The regional electric grid is under growing strain as data centers drive demand higher. Here’s what happened in the latest auction and why it matters.

The warehouses full of computer servers powering artificial intelligence, cloud computing, and other online services are driving up electricity costs in New Jersey and much of the Mid-Atlantic and Midwest, according to the independent watchdog overseeing the regional power market.

PJM Interconnection operates the electric grid serving New Jersey, 12 other states, and the District of Columbia.

The latest analysis from Monitoring Analytics, the independent market monitor for PJM Interconnection, estimates that data centers accounted for $6.3 billion — or 38% — of the costs from PJM’s most recent capacity auction. Those costs are ultimately recovered from electricity customers.

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What is a capacity auction?

Think of it as an insurance policy for the electric grid.

PJM Interconnection buys commitments from power plants and other electricity providers to make sure enough electricity will be available several years into the future, especially during periods of extremely high demand, such as heat waves or severe winter storms.

Power plants that agree to be available receive payments through what’s known as a capacity auction. Electric utilities recover those costs through customers’ bills.

Why are costs rising?

Electricity demand is growing rapidly, and one of the biggest reasons is the explosion of data centers.

These facilities operate around the clock and require enormous amounts of electricity to power thousands of computer servers used for artificial intelligence, cloud computing, streaming services, financial transactions, and other digital applications.

As demand increases, the regional grid operator must buy more reserve power to ensure there will be enough electricity available when demand peaks.

Monitoring Analytics President Joseph Bowring told Utility Drive that data centers accounted for an estimated $6.3 billion of the $16.4 billion in charges from the latest capacity auction.

Looking at the past four capacity auctions, Bowring estimated that data centers have been responsible for $29.4 billion in capacity costs, or about 46% of the $63.6 billion in total charges during that period.

Why didn’t higher prices lead to more power plants?

The purpose of higher capacity prices is to encourage companies to build new power plants or expand existing ones. But that isn’t happening quickly enough.

The latest auction cleared at the market’s maximum price of $325 per megawatt-day, yet the regional grid still fell about 6.8 gigawatts short of its reliability target, slightly worse than the previous auction’s 6.5-gigawatt shortfall.

The auction also attracted only about 525 megawatts of new generating resources, including upgrades to existing power plants.

Developers face years-long permitting and environmental reviews, lengthy studies before new projects can connect to the grid, rising construction costs, and financing challenges. PJM is also running auctions on an accelerated schedule after previous delays, giving developers little time to respond to the higher prices.

Why does this matter for New Jersey?

Because New Jersey is part of the regional PJM power market, the state’s electric customers help pay these capacity costs along with customers in the other states served by the grid.

Capacity charges are only one part of an electric bill, but they have become an increasingly important driver of recent rate increases.

Bowring also argues customers are paying more than just the capacity costs associated with data centers. He told Utility Drive that electricity customers are also paying higher wholesale energy prices and transmission costs resulting from the rapid growth in electricity demand.

“PJM is continuing to act like it’s business as usual,” Bowring told Utility Drive. “You have to open your eyes and recognize that it is really a paradigm shift, and failing to do that imposes costs on other customers.”

Why is this becoming a political issue?

The rapid growth of data centers has become one of the biggest challenges facing the regional electric grid.

In New Jersey, more than two dozen municipalities have banned data centers over concerns about their impact on the environment, water supplies, and electricity costs. Mansfield Township and Neptune Township became the latest to approve bans last week.

State officials, utilities, consumer advocates, environmental organizations, and large electricity users are debating who should pay for the new power plants, transmission lines, and other infrastructure needed to support that growth.

The issue has become increasingly contentious as electricity prices have climbed across the PJM region. Last year, the governors of states served by PJM, including New Jersey, formed a collaborative to advocate for changes to the regional grid operator’s policies.

New York Gov. Kathy Hochul signed an executive order last week establishing what her administration says is the nation’s first one-year moratorium on new large-scale data centers seeking certain state environmental permits while officials develop new rules for the rapidly growing industry.

State officials said the one-year pause will give New York time to create a regulatory framework intended to protect electricity customers from higher costs, safeguard the power grid, reduce environmental impacts, and help local governments evaluate future data center proposals.

Environmental groups have called on Gov. Mikie Sherrill to institute a moratorium in New Jersey as well.

U.S. Rep. Frank Pallone, Jr. has called for a nationwide moratorium. “Families around the country should not see their power bills rise by a single cent because of data centers,” Pallone said.

What’s next

The regional electric grid needs more power plants and other generating resources to keep pace with rapidly growing electricity demand, much of it driven by data centers. Until enough new generation comes online, experts expect the costs of maintaining a reliable electric grid will remain elevated. New Jersey customers, along with millions of other electricity users across the PJM region, will continue paying a share of those costs through their electric bills.