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We got crystals that help you sleep. We've got Buddha.
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We've got a a kiwi or a or an >> Looks like a kiwi.
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Yeah, that's a kiwi from uh from New Zealand, right?
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They lay the little green >> [music] >> eggs that turn into fruit. >> Yeah, that's the one. >> I love those. They're really tasty.
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>> [music] >> Hello everyone and welcome back to [music] Semi-Annual Weekly.
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We've got episode 26 and we're here with uh Robert Boswell.
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We're going to talk uh all about US rate payer US rate payers wasting $12 billion of money that they don't have to waste because PJM is making a modeling mistake and uh they want to do it again.
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Rob, uh welcome to the show, man.
0:47
I I appreciate that you're you're there in your man cave with the crystals and the kiwi. It's looking great.
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>> Yeah, yeah, I got to you know, I got to got to balance out bring out my feminine side, I guess. Yeah.
1:01
I mean, I love the crystals.
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Who doesn't love crystals?
1:05
Uh >> Yeah, we're going to have a nice time in the podcast where we talk about the electricity grid and uh Pennsylvania and Maryland today and Virginia, okay?
1:11
Okay, let's start with the basics.
1:13
So, the high-level call that you guys are making here is that um well, first of all, maybe you can explain like what PJM is like really basic, what's happening in the electricity grid in the US right now, and why um Americans are going to see their power bills rise.
1:32
>> Well, yeah, that's the thing.
1:32
They don't They don't They don't necessarily have to.
1:35
So, PJM stands for uh Pennsylvania, New Jersey, Maryland, but it's actually 13 states.
1:42
It's Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia, and on top of that, the District of Columbia.
1:55
It's not all of all of those states.
1:57
Some of them are partial, but yeah, it's a bit of a mouthful for the acronym to be all of the states.
2:02
Uh so, this >> But, this is US East 1.
2:04
Like Like, this is data center alley.
2:08
>> This is 66 million people.
2:10
This is data center alley.
2:10
This is the largest grid by electricity delivered in America or the largest uh sort of operational area in America.
2:22
Um and it's also what's driving a lot of the narrative around data centers driving up electricity prices.
2:28
Like, if you you know, hundreds, maybe thousands of articles.
2:31
And I always kind of just check this whenever it says that data centers lead to increased electricity rates, I always see what the source is, and it's almost always specific to PJM.
2:40
And like, this is not There are some very small instances of this happening outside of PJM, but PJM is a particularly large driver of both the narrative, but also it's the area that's seen by far the largest rate increases um due to increasing demand.
2:55
And that's yeah, we are take and we've written about this before and we're writing about this again from a slightly different perspective this time is that that's due to market design.
3:05
Or not really even market design, more like sort of bureaucratic auction design.
3:12
>> Okay, let's dig into that uh specifically.
3:14
So, PJM is unique when compared to other grids even in the US in the way that they do these auctions, right?
3:20
>> Yeah, so it's normal in electricity in electricity markets to have kind of real-time markets and then like more uh ahead of time markets.
3:29
So, you just you want to build in a buffer to how the electricity system runs, and so you run these auctions years in advance to make sure that you have enough spare capacity on the system that it that you know, in the worst-case scenario, it it operates well.
3:45
And normally you actually only run those markets for either new capacity because they need long-term contracts, they need a degree of certainty to get built.
3:56
Uh or you're running them for like refurbishments or um yeah, life extensions, things like that.
4:04
You're basically just trying to keep some give in the system.
4:07
And PJM is unusual where they run this for the entire system.
4:10
And so every power plant can bid into this, like fully existing ones that are completely paid off.
4:17
Um and what that means is that any price increase has like a massive multiplier effect across the If you think about like an X and Y axis, you have a small price increase on the um Y axis that's multiplied across the entire X axis.
4:30
And because this is a very large grid, cuz it's the largest grid in America, that can lead to some quite large price spikes, which is what we've seen. >> Yeah.
4:39
And this is definitely why maybe people talk a lot about how as uh data centers or just energy demand in general in the US increases over time, we need to solve this with base load, but also variable capacity because there's, you know, fluctuations in demand throughout the year.
4:57
Um this does not imply that there's actually variable capacity for the entire grid in PJM.
5:01
It's just saying that they pay for everything and they do their planning up front with this market auction style approach, and that's going to lead to Well, what you tell me.
5:12
What's What's that leading to in this case?
5:15
>> Yeah, so what's what's happening is that for for various reasons, PJM has a sup- a constrained supply.
5:22
So in the article, we kind of map out the supply curves, and you can see the supply curve lit- literally sort of shifting left as you're having uh fewer power plants that are able to join this auction even as demand is going up.
5:35
And this is because PJM uh delayed its auctions for a while.
