PJM Board Proposes Reserve Capacity Auction and Data Center Load Shedding Plan

Key Takeaways

• The PJM Interconnection will launch a one-time reserve capacity auction in September to address a 6.8 GW shortfall in its just-concluded capacity auction for the delivery year beginning mid-2028, a proposal released by the grid operator's board of managers on Monday.
• Additionally, new data centers and other large loads that do not bring their own power supply would face curtailment when grid demand approaches emergency conditions, according to a summary of another proposal.
• The PJM board expects the grid operator to submit the proposals to the Federal Energy Regulatory Commission for review by the end of this month.

Deep Dive

"PJM will take actions within its authority to procure needed supply and maintain reliability, while supporting states and other responsible entities to ensure costs associated with new large loads are appropriately allocated," the grid operator's board said in a letter to stakeholders.

According to the board, PJM estimates that large loads could grow by 70 GW by 2038 across its 13-state Mid-Atlantic and Midwest footprint plus the District of Columbia.

The board said it will direct PJM staff to exclude any new large loads that do not bring their own new power supply from demand forecasts in future auctions.

"Existing consumers should not bear higher capacity costs because of new large loads that do not bring (or contract for) the new supply they require," the board said.

Excluding data center load that does not bring its own power supply from capacity auction demand forecasts should help lower capacity prices over time, according to equity analysts at Jefferies.

The PJM board's proposals are based on and largely align with the fast-track stakeholder process the grid operator conducted this year, said Julia Hoos, head of U.S. East at Aurora Energy Research.

"The procurement target for the reserve auction is ambitious, but if all large loads show up, it is far from sufficient to meet demand," Hoos said in an email to Utility Dive. "It is filling the gap and then pushing the responsibility for procuring new generation onto the large loads themselves."

Reserve capacity auction

Under the board's proposal, PJM would hold a capacity auction to procure 6.8 GW — minus any bilateral contracts that emerge before the auction — to address the grid operator's failure to meet a 20% reserve margin in its last base capacity auction. The auction target could also be reduced by new combined resource plan supply or large load demand response commitments, according to the board.

If approved by FERC, the auction would begin September 30 and run through October 21. Fifteen-year commitments would be finalized before PJM's 2029/30 base capacity auction in early December.

Costs from the reserve auction would be borne by load-serving entities in a manner "structurally consistent" with how PJM's base capacity auction costs are allocated, according to the board. How costs are applied to different rate classes would be up to LSEs and state regulators, PJM said in a post about the decisions.

PJM plans to cap the total cost of supply offers it will accept at $555 per megawatt-day, above the $325 per megawatt-day interim cap in the last base capacity auction.

Eligible resources must be operational by June 1, 2032, under the proposal.

PJM will also administer a bilateral matching process that begins with a request for proposals issued June 9. PJM has hired Charles River Associates to oversee the process, with initial matches expected in August, according to the board. Additional matching rounds could last six to nine months.

Data center curtailment

Under the board's proposed Interim Reliability Resource Availability Service framework, previously called "connect and manage," large loads that do not bring new power supply must curtail or switch to on-site backup resources when the PJM system approaches emergency conditions, effective June 1.

Utilities and other distribution companies and transmission owners would be required to develop IRAS rules, which would need approval from state or local utility regulators.

Additionally, PJM would establish a large load "registry" recording facility locations, ramp-up plans, capacity supply, and other details. The registry would provide the "critical data transparency" needed to set curtailment priorities for retail customers, the board said.

How will the plans affect costs and reliability?

The board's proposals retain two key features that will impose costs on PJM customers, according to Joseph Bowring, president of Monitoring Analytics, the grid operator's independent market monitor.

First, data center load will remain in capacity auctions, which has added $29.4 billion to capacity costs over the past four auctions, he said in an email to Utility Dive.

"If PJM succeeds in raising the maximum price in the auction, this number will accelerate in future auctions," Bowring said.

Additionally, PJM's IRAS proposal will raise wholesale energy costs and reduce reliability because it connects customers without adding generation to serve them, he said, noting the market monitor will provide a more detailed response later.

Moreover, the reserve auction addressing only the last base capacity auction shortfall cannot "solve the core of PJM's problem — new large loads that have not yet materialized," the Jefferies analysts said. "We could see more reserve auctions in the future, making PJM increasingly a bilateral market."

Aurora Energy's Hoos sees risks remaining for PJM.

"At the end of the day, the real-world challenges of rapidly building new generation are not solved," Hoos said. "Until the underlying problem is addressed, prices will remain high."

Rising interconnection costs are one of those risks, Hoos said. A plant project planned by Competitive Power Ventures in Ohio exited PJM's fast-track "Reliability Resource Initiative" interconnection process after receiving an interconnection cost estimate of $878 per kilowatt, according to Hoos.

"A few years ago, that number was closer to total construction costs, and now it is just interconnection costs," she said. "I would not be surprised if interconnection costs continue to be a silent project killer."

Research firm ClearView Energy Partners said in a Tuesday report that FERC's response to the proposals could "affect utility capital investment, data center development timelines, and the allocation of reliability risks and costs."