Inside PJM’s $555/MW-day Reliability Backstop Plan for Data Centers
PJM stakeholders – including the electric distribution companies and the Data Center Coalition – OK’d a reliability backstop procurement plan to meet data center demand and address a looming supply shortfall.
This approach – if approved by the PJM Board and then by the FERC – would have utilities, other load-serving entities, and perhaps the data centers themselves - requesting PJM to access a specific quantity of capacity in a one-time auction. The load-serving entities will then bill large loads for capacity, with average prices capped at $555/MW-day, starting in the 2028/2029 Delivery Year. Contracts will cover from two to 15 years.
The Reliability Backstop Procurement (RBP) package will use a bilateral auction allowing large loads and suppliers to directly contract for capacity, with specific terms and conditions to be negotiated among the parties
A Large Load Registry will be established develop the procurement target quantities.
Pricing will be governed by a volume-weighted average cap, based on the estimated Cost of New Entry - CONE - for the 2028/29 Delivery Year – in other words, what it will cost to bring new gas-fired supply on in about two years. That cap is set
Note that this number is considerably higher than the current $325/MW-day cap for the past two capacity auctions and subsequently extended to the next two.
PJM would commit resources, ranking the offers by volume-weighted price (in $/MW-day, averaged across the contract term based on the resource’s in-service date). It will accepting each offer sequentially from lowest to highest until the procurement capacity target is met or the price cap is exceeded.
In PJM’s example, a total volumetric target of 1,000 MW is used and each tehroetical project has the same duration. So, Offer 1 comes in for 250 MW at $475, Offer 2 for 250 MW at $500, Offer 3 for 250 at $525, and Offer 4 for 250 MW at $600, leading to a weighted average of $525.Under that example, all resources would be accepted. But in my example, if the last offer were to come in at $725, the weighted cap would come in over $556/MW-day exceeding the cap. The auction would end and that final $725 offer would be excluded.
The cap is meant to keep developers from obtaining immense leverage, enforcing competitive discipline so generators don’t get too greedy. But it may simply push capital to invest in supply resources elsewhere.
There’s another challenge: PJM’s recently issued 70-page white paper Powering Reliability Through Market Design notes that the estimated CONE – upon which the price cap is based – is well below empirically observed prices for new turbines. Since that price was set, the CONE has nearly doubled owing to slow supply chains.
However, this example should provide a real-world indicator of what’s available at what price, while sending a very strong example to PJM ratepayers as to what capacity prices may look like in the years after the current $325 cap expires.