5:39
It's now running its auctions with very little lead time.
5:41
So like once you sign one of these contracts, you you to be delivering that power within a year or now 2 years, which is just not long enough for a new power plant to get built.
5:51
And so there's very sort of constrained supply.
5:55
And more constrained supply is the more shifted left, but also the more vertical it is.
5:59
Yeah, so you you got the got it there like if demand then moves at all, price jumps.
6:04
And you know, this is that's very normal in markets.
6:06
If you constrain supply and then demand increases, you know, you get scarcity pricing.
6:11
And that's basically what's happening here.
6:13
So two things are happening simultaneously where PJM is constraining supply through bad auction design, not giving enough warning, um and not signing long enough contracts such that new supply can't enter the market.
6:28
And then also it is inflating demand, which is the main focus of what we get into in this news newsletter and in the model in general where because it underestimates how much power it already has available to it, which we can get into, it's trying to buy more than it needs to.
6:44
And it and it has it has bought more than it needs to in two previous auctions, which is where the 12 billion dollars comes from.
6:51
And it's got an emergency auction coming up, which there is a risk that it will buy more than it needs to there and actually put rate payers at risk of further price increases.
7:04
Um yeah, which because basically they're expecting data centers to take on this liability and they might just not be able to or they might not turn up.
7:14
There's yeah, there's a there's a kind of moral hazard there, but I can get into I can get into the sort of demand model the supply modeling in that as well.
7:24
>> Yeah, well, maybe first put the um 12 billion dollar excess payment in context like this is actually still a large percentage of the total consumer spend on power. >> Yeah, on PJM.
7:39
>> Yeah, so over the last four auctions they spent 63 billion dollars and 12 of it we estimate was avoidable.
7:45
And all 12 is actually from the first two auctions.
7:53
The uh because of primarily government hero, but also other sort of political pressure, price caps were put in.
8:02
And these price caps mean that actually sort of demand and supply were kind of so out of whack, were so constrained that even this modeling adjustment wouldn't have had enough of an effect um to to sort of change things.
8:14
But in the first two auctions, in the auction for 2025-26, these run uh June to July.
8:18
Um so that yeah, split years.
8:23
25-26 and 26-27 would have saved um 7 billion and 5 billion respectively.
8:33
And yeah, so 12 billion in total across those two auctions if they modeled this differently.
8:39
And there's only There's only such a huge effect because supply is so constrained, because you're working right at the edge of the supply curve and it's going kind of vertical, which you know, this shouldn't do um ideally.
8:49
Uh that's why you have these like huge price price increases.
8:53
>> Yeah, can you dig into both of those in a little more detail?
8:56
>> Yeah, so yeah, I've I've talked about this I've talked about the supply going vertical a bit, which is yeah, you're not getting enough warning.
9:02
Um the interconnection queue is the other thing.
9:04
So PJM is currently just very slow to get connected to the grid if you're a new power plant.
9:10
Um because of various things that the various things that PJM did, they they had a pause, they've had a whole bunch of kind of changes to how they run that the how they run that process, which have introduced a lot of delays.
9:22
And they're running these auctions on way too little warning.
9:24
So these these auctions should be run on kind of three years warning, and even that's a bit tight in my opinion, but they've been run on one to two years warning.
9:33
And so you just can't get a power plant up and running.
9:36
Um and so there's really constrained supply.
9:39
And then, the thing that we're actually really getting into in this modeling effort, um, is that power plants are more efficient in the winter.
9:49
Uh, they they get cooled down more easily if they're a coal or a nuclear power plant, but most importantly for a gas power plant, uh, the the air inlet, the air is denser, so the power plant is easier to be cooled and it also is running more mass.
10:03
It's basically just a more efficient system.
10:05
There are also certain ways in which cooler temperatures help with electricity systems in general, but the main one is the is the dense air going into gas turbines.
10:13
And this has been proposed in the past where currently PJM just runs it as if it's summer all year round, right?
10:22
It just basically acts as if they have summer summer ratings of efficiencies.
10:25
And as much as, you know, endless summer would be a lot of fun, uh, it's simply not the case.
10:32
Um, you know, winter yeah, winter will come. Winter is coming.
10:33
And, uh, so it inaccurately forecasts that or inaccurately models that in its in when it's deciding how much to buy.
10:44
And then the other factor that we model, so we model sort of two things that uh, change how you understand the current power plants operating.
10:51
One is that and the other is, um, imperviousness to winter, so winterization or weatherization.
11:00
So, during Storm Elliot in 2022, but then also during the polar vortex 2014, power plants came offline due to componentry freezing or due to pipelines, um, cracking.
11:13
And, uh, a lot of effort has been put in since to prevent this from happening again.
