The Power Grid's AI Problem

0:05One of the biggest players in the U.S. power industry is called PJM Interconnection. PJM oversees the energy market across 13 states, from New Jersey to Pennsylvania to Kentucky, and serves about 67 million people. Where your electricity comes from is something that I feel like most Americans are usually pretty lucky not to have to think about. Really, none of us should know who PJM is. Normal people should not really be thinking about who their grid operator is. Unlike most normal people, my colleague Jennifer Hiller has been thinking about PJM a lot. They are kind of like air traffic control for the electricity market and, you know, making sure that supply and demand are in balance.

0:56And right now, PJM has a problem. AI data centers are putting a huge strain on the power grid. So data centers are a really big new customer, essentially. for the power grid. And it's almost like endless or bottomless how much energy they are asking to use. A large data center can eat up a gigawatt of power or more. That's like an entire city. So that's, you know, one customer saying, I need the power of a whole city right here. There's so much demand for power that the supply is struggling to keep up. And it's pushing PJM to the brink. Is it possible that this could lead to a situation where there has to be blackouts?

1:44Well, nobody is ever happy to lose power. And definitely blackouts are the situation that you want to avoid at all costs. But the system is getting more stressed in different ways. And the risks are rising.

2:01Welcome to The Journal, our show about money, business, and power. I'm Ryan Knudsen. It's Wednesday, January 21st.

2:14Coming up on the show, can America's biggest grid operator keep the lights on?

2:34For companies in the power industry, this huge new demand for power is a big change. For years, electricity consumption in the U.S. was actually staying pretty flat. Across much of the country, for like about 20 years, there really wasn't a lot of increase in power demand. That's surprising because I feel like over time there would be more and more energy consumption. Yeah, you would think that. But a lot of things got more efficient. So you would have more efficient buildings or LED lights and things like that. And so it kind of tamped down demand for electricity. Way to go us. Yeah. But now we are suddenly in a period where we have AI and, you know, all of the tech companies need to continue to build and develop their AI models.

3:30And we are all using AI and we think of all of this stuff as kind of being off in the cloud somewhere, but it's really in a data center. Many of the new AI data centers, which are being built by companies like Google and Microsoft, are cropping up in one area within PJM's territory, known as Data Center Alley. So Data Center Alley is in Northern Virginia, and it is kind of this big concentration of data centers. Data centers, these hulking concrete boxes filled with servers, guzzle electricity. And in the past few years, dozens of them have been built there. Thanks to all these data centers, PJM expects power demand to grow about 4.8 % a year on average for the next decade.

4:18In other industries, 4.8 % might not sound like that much, but it's a really big system. And so if you're adding, you know, growth like that onto a really large system, it's just a lot more customers. It's a lot more infrastructure that needs to be built to be able to serve them. I mean, some people compare this to the advent of air conditioning or a lot of home appliances. You know, people working in the industry now have not seen anything like this.

4:54Up until recently, PJM had almost the opposite problem. There was too much power generation. Well, that made power prices pretty cheap. And so a lot of plants shut down because they couldn't afford to keep operating. So you had some plants closing down simply because of market reasons. And you also had states that have environmental targets and things like that where they wanted to maybe close some of their aging coal plants early, some of their older gas plants early. and so you kind of had that dynamic going on in like the years leading up to now. They had a lot of power in PJM. They had too much power.

5:38They had so much power that you couldn't afford to operate some of these power plants. Which means the supply of reliable power has actually been decreasing and everyone knows what happens when you have increasing demand and shrinking supply. We are talking about your money, specifically rising electricity costs. So right now it's making people really furious in the PJM system. Not the year-end news you probably want to hear, but your energy costs are going to go up again. Power grid operator PJM is under fire over significant electricity rate hikes across its 13 states. In a state like New Jersey, I believe in June, they saw bills increase about 20%.

6:23Wow. I'm sure people in New Jersey love that. Yeah, it's been real popular there. It's not just higher bills that are the problem. Demand is going up so fast that an independent market monitor for PJM warned that it could have to manage blackouts during periods of peak demand if they don't find a solution. So what's PJM going to do about all this? That's after the break.

7:03There's an obvious solution to bring down people's electricity bills. Increase the supply of electricity. Build more power plants. But it's actually not that simple. One issue is that you can build a data center a heck of a lot faster than you can build a power plant or a new substation or big transformers and get the power grid out to them. Everything's just become so much more expensive, from materials to labor. You can't get a turbine for the next four or five years. Another reason it's complicated is because data center companies tend to shop around different places looking for things like the best tax incentives, which means it's hard for utility companies to predict exactly where data centers will get built.

