By Todd Thurlow and Kyle Smith
While overall electricity prices have been rising at a pace that exceeds inflation, there is growing evidence that the fundamentals of supply and demand on our constrained electrical infrastructure may become significantly more pronounced in the near term–and that those fundamentals are here to stay. The U.S. Energy Information Administration (EIA) forecasts that wholesale electricity prices will exhibit increasing volatility due to the combination of resource supply constraints, rapidly rising electricity demand and fueling cost fluctuations. The resulting higher, more volatile prices will add significant financial pressure to businesses that rely on firm electricity supply and stable, predictable input costs.
Electricity demand is far outpacing many industry projections as many regions of the U.S. experience unprecedented load growth. For example, American Electric Power (AEP), one of the largest utilities in the U.S., projects an 8.6% annual increase in its retail electric load, which will strain grid capacity. Adding to these pressures is a mounting concern over supply adequacy. PJM Interconnection, a regional transmission organization, warns of electrical capacity shortfalls as early as 2026-2027; their recent capacity auction results reflect this new reality of rising capacity prices, rapid electrification, and slower-than-expected growth in energy generation .
From 2024 to 2025 thus far, energy prices have increased by approximately twofold while capacity prices have risen tenfold, following many years of generally low and relatively stable prices for both. These same price impacts are being felt beyond the PJM Interconnection, with the Midcontinent Independent System Operator (MISO) just announcing a summer capacity pricing increase of twentyfold in its most recent capacity auction for the 2025-2026 planning period.
Understanding The Drivers Behind Rising Electricity Prices
For decades, electricity demand has been relatively flat; outside of some regional extreme weather events, our utility grids have coped. These same grids, now decades older and generally poorly maintained, must deal with sharply higher (and growing) demands and from a more complicated demand profile. These dynamics have reached an inflection point, where AI, domestic manufacturing, and electrification growth will compete for limited grid resources for the foreseeable future. Let’s further explore what’s driving electricity prices higher and creating greater volatility in the market:
- Data center growth and AI innovation: These facilities require massive amounts of power to run both the IT equipment and the cooling systems that protect it. As AI adoption accelerates, energy demand will rise as well, further straining the grid and requiring increased investments in both grid and generation resources.
- Industrial electrification and the rise of electric vehicles (EVs): This combination has introduced new demands and demand patterns on the utility grid, including larger, unpredictable charging patterns which can lead to demand spikes during peak hours.
- Capacity market pressures and supply constraints: As fossil fuel plants are retired, replacement energy generation sources are not coming online quickly enough to keep pace with the rapidly rising demand, leading to concerns about grid reliability and higher costs as seen in the recent PJM capacity auctions.
- Aging grid infrastructure and maintenance costs: The U.S. utility grid was simply not built to handle the scale and sophistication of today’s energy demands. Many transmission and distribution systems are decades old and will now require major, consistent investment to catch up. These regulated costs are almost always passed along to customers.
- Federal energy policy: The recent shift in federal energy policy, which supports domestic fossil fuel projects, has created further uncertainty in the market. Emerging trade policies, such as cross-border tariffs on materials and critical energy components, may further impact electricity production, delivery, and pricing.
This combination of factors makes it unlikely that electricity prices will stabilize in the foreseeable future. Businesses that do not mitigate sustained increases in cost and volatility will ultimately purchase electricity at higher and more unpredictable rates, affecting profitability and long-term competitiveness.
Businesses Do Nothing At Their Own Risk
Businesses that do nothing to adapt to today’s conditions do so at their own risk. Continuing to purchase electricity at market rates without hedging strategies or demand reduction measures will mean higher energy costs, reduced profitability, limited budget flexibility, and increased operational uncertainty.
An unreliable energy supply also introduces operational risks to organizations. Power disruptions, whether they’re due to grid congestion, extreme weather, or capacity shortages, will have an impact on business continuity. Everything from productivity losses and service delays to broader supply chain impacts is on the table for organizations that rely entirely on the grid without any backup generation or energy storage safety nets.
Proactive Strategies To Mitigate Exposure To Market Fluctuations
While businesses cannot directly control electricity prices, they can control how they prepare for and respond to them. Here are proactive strategies that can help mitigate exposure to market fluctuations, enhance operational resilience, and create a competitive advantage.
Strategic Energy Procurement To Manage Market Risk
Strategic energy procurement empowers businesses to hedge against future price increases by locking in long-term, fixed-rate contracts for some or all their electricity supply or by leveraging financial instruments to manage risk. Partnering with energy suppliers to structure procurement agreements can help shield organizations from an unpredictable market. As market price volatility increases, the value of these physical and financial instruments will also increase but so too might the premiums associated with them.
Energy Efficiency And Demand Reduction To Control What You Can
Reducing energy consumption through energy efficiency improvement and demand reduction measures can directly affect an organization’s exposure to market price fluctuations. Energy efficiency improvements not only cut costs but also help reduce reliance on grid-supplied power. Implementing demand-side management strategies, such as optimizing HVAC systems, installing energy-efficient lighting, and optimizing space utilization can translate into significant reductions in energy consumption. When combined with real-time monitoring and predictive analytics, businesses can enter a cycle of continuous energy optimization. Higher electricity pricing will make the business case for energy efficiency investments increasingly compelling.
Load Management To Shift Demand
With load management strategies, businesses can actively manage when and how they consume power. Demand response programs incentivize companies to reduce their consumption during periods of peak demand when electricity is most expensive. Here’s where automated load management technologies can help shift demand by moving non-essential loads to off-peak hours without having an impact on operations.
Distributed Energy Solutions To Reduce Grid Dependence
Investing in distributed energy solutions allows businesses to generate and store energy independently of the utility grid. Onsite energy generation, such as solar photovoltaics, fuel cells, and combined heat and power (CHP) systems, can offset grid electricity purchases, minimize the risk of downtime due to power outages, and have a positive impact on an organization’s carbon footprint. Energy storage strengthens these benefits, providing greater flexibility over when power is generated and used, enabling companies to effectively store their excess energy to use during outages or periods of peak demand.
Additionally, microgrids serve as a decentralized energy system, letting organizations operate independently of the grid. This technology integrates onsite generation with storage and controls to balance load demands, reduce carbon emissions, and deliver uninterrupted power. At the end of the day, producing your own energy can insulate your business from the coming price increases and potential capacity shortfalls.
Building A Sustainable Energy Future
Although energy price increases and volatility may be here to stay, businesses have options. Those who take a strategic approach to mitigating exposure to market fluctuations will position their organizations for long-term resilience. Moreover, many organizations likely have a long list of energy initiatives that haven’t risen to the top of the priority list; today, those same projects have a much more compelling financial case for implementation. Taking proactive steps now means that businesses are not simply reacting to the market and accepting their fate–they’re ready for the uncertain energy future that lies ahead.
Todd Thurlow is director of distributed energy systems and Kyle Smith, director of sustainability project finance at Siemens Smart Infrastructure USA.