Electricity prices in Chicago, Illinois could increase by 20 percent as a result of a court ruling that would halt the long-standing practice of paying big power users to reduce their demand during peak periods such as hot summer days.

Illinois’ largest power generator, Chicago-based Exelon Corp., stands to benefit financially if the court decision is upheld. Exelon calls itself a green power company because of its reliance on carbon-free nuclear power rather than coal. But it won’t say whether it supports the environmentally friendly practice of incentivizing large power consumers to slash their consumption.

Regional power grid operator PJM Interconnection LLC depends heavily on paying industrial firms and other big consumers of electricity to curtail their demand—known informally as negawatts—to keep the lights on for everyone else. Earlier this year, for example, PJM signed curtailment contracts with enough northern Illinois users to provide 1,478 megawatts of capacity when needed three years from now. That approaches the 1,750 megawatts at Exelon’s Dresden nuclear station.

The ruling in May by a three-judge panel of the U.S. Court of Appeals for the D.C. Circuit held that PJM and other regional grid operators around the country don’t have the legal authority to purchase “demand response,” the formal name for negawatts. Only states can do that, the court ruled in a challenge brought by an association of power generators that includes Exelon.

The decision has significant pocketbook ramifications. Eliminating negawatts to meet peak demand would tend to raise prices because it would force consumers to buy from less-efficient, higher-cost power plants that otherwise wouldn’t qualify for capacity payments. The independent market monitor for PJM, which plays a market-referee role for the power grid stretching from Chicago across all or parts of 13 states to North Carolina’s Outer Banks, estimated late last month that—if the court ruling stands—the annual cost to reserve enough power capacity to meet demand during peak periods would rise as much as 124 percent from today’s levels (see the PDF).

Those capacity costs—paid by all business and residential customers—are embedded in the overall energy price reflected in their electric bills. The cost for energy would increase 1.5 cents per kilowatt-hour, or 20 percent above the 7.5 cents currently charged by Commonwealth Edison Co. (ComEd), according to an analysis by Mark Pruitt, former director of the Illinois Power Agency. That would inflate the revenue for power plants selling into northern Illinois, including Exelon’s five nuclear stations in the northern part of the state, by about $1.3 billion, Mr. Pruitt found.