Demand on the electricity grid that serves Pennsylvania and a dozen other states, including Maryland, flirted with an all-time record last week as arctic cold blanketed most of the country and millions of heating systems worked overtime.
While it fell short of a new peak — due to school and government closures after winter storm Fern, according to grid operator PJM Interconnection — the episode underscored the urgency of modernizing the system to cope with predicted unprecedented growth.
“PJM is the regional transmission organization in the country that is most short of electricity right now,” said Jon Gordon, director of the renewable energy industry group Advanced Energy United.
Without more, electricity prices that spiked more than 20% last year will continue to rise as the supply gets tighter, he said. PJM, meanwhile, has struggled to add new generating capacity, including hundreds of renewable energy projects stuck in its queue, to the grid.
PJM, based in Pennsylvania’s Montgomery County, outside Philadelphia, forecasts electricity use will grow by nearly 70% over the next two decades. Most of the new demand will come from data centers to develop artificial intelligence, an endeavor some elected leaders liken to a new race for global technological dominance. On the national level, states are competing to attract data center projects for the boost they’re expected to bring to local economies.
Rob Gramlich, a Maryland-based energy policy consultant, said consumers in the PJM states are suffering the effects of policies that could not protect them from a dramatic shift in the energy economy.
Elected officials, the tech and energy industries and PJM itself appear motivated to implement solutions, but Gramlich, who is a former senior economist at PJM, warned relief won’t be quick. While the wholesale price increased dramatically, PJM notes that’s a relatively small portion of a retail electric bill and translates to a 1.5% to 5% year-over-year increase.
Across PJM’s territory, the additional cost adds up. Pennsylvania Gov. Josh Shapiro’s administration estimated freezing the wholesale price at its current level for two years would save retail customers $27 billion, with $5 billion in Pennsylvania alone.
“It’s hard to see prices coming down any time soon. It takes a few years to dig out of a hole like this,” he said. “Everyone just needs to figure out ways to manage through the next few years.”
But Abe Silverman, a researcher at Johns Hopkins University’s Ralph O’Connor Sustainable Energy Institute, said he’s hopeful because industry leaders and elected officials appear to be largely on the same page with regard to their possible solutions.
“There’s infinite numbers of variations,” he said. “What really matters is who is paying for the generation needed for data centers.”
Last month, the Trump administration and governors from each of the PJM states, announced a bipartisan statement of principlesto reform PJM. They include extending a cap on wholesale electricity prices, speedy construction of new power sources and transmission lines and a plan to insulate regular consumers from the effects of data center power consumption.
Almost simultaneously, PJM’s board filed an outline of its plan with federal regulators. Developed with input from power generators, local utility companies and state consumer watchdogs, it proposes improvements in energy demand forecasting, allowing data centers to build their own power plants and creating a faster review process for projects with state backing.
Ultimately, the Federal Energy Regulatory Commission will have to approve changes to PJM’s tariff — the grid operator’s rulebook. Which elements of the two plans make the final cut will be the subject of discussions between PJM members. The filing indicates PJM aims to finalize reforms by next year. State regulators and consumer advocates have only a limited rolein PJM’s deliberative process.
“They’re trying to balance cost, reliability and growth,” Gordon said. “It’s almost impossible to have all three of those things.”
Record prices
PJM was established in 1927 to improve efficiency and reliability between electric utilities in Pennsylvania and New Jersey. Maryland later joined, giving the organization its three-letter name.
It has since expanded to cover territory from New Jersey to Illinois and from Pennsylvania’s northern border to North Carolina, serving 67 million customers.
In addition to managing the flow of electricity during severe weather events, such as last month’s winter storm and polar chill, PJM manages access to the transmission lines that connect power plants and customers. It also operates electric markets to ensure enough generating capacity is available when it’s needed.
PJM holds auctions to set the prices power plant owners receive for generating electricity or having capacity standing by to run when demand surges.
Patrick McDonnell, president and CEO of environmental group PennFuture, said the auctions are held three years out from when the power is needed to provide price signals for the market. The trends in price clue in generators whether more or less electricity will be needed in coming years.
That reliability pricing model is used by energy companies to determine when older, less-efficient power plants should “retire” and provides incentives for companies to build more plants when prices are trending higher. The auctions also assure plant operators that they won’t lose money by keeping plants on standby, even if they’re never needed.
