PJM’s old way of getting power built isn’t working. Has it found a fix?

With the conclusion of its latest capacity auction, PJM Interconnection has once again shown that its process for securing new energy is unable to keep up with the wave of electricity demand from data centers.

But PJM, the grid operator for the country’s biggest energy market, is poised to adopt a new process that could help fix these problems: by pushing data centers to pay directly for the new clean energy, batteries, and fossil-fueled power plants needed to meet their huge electricity demand.

Late last month, PJM stakeholders achieved a rare level of consensus in voting to approve the plan for a new auction, called a reliability backstop procurement.

The measure, which still needs final approval from both PJM and the federal government, represents the grid operator’s most significant step to repair an auction process that has left consumers paying more money for a less reliable grid. PJM’s board of directors is expected to submit the proposal to federal regulators in the coming weeks.

The results of PJM’s Tuesday capacity auction underscore how critical it is for the grid operator to find a solution.

PJM’s capacity auctions, held once or twice each year, are the key process through which it ensures there’s enough capacity to keep its grid up and running during summer heat waves and winter cold snaps. It’s a high-stakes task: 67 million people from Virginia to Illinois depend on PJM for electricity.

For the third time in a row, the capacity auction hit the market’s price cap, in this case, $325 per megawatt-day. Similar caps have been in place since last year, after state governors demanded a limit to the massive cost increases being pushed onto utility customers across the PJM region.

These latest capacity costs reached $16.4 billion, matching the record set last December, and are more than eight times as much as PJM has paid for capacity in prior years. Customers in some PJM states — including Illinois, New Jersey, and Pennsylvania — are already seeing their bills rise by more than 10%, in part because of these soaring costs.

And yet, these maxed-out prices are still not high enough to get energy developers and utilities to build the power plants PJM needs to hit its reliability targets. This week’s auction fell short of PJM’s reliability requirement by over 6.8 gigawatts — the second time in a row that sky-high prices have failed to bring sufficient capacity resources into play.

The upshot is that customers in PJM Interconnection are paying some of the highest rates in the U.S. for grid reliability — even as the grid operator says the system isn’t reliable.

At the root of the problem is an explosion of demand from data centers that utilities and project developers can’t keep up with.

The grid operator forecasts that 30 to 34 gigawatts of data centers will be online in states across its region by the early 2030s. Utilities and developers would struggle to meet that pace under favorable conditions, but PJM’s infamously sluggish interconnection process makes it an impossible task.

While power demand has soared, the capacity being brought online in PJM has stagnated.

Of the 138.3 gigawatts of resources secured in this week’s auction, only 525 megawatts came from new capacity. All told, just under 4 gigawatts of newly built and ​“uprated” capacity from existing projects have been included in the capacity auctions since 2024, well below the roughly 20 gigawatts of new capacity added in the five prior auctions.

“We’ve got two problems,” said Julia Hoos, who leads coverage of Eastern U.S. power markets for Aurora Energy Research. ​“One, new capacity is just more expensive than we’re willing to pay for; and two, we haven’t resolved the physical barriers to build. Now, we’re paying for both issues.”

And those problems aren’t going away. Monitoring Analytics, PJM’s independent market monitor, has cited forecasted growth in data center power demand as being responsible for more than $29 billion in additional capacity costs to customers in PJM since 2024. In a May report, the monitor warned that these costs will ​“continue to grow until the issues associated with the addition of large data center loads are addressed.”

Can data centers pay for their own new capacity? 

It hasn’t been easy to land on a path forward.

Environmental groups, consumer advocates, and state politicians have been haggling with data center trade groups, utilities, and power plant owners for more than a year over how to manage electricity costs related to data centers.

Some argue that new data centers should be forced to drop offline during grid emergencies, to avoid burdening all other customers with the cost of building power plants to ensure service at those times. Others say data centers should be required to pay directly for the capacity resources needed to mitigate their burdens on overstressed grids.

The plan approved by PJM stakeholders in late June, which was put forward by utilities and the trade group Data Center Coalition, would enable that latter option.

