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

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Episode Transcript

SPEAKER_00 (00:03):
I've got your energy story for this, the second week
of December, 2025.
Well, from December 4th toDecember 10th, the PGM
Interconnects base residualauction is taking place to
ensure a sufficient capacity forthe power delivery year starting
June of 2027.
First of all, why the heck doesevery grid operator have to have

(00:24):
such arcane names foreverything?
It's like the legal professionwith all of its strange,
inscrutable, and frankly stupidlanguage, seemingly meant to
ensure we cannot understand it.
For Google's Gemini, the baseresidual auction is called that
because it's the base auction inPGM's market held to procure the
majority of needed electriccapacity for future delivery

(00:45):
years.
These typically take place threeyears ahead of time with
incremental auctions that occurlater on to fill any gaps.
Usually, these auctions, held byPGM to cover its 13th state
territory, are ignored by therest of us because they're
somewhat arcane, and in the pastthey also didn't impact energy
prices all that much.
But in November of 2022,something took place that would

(01:08):
eventually change all of that.
OpenAI launched ChatGPT, and theAI butterfly began quietly
flapping its wings.
That event stimulated a greatdeal of activity in the space
among other AI developers, evenas chip manufacturer NVIDIA
began manufacturing increasinglymore powerful and energy hungry
chips to satisfy this burgeoningAI demand.

(01:32):
Soon, the butterfly effect onthe power industry became
remarkably pronounced.
In some states, like Georgia,Indiana, Texas, Ohio, and
Virginia, data central loadssoared.
At least projected data centralload did.
Ohio and Virginia load sitwithin PGM, and suddenly the
demand forecasts there that hadbeen stagnant for over a decade

(01:55):
started ramping up quickly.
PGM's school erotic supply sideof the equation did not keep
pace with its interminableinterconnection cues, and the
grid operator re-rated all ofthe supply assets to better
reflect their ability to meetdemand under high stress
conditions.
That effort was prompted bydeficiencies that occurred

(02:15):
during Winterstorm Elliott'sunhappy surprise in late
December of 2022.
Then, numerous assets did notshow up to the pre-Christmas
party, with gas fire generationscrooging up big time.
In fact, nearly 40 gigawatts ofgas failed to show up during the
worst part of that shortage.
So with existing supply derated,almost nothing new being built,

(02:39):
and an expanding forecast fordata central loads, you have the
classic Econ 101 price setting.
Take a supply curve that barelybudges and shift the demand
curve to the right and voila,higher prices.
Those prices started to show upin July of 2024, with the
auction for the 2025-2026delivery year that started June

(03:00):
1st.
If you had to pay for capacity,prices were ugly.
In fact, they soared from athree-year average of$37.68 per
megawatt day to$269.92.
And naturally this invited apolitical uproar.
So, Pennsylvania Governor JoshSapiro negotiated a deal with

(03:21):
PGM that was blessed by theFederal Energy Regulatory
Commission to put a caller onprices with a nominal floor of
roughly$175 and a ceiling of$325.
That was to take place for twoyears.
The following auction for the2026-27 delivery year occurred
this past July, and Shapiro'sactions were prescient and paid

(03:44):
off.
Clearing price came in at$329.17, the actual approved
FERC cap once updated withspecific auction parameters.
And that price was a shocker tomost.
But when PGM ran a simulatedauction without the cap, prices
soared even higher to over$388per megawatt day.

(04:04):
One would think that the2027-2028 auction would have
occurred a year later.
But since there had been so muchregulatory 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 2028-29year is now docketed for May of

(04:29):
2026.
And significantly as thingsstand today, the cap only covers
that auction that's taking placeas I speak.
Then the gloves come off andanything goes in the form of
prices.
The 2029-2030 auction is set totake place in December of 2026,
and it doesn't have a cap orfloor either.
And the next one then returnsback to the three-year advanced

(04:52):
schedule.
Got it?
So what's the problem with atruncated schedule?
Well, the whole point ofcompetitive markets is to set
price signals that elicit anelastic response.
If the cost of bread, forexample, goes up 50%, more
bakers jump into action.
Same dynamic applies to eggs,t-shirts, it should apply to
electricity supply assets aswell.

(05:14):
The problem is that those pricesneed to be set far enough out in
front to give developerssufficient time to put those
assets into play.
But now, with interconnectioncues and supply chains being
what they are, that supplyresponse doesn't happen.
Meanwhile, that expected growthin PGM demand, stemming from
data centers, that's now pushedup the forecast by 30 gigawatts.

(05:38):
For context, last June's peakdemand in PGM was 160 gigawatts.
And it's that expected growththat is causing this massive
inflationary push.
Data load, both existing andforecasted, is calculated by the
third-party independent marketmonitor, whose job is to police
the grid, to have cost all theloads a whopping$16.6 billion

(06:02):
over the past two auctions, overhalf the total revenues that
will be paid.
This now represents a quarter ofthe entire competitive supply
bill, so of course it's become apolitical hot potato, with many
of the state governors recentlysigning a letter indicating
their lack of confidence inPGM's leadership and other large
energy consumers getting intothe game as well as they fight

(06:25):
for their own interests.
Last month, after fieldingmultiple proposals in an effort
to address the massive new datademand, PGM stakeholders
couldn't agree on a path forwardin terms of how to approach new
interconnection proposals.
What seems clear is there isabsolutely no way PGM can meet
firm demand, so there has to bemore flexibility built into the

(06:47):
system.
And this goes well beyond theconcept of data centers
moderating demand during peakperiods and more into the realm
of so-called BYOG, or bring yourown generation, or at least
bring your own capacity duringpeak periods.
Meanwhile, the Department ofEnergy has also stepped into the
fray with Secretary Wright inNovember directing the Federal

(07:08):
Energy Regulatory Commission todevelop a one-size-fits-all
approach to the interconnectionissue that would address the
entire country.
Naturally, the statesimmediately began pushing back
on that one, arguing that suchan approach steps on regulatory
authority of the states in avery significant way.
The speed with which these newloads have emerged, combined

(07:29):
with their enormous magnitudes,will test the physical grid and
its regulatory framework in wayswe've never seen before.
The pressures related to datacenters and their impacts on the
grid appear close to a boilingpoint, and the results of the
ongoing auction to be releasedon December 17th might just
cause the lid to pop off thepot.

(07:50):
Well, that's all for this week.
Thanks for watching, and we'llsee you again soon.