PJM States Urge Action as Interconnection Delays Threaten Reliability

On January 16th, the U.S. Department of Energy, along with the governors of every state in PJM’s territory, published a “Statement of Principles Regarding PJM.” The letter came in reaction to PJM’s recent capacity auction, which fell more than 5% short of reliability targets and raised serious concerns over future grid reliability and affordability in the nation’s largest power market. The Statement of Principles urges PJM to hold a “Reliability Backstop Auction” to procure new capacity resources through 15-year PPAs that will provide the price certainty needed for developers to build new generation. Yet this auction, should it commence, will likely fail to address the fundamental issue plaguing PJM: its inefficient interconnection queue.

Unprecedented Growth

The shortfall in PJM’s most recent capacity auction, for delivery years 2027/’28, reflects skyrocketing load forecasts. PJM’s 2030 peak load estimates increased from 158 GW in 2023 to 183 GW in 2026, driven largely by the growth of AI data centers in places like northern Virginia, Ohio, and Pennsylvania. As such, the amount of on-call, dispatchable generation necessary to maintain reliability and avoid blackouts has increased significantly over the span of a few short years. This development has also coincided with regulatory overhaul and rule changes regarding PJM’s capacity accreditation, which have driven delays in capacity auctions and rendered developers unable to respond quickly to price signals in the market.

Generation Shortfalls

Rising load forecasts and high capacity prices highlight a need for more generation, but firm capacity is not coming online fast enough. While more than 12 GW of generation capacity is currently slated to energize before 2028, nearly 11 GW of it is renewable, which is non-dispatchable and less able to stabilize the grid in moments of peak stress. The little gas generation that has connected to the grid recently is illustrative of the extensive wait times new resources must go through: the 1.1 GW Trumbull Energy Center gas plant in Ohio, which energized this past December, was first proposed in 2015. In the face of enormous price signals in PJM’s market, developers may nonetheless be unable to execute on new dispatchable projects soon enough to address reliability issues.

Interconnection Issues

While wait times for new projects have historically been high, they have recently increased markedly due to a massive backlog in PJM’s interconnection queue, with projects coming online after 2020 having spent over five years on average in the queue. The trend has been driven by the rise of renewable energy projects, which tend to be individually smaller and more modular, and thus more numerous, than traditional large power plants. Developers for many of these projects were incentivized by a lack of withdrawal penalties, as well as minimal financial commitment or project control requirements, to submit multiple, often speculative, projects to the interconnection queue. PJM froze new interconnection applications in 2023 and has begun to implement new interconnection procedures, such as the Reliability Resource Initiative, designed specifically for shovel-ready dispatchable generation. However, these reforms have yet to demonstrate the impact necessary to address PJM’s severe reliability issues.

Going forward

A new Reliability Backstop Auction, similar to the one proposed by the Secretary of Energy and numerous governors of PJM states, is currently being prepared by PJM. It should address concerns around the need for “15-year price certainty” to incentivize long-term commitments for new firm generation. Yet price certainty alone won’t suffice without the regulatory certainty to match it. Current disfunction in PJM is largely attributable to the long and unpredictable process of interconnecting to the grid, which has chilled new investment despite an extended period of high prices. It remains to be seen if more reforms can be implemented to fully energize and support new generation and stave off serious reliability issues in PJM.

Interested in more power coverage? Check out all of FactSet’s Energy Market Insights.

This blog post is for informational purposes only. The information contained in this blog post is not legal, tax, or investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.