Beyond PJM: Regional Electricity Markets at a Crossroads

Energy Policy Perspectives: Vol. 20

After last week’s 2028/2029 Base Residual Auction (BRA) results, PJM has failed to hit its reliability targets for three consecutive delivery years. This has drawn the ire of customers, utilities, businesses and the Trump Administration with the Federal Energy Regulatory Commission (FERC) expected to hold a conference tomorrow (July 23rd) to evaluate the best path forward for PJM. While some are calling PJM “broken” or “too big to function”, we believe this narrative confuses where the system’s stresses are being revealed with where they originate. PJM and the 2028/2029 BRA did not create the issues, they merely further expose them. We believe the real policy debate is not simply about PJM but how grid regions across the United States need to implement transparent and streamlined rules for converting unprecedented electricity demand into physical infrastructure and which political trade-offs are acceptable to achieve this objective. Ultimately, these outcomes will dictate the future of regional electricity markets and directly influence earnings, capital allocation and long-term value creation across utilities, IPPs and the broader electricity value chain.

PJM is the face of a national problem. Nearly every ISO/RTO is trying to withstand the same structural forces: 1) unprecedented large-load growth, led by AI data centers; 2) tightening reserve margins; 3) generator retirements; 4) transmission constraints; 5) interconnection backlogs; 6) equipment, labor, and construction bottlenecks; and 7) increasingly complex and contradictory state and federal policy objectives. Electricity markets are structurally slow moving, risk-averse, politically visible and reliability-constrained. AI data centers are exposing pre-existing weaknesses and forcing a reassessment of the governance, operating and institutional frameworks designed for a different era. PJM’s scale, market design, load concentration, and fragmented authority have made it the first ISO/RTO where these problems have become most visible and politically unavoidable, but we do not believe it will be the last.

What to watch for at tomorrow’s FERC conference. We believe the most likely near-term outcome is incremental PJM governance modernization efforts to accelerate its planning and interconnection processes, rather than sweeping structural reforms. The political objective of the conference appears to establish “on the record” that PJM is too slow to respond to rapidly changing system and market conditions, which will help to justify future actions by FERC. We believe it will likely reinforce the direction PJM has already been heading (Reliability Backstop Procurement, connect-and-manage, BYOP, etc.) with the underlying problem that markets are insufficient to address the bottlenecks constraining supply. In our view, the debate is how far PJM should move from a pure merchant-market model, not whether problems exist.

The deeper questions are around institutional design. In our opinion, the more consequential long-term development is not about PJM governance but institutional design of regional electricity markets. There is no governance structure capable of simultaneously minimizing costs, maximizing reliability, accelerating infrastructure deployments, and eliminating investment risk. These deeper questions include: If markets are insufficient, who should be responsible for procurement of generation? Should large loads bear incremental infrastructure obligations? Should PJM have broader emergency procurement powers? Should utilities or states have greater residual responsibility? And ultimately, who should bear the cost if forecasts are incorrect? Most answers to these questions are not objectively “right” or “wrong”, each contains trade-offs, although the economic and reputational consequences are often binary and concentrated causing self-interest to dominate political discourse.

The accountability paradox, accountability without authority. PJM is responsible for administering capacity markets, forecasting reliability needs and publicly identifying resource shortfalls. It is increasingly being held politically associated with the outcomes those markets reveal even though it does not control many of the decisions required to solve the underlying problems. Generation developers decide whether to invest, while states and local governments control permitting, utilities determine retail service obligations and distribution investments, transmission owners construct facilities, equipment manufacturers and labor markets determine construction timelines and federal and state policymakers shape incentives and cost recovery. All these entities can semi-credibly blame PJM, who is the most visible institution at the center of system and avoid potentially politically uncomfortable discussions. PJM was designed to coordinate existing infrastructure but now it is expected to create new infrastructure without sufficient expansion of its authority, incentives or jurisdiction.

Data centers reveal the limitations of institutions designed for a different era of electricity. AI data centers did not create every challenge facing electric systems, but it has amplified nearly all of them. The change is more than simply higher electricity demand. Single data center customers are now requesting gigawatt-scale service on timelines that exceed the time required to construct new generation and transmission, concentrate in already constrained areas, place very high value on firm, redundant and continuous supply while being uncertain enough to create material stranded cost risk. Once treated as a largely standardized commodity, electricity is becoming a multi-attribute infrastructure service. This has changed the commercial problem the electricity market must solve as well as requires several decisions historically made by different entities to occur concurrently. Making data centers pay for upgrades solves (or at least materially helps) the financing and related problems but cannot synchronize permitting, manufacturing, construction, transmission, interconnection, operating rules and institutional responsibilities into a reliable power system.

Governance is a coordination problem. Stakeholder conflicts are a rational, game theory outcome created by misaligned incentives, fragmented authority and uncertainty over who bears downside risk. Nearly every proposed reform redistributes risk, cost and/or economic value creating inherent conflicts which only get worse under scarcity conditions. This is why the current problem is best understood as not simply an energy or even a capacity shortage but a coordination problem. Individually, each party is rationally waiting for another party to take risk but collectively is a major impediment to progress: data centers want power before committing, generators want buyers before construction, utilities want customer collateral before investing, regulators want proof of need before approving, PJM wants credible load and generation before incorporating them in forecasts, and existing customers do not want to underwrite speculative growth or see rising bills. Consensus governance naturally becomes more difficult when the required changes become more significant. Governance reform can perhaps improve PJM decision speed, but it cannot manufacture turbines, pipelines, substations, transmission rights-of-way or labor contracts which are binding physical, contractual and jurisdictional bottlenecks on new supply.

Political demands are not internally consistent. Politicians want several competing objectives to be true at the same time: lower electricity prices, infrastructure expansion at an unprecedented speed and scale, faster data center connections, unaffected reliability, stronger market competition, greater stakeholder participation, increased state influence and minimal cost shifting. This creates a circular, partially policy-induced market failure. Scarcity appears, capacity prices rise, political intervention limits prices, investors perceive this as increased regulatory risk, merchant investment becomes less attractive, thus PJM cannot elicit enough supply investment, then policymakers are using this as evidence that PJM and markets have failed. This narrative may be effective at shifting blame and responsibilities ahead of mid-term elections in November while doing little to provide a solution.

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