11:18
To make sure that because a lot of these components actually failed within their operational margins, so they should have been fine.
11:27
Um, it wasn't the case that the weather was so bad that it was sort of physically impossible to keep these things online.
11:30
If they had been properly winterized, uh then this shouldn't have happened.
11:35
And so, there's been uh federal orders, there's been various um local mandates, etc.
11:40
to winterize these units.
11:43
Uh however, and the yeah, the the graph you've got up on screen explains this well, the way that PJM models this is purely backwards-looking.
11:51
So, they only look at when power plants have failed in the past and then extrapolate that out into the future.
11:58
And it's, you know, any good any good financial professional knows uh past performance is not a pre- predicate for future performance.
12:04
Um and so, uh rather than that, what we what I think would be a better way of doing it would be to reward power plants that winterize by recognizing that they are more reliable and they would get more money out of this auction system.
12:18
And so, you would create, rather than currently, which is it's mainly just a stick, you would also introduce a carrot into the system.
12:25
But also, you would you would prevent yourself from overbuying.
12:27
You prevent you prevent the system from, yeah, spending more than it needs to.
12:33
>> Okay, can you can you explain the auction uh concept there again?
12:35
Uh maybe in a bit more detail, just to say when you're saying they're going to get more money, like explain how the auction works and how power plants actually get paid by PJM for the power that they're producing. >> Yeah.
12:49
So, um the key thing is that it's it's megawatt days is the going to lose all of our listeners at this point.
12:56
Um I don't know why I said that. Just cut. Uh the unit is megawatt. So, it's capacity. It's not generation.
13:06
It's not how many electrons are actually managed.
13:08
It's kind of ability to make electrons.
13:10
Um it's like paying a farmer for having a field as opposed to paying them for the wheat that comes from the field.
13:19
It's kind of capacity to produce.
13:23
And um it's so that you have this reliability margin.
13:25
It's so that it's so that you know that on the worst possible day of the year you make sure that that there's enough electricity.
13:31
Not all markets have this.
13:33
There's there's a lot of debate over whether or not these things are necessary, but they're seen as the more reliable approach or the or the or the more um I don't know, sensible or or kind of uh well-insured uh approach.
13:46
And so, what literally happens is PJM runs an auction and says that we need whatever it is, 160 um gigawatts of capacity.
13:58
On our worst possible day, we need that much.
14:00
So, we're going out to market and we're buying 160 gigawatts of capacity.
14:04
And they actually they draw a price curve.
14:06
They say, "Oh, if it's really cheap, we're willing to buy 170 gigawatts, right?
14:10
Because like you know, that extra margin is worth it to us.
14:11
Or if it's really expensive, then then this is the price that we're going to kind of top out at."
14:17
And they literally draw a you know, straight out of like a like an economics textbook.
14:20
They draw a they draw a demand curve.
14:23
Um and then they run an auction and people bid.
14:25
And people just say, "Right, I'm willing to pay whatever."
14:29
Uh and here's the amount of capacity that I'm bringing to the table.
14:32
Then that draws the supply curve.
14:32
Each one of those bids is like a dot on the supply curve.
14:36
And then wherever the two cross, that's your price and that's your quantity.
14:40
But the key thing is everyone gets paid this price.
14:43
So, if you bid in at $5 uh a megawatt a megawatt day, which a lot of people, you know, do, that is a price that people bid.
14:50
That's not That's not excessively small.
14:52
You will still get paid $300 a megawatt day if that's what if that's what the last unit needs.
14:59
And so, that's why that's why you can have very big total cost changes to an auction due to um a very small number of of megawatts right at the end of the supply curve.
15:14
>> So, can you explain again the concept of getting credit for a power plant that has winterized? >> Um yeah.
15:21
Yeah, so every every power plant gets given gets rated for how reliable it is.
15:25
And that that that determines its volume.
15:30
So, you can be uh so for example, nuclear power plants are rated higher than gas power plants cuz they're considered more reliable.
15:37
They're considered more kind of robust.
15:39
Uh and so, if you are a um 1,000 MW nuclear power plant, you get rated at about kind of 90% say 93%.
15:48
Um and so, you get more money basically per your per your power plant than a gas power plant station which might be rated at say 80%.
15:57
And if you say, "Right, we actually think this is a really good gas power plant station.
16:01
This is like a really well winterized.
16:03
It's in a really good location.
16:05
It's got a very short pipeline."
16:06
The various things, you know, really um really well-built, good design.
16:10
Actually, we think that should be worth 85%, 88%, and it should get more money by bidding.
16:17
It should be able to bid into that auction with more volume, basically.
16:20
And then they get more money.
16:22
And this money is literally it's it's a year. It's covering a year.
16:26
And you get paid the money.
16:26
I don't know how to say it more simply than that.
