America's biggest grid is showing signs of a power squeeze

PJM's latest capacity auction shows the cost of not building new capacity

Last week, America’s largest grid operator, PJM, announced the results of its latest capacity auction.

Typically, such auctions don’t garner much attention. For much of the last two decades—an era of flat electricity demand—capacity on the grid was essentially a given. As a result, the market for such capacity was an afterthought. But PJM’s latest auction results were yet another sign that America’s electric grids are entering a turbulent new era.

The clearing prices in last week’s auction came in at $270/MW-day, more than 8 times higher than last year’s price. In the Dominion zone—home to Virginia’s “data center alley”—the price came in at $444.26/MW-day.

PJM’s capacity market was designed to create an incentive for reliable power. It’s a way for the grid operator to book electricity generation capacity years in advance to ensure that the lights don’t go out. When there’s a surplus of capacity available, prices go down; when there’s a shortage prices go up.

As fossil fuel plants have retired, the total amount of capacity that can show up to the auction has fallen. That’s, in many ways, by design. Federal air pollution limits, state decarbonization goals, and utility net-zero plans have all been architected to shut these plants down.

But policies designed to decarbonize the power sector have been based on an important assumption: that these resources will be replaced. So far that isn’t panning out as expected.

Slow interconnection queues, permitting delays, local opposition, and supply chain problems have all prevented new solar, wind, and battery projects from coming online. The drag on clean energy has been so significant that retirements in PJM actually outpaced new capacity additions over the last 5 years.

Grid operators, regulators, and lay-doomers have been sounding the alarms about the risks of such a scenario for a long time. But in the last 18 months, the squeeze has grown even tighter.

The IRA’s incentives for electric vehicles, combined with the EPA’s new tailpipe rules led grid operators to revise their electrification forecasts significantly. PJM is now expecting millions of new EVs to charge each night that they weren’t expecting just a few years ago.

“Bidenomics” and the larger trend of reshoring manufacturing is leading a boom in industrial electricity demand. Clean energy companies have announced new factories throughout Ohio, Pennsylvania, and other states in the PJM territory.

Meanwhile, liberal states have passed policies aimed at decarbonizing their building sectors, which will result in large shifts away from gas heating and towards electric heat pumps.

Add all this up and you get a lot of future electricity demand. PJM expects winter peak demand to grow by 20% over the next decade.

None of these challenges are intractable. America has the technological and physical ability to meet surging demand.

In the short term, utilities can invest more in demand response programs and “virtual power plants” that create better incentives to cut peak demand. Power developers can make use of transmission lines that previously brought coal power to city centers. Grid operators can invest in reconductoring and grid enhancing technologies.

Over the longer term, clean firm power technologies like enhanced geothermal can power vast swaths of the American West, while offshore wind can bring steady power to the East Coast. Nuclear could finally make a comeback after years of stagnation and slow decline.

All of the tech and all of the roadmaps are right in front of us. But planning and implementing are two very different tasks.