Unlike PJM’s standard capacity auctions, which are aimed at meeting the needs of all the utilities and customers served by its grid, this reliability backstop procurement, or RBP, is meant to be a ​“one-time process to purchase new supply resources to serve new data centers and other large loads,” PJM explained in announcing the outcome of its stakeholder process.

The proposed backstop procurement auction would come with a price cap of $555 per megawatt-day, much higher than the limit now set on PJM’s broader capacity market. In fact, the amount is pretty close to Aurora Energy Research’s calculation that about $500 to $600 per megawatt-day is what’s needed to finance new capacity resources trying to get built and interconnected to the grid, Hoos said.

This new auction would also structure deals between data centers and project developers under 15-year contracts, which ​“makes it cheaper to build, because developers have more security,” she said. ​“In the short term, it may be the only way to build new capacity, because generators need certainty.”

PJM has also showed some signs of life in moving projects through its snarled interconnection queue.

This year, the grid operator finally cleared roughly 53 gigawatts of solar, batteries, wind, and fossil gas power projects to connect to its system. If the RBP is approved by the Federal Energy Regulatory Commission in its current form, it could be ​“potentially a way to funnel a lot of money to projects that are already in the works,” said Tom Rutigliano, senior advocate for climate and energy at the Natural Resources Defense Council.

But that’s not the only way for new data centers to pay for the resources they need to come online, Rutigliano and Hoos noted. An even bigger channel could emerge in the form of bilateral contracts — agreements between individual data centers and developers of generation, battery storage, and demand-side resources like virtual power plants.

Such bilateral contracting has always been an option for large power customers, Hoos noted. In fact, major corporations have been signing power-purchase agreements with solar and wind projects for more than a decade. But those contracts have been focused on securing clean energy, and not so much on projects that can provide capacity during hours when the grid is under the greatest stress.

That’s a more complicated type of deal to structure, and tech giants like Amazon, Google, Meta, and Microsoft are only in the early stages of combining clean energy, batteries, generators, and demand-side resources or flexible computing that can meet PJM’s capacity needs.

But with states served by PJM demanding that large loads bring their own capacity, these kinds of deals are increasingly seen as necessary to get new data centers built. As part of the same effort, PJM last month also started work on facilitating ​“bilateral, long-term agreements between large load customers and generation providers” as a way to help these processes along, it also announced.

In fact, the RBP could become a last-resort choice for large loads that can’t strike their own deals, Hoos said. ​“There’s a lot of value to these bilateral contracting models that move that risk to investors and to the large loads,” she said — not to utility customers at large.

What remains uncertain is whether the RBP and these bilateral deals can enable data centers and new grid resources to come online ​“without raising rates on everyone else,” Rutigliano said.

PJM was meant to tackle the cost considerations by adopting a ​“connect and manage” plan, a structure that would require data centers to either bring their own capacity or face being cut off from grid power during emergencies. But PJM stakeholders failed to approve any of the 11 connect-and-manage proposals on hand.

So PJM proposed that state regulators take the lead in setting the rules for how utilities bundle up all the capacity needs of the large loads seeking to come online and submit them to the RBP, Rutigliano said.

This creates a risk that utilities could claim to be representing large loads in future auctions without securing durable commitments from those customers to actually pay for the capacity they commit to buying. If that happens, utility customers would be left holding the bag.

All this is unfolding on a compressed timeframe. Under pressure from the Federal Energy Regulatory Commission and state governors, PJM has agreed to hold its backstop procurement auction in September. That’s not a lot of time to prepare — but Rutigliano thinks PJM needs to work closely with states to ensure that regular customers don’t end up paying for resources that utilities secure for data centers.

“The stakeholder-approved version is that only utilities that affirmatively step up and say ​‘we want more capacity’ get put in as buyers,” he said. ​“States have to make sure that doesn’t get passed on to ordinary ratepayers. They have to make damn sure there’s a data center that pays for it, or [utility] shareholders pay for it.”