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.”