16:27
You You just sort of that money just gets just comes in.
16:32
Um there are ways to uh violate the contract, but short of violation, it's just it's just revenue.
16:38
It just comes straight in the door. >> Yeah.
16:41
So, I think the like just to go back to what you said about the winterization, like people have gone out and done this pretty good thing after they saw Storm Elliot or the polar vortex and upgraded the power plants to be better winterized.
16:53
And then they don't get paid more money. >> Yeah.
16:56
I mean, it's hard to it's hard to say to what extent this is out of goodness of their own hearts because um NERC, N E L C, uh National Energy Regulatory Commission, anyway.
17:07
Uh they they told them to do this.
17:08
They said, "Right, it is now a legal mandate for you to go and winterize your plants."
17:14
Uh and there was a number of other mandates to do this as well. They were also fined.
17:17
The ones that failed during storm Elliot were fined.
17:19
So, they they have financial reasons to, you know, go and not do that again.
17:24
Um but there's yeah, there's kind of two things going on here.
17:28
One is, you're right, they're not being incentivized to do the right thing or to do the thing that the system wants them to do.
17:34
But then also the system's just overbuying.
17:35
It It the system is not, you know, recognizing the value of what it already has, i. e.
17:41
how reliable its existing power plants are.
17:45
It then goes to market and asks for too much.
17:47
It then goes to market and yeah, and um Yeah, so yeah, what you put what you put on the screen is kind of trying to talk through It's quite a large range here.
17:56
To be clear, this is very much a range.
17:57
We're not kind of putting We're not saying this should be the number.
18:00
We're just saying like there is a lot of margin in here that PJM could be accessing its value.
18:07
Like it could be saving this money for its ratepayers if it were more accurate in terms of how it rates technology.
18:12
I know my ideal like Like The big picture question here is um the old PJM is kind of the poster child, for good or for ill, of the old-fashioned way of running an electricity system, which is like very centralized control, um pretty bureaucratic, pretty democratic in an interesting kind of way, in a complicated way.
18:35
Um and so it very much takes on to itself deciding how much capacity is needed and all of this sort of central planning.
18:42
Um versus other grids that are, you know, the famous one at the other end of spectrum is Texas with the with ERCOT, um which are much less centrally planned, much more decentralized.
18:55
And yeah, this currently PJM is due to odd reasons of governance and uh system modeling, it is failing at keeping up with the times.
19:07
It hasn't seen demand growth in a very long time, arguably in about two decades, and it is really fumbling the bag now that demand growth has turned up.
19:18
And this is a shame because data centers should be a way to make electricity cheaper, not a way to make electricity more expensive because electricity systems have very high fixed cost.
19:32
You know, you got the pylons, you got the power plants, you got all of this physical infrastructure.
19:38
Uh so, as a commodity, it's incredibly high fixed cost.
19:40
And so, there are great economies of scale.
19:43
So, the more demand you have, the more you can spread that fixed cost out across everyone, the higher the utilization rate you can hit is, the more efficiently you can run.
19:53
Uh and also with data centers because because they're, you know, these value-creating or money-printing machines, they're they're sort of this is this is got to be by far the largest uh differential between like cost of electricity in versus value out that has ever existed on electricity system.
20:11
That's like an amazing opportunity for electricity to get really cheap uh because they can invest in these systems and they can grow they can grow the system, drive the efficiency.
20:18
They've got loads of vested interest in making the system work.
20:21
And if you look at I don't want to stand too hard for the for the data data center industry, but like if you look at the uh if you if you look at the like transcripts and um the the meeting minutes uh the date like the data centers are really coming into this with a lot of solutions and they are more than happy to put money where their mouth is on most things.
20:40
You know, with with with some exceptions, right?
20:42
I'm sure there are exceptions.
20:43
There are always exceptions, but um they are meaningfully pot committed to this region, right?
20:51
This is a region where loads of their workforces, loads of this is where like, you know, a lot of the people in these meetings, this is where they live, you know, this is home for them.
21:00
And they're currently going, "Right, well, either we figure this out or I'm moving to Texas, right?
21:03
Those are my those are my sort of options as an individual, but also these companies and these organizations.
21:08
So, they want to make PJM work.
21:09
And it's a real shame that yeah, PJM's not figuring this out. >> Yeah.
21:16
Um maybe we could go back to that demand side.
21:18
Like, I think what likely happens here is that people see a high-level headline or people who live in the region see their electricity bill and they see the price go up.
21:26
And then they immediately blame the demand side as you're describing. Like, >> Yeah.
21:34
>> so many more data centers being brought online.
21:35
Therefore, there's more demand for electricity.
21:38
There's some limit in terms of how much electricity can be brought into the grid or how much the grid can support, how much power generation there can be.
