The largest US energy company is under pressure from AI – and no one is happy

Pity the grid operator PJM Interconnection. For years it worked quietly and in the background, matching electricity demand with supply. During this time, customers enjoyed the lowest electricity prices in the United States.

Not anymore. Politicians, businesses, families, and the power industry think it needs reform. Even PJM agrees.

PJM has released a white paper this week which said the region has “years, not decades” to change the way it operates. “The current situation is unsustainable,” PJM CEO David Mills wrote in the report.

Often times, this kind of wonky report landed on the desks of a few legislators and administrators. But the PJM region includes many data centers, including the compute-dense region of Northern Virginia. What happens in PJM will send ripples around the world.

The 70-page report is a survey of the navel. But even if they take a closer look, not everyone believes that the organization has the task of reforming itself. One utility, American Electric Power (AEP), is considering pulling out of PJM altogether.

“The way PJM is working and the acceptance of those involved doesn’t give me a lot of confidence that this will be resolved anytime soon,” Bill Fehrman, CEO of AEP, said Tuesday. “In fact, if something isn’t done now, I expect we’d still be having the same conversation in 10 years. The PJM market did very well when supply exceeded demand; now we’re in a very different era.”

This is what changed

Cloud computing and AI are beginning to disrupt PJM’s manufacturing capabilities. In anticipation of the expansion, PJM has suspended operations in 2022 for new generation sources to connect to its grid, citing a multi-year delay. As demand for electricity began to grow for the first time in decades, the grid operator blocked new sources from being used again to match.

PJM is not entirely to blame for this long backlog. Most interconnection requests are repetitive – developers will propose the same project in different parts of the grid to see which one gets approved first. PJM’s sclerotic approval process means that more than 300 gigawatts worth Of the projects lined up for 2022, only 103 gigawatts have completed signing contracts, and only 23 gigawatts have been connected so far. Many developers left rather than wait.

Demand in the region remains so strong that, since PJM recently reopened the line, power companies and project developers have submitted more than 800 requests for 220 gigawatts of new capacity. PJM could have stopped new requests, but it did nothing to eliminate the need for new connections.

This is what PJM wants

In its white paper, PJM has proposed three options. One would need resources and generators to make large, long-term commitments. (PJM currently wants them to commit to providing the same amount of electricity for three years.) A second option would change reliability guarantees to customers — those who pay the least amount could have their power cut first. The final option would try to move PJM closer to the real-time market, where supply and demand drive prices, without ending the stability of the long-term contract.

It’s hard to see how PJM comes out looking good in either situation.

First, PJM’s performance in its market is locked in a three-year perspective. That seemed to work when gas-fired power plants were replacing coal-fired generators, but today solar and batteries can be installed two or three times faster. Also, it is lack of gas generators it means that the power plants planned today will not be able to install equipment until the early 2030s. Additionally, turbine prices have risen on the back of demand for hyperscalers. Given these realities, it’s hard to see retailers wanting to make a long-term commitment.

A second option would result in PJM dividing its share, its customers, or both into groups of “owners” and “non-owners.” For people and businesses who are losing weight due to increased subsidies, it is hard to see them enjoying the low level of service. Politicians have grasped the rise in electricity prices and anti-data center animus, and therefore cannot accept this.

The latter option is more complicated, but it also feels like PJM is trying to be all things to all people. It’s the kind of system that looks like it should attract major utilities like American Electric Power, giving them the opportunity to play in short-term markets to make more profits and benefit from long-term contracts — having their cake and eating it, too. However if AEP, one of the biggest players in the PJM sector, is not happy with the pre-order menu, it’s hard to see how PJM can choose again.

The increase in demand for data centers has just happened to coincide with the disruption of renewables and batteries, which continue to fall in price. The current situation is at odds with an organization that does not want – or does not know how – to change the way it works.

PJM may consider its white paper my problem may buy it next time. But with politicians threatening price hikes and utilities blocking future participation, the grid operator could have years to get things right. It looks like a confusing few years ahead.