Melius: 'We View the May 19 PJM Board Letter as a Structural Positive for the IPP Complex'.

The analyst comments "We View the May 19 PJM Board Letter as a Structural Positive for the IPP Complex. We caught up with firms across our IPP coverage last week, including VST, TLN, and CEG. The September 2026 acceleration of the centralized Reliability Backstop Procurement (RBP) auction, pulled forward from early 2027, directly reflects feedback from firms arguing the original timeline was too long. The executive teams broadly characterized the letter as very positive. Importantly, this removes approximately six months of regulatory limbo from a market that had been pricing in capacity risk and provides the path to economic clarity that IPPs and their datacenter counterparties argued was necessary for transactions to close. Earlier-stage counterparties had paused deal activity in the absence of a defined rule framework; that dynamic should ease. IPP equities moved sharply higher following the letter, and we believe a further re-rating upwards is warranted.

The Board Letter is a Timeline Fix, Not a Full Policy Resolution. PJM's Board of Managers simultaneously merged the previously parallel RBP and Connect and Manage (C&M) proceedings into a single CIFP process, ending the dual-track confusion that had weighed on the sector. That consolidation matters: bundling C&M into the Backstop CIFP effectively forces FERC to evaluate the C&M construct as part of a single package rather than adjudicating it separately, raising the probability of acceptance. However, we continue to look for further clarity on cost allocation and bilateral incentive structures before drawing conclusions on the ultimate effect on IPP earnings power. The upcoming additional stakeholder meeting (May 27th) is a potential source of commentary and clarity.

Cost Allocation and Bilateral Incentive Structure Remain the Outstanding Items. PJM has written to each state governor requesting frameworks to allocate backstop costs to new large load customers. PJM lacks authority to allocate those costs directly to retail customers; if states do not act, costs default to residential consumers, creating political risk that could complicate the regulatory path. The bilateral window is preserved alongside the centralized auction, but the incentive structure for bilateral participants, including faster interconnect, firm capacity credit, and C&M exemption clarity, has not yet been specified. The May 27 Special MC and Stage 4 vote will not proceed as originally scheduled; an additional CIFP stakeholder meeting will be held instead, with late June as the current endpoint before FERC filing.

The Broader Question is Whether September is a Bridge or a Final Answer. The 2027/2028 BRA closed with a hard shortfall of approximately 6,500 MW, the gap between what the auction cleared and PJM's reliability requirement. Separately, PJM's RBP proposal targeted approximately 14.9 GW of new capacity, a forward-looking demand build derived from large load forecasts through 2029. The PJM letter anchors the September centralized procurement to addressing the near-term BRA shortfall, pointing toward the lower figure. A September auction sized closer to 6 GW is less likely to introduce the oversupply concerns that a 15 GW procurement would raise. However, PJM has not yet published a specific procurement target for September, as that comes in the revised proposal expected in late June, so the ultimate size remains an open variable.

Bottom Line. Regulatory clarity is emerging, bilateral deals are close to closing, and these stocks should re-rate and trade like infrastructure names as decades of cash flow gets locked in."