The PJM Grid Crisis: How AI & Data Centers Are Spiking Energy Prices

Is the "AI butterfly effect" about to send electricity prices through the roof? In this video, we break down the critical PJM Base Residual Auction taking place between December 4th and December 10th, 2025. While grid auctions usually sound arcane and boring, this one is deciding the capacity and cost of power for June 2027—and the stakes have never been higher.

Here is what we cover in this episode:
• The AI Boom & Power Demand: How the launch of ChatGPT and the manufacturing of energy-hungry Nvidia chips kicked off a massive spike in data center load, specifically in states like Ohio and Virginia.

• The Supply Crunch: Why the grid’s supply side hasn't kept up. We discuss the fallout from Winter Storm Elliot in 2022, where nearly 40 gigawatts of gas generation failed to show up, forcing PJM to derate its assets and tighten the supply curve.

• Skyrocketing Prices: We look at the numbers. Capacity prices soared from a three-year average of roughly $37 to over $269 in previous auctions.

• The Price Cap Strategy: How Pennsylvania Governor Josh Shapiro negotiated a temporary price cap (a "collar" between ~175and 325) to protect consumers."

• The Coming "Gloves Off" Moment: This current auction is the last one protected by the price cap. Future auctions scheduled for 2026 will have no floor or ceiling, potentially leading to even more volatile pricing.

• Political Fallout: With data center loads costing the market over $16.6 billion in the last two auctions alone, state governors and the Department of Energy are now fighting over how to fix the interconnection queue and manage the grid’s future.

The results of this auction will be released on December 17th, and they could signal a boiling point for the US electrical grid

Chapters

• 0:03 Setting The Stage: PJM Auction
• 0:21 Decoding The “Base Residual Auction”
• 0:53 The AI Butterfly Hits The Grid
• 1:48 Winter Storm Elliott And Deratings
• 2:31 Capacity Prices Spike And Political Caps
• 3:06 Truncated Schedules And Weak Supply Signals
• 3:30 Data Center Load And Cost Shock
• 4:00 BYOG And Policy Showdown
• 4:26 A Boiling Point Before Results

