America’s largest power grid is under strain from AI – and no one is happy

PJM interconnection is disappointing. For decades, grid operators worked quietly behind the scenes to match power demand with supply. Meanwhile, customers enjoyed some of the lowest electricity rates in the United States.

no longer. Politicians, businesses, households, and power companies believe that a review is necessary. PJM agrees.

PJM said in a white paper released this week that it will “take years, not decades” for the region to fundamentally change the way it operates. “The current situation is not sustainable,” PJM CEO David Mills wrote in a forwarding to the report.

Normally, this kind of bizarre report would land on the desks of several lawmakers and regulators. However, PJM’s territory includes numerous data centers, including the compute-dense region of Northern Virginia. What happens with PJM will have ripples throughout the tech industry.

The 70-page report is a navel-gazing exercise. But despite deep self-reflection, not everyone is convinced that organizations are up to the task of radically reinventing themselves. One utility, American Electric Power, is considering exiting PJM altogether.

“The current state of PJM’s operating results and stakeholder approval process does not give us great confidence that these issues will be resolved quickly,” AEP CEO Bill Fehrman said on Tuesday’s earnings call. “In fact, I think if we don’t take action now, we could be having the same conversation 10 years from now. The PJM market was performing very well when supply exceeded demand, but we’re in a very different era now.”

What has changed is that

Cloud computing and AI are beginning to strain PJM’s existing generation capacity. Against a backdrop of surging demand, PJM has suspended applications for new generation sources to connect to the grid until 2022, citing a long-standing backlog. Just as demand for electricity began to rise for the first time in decades, grid operators blocked applications for new power connections.

Not all long-term backlogs are due to PJM. Many interconnection requests are duplicates. Developers essentially propose the same project in different grid areas to see which one gets approved first. Due to PJM’s rigorous approval process, only 103 gigawatts of the more than 300 gigawatts of projects pending in 2022 were ultimately able to sign contracts, and only 23 gigawatts have been connected so far. Most developers backed out rather than wait it out.

Demand in the region remains so great that utilities and project developers have submitted more than 800 interconnection requests for 220 gigawatts worth of new power since PJM recently reopened the queue. PJM may have been able to pause new requests, but it was unable to curb the demand for new interconnections.

Here’s what PJM suggests

PJM proposes three options in its white paper. For one thing, it will require utilities and power producers to take on an inherently larger and longer-term commitment. (PJM currently requires a commitment to provide a certain amount of electricity for three years.) The second option changes the reliability guarantees to customers. Low-rate customers may be the first to lose power. The final choice seeks to move PJM closer to a real-time market where supply and demand determine prices without completely eliminating the stability of long-term contracts.

It’s hard to see how PJM would properly appear in any of these scenarios.

First, the way PJM operates its markets is somewhat anchored in a three-year mindset. While it seemed to work well when natural gas power plants were replacing coal-fired power plants, solar power and battery storage can now be installed at least two to three times faster. Additionally, a shortage of natural gas turbines means currently planned power plants will not be installed until the early 2030s. Furthermore, the price of turbines is rising due to demand for hyperscalers. Given these realities, it is unlikely that suppliers will want to commit to longer schedules.

The second option would result in PJM dividing its territories, customers, or both into groups of “haves” and “have-nots.” It’s hard to imagine that people and businesses, exhausted by years of rising utility costs, will be satisfied with a downgrade in service. Politicians are unlikely to support this policy as they capitalize on rising power prices and anti-data center hostility.

The last approach is the most nuanced, but it also sounds like PJM is trying to be all things to all people. This is the type of plan that could be attractive to large power companies like American Electric Power, offering them the opportunity to play the short-term market and make more money while also having the benefit of predictable long-term contracts and having their cake and eating it too. But if AEP, one of the largest power companies in PJM’s area, isn’t happy with the menu before it, I don’t see how PJM can even choose that menu.

The growing demand for data centers coincidentally coincides with disruption from renewable energy and batteries, which continue to fall in cost. These trends are currently colliding with organizations that are unwilling or unable to change the way they operate.

PJM may have thought that reading the white paper would buy them some time. But with politicians threatening price caps and utilities hesitant about future participation, grid operators may not have years to sort things out. It looks like things will be tough in the next few years.