PJM set an all-time demand record of 162,200 MW yesterday, only to see that record likely to be surpassed today, July 2. The expected peak today is over 166,000 MW, which makes for an interesting analysis of the question “what is the existing reserve margin?” in light of this new record.

Today, PJM reports available capacity ranging from 183,000 MW to 198,000 MW. While that may seem substantial, it appears less so when measured against the reserve margins needed to support a new and growing peak demand. Reserve margin is the amount of generating capacity available above expected peak demand. Historically, when utilities owned and operated their own generation, transmission, and distribution systems, they typically maintained reserve margins of 15% to 20% to ensure reliability during periods of extreme demand.

While some utilities have maintained reserve margins well above these levels, using the more conservative 15-20% standard and today’s peak demand of 166,000 MW indicates that PJM should have between 190,900 MW and 199,200 MW of installed capacity.

Demand is expected to continue to grow, and so is installed capacity, so the conclusion coming from these rather “off-the-cuff” calculations is what the market is expressing through higher capacity prices and higher forward energy prices.

Supply conditions are expected to remain tight for some time, unless and until reserve margins are rebuilt to the more conservative levels that utilities have historically maintained.

In the old utility model, an estimate was made of the “cost of load loss” meaning what it would cost a utility if it had to shed load because it could not meet demand. Public Utility Commissions have long faced the challenge of determining how much reserve capacity is appropriate. Maintaining additional generating capacity improves reliability during periods of extreme demand or unexpected outages, but those power plants are costly to build and maintain, even if they only operate a few days over the course of several years.

This is the fundamental balancing act in electric system planning: ensuring reliable service under even the most adverse conditions while keeping electricity rates affordable.

Achieving that balance often requires investing in and maintaining billion-dollar generating assets that spend much of their time idle, available only when they are needed most.