21:45
And so therefore, you know, more demand chasing fixed supply means increases in prices.
21:49
And I think while that dynamic exists to an extent, we have made two cases in sequential articles.
21:59
One is that um there is a lot uh the fork PJM's in a previous article uh PJM's forecast for actual data center demand was being criticized because it was less accurate than our model.
22:15
And now we're also talking about the supply side being, you know, an issue and and being criticized.
22:21
Is there something beyond the modeling, better modeling, like that they could be doing to actually upgrade the grid itself?
22:28
And maybe you can just talk about like generally what's going on with electricity grids right now.
22:33
Like, what's the technical stuff that everybody's struggling with? >> Yeah.
22:38
I think key key thing I'll just pick up on there is that you said, you know, fixed supply, right?
22:43
Like, yes, if if demand goes up with a fixed supply, then price goes up.
22:47
But, there's no reason why supply needs to be supply needs to be fixed, right?
22:51
Like, you can you can have uh increased you can have increased supply, and then you can actually if the new supply is, you know, theoretically you should be bringing on new supply that's that's more efficient and um more modernized than our supply and then you think you can get into nuances there.
23:07
But on the electricity system I think the the opportunity that's being wasted here is um yeah, basically deployment of batteries.
23:19
My bet will be a very big one.
23:19
There's a huge amount of opportunity for bringing down the price of electricity through better deployment of batteries.
23:26
>> Yeah, is there something in the transmission of electricity in the substations and in the transformers?
23:29
Is there something to do with the actual like power lines in the grid?
23:32
The physical infrastructure that prevents people from putting a power plant you know, on one side of the grid hundreds of miles away and then the data center on the other side of the grid, right?
23:47
>> This is a yeah, this is this is slightly separate point and I so I'm going to give you I'm going to give you my sort of high-level take on this and it might be something that I that I need to kind of do further research on to before we kind of write about something similar, but PJM PJM has been described as too big to function.
24:07
Um and one of the ways in which it is arguably too big to function is that it does these deliverability studies that work across a very large area.
24:16
And so it's basically saying, right, if we deliver a power plant here in Washington D. C.
24:23
or you know, in Washington D. C.
24:23
but in in in Virginia, can it reach Illinois?
24:29
Can it reach sort of the other end of PJM?
24:32
Like is there enough space in those wires?
24:35
And you arguably just shouldn't do that.
24:37
You should arguably try to have much more localized what?
24:42
And this way you'll be able to connect power plants, you'll be able to connect new demand to the grid much faster.
24:45
And so a lot of grids do this where they basically just say, right, okay, we're actually just doing sort of operability areas.
24:54
We're just saying that you only need to be able to supply your power to a large enough area that we think overall this is going to work out.
25:01
And PJM, this is a lot of why their interconnection studies take a very long time, and why connecting to the grid takes a long time, and why arguably, this is what I'm not certain on, but I've seen some data um that says that PJM is building more grid than it needs to.
25:17
It's because it's doing it's people call it copper plating, where you basically just turn the entire area into wires, such that it's basically just like copper plated.
25:27
Um and so that is that is a potential criticism of PJM, which I, you know, I have read read elsewhere, and I'm sort of I'm susceptible to, because I know that happening in matter of a fact, and I'm actually I'm British.
25:37
Um it's something that we've done in Britain.
25:40
Uh in Britain, we've we've arguably significantly overbuilt our electricity system um for different reasons to PJM.
25:49
Uh but yeah, so that is one thing is that building out these wires, copper is expensive, you know, transformers have a very long lead time.
25:56
Um this kind of infrastructure is hard to build.
25:58
Um and so there is some there is some degree of that going on.
26:03
But really yeah, really this is about better pairing up demand with supply, and that can be done, yeah, locationally, which is relevant to these wires, uh and then it can also be done over time, where new demand needs to be be bringing new supply.
26:18
And or at least linked to new supply.
26:21
It doesn't necessarily need to be bringing it themselves.
26:23
And that's what these capacity auctions are supposed to do.
26:26
They're supposed to help bring new supply online uh to meet new demand, but they're just very bad at doing it.
26:36
>> Xantusman, um where should we go from here?
26:38
Is there anything that uh we haven't covered in the question?
26:42
>> So the emergency auction is the is the kind of the next thing.
26:43
So like uh PJM PJM models that it currently has, well, it that it had that it will have by 2028 2029 6. 8 gigawatts shortfall.
26:55
That it'll be short of what it forecasts demand to be then versus what it will have a supply by 6. 8 gigawatts.
27:02
This is partially because of the price caps, meaning that these auctions didn't kind of clear, but it's but frankly, even if there hadn't been the price caps, I think the price caps were probably the right thing to do um given other constraints.
