US Power Auction Results Set to Reveal Cost of AI Boom to Consumers

The largest US power auction, operated by PJM Interconnection, is set to release results that may show the cost of AI's energy consumption to consumers. Last year's auction saw costs rise 600% and reached a record $14.7 billion. This year's results may lead to similar costs per megawatt, resulting in total payouts of $13 billion to $16 billion. Analysts warn that consumers, not tech companies, will bear the brunt of the soaring energy costs.

The largest US power auction, operated by PJM Interconnection, is set to release results that may reveal the cost of AI's energy consumption to consumers. Last year's auction saw costs rise by 600%, reaching a record $14.7 billion [1]. This year's results may lead to similar costs per megawatt, resulting in total payouts of $13 billion to $16 billion. Analysts warn that consumers, not tech companies, will bear the brunt of the soaring energy costs.

The auction, which determines how much generators will be paid for generating capacity at new and existing power plants, is also an indicator of how high consumer utility bills will be. The soaring price tag is due to booming demand from data centers, according to recent analysis from the grid operator’s independent market monitor [1]. That’s raising concerns that consumers — not technology companies — would bear the brunt.

Last year’s auction, which saw costs rise about 600%, created a political firestorm that ultimately led PJM and the governor of Pennsylvania to agree to set both a price floor and cap for the first time in the auction. This year’s results could similarly “put policy makers’ feet to the fire,” said Barclays Plc analyst Nicholas Campanella [1]. PJM declined to comment.

The cost of supply last year rose to about $270 per megawatt a day while Baltimore cleared more than 70% higher and Virginia, home to the biggest concentration of data centers in the world, was close behind. Maryland saw the highest capacity costs in the last auction, with Exelon Corp.’s Baltimore Gas & Electric utility tacking on $16-$20 to consumers’ monthly bills [1].

However, the utility reached an agreement with regulators to pass through those costs in the spring and fall months to avoid adding to already high summer bills. Both Maryland and Virginia should see capacity costs decrease under the cap. Yet matching or exceeding last year’s prices would be a boon for independent power producers like Talen Energy Corp., Constellation Energy Corp., Vistra Corp. and, especially, NRG Energy Inc. after its $12 billion deal to buy power plants in PJM territory [1].

The new price floor and cap will leave room for costs to rise across the grid while ensuring there are no extreme breakout zones. The difference between the floor and the cap is just about 1.5 gigawatts, said Mac McFarland, chief executive officer of Talen, which just agreed to buy two of the most efficient gas plants in PJM last week for $3.8 billion to serve AI demand [1].

Looking ahead for years, “we are constructive” about capacity prices, he said on a July 17 call discussing the deal. PJM said that the projected peak demand on its system plus required reserves will require an additional 146.1 gigawatts. However, if some of that demand is satisfied by direct contracting with the retail power providers, PJM may only need 134.5 gigawatts, it said. That means the auction will at minimum cost $8.7 billion [1].

These capacity auctions are typically held three years in advance to give new power plants, especially those running on natural gas, time to be constructed. This year’s is two years behind schedule and only projects already under construction are likely to get built in the next 11 months. With PJM’s projections showing demand growth ramping up significantly in 2028 and beyond, supplies may start to get strained. “If the new build doesn’t show up and demand continues to uptick, you could see prices go even higher,” Campanella said [1].

Meanwhile, CMS Energy Corp has made significant strides in energy efficiency through its customer programs, achieving an impressive milestone. The company's energy savings programs have collectively saved enough energy to match the annual output of 18 natural gas power plants since their inception in 2009 [2]. These programs are designed to help customers use energy more efficiently, reduce their bills, and ensure the reliability of the electric grid.

The programs, which include initiatives such as the Appliance Recycling program, Smart Thermostat program, Home Energy Analysis, and Water Heater rebates, have demonstrated their effectiveness in promoting energy conservation. By encouraging customers to shift their energy use to off-peak hours and providing incentives for energy-efficient appliances, CMS Energy Corp has not only helped its customers save money but also contributed to the overall stability of the grid.

From a financial perspective, these energy-saving efforts can lead to long-term cost savings and operational efficiencies for the company. By reducing peak load and overall consumption, CMS Energy Corp can avoid the need to build or run additional generating resources, thereby lowering operational costs [2].

However, the long-term sustainability of these programs and their impact on the company's financial performance remain to be seen. While the immediate benefits of reduced energy consumption are clear, the long-term effects on the company's revenue and profitability require further analysis.

Facing an “unprecedented crisis of confidence,” the PJM Interconnection needs fundamental change and new leadership, according to nine governors representing the majority of electric customers in the grid operator’s footprint [3]. The letter from the governors comes about a year after total capacity costs in PJM’s last capacity auction jumped to $14.7 billion from $2.2 billion in the previous auction. The increase led to potential electric bill hikes in some states in the 10% to 20% range [3].

The governors plan to create a formal group to represent PJM governors to help the grid operator chart “a productive path forward on the issues facing our region.” The PJM board “appreciates the governors’” [3].

References:
[1] https://finance.yahoo.com/news/biggest-us-power-sale-offer-103000299.html
[2] https://www.ainvest.com/news/cms-energy-corp-achieves-significant-energy-savings-customer-programs-2507/
[3] https://www.utilitydive.com/news/governors-pjm-interconnection-crisis-electric-bills-capacity/753421/