In 2024, the auction for standby capacity resulted in a record price of about $270 per megawatt per day, or roughly 10 times the prior auction’s price, setting the stage for dramatically higher electricity bills last year. PJM has a cap of $500 per megawatt-day, which did nothing to insulate ratepayers from the market forces at work.
Shapiro sued PJM, arguing that its pricing model wasn’t designed for the current environment and that it could no longer provide accurate market signals. As a result, consumers would pay astronomical prices without any assurance that their lights will stay on.
“Allowing a capacity auction to proceed with a cap that, because of changing real world circumstances, fails to protect consumers across the PJM region from bearing astronomical costs,” Shapiro’s complaint claimed, adding that it undermined public confidence in the system.
In December 2024, the Shapiro administration and PJM reached a settlement to cap prices for capacity auctions in 2025 and 2026 at $329 per megawatt-day.
Political consensus
Silverman, who worked for the New Jersey Board of Public Utilities and FERC before joining Johns Hopkins, said PJM’s interim CEO David Mills expressed willingness to work with its state officials and the federal government in a recent meeting.
“Directionally, I have a little bit of hope that this is the beginning of a lasting political consensus across and among entities that don’t always see eye-to-eye,” Silverman said.
The principles the PJM governors and U.S Energy Secretary Chris Wright and U.S. Interior Secretary Doug Burgum inked on Jan. 16 call for a two-year extension of the capacity auction price cap. If implemented, that would freeze prices through 2030 and provide time to engage PJM members on market reforms.
The governors and Trump administration also called on PJM to hold a “reliability backstop auction” later this year to procure adequate generation resources. This would come with a 15-year price guarantee to ensure revenue for generators that build new power plants.
They are urging PJM and each of the states to make data centers pay for the additional power. It directs PJM to allocate the costs to local utilities.
Governors in each state agreed to use their authority to have state regulators establish new rate classes for large loads, including data centers, allowing local utilities to pass the cost to data center operators.
PJM’s proposal is the result of an ongoing Critical Issue Fast Path process involving its stakeholders. Like the governors and Trump administration, it calls for an immediate backstop auction to remedy shortfalls in capacity. It stops short of committing to an extension of the price cap, noting advantages and disadvantages that require further discussion.
It also takes a different approach to managing the impact of data center demand on the wholesale electricity market. It would encourage data centers to “bring your own new generation” (BYONG) to offset their load on the grid by offering an expedited process to connect to the grid.
The proposal calls on state governments to enact reforms to siting and permitting processes to accelerate the addition of generation constructed by data centers.
Because data centers would not be required to provide their own power, PJM proposed a “connect and manage” strategy that would allow data centers to draw power from the grid without offsetting it with a new supply. Those users would be subject to requests to shed load by shutting down or switching to back up generators during periods of high demand. Local electric utilities would determine which customers’ power use should be curtailed, the proposal says.
Other reforms include improvements to PJM’s load forecasting process, which Silverman said relies on utilities and other intermediaries to report what they expect their demand to be.
“It was widely agreed that the PJM load forecast was too high,” he said, noting it contained speculative demand for data centers that may never be built, or whose developers submitted applications for the same project in multiple locations.
Gordon, of Advanced Energy United, said renewable energy advocates also have concerns that the expedited connection process is designed to bring new fossil-fuel fired power plants to the front of the queue by including a minimum capacity of 250 megawatts. That would effectively shut out wind, solar and battery storage installations, he said.
PJM’s proposal to make data centers that don’t build their own power plants the first to be cut off in an emergency is likely to face opposition from the tech industry, Gordon said, noting that AI training depends on steady power supplies.
“The hyper scalers really don’t like the thought of being asked to shut down involuntarily,” he said.
Both proposals set ambitious timelines, Silverman said, with the governors recommending a backstop auction in September and market reforms in place for the next capacity auction in 2027. PJM’s timeline calls for the fast track for BYONG connections to be in place by the end of this summer and other reforms to be finalized by the end of the year.
“What we’re going to see is a real intensive push at PJM over the next few months where they work on having a separate market for large loads,” Silverman said.
And while the joint proposal by PJM governors and the White House has a political advantage, Gordon said the ball is in PJM’s court to decide what is in the final submission to federal regulators.
“We’re all waiting for that to happen,” he said. “The devil is in the details and there are a lot of details waiting to be fleshed out.”