Transcript

SPEAKER_00: 0:03

I've got your energy story for this, the second week of December, 2025. Well, from December 4th to December 10th, the PGM Interconnects base residual auction is taking place to ensure a sufficient capacity for the power delivery year starting June of 2027. First of all, why the heck does every grid operator have to have such arcane names for everything? It's like the legal profession with all of its strange, inscrutable, and frankly stupid language, seemingly meant to ensure we cannot understand it. For Google's Gemini, the base residual auction is called that because it's the base auction in PGM's market held to procure the majority of needed electric capacity for future delivery years. These typically take place three years ahead of time with incremental auctions that occur later on to fill any gaps. Usually, these auctions, held by PGM to cover its 13th state territory, are ignored by the rest of us because they're somewhat arcane, and in the past they also didn't impact energy prices all that much. But in November of 2022, something took place that would eventually change all of that. OpenAI launched ChatGPT, and the AI butterfly began quietly flapping its wings. That event stimulated a great deal of activity in the space among other AI developers, even as chip manufacturer NVIDIA began manufacturing increasingly more powerful and energy hungry chips to satisfy this burgeoning AI demand. Soon, the butterfly effect on the power industry became remarkably pronounced. In some states, like Georgia, Indiana, Texas, Ohio, and Virginia, data central loads soared. At least projected data central load did. Ohio and Virginia load sit within PGM, and suddenly the demand forecasts there that had been stagnant for over a decade started ramping up quickly. PGM's school erotic supply side of the equation did not keep pace with its interminable interconnection cues, and the grid operator re-rated all of the supply assets to better reflect their ability to meet demand under high stress conditions. That effort was prompted by deficiencies that occurred during Winterstorm Elliott's unhappy surprise in late December of 2022. Then, numerous assets did not show up to the pre-Christmas party, with gas fire generation scrooging up big time. In fact, nearly 40 gigawatts of gas failed to show up during the worst part of that shortage. So with existing supply derated, almost nothing new being built, and an expanding forecast for data central loads, you have the classic Econ 101 price setting. Take a supply curve that barely budges and shift the demand curve to the right and voila, higher prices. Those prices started to show up in July of 2024, with the auction for the 2025-2026 delivery year that started June 1st. If you had to pay for capacity, prices were ugly. In fact, they soared from a three-year average of$37.68 per megawatt day to$269.92. And naturally this invited a political uproar. So, Pennsylvania Governor Josh Sapiro negotiated a deal with PGM that was blessed by the Federal Energy Regulatory Commission to put a caller on prices with a nominal floor of roughly$175 and a ceiling of$325. That was to take place for two years. The following auction for the 2026-27 delivery year occurred this past July, and Shapiro's actions were prescient and paid off. Clearing price came in at$329.17, the actual approved FERC cap once updated with specific auction parameters. And that price was a shocker to most. But when PGM ran a simulated auction without the cap, prices soared even higher to over$388 per megawatt day. One would think that the 2027-2028 auction would have occurred a year later. But since there had been so much regulatory tussle between PGM and FERC in prior years, capacity auctions have been delayed, so long, in fact, they'll now take place every six months until the end of 2026. So the next one for the 2028-29 year is now docketed for May of 2026. And significantly as things stand today, the cap only covers that auction that's taking place as I speak. Then the gloves come off and anything goes in the form of prices. The 2029-2030 auction is set to take place in December of 2026, and it doesn't have a cap or floor either. And the next one then returns back to the three-year advanced schedule. Got it? So what's the problem with a truncated schedule? Well, the whole point of competitive markets is to set price signals that elicit an elastic response. If the cost of bread, for example, goes up 50%, more bakers jump into action. Same dynamic applies to eggs, t-shirts, it should apply to electricity supply assets as well. The problem is that those prices need to be set far enough out in front to give developers sufficient time to put those assets into play. But now, with interconnection cues and supply chains being what they are, that supply response doesn't happen. Meanwhile, that expected growth in PGM demand, stemming from data centers, that's now pushed up the forecast by 30 gigawatts. For context, last June's peak demand in PGM was 160 gigawatts. And it's that expected growth that is causing this massive inflationary push. Data load, both existing and forecasted, is calculated by the third-party independent market monitor, whose job is to police the grid, to have cost all the loads a whopping$16.6 billion over the past two auctions, over half the total revenues that will be paid. This now represents a quarter of the entire competitive supply bill, so of course it's become a political hot potato, with many of the state governors recently signing a letter indicating their lack of confidence in PGM's leadership and other large energy consumers getting into the game as well as they fight for their own interests. Last month, after fielding multiple proposals in an effort to address the massive new data demand, PGM stakeholders couldn't agree on a path forward in terms of how to approach new interconnection proposals. What seems clear is there is absolutely no way PGM can meet firm demand, so there has to be more flexibility built into the system. And this goes well beyond the concept of data centers moderating demand during peak periods and more into the realm of so-called BYOG, or bring your own generation, or at least bring your own capacity during peak periods. Meanwhile, the Department of Energy has also stepped into the fray with Secretary Wright in November directing the Federal Energy Regulatory Commission to develop a one-size-fits-all approach to the interconnection issue that would address the entire country. Naturally, the states immediately began pushing back on that one, arguing that such an approach steps on regulatory authority of the states in a very significant way. The speed with which these new loads have emerged, combined with their enormous magnitudes, will test the physical grid and its regulatory framework in ways we've never seen before. The pressures related to data centers and their impacts on the grid appear close to a boiling point, and the results of the ongoing auction to be released on December 17th might just cause the lid to pop off the pot. Well, that's all for this week. Thanks for watching, and we'll see you again soon.