27:14
Um but uh yeah, the price caps were probably the right thing to do given given the other constraints.
27:22
But yes, so you got the 6.
27:22
8 gigawatt shortfall and we think that if you better took into account the cold weather uplift and the winterization, you would actually only need about 3 gigawatts.
27:33
So you'd save more than half.
27:35
And this is important um one because it would just save that money.
27:37
It would just save that um that kind of 3.
27:38
8 gigawatts of procuring it.
27:41
But two, the way that PJM's board, specifically the board, has chosen to design this emergency auction actually against the wishes of its members.
27:51
So PJM has these big complicated votes.
27:54
Um it has over 1,000 members.
27:56
They're split down into five groups.
27:58
Each of the groups votes and you need the equivalent of 66% to get anything through.
28:05
So surprise, surprise, a lot of lot of the time things don't get through.
28:09
Um but they actually did agree on a different auction design that didn't have this problem.
28:14
But PJM's board has decided that it is going to sign these contracts.
28:17
So these are long-term contracts going out to 2042, which is a good thing.
28:20
Long-term contracts are good for new capacity.
28:25
Um but they don't necessarily have a counterparty.
28:29
PJM doesn't have its own money, right?
28:31
PJM just has ratepayers' money.
28:31
It just kind of passes through these costs to ratepayers.
28:35
And the theory is that PJM is going to pass this through to new demand load in the form of data centers.
28:39
But it's not a given that this new load appears, right?
28:44
So it could contract out it could contract 6.
28:46
8 gigawatts of new load out to 2032 23 20 2042 2043, so out sort of 11 to 15 years, um depending on the start date, and then not have anyone to pay for it.
29:00
And so it would have to go on existing ratepayers because if you're a data center looking at this, we go into this in depth in the article but it in the newsletter, but if you're a data center looking at this deal, you really don't know what you're signing up for.
29:11
Uh there's a very high price cap of 555 uh dollars a megawatt day, um which over the full 15 years could be up to the amount of they're trying to contract could be up to 21 billion dollars.
29:25
Uh and if you're the data center, you don't really know what you're agreeing to.
29:29
This is all still being decided.
29:30
This auction's going to happen pretty soon.
29:32
It's happening um September, October this year.
29:35
So yeah, end of next month basically.
29:38
Um and they I think there's a very real possibility that data centers don't turn up, don't don't don't take on these liabilities, and then PJM is stuck there holding holding the bag.
29:49
And PJM can't hold the bag cuz it doesn't have its own money.
29:53
So that So what's going to actually happen is the existing ratepayers are going to hold the bag. >> Okay.
29:59
And then you were basically saying that there was a coalition that was making this case against how this can work and they got overruled?
30:09
>> Yeah, they they basically said that um PJM just shouldn't take on the liability and then pass it on.
30:13
The data center should just take it on direct, which I think is a much better system where data centers should kind of rock up, sign, you know, sign on the dotted line, say I need X amount, um and then uh either bring their own power through their own contracting, or you could even run an auction where the data centers have kind of pre-committed, but they might not be willing to pre-commit.
30:34
That's debatable, but yeah.
30:37
And I mean, the the key thing here is PJM's board overrode this because they thought that the alternative that was supported by the membership wouldn't procure enough power.
30:50
And so if our modeling is correct and they don't need that much power, then they didn't need to overrule the membership.
30:56
Like that's that's the thing.
30:58
It all comes back to it's very important.
31:00
If you're centralized >> on.
31:01
They they they have this vote.
31:01
They get more than 2/3 required.
31:07
And then the board just overrules it and says, "No, you're wrong." >> Yeah.
31:12
>> [laughter] >> Why have the vote? >> understanding.
31:15
I mean I I yeah, it's quite it's quite something.
31:18
I mean well, I mean You know, not everything's good to be as a demo you know, to be run as a democracy, right?
31:23
Not not at you know, democracy doesn't work in all cases.
31:25
Uh but yeah, it does it does seem >> Democracy until you do something we disagree with.
31:34
>> Something like that, yeah.
31:34
I mean but then again, the board Yeah, there there are plenty of times that I wish the board had overruled the I the the the real depths of this in terms of why this has been voted down in the past, why this was voted um through this time but then shot down.
31:49
You know, you you need you need a a politics thesis and like three psychiatrists to actually get to the bottom of of of the back and forth of like what's actually gone on in PJM, which is not something that I go into in any great depth in in in the newsletter.
32:04
Um but yeah, a lot of plenty of people are more than welcome to look into that in their own time.
32:11
>> Maybe we can loop around, you can grab your crystals from behind you and then we can uh make some forecasts here.
32:13
We can ask the oracle about uh which uh what the zodiac signs of different board members are and you know, you can really what sort of >> You need to understand it.
