Largest U.S. Grid Faces Battle Over Data Center Plan As Prices Rise

An upcoming decision by the largest U.S. grid operator could reshape the data center development landscape and have a major impact on millions of Americans' utility bills. 

Surging data center development is creating havoc across the territory of PJM Interconnection, a power transmission system spanning 13 states in the mid-Atlantic and Midwest and encompassing many of the largest and fastest-growing data center hubs, like Northern Virginia, Chicago and Pennsylvania.

Across its service area, data centers are connecting to the grid faster than new power generation needed to supply them. The result has been skyrocketing electricity prices poised to increase households' utility bills by close to $70 by 2028, as well as a growing risk of regional blackouts as grid reliability deteriorates.

As PJM careens toward an affordability and reliability crisis, it has been forced to fundamentally rethink how data centers and their power sources connect to the grid. PJM is in the final stages of a process to establish new rules and policy tools governing data centers that aim to keep prices down and ensure reliability while still facilitating the data center sector’s rapid growth. 

Whether these efforts are successful will have consequences that extend beyond the data center industry.

“As soon as 2027, we might not have enough power to go around, and what are we going to do in that situation?” said Claire Lang-Ree, an advocate for the Sustainable FERC Project at the Natural Resources Defense Council. “How can we make sure the general public isn't paying for the electricity costs and reliability risks that are caused by a few big companies?”

PJM is expected to decide on its new data center plan by the end of this month. But what this plan will look like remains far from certain. 

There are deep disagreements among the data center firms, utilities, tech giants, energy producers, governors, consumer advocates and others engaged with PJM on developing a framework to address its data center problem. 

In November, a committee of stakeholders voted on 12 different proposals for how to reform the data center interconnection process, and not a single proposal passed. While the vote was nonbinding, it highlighted the divisions on the best path forward.

Amid competing priorities, the only area of consensus is that the current system isn’t working. 

“The voting reflects the nearly impossible challenge of trying to ensure resource adequacy and control ratepayer costs, while also allowing data center development in a market that is already short on generation supply and faces a 5-to-7 year timeline to bring on new large-scale generating resources,” Jon Gordon, a director at clean energy trade group Advanced Energy United, wrote about the meeting.

Like all regional transmission organizations in the U.S., PJM oversees a service territory within which many utilities provide electricity to customers. More than a thousand member utilities participate in PJM, including Dominion Energy, American Electric Power and Consolidated Edison. 

PJM operates the market in which those utilities buy power, and it is responsible for coordinating the flow of wholesale electricity and ensuring the reliability of the grid. While it doesn't own power plants, PJM and other operators control the approval process for adding plants and other new generation. 

At the heart of PJM’s looming crisis is an imbalance between the limited supply of new power being added to the grid amid a flood of demand for electricity from data centers.

PJM is home to a higher concentration of data centers than any other U.S. grid system. Total electricity use within PJM is expected to grow by 166 gigawatts by 2030, with 55% of that growth coming from data centers, according to Grid Strategies.  

Urgent action is needed to build more generation and increase the supply of power, but PJM’s generation interconnection process is fundamentally broken, according to industry observers. The grid operator has a backlog of power generation projects in its interconnection queue, with some waiting as long as seven years as an overwhelmed PJM struggles to conduct reliability studies.

Soaring electricity demand from data centers, combined with insufficient supply, is already pushing the PJM grid to its limit. The system narrowly avoided cascading blackouts on at least one occasion in 2024. According to the NRDC, by next summer, PJM will have just enough power to keep the grid reliable. 

This energy supply shortage is also driving up electricity costs for consumers. 

Next week, PJM is set to release the result of its capacity auction for 2027, which sets the price power plant owners will receive for the electricity they generate during periods of peak demand. These capacity prices have exploded as anticipated demand from data centers has far exceeded the amount of new generation expected to come online. 

Now, capacity power prices are expected to jump more than 1,000% from 2024, an increase that would have been higher had PJM not placed a price cap on the sale. PJM’s customers collectively saw $9.4B in higher electricity bills last summer due to data centers’ impact on capacity pricing, with an additional $1.4B expected in 2026, according to the NRDC.

Under the current system, PJM customers would pay an additional $100B through 2033.

“We have this massive, almost overnight influx of load through data center development, so there's all this demand, but we're short on supply,” said Patrick Cicero, an attorney with the Pennsylvania Utility Law Project, an organization that represents the interests of low-income utility customers.

“How do we figure out how to create a process whereby all these large loads that want to connect can do so in a structured manner that doesn't cause affordability or blackout concerns?”

In designing its new data center interconnection framework, PJM has several available policy tools to help bring power supply more in line with data center demand.

On the supply side, steps can be taken to expedite grid connections for generation assets being built to power data centers. On the demand side, data centers can be encouraged or required to become “flexible loads” that reduce their energy consumption or disconnect from the grid when the system is under strain.

While there is consensus among PJM stakeholders that these measures need to be in place, there are stark divisions as to whether the grid operator should be approaching data center developers with a carrot or a stick to implement them. 

Groups like the NRDC and PJM’s independent market monitor, Monitoring Analytics, have proposed that data centers be required to provide their own generation to participate in the capacity market.

Data centers would only be given interruptible service until they fund the development of equivalent generation assets or agree to participate in demand response or curtailment programs. Monitoring Analytics’ proposal goes even further, arguing PJM should only allow data centers to connect to the grid when there is capacity on the system to serve them reliably.

According to the NRDC’s Lang-Ree, PJM would save its customers $100B in capacity costs by mandating that data centers develop their own capacity generation.

“If you're a data center, you just have to understand that when there's a grid emergency and there's not enough power to go around, you might get interrupted first for whatever portion of your capacity you haven't offset yet,” Lang-Ree said. “The cost implications are really jaw-dropping.”

But the data center industry and other PJM stakeholders have pushed back on such mandates.

When PJM published a “conceptual proposal” in August that would have allowed the grid operator to curtail power deliveries to data centers before other users when the grid is under strain, the Data Center Coalition filed a brief in opposition. It argued the measure “relies on unsupported assumptions, and lacks the detail necessary for customers to even evaluate technical and operational feasibility.” 

The DCC, along with a coalition of governors and utilities like Exelon and PPL, have instead advocated for a more carrot-based approach. Their proposals aim to incentivize data centers to facilitate new generation by creating an expedited interconnection process for generation tied to data center projects or that state leaders identify as being critical for serving them.

A pathway proposed by PJM would approve new generations in just 10 months, rather than years. These proposals would also incentivize data centers to participate in demand response programs but wouldn't mandate them. 

Advocates for affordable power and grid reliability are skeptical that these incentive-based measures will be effective. Lang-Ree called such measures a “hopes-and-dreams” approach to PJM’s problems, arguing there need to be clear rules and guidelines for what happens when there isn’t enough power to go around.

“You need enforceable requirements — trying to incentivize people to do this isn't going to work,” PULP’s Cicero said. “The only proposals that I take seriously are the ones that require bringing their own generation.”