PJM Looking at Options to Meet Demand, Cost Challenges

Regional grid operator PJM Interconnection is rethinking how its wholesale electricity market is operated as it struggles to keep up with rising demand from data centers while keeping prices affordable for consumers.

PJM is the Pennsylvania-based regional transmission organization that coordinates the movement of wholesale electricity in all or parts of 13 Mid-Atlantic and Midwest states and the District of Columbia. It recently published a white paper that assesses the current wholesale electricity market landscape and the changes that need to be made to the system for purchasing and delivering electricity.

“The current situation is not tenable,” PJM President David Mills said in a statement. He noted that many of the choices that need to be made will be up to other stakeholders, including state officials, the Federal Energy Regulatory Commission, utilities, consumers and advocates.

PJM is under fire to rapidly change its operations as the data center boom is rapidly increasing demand for a limited supply of energy. That has led to spiking utility bills, and criticism from governors and legislators about energy affordability. PJM is scrambling to add new power generation quickly, as its reliability margin shrinks, but the cost of new power projects is also skyrocketing, and investors are reluctant to take on risk without guarantees of returns.

The PJM capacity market for years grew slowly and prices for guaranteed 24/7 power availability were stable. But in 2024, PJM’s capacity auction for 2025-26 for guaranteed baseload power resulted in an 800% increase from the previous year, setting of alarms in member states. That led Pa. Gov. Josh Shaprio to file a lawsuit against PJM with FERC arguing that flaws in how it purchases power from electric producers is driving up prices for residents and must be changed. PJM agreed to put in place a price cap on the amount it pays for wholesale capacity, which was just extended, to slow increases in utility bills but that also disincentivized  investment from power plant developers.

“That leaves PJM’s capacity market in a credibility trap,” the release said. “High prices designed to signal the need for investment put pressure on consumers who are unprotected from market volatility: this triggers government intervention to protect consumers, which undermines the credibility of those same high prices and fails to incentivize new investment.”

The report does not recommend a specific path for change, but sets out three frameworks, and argues that the choices need to be made by stakeholders, and state and federal government. The first pathway would preserve the concept of reliability for all, protecting consumers by requiring more capacity to be locked in through long-term commitments. The second would differentiate reliability standards across customer class and region and prioritize certain customers during emergencies. The last path would favor real-time energy markets, and price power and flexibility closer to when it is needed, while maintaining some long-term contracts to protect customers from wild price swings.

“The choices embedded in these paths have definite trade-offs and those trade-offs affect different customers uniquely,” the report states.