7:49And if they build a power plant and a data center doesn't show up, then they'll have too much power, which is also a problem. You don't want to underbuild and not be able to serve customers, and you don't want to overbuild and then be charging people for infrastructure that maybe wasn't needed. There's, I guess, kind of layers of complication that go into where do you actually put the power plant? Are you sure enough of this market for the next, you know, however many years, to have confidence to put a few billion dollars into, you know, building a power plant of some kind. So it's very difficult on the ground, essentially.

8:36While the power and tech industries are trying to sort this out, politicians are losing patience. The governors have been really unhappy about these price increases and that, you know, this has become such an issue that in Pennsylvania, Governor Shapiro has filed complaints with federal regulators about the PJM market. but among the things that he was asking for was a price cap, which he did get. But you're seeing a lot of just unhappiness from the group of governors as a whole, where they want to have more involvement and kind of oversight on how prices are determined. While a price cap like the one in Pennsylvania can bring relief to consumers in the short term, it can also reduce the incentive for companies to build new power plants.

9:27The price rising is supposed to be a market signal to the owners of power plants to go build more of them. You know, there are a lot of companies that own power plants that would say, you know, we need to see that market signal to have confidence to build. Yeah, it might put a lid on prices now, but it doesn't solve the problem in the long run. Exactly. Last Friday, the Trump administration also got involved. So what happened last week is that you had a big bipartisan meeting of the Trump administration and 13 governors trying to hash out what they would like to see happen in PJM and some things that would maybe be able to address those rising prices.

10:15A bipartisan group of governors from Pennsylvania, Ohio, and Virginia will reportedly meet at the White House today to sign a statement of principles aimed at bringing more power into the 13 state markets that are overseen by grid operator PJM Interconnection. One of the big directives out of the meeting is that PJM should give 15-year contracts to power plant developers promising to buy power at a guaranteed price, and that AI data center companies, not consumers, will be required to foot the bill. Basically, they're saying, you guys are the new big user that is coming into the system that is sort of creating or revealing this problem of, you know, we don't have enough power in PJM.

11:01And so you should bear the cost of like the new generation that is going to need to get built. After the meeting, PJM put out its own set of proposals, which, in addition to the 15-year contracts for new power plants, included a few other solutions that will also put more onus on the tech companies. One of those is that the BYOB, or in this case, actually BYOP, they have to bring their own power. Data centers can bring their own power generation that would either be maybe on-site or nearby. Bring your own power. you're hearing it across the country, you're seeing it in a lot of places in Texas and Tennessee and Ohio and, you know, all sorts of places, you are seeing large data center projects that are bringing on-site power with them.

11:53And they are planning to either, in a few cases, island themselves and just provide their own power forever, or just use it as a bridge until, you know, all of the grid infrastructure can catch up and then they will connect at some point. Another solution PJM is proposing is to pressure data centers to go offline during periods of peak demand. The grid operator will tell you from time to time, you know, we need you to go offline. We need you to go to your backup power.

12:27How did the tech companies respond to this new plan from PJM and the Trump administration? So I know that the data center coalition, which is a trade group that represents a lot of the big tech companies and data center companies, has said that they don't accept the argument that they are causing this problem. They say that the grid and the system has just been underinvested. And they're, you know, happy to participate in figuring out the solution to all of this. But that there are other issues. So it's not, you know, they're saying it's not a problem of their creation. The president of Microsoft, Brad Smith, posted on X that the meeting with the Trump administration was, quote, a strong starting point.

13:13and that, quote, we look forward to engaging with stakeholders as this important work moves forward. We talked earlier about how if PJM can't get this solved, it might need to eventually resort to blackouts. How likely is that right now? That's one of the things that's really hard to predict because, you know, a lot of factors would go into that and you would have to have kind of an extreme weather situation. you have these certain hours of the year, usually if it's extremely hot or extremely cold, where things become stressed. And so the risk is really in a small number of hours of year. But it's just that we see that risk rising, and this has been flagged by federal oversight officials and things like that, just that risks are rising across the electricity system.

14:08So I don't want to paint this picture of that we're just careening into this era of rolling blackouts? Because I don't think that will be the case. Do you think PJM has all this figured out or do we still have a ways to go before this problem is actually solved? This is such a good question. This continues to be a huge fight in PJM in the near term. And I also think this is still kind of early innings for how this plays out in other places across the country. Because we are really kind of just on the cusp of seeing all of this new demand, and we don't know quite exactly what it looks like, exactly where these data centers will locate, exactly how they're going to be using power.

15:01And so I think a lot of this is to be determined.

15:17That's all for today. Wednesday, January 21st. The Journal is a co-production of Spotify and The Wall Street Journal. Additional reporting in this episode by Catherine Blunt, Amrith Ramkumar, and Scott Patterson. Thanks for listening. See you tomorrow.