Feel sorry for the PJM Interconnection. For many years, the grid operator functioned discreetly behind the scenes, aligning electricity demand with supply. In the meantime, consumers benefited from some of the lowest electricity rates in the United States.

That is no longer the case. Politicians, businesses, households, and power companies believe it is due for a significant redesign. Even PJM concurs.

This week, PJM issued a white paper stating that the region “has years, not decades” to implement essential reforms in its operations. “The current state is unsustainable,” PJM CEO David Mills mentioned in the report’s foreword.

Typically, such technical reports would be reviewed by a select group of legislators and regulators. However, PJM’s area includes a significant number of data centers, notably in the compute-intensive Northern Virginia region. Changes affecting PJM will reverberate through the tech industry.

The 70-page document serves as a reflective exercise. Yet, despite the profound reflection, not everyone is persuaded that the organization can manage its own reform. One utility, American Electric Power, is contemplating withdrawing from PJM entirely.

“The existing condition of PJM’s performance and stakeholder consent process does not fill me with confidence that these challenges will be addressed soon,” Bill Fehrman, AEP’s CEO, stated during an earnings call on Tuesday. “In fact, if action is not taken promptly, I anticipate we could still be having these identical discussions in 10 years. The PJM market functioned efficiently when supply outstripped demand; we are now in a distinctly different era.”

What has changed

The rise of cloud computing and AI is beginning to strain PJM’s current generating capacity. Amid escalating demand, PJM halted applications in 2022 for new generating sources to connect to its grid, citing a backlog lasting several years. Just when the need for electricity was set to increase for the first time in decades, the grid operator barred new sources from even applying for integration.

PJM is not solely responsible for the prolonged backlog. Numerous interconnection requests are duplicates—developers often propose virtually identical projects in different grid regions to determine which gains approval first. PJM’s sluggish approval system meant that out of over 300 gigawatts of projects waiting in 2022, only 103 gigawatts signed agreements, and merely 23 gigawatts have been connected thus far. Most developers opted to withdraw instead of enduring the wait.

The demand in the region continues to be so immense that, since PJM recently reopened the queue, power companies and project developers have submitted more than 800 interconnection requests for 220 gigawatts of new power. PJM may have attempted to pause new requests, but it did nothing to mitigate the demand for new interconnections.

What PJM is proposing

In its white paper, PJM has suggested three alternatives. One would necessitate utilities and power generators to essentially make larger, longer-term commitments. (Currently, PJM requires them to commit to supplying a specific amount of electricity for three years.) The second alternative would modify reliability guarantees for customers—those paying less might experience power cuts first. The final option would aim to transition PJM towards a real-time market, where prices are dictated by supply and demand, without completely eliminating the stability provided by long-term contracts.

It’s challenging to envision PJM emerging favorably from any of these scenarios.

Firstly, PJM’s market operation has somewhat restricted it to a three-year perspective. This approach seemed effective when natural gas power plants replaced coal-fired generators, but nowadays, solar and batteries can be deployed at least two to three times faster. Additionally, the scarcity of natural gas turbines means that power plants proposed today won’t be able to install the necessary equipment until the early 2030s. Furthermore, turbine prices have soared due to demand from hyperscalers. Given these conditions, it’s difficult to see suppliers eager to commit to an even longer timeline.

The second alternative could lead to PJM dividing its region, its customers, or both into categories of “haves” and “have nots.” For individuals and businesses strained by years of increasing utility bills, it’s hard to imagine them being pleased with reduced service. Politicians have taken note of rising power prices and anti-data center sentiments, making it unlikely for them to support this option.

The final approach possesses the most nuance, yet it also appears as PJM attempting to appease all stakeholders. It’s the sort of plan that seems like it should attract large utilities like American Electric Power, allowing them to engage in short-term markets for greater profit while still benefiting from reliable long-term contracts—essentially, having their cake and eating it too. However, if AEP, one of the largest utilities in PJM territory, isn’t enthusiastic about the offering, it’s hard to see how PJM can select that one either.

The surge in demand for data centers has coincided with disruptions from renewables and batteries, which continue to decrease in price. Those trends are now colliding with an organization that is either unwilling or unclear about how to change its operational practices.

PJM may have hoped its white paper mea culpa would grant it some leeway. But with politicians hinting at price caps and utilities hesitating about future involvement, the grid operator may not have the luxury of years to resolve these issues. It appears a tumultuous few years lie ahead.