US power grid operator PJM is considering market overhaul

By Laila Kearney

NEW YORK, May 6 (Reuters) – PJM Interconnection, the largest U.S. power grid operator, said on Wednesday it is considering market changes that could reshape how electricity is bought and sold across its system, which faces the risk of shortages from data centers outstripping energy supplies.

PJM’s wholesale markets, spanning 13 Mid-Atlantic and Midwest states, help determine electricity prices for roughly one in five Americans and influence power plant investment and grid reliability in the nation’s largest data center hub. 

The grid operator is considering reforms after a record price rise in its capacity market, which was driven primarily by new requests to connect data centers to the grid, and the political fallout that ensued.

“Typically, in the electric utility industry, you would expect some level of stability … not this ramp-up that we haven’t experienced since, probably, the Industrial Revolution,” PJM Chief Operating Officer Stu Bresler told Reuters.

Capacity prices, which are typically determined by an annual power auction, are the grid operator’s primary way of securing enough electricity to avoid blackouts on the highest-demand days of the year.

While high prices are meant to encourage developers to build more power plants, that new supply isn’t coming on fast enough. PJM has warned of an electricity shortfall as early as 2027.

At the same time, rising power bills for homes and small businesses in the region have drawn political scrutiny and intervention in PJM’s operations. Last year, a group of governors led by Pennsylvania’s Josh Shapiro successfully pushed to place a limit on PJM’s capacity prices, which have spiked by more than 1,000% over the last two auctions. 

The cycle of high demand leading to spiking prices in PJM’s largely unhedged market, followed by politicians or regulators stepping in to suppress those prices, has created a “credibility trap” that ultimately scares off the long-term investments needed to develop major power plants, PJM said.

“Prices must rise to attract new supply, but those same price spikes also trigger interventions that undermine confidence those prices will hold,” PJM said. “As a result, investment is delayed, and the shortage continues.”

In January, PJM’s board asked staff to explore alternatives to the existing market structure. The company on Wednesday outlined three potential reforms that would rely more heavily on long-term power deals compared with the current short-term contracting. 

One so-called pathway would require most electricity in PJM to be sold through long-term contracts between suppliers and wholesale buyers at fixed rates, with the capacity market continuing to operate on a smaller scale. 

A separate proposal would allow PJM stakeholders, which could include entire states, to choose whether to limit what they pay for capacity in exchange for also limiting the reliability of their electricity supply.

The third option involves significantly shrinking the capacity market, and instead recovering revenue through separate energy markets, PJM said.

The pathways are intended to be the framework of potential solutions that will be discussed by PJM’s hundreds of stakeholders, it said.

“The choices involve real trade-offs affecting different parties in different ways,” PJM said.

(Reporting by Laila Kearney in New York; Editing by Paul Simao and Aurora Ellis)