D.C. Circuit Court Upholds FERC Ban on Energy Efficiency in PJM Capacity Markets
The D.C. Circuit Court of Appeals delivered a severe blow to environmental advocates in February 2026, upholding FERC's decision to ban Energy Efficiency (EE) resources from participating in the PJM Interconnection capacity market. The court agreed with FERC and grid operators that monetizing standard efficiency upgrades (like LED lighting) constitutes "unjust enrichment" and double-counting. This permanently removes thousands of megawatts of "paper capacity" from PJM auctions, directly exacerbating the ongoing physical supply shortage.
Executive Impact — C&I Buyers
- →End of EE Subsidies: Commercial facilities will no longer receive capacity market checks from Curtailment Service Providers (CSPs) for simply installing efficient chillers or lighting. The financial ROI calculation for capital efficiency upgrades must now rely solely on volumetric energy savings (kWh reduction).
- →Bullish for Capacity Pricing: Energy efficiency historically pushed capacity clearing prices downward by acting as zero-cost supply. Removing this from the bid stack permanently reduces available supply, forcing PJM to buy more expensive physical generation to hit reserve margins.
- →Demand Response Supremacy: While "passive" efficiency is banned, active Demand Response (physically dropping load during a grid emergency) remains highly lucrative and fully eligible. Third-party CSPs are now pivoting all their focus to enrolling curtailable load.
The "Double Counting" Argument Wins
For over a decade, Energy Efficiency (EE) rules allowed third-party aggregators to measure the power reduction resulting from a commercial building's upgrades (e.g., swapping old HVAC units for high-efficiency models) and sell that "saved" electricity into the PJM capacity market as if it were a physical power plant generating megawatts.
The Federal Energy Regulatory Commission (FERC) struck down this practice, and the D.C. Circuit Court has now affirmed that ruling. The legal argument centered on the concept of "unjust enrichment." When a facility installs efficient lighting, its overall load profile automatically drops. PJM's baseline load forecasting models capture that reduction naturally over a few years. Allowing the building owner to also sell that reduction into the capacity auction means ratepayers are essentially paying twice for the exact same conservation.
Removing "Paper Capacity" from a Starved Grid
While mathematically sound, the timing of this ruling exacerbates an ongoing crisis. PJM is currently experiencing acute, unprecedented physical supply shortages.
In previous capacity auctions, Energy Efficiency accounted for several gigawatts of supply. Because EE always bid at zero dollars, it artificially depressed clearing prices. By permanently stripping this volume out of the Base Residual Auction (BRA), the supply/demand curve tightens significantly. Ratepayers will now bear the true, unshielded cost of contracting physical steel-in-the-ground power plants to meet reliability targets.
The Aggregator Pivot: Active vs. Passive
This ruling draws a hard line between "passive" conservation and "active" grid support.
- Banned (Passive EE): Running an efficient chiller 24/7. It lowers your volumetric energy bill, but you cannot sell the delta as capacity.
- Eligible (Active DR): Receiving a digital signal from PJM to actively shut down normal operations to shed 1,000 kW of demand during a Level 2 Emergency.
Curtailment Service Providers (CSPs) like Enel X, CPower, and Voltus relied heavily on EE revenues to pad their portfolios. With that revenue stream eliminated, these firms are aggressively pushing their commercial clients to enroll in true Demand Response programs to capture the record-high $269.92/MW-day capacity clearing prices established in the recent 2026/2027 auction.
Connected Analysis
This ruling compounded the supply shock detailed in the PJM Capacity Crisis Analysis. To understand the active programs still eligible for revenue, explore our Guide to PJM Demand Response Providers.
Source: United States Court of Appeals for the District of Columbia Circuit; Federal Energy Regulatory Commission (FERC); PJM Interconnection Manuals.