32:25
>> Is Mercury Mercury in retrograde while this uh vote was going on or what? >> Yeah.
32:30
I I honestly, it's the the complexities of it and the motivated voting and the like ability to veto and the vested interests and cuz yeah like a lot of the a lot of the people voting are existing generators, right?
32:46
So, they're they're currently um getting windfalls off the back of this.
32:53
They're getting windfalls off this kind of constrained uh supply and and increased price.
32:57
Um and I think a lot of them also want to build new power plants.
33:02
So, like you know, that that's not the same that they're all just kind of sitting on their hands.
33:04
Like it's just it's a highly complicated system that PJM has built.
33:08
And my interpretation so, too big to function was actually a um was actually something said by the Federal Energy Regulatory Commission's um chair.
33:20
And my interpretation of that was that it's too big to function in terms of its bureaucracy and its governance.
33:24
Like it literally can't function.
33:26
It can't navigate its own systems of governance.
33:31
Um and it's also just physically very large.
33:34
But, being a large grid shouldn't be a problem, right?
33:36
Electricity grids benefit from scale.
33:38
Being big is good if you're electricity grid.
33:42
Um so long as you're able to yeah, make the design choices and and make the make the governance choices that mean that that works.
33:49
It means that you actually benefit from those efficiencies of scale.
33:52
Um but yeah, PJM PJM is really struggling and it's got a lot of uh yeah, political engagement now with uh governor's races coming up at the end of this month.
34:02
Um not the end of this month, end of this year. Sorry, November.
34:04
We've got a whole We've been digging right into data center moratoriums and um you know, there's loads of chatter in Ohio all over the place uh the yeah, the the political problems around this.
34:17
And it is very frustrating that again and again, PJM is the is the evidence for data centers leading to price increases.
34:26
And you know surprise surprise, if you suddenly start uh trying to explain that it's actually uh the nuances of market design.
34:33
People doesn't It's not as catchy.
34:34
It's not as >> [laughter] [clears throat] >> I yeah, I mean, but maybe not on the technical side, but I'm getting the sense that there's there's some potential, you know, investigative journalism opportunities here or that there's some uh you know, soap opera style uh drama that could be coming out if you're sitting in on some of these uh board votes and stuff.
35:00
So, maybe maybe we can bring in some new viewers to the PJM uh board votes.
35:05
>> I yeah, I need to I I I've got a whole bunch of transcripts of some of these meetings and they really are they are kind of it does make me wonder, yeah, what's going on behind the scenes.
35:14
Uh I'm sure I hope that I hope there are some journalists logging it out um trying to trying to sort of walk the corridors of walk the corridors of these meetings, but sadly I doubt that there are.
35:24
I I don't think it sells copy.
35:29
>> It's a hard It's a hard thing, right?
35:30
Like, lots of electricity grids or lots of electricity systems have this problem where for for kind of understandable reasons, they try to bring industry into the decision-making process.
35:44
And then there's it's regulatory capture, right?
35:47
It's like very classic regulatory capture where you bring industry in.
35:52
Industry is just much more motivated to actually understand and control the system than anyone else is, right?
35:56
The the the generators and the transmission and the distribution, this is their entire job.
36:02
This is their entire reason for existence.
36:05
>> Yeah, this is code red up.
36:07
>> Like like >> And they immediately take over.
36:07
We have to say in Britain we have these whole We have all of these complicated systems of what are called industry codes.
36:14
And it's how like the system is run.
36:15
It's like the rules of the system.
36:17
And they're written by the players.
36:18
They're written by the people who are in the system.
36:20
And there's ostensibly this kind of overarching regulatory body that is supposed to kind of mediate this.
36:27
But they get run rings around.
36:27
And like of course they do because like these guys are just much more financially motivated to understand and guide the system than the regulators are.
36:40
And that's what Yeah, that's what's happening here as well where like I really confuses me.
36:43
The bit I really don't have a good grasp on and I'm still trying to get my head around is like the deep politics of this.
36:48
It really confuses me who what who is on whose side, who the kind of players are, when the board can overrule or when it can't overrule.
36:58
There are There are PJM really is just like a a stack of contracts.
37:03
That's all it really is in terms of its like actual existence.
37:07
There are like three contracts which all of the utilities and generators have signed.
37:12
And these are like unbelievably complex contracts.
37:15
And that's all of these things really kind of are is just like agreements to operate under the terms of these contracts.
37:21
And yeah, it's not like a cuz it's because it's such a coalition because it's such like a conglomeration of things because it's got utilities, it's got deregulated or or like it's got utilities that have been vertically disintegrated.
37:35
You've separated out all the the layers but then it's also got vertically integrated utilities, it's got co-ops, it's got these transmission players, it's got independent power producers.
