Solmar Insights
PJM Interconnection has filed a proposal with the Federal Energy Regulatory Commission to conduct a one-time reliability backstop auction seeking up to 6.8 GW of new capacity, following a shortfall in its most recent base capacity auction. The move comes as the region faces rapid growth in data center loads, which PJM forecasts could expand by as much as 70 GW by 2038, challenging the operator’s ability to maintain targeted reserve margins for system reliability.
Key figures
6.8 GW capacity shortfall to be filled
70 GW projected data center demand growth by 2038
$555/MW-day proposed auction price cap
Up to $20 billion in potential new power plant payments
Drivers of the capacity shortfall
The capacity deficiency in PJM’s recent base auction stems primarily from a steep uptick in large load forecasts, most notably the ongoing proliferation of data centers and related digital infrastructure. PJM’s reserve margin target aims to prevent more than one unexpected outage per decade, but the June auction for the 2028 delivery year fell short of this reliability benchmark. The operator links this gap to both lagging new generation development and burgeoning large-user demand that conventional market mechanisms have not yet matched in pace.
This environment of record data center growth is being driven by strong demand for cloud computing, artificial intelligence services, and hyperscale deployments, particularly concentrated in states like Virginia and Pennsylvania. The tightening capacity market reflects an industry-wide challenge as grid operators strive to balance accelerating digital infrastructure requirements with reliable generation supply and interconnection backlogs.
PJM’s planning documents underscore that past assumptions about load growth are no longer sufficient, prompting the operator to recalibrate procurement and contract mechanisms. Notably, traditional generation development remains constrained by longer lead times and permitting processes, leaving bulk system planners little room for error as large-load projects come online at a faster rate than new supply additions.
Structure of the backstop auction
Under the plan filed with FERC, PJM will hold a single reliability backstop auction between September 30 and October 21, explicitly targeting the procurement of up to 6.8 GW of new capacity. This auction is intended to supplement outcomes from the latest base capacity auction and is a one-time mechanism intended to address immediate reliability risks posed by unprecedented load expansion.
The auction is capped at $555 per MW-day, a marked increase from the $325/MW-day ceiling in the ordinary capacity auction. The structure provides for PJM to pay up to $20 billion for new resources, a figure cited by the Natural Resources Defense Council as an estimate of potential new-build costs if the auction clears at its cap. The auction design allows the capacity procurement target to be reduced if bilateral contracts are secured between data center operators and generators prior to the auction, introducing some market flexibility.
Results of the backstop auction are expected to be announced by December 2, which would allow PJM to integrate new contract obligations before its next regular base capacity auction for the 2029/2030 delivery year. The operator’s timeline reflects both the urgency and the complexity of securing firm commitments from new or existing resource providers amid a shifting demand profile.
Cost allocation and regional impacts
The costs associated with the backstop procurement will be spread across PJM zones in proportion to their share of the total procurement target. Within each zone, utilities and competitive load-serving entities will bear the costs based on their respective load contributions. This approach is designed to ensure that the additional expenditure on new capacity is allocated to those responsible for the increased need as reflected in demand profiles.
PJM’s filing places significant emphasis on the role of state utility commissions and policy makers in determining which retail loads, including large and non-traditional users such as data centers, should bear specific cost allocations. The RTO explicitly requests that states refine their cost-sharing refinements to minimize adverse impacts on traditional retail consumers and address fairness as digital infrastructure continues its rapid buildout.
This raises key considerations for municipal, cooperative, and investor-owned utilities within PJM, as many now face the policy and financial challenge of integrating disproportionately large, non-residential users into equitable rate structures. States will need to clarify responsibility for reliability investments as the load landscape evolves.
Bilateral contracting and alternative procurement
In addition to the centralized auction, PJM’s plan sets a framework for data center operators and independent power producers to reach bilateral procurement arrangements. These direct contracts, if arranged prior to the auction window, will count toward fulfilling the capacity shortfall, potentially reducing the volume procured through the auction itself. This dual-path approach allows market participants flexibility in complying with reliability targets and in managing exposure to auction price outcomes.
For data center developers, bilateral contracts can offer more certainty on pricing and resource type, and can be tailored to specific operational needs or sustainability goals. Generators may benefit from the ability to directly negotiate terms that reflect the complexities of adding new dispatchable supply or flexible resources in a high-load growth environment.
This mechanism could also serve as a precedent for future reliability interventions as large flexible loads become a dominant feature of the grid, signaling to institutional buyers and sellers opportunities for bespoke risk management, alongside participation in standardized market products.
Next steps and regulatory coordination
PJM is scheduled to issue results of the reliability backstop auction by December 2, providing a brief interval before launching procurement for the 2029/2030 delivery year. The RTO has also indicated plans to file an additional proposal with FERC on August 7, which would seek authority to curtail large loads if grid reliability is at risk, a move that signals growing concern about integrating major demand centers without adequate new supply.
Stakeholder engagement with state regulators, utilities, and new demand-side participants will be critical in the months ahead. The effectiveness of PJM’s approach will hinge not only on the auction outcome but also on the capacity of states to execute ratemaking and cost allocation reforms that balance economic development incentives with affordable retail rates for legacy customers.
The regulatory coordination required to implement these changes is likely to set important precedents for other North American system operators, as similar data center and AI-driven load booms emerge in ERCOT, NYISO, and CAISO territories.
What this means for buyers
Institutional buyers, developers, and investors active in PJM states should closely monitor the auction process and forthcoming regulatory changes. The backstop procurement raises the stakes for bilateral contracting and introduces significant upward cost risk for large flexible loads, especially data centers through 2028 and beyond. The evolving capacity landscape may create both risks and opportunities in project development, structuring, and long-term offtake negotiations. It will also be critical to engage with state policymakers on cost allocation methodologies to manage exposure and ensure competitively priced, reliable capacity for digital infrastructure expansion.
