Energy budgets used to be simple math: usage multiplied by rate. That math still matters, but it no longer tells the full story. PJM Interconnection’s capacity auction has cleared at or near its price cap for four consecutive delivery years, and the organizations that avoided the worst of those increases will not see that avoidance on any line item. It never shows up as a cost, because it never happened.
That gap between what got cheaper and what got avoided is where a lot of energy budgets fall short. Energy leaders who track only one side are working from half the picture.
What is the difference between cost savings and cost avoidance?
Cost savings is a measurable reduction in money already being spent, visible when comparing one billing period to another. Cost avoidance is money that would have been spent if no action had been taken, so it prevents a future cost increase rather than reducing a current one. Both are legitimate financial outcomes, but they are measured differently, reported differently and, too often, only one of them makes it into the budget review.
Why the distinction matters more in 2026
PJM’s capacity market, which prices the electricity supply needed to keep the grid reliable across 13 states and the District of Columbia, has become a case study in why avoidance deserves its own line item.
The 2027/2028 Base Residual Auction cleared at $333.44 per megawatt-day, the price cap set through an agreement tied to a complaint from Pennsylvania Gov. Josh Shapiro, marking a record high for the third auction in a row, according to PJM’s auction report and reporting from Utility Dive. PJM estimated that without that cap, the price would have landed near $530 per megawatt-day, roughly 60% higher.
The 2028/2029 auction, released July 14, 2026, cleared at $325 per megawatt-day, still at the FERC-approved cap, even as it came in 2.5% below the prior year, PJM said. Total capacity procured reached 138,318 megawatts of unforced capacity, short of PJM’s reliability target by 6,831 megawatts.
None of the organizations that avoided that 60% swing recorded a savings. The number that matters to them is the one that never hit their bill, and that is cost avoidance.
How cost savings shows up on an energy budget
Cost savings are the reductions a finance team can point to directly: a renegotiated supply contract, a completed LED retrofit, an HVAC schedule that trims run hours, or a rate class correction that fixes an old billing error. Each has a before-and-after number pulled straight from utility invoices. EnergyCAP, a utility bill management platform, defines this as the accurate measurement of raw savings against actual, current spending.
How cost avoidance shows up, and why it is harder to prove
Cost avoidance rarely appears on an invoice. It shows up in decisions such as enrolling in demand response ahead of a summer peak, hedging a portion of load before a capacity auction clears, or locking a rate before a scheduled increase takes effect. Demand response alone made up 5% of the capacity PJM procured in its 2028/2029 auction, a resource category that exists almost entirely to avoid strain, and cost, during the hours that matter most.
Because avoidance measures the absence of a cost, it requires a documented baseline and a counterfactual rather than a receipt. That is where measurement and verification, often called M&V, comes in. The International Performance Measurement and Verification Protocol, maintained by the Efficiency Valuation Organization, is the industry standard for calculating avoided costs against a defined baseline rather than a guess.
What energy leaders should ask before the next budget cycle
A few habits separate energy leaders who can defend their numbers from those who cannot.
First, ask the energy or facilities team to report savings and avoidance as two separate figures, not one blended number. Second, require a documented baseline for every avoidance claim, built on the same M&V standard used across the industry rather than an internal estimate. Third, track capacity market exposure on its own line, separate from usage-driven costs, since the two move for entirely different reasons. Fourth, treat demand response enrollment and hedging primarily as risk management decisions, with potential revenue as a secondary benefit.
Frequently asked questions
Is cost avoidance the same as a cost reduction? No. A cost reduction, like a cost savings, lowers an expense that already exists. Cost avoidance prevents a future expense from occurring at all, so it never appears as a reduction on a bill.
Why does PJM’s capacity market matter to a facility that doesn’t buy capacity directly? Capacity costs are built into most commercial and industrial electricity rates in PJM territory. When the auction clears near its cap, as it has for four straight delivery years, that cost flows through to customers regardless of whether they negotiated it directly.
How should cost avoidance be reported to a board or finance committee? With a stated baseline, the method used to calculate it and, where possible, third-party or industry-standard verification such as IPMVP. A number without a baseline is an estimate, not a result.
In a market where the price is set by an auction rather than a negotiation, the number an organization avoided is often larger than the number it saved. Energy leaders who can show both walk into budget season with proof instead of a bill that happened to go down.
Sources:
- PJM 2027/2028 Base Residual Auction Report
- PJM capacity prices hit record high as grid operator falls short of reliability target
- PJM Capacity Auction Procures 138,318 MW of Generation Resources as Work Continues To Address Growing Electricity Demand
- Cost avoidance vs. raw savings: How to accurately measure energy efficiency
- Cost avoidance in utility management: How to prevent spend and protect your budget
- International Performance Measurement and Verification Protocol (IPMVP)