37:45
Because it's got all these different rules.
37:47
So like 10% of the system doesn't even participate in this auction, right?
37:50
10% of the system vertically integrated utilities just say now we're we're good.
37:55
We've covered our own demand.
37:57
We've got our own supply.
37:59
We're going to do our own thing.
37:59
So they're like okay, off you go.
38:03
So yeah, this this thing is just infinitely complex.
38:04
And it will I I basically agree with the FERC chair that like it's too big to function.
38:10
You either need to significantly simplify its its governance which would probably fall afoul of like the US Constitution or you've got to somehow operate it in a more localized manner.
38:25
>> Yeah, I think there's a I'm getting the sense here that like there's some House of Cards or Billions style TV show.
38:32
If anybody from Netflix or HBO is listening out here and wants to make a wants to bring Kevin Spacey or Paul Giamatti in to play a FERC >> [snorts] >> regulatory chair and uh and cover the politics.
38:47
Maybe it's more like Justified where they're like wearing cowboy hats and threatening to like shoot each other or something, but >> But it's it's such a funny it's such a kind of um you know the fates are really laughing at us that to some meaningful degree the kind of future of Western civilization is riding on like this governance cluster Right?
39:15
Like the I I I would love I would love I wonder I wonder if there's like some news aggregators out there that we can pay who currently scrape like everything ever written in America and see what proportion of the like electricity price debate stems from PJM.
39:35
Because if I if I were to debate I I I honestly think it's something like 40%.
39:39
I think like something like something like something like 40% of the kind of first tier debate is from this kind of stuff.
39:49
And then arguably a lot of that 60% is just downstream of the 40%, right?
39:52
A lot of it is just like the Facebook posts or all the all the like tweets, etc.
39:58
And so it's just unbelievably frustrating.
39:59
So you look at all the other grids and it just isn't happening because this is like a completely resolvable problem, right?
40:04
Demand go up, supply go up, you have forecasts for that reason. You know, life goes on.
40:10
Ideally price comes down because you find efficiencies, you have economies of scale, and you introduce like a load of batteries and load flexibility and you make the data centers overpay.
40:19
You literally just say, "Look, like you just have to pay more than your fair share because you're making absolute bank."
40:27
Um and the data centers be like, "Yeah, totally cool with that because this way we actually get to get filled rather than not get filled." >> Yeah, yeah.
40:32
Okay, is there a way to turn this around and end this on a happy note? How about we say this?
40:35
It is good generally that they're costing people money and making sure that there is no shortfall because shortfalls are worse than having too much capacity and paying more money than it. >> Yeah, yeah.
40:50
I mean the the counter argument the counter argument is uh you can't be too careful. Right?
40:57
Like it's fine to overpay and to um have more capacity than you need because uh yeah, you can't be too careful.
41:07
Electricity is incredibly important.
41:07
But yeah, you should be able to bring on more load now.
41:11
You should be able to fund these guys to build our new power plants that they want to build by giving them more money.
41:17
Um all at the expense of the American taxpayer. Yeah, yeah.
41:22
I mean I can I can I can give I can give I can give the negative case against the positive case, but I feel like I have to pick the positive case.
41:30
>> Trying to end positive here, man.
41:30
We got 40 40 minutes of negative already. Um all right.
41:36
Sounds like we're just uh yeah, unfortunately we're getting down or something everything we want to do.
41:41
>> we need to we need to come up with like more positive pieces on on these utilities that we like.
41:45
I mean we obviously like ERCOT.
41:46
And PJM can still turn it around, right?
41:50
They really they really can.
41:51
These auctions These auctions are only every year as in like they only cover the year that they cover.
41:55
So the moment you time them out, you stop paying those high prices, right?
42:00
These These are not necessarily baked in for very long periods of time.
42:04
So the auctions currently last until uh probably through 2029.
42:06
So, you know, only 3 years only 3 more years of um Yeah, three more years of of of higher rates uh and then they can come back down again.
42:17
So, not too bad in the grand scheme of things.
42:18
Um And I mean load growth, like if data centers can make their case, then electricity load growth is by far the best way to bring down electricity prices.
42:29
Uh you can do, you know, bring your own power in terms of behind the meter or backup power.
42:35
You can do uh batteries for like increased utilization.
42:38
You can even do demand flexibility either of the data center or of other people.
42:42
Um gently skeptical of demand flexibility of of of data centers, but there definitely very impressive people working on that.
42:50
And so, yeah, hope that hope that they're right. >> Awesome. Okay.
42:54
Well, uh really appreciate you coming on today. I enjoyed uh this time. Learned a lot. And uh yeah, good job. >> Thanks, man. Uh you, too. Yeah. >> Okay, should we go? We're stopping.