US Considering Scrapping Multibillion-Dollar Power Auctions

(Bloomberg) -- The top US energy regulatory agency will debate whether multibillion-dollar power auctions are still the best way to ensure sufficient electric supply amid a demand boom from artificial intelligence.

The Federal Energy Regulatory Commission will hold a two-day conference in June to discuss the topic, and under discussion will be alternatives to these auctions, Chairman Mark Christie said in an interview in Washington. At the moment, there aren’t enough power plants getting built to meet demand growth that’s being accelerated by data centers, he said. 

“What could be more important than not having enough power supply to keep the grid on? You can’t get more important than that,” said Christie, who was appointed to the five-member commission in 2021 and tapped to lead it by the Trump Administration last month.  

“That’s what I wanted to do first as an issue — look at the resource adequacy and then continue to focus on consumer costs,” Christie said. 

The US electric grid is coming under increasing stress as aging infrastructure is strained by more severe weather and as the transition to renewable energy faces bumps in the road. Now, many experts are pointing to the data-center driven surge in demand that’s expected.

The power-capacity auctions were established to make sure there was enough supply around-the-clock. But they’ve been riddled with problems almost since they first started emerging nearly two decades ago after deregulation. With the increased stress, the markets have gotten more volatile and even record high prices on the largest US grid haven’t been enough to spur developers to build new plants.

A key focus of the conference will likely be PJM Interconnection LLC, where last year capacity costs jumped more than six fold to $14.7 billion in an auction that sets annual prices. Those soaring costs, which will start to hit consumers’ utility bills June 1, sparked widespread outrage. The company is the largest US grid operator with lines spanning Illinois to New Jersey.

As PJM auctions now face delays and rule revisions, Christie posed that the bigger question is whether these capacity markets are even viable going forward. 

“One of the questions we’re gonna ask at the tech conference is: What alternatives to the capacity market should even be considered?” Christie said. “If the capacity is not working the way people want it to work, meaning delivering reliable power at a cost that people can afford, then it’s totally appropriate to consider alternatives. And what are those alternatives?”

But the potential scrapping of capacity auctions risks rattling investors, said Travis Miller, an analyst at Morningstar. Shares of independent power producers Constellation Energy Corp. and Vistra Corp. were down 8.2% and 8.3%, respectively, at 2:32 p.m. in New York.

Christie described the power grid as a lake that had to match water coming in with water going out exactly at all times to keep its depth steady, or the whole thing would collapse. “The challenge is keeping enough supply coming in at the other end, and that’s where we’re falling short,” he said.

“So they’re all gonna get their day in court,” Christie said.

Here are more highlights from the Christie interview:

• The reliability crisis that was “coming” two years ago is now an “impending crisis” for US power grids.
• Christie referenced a pending rule from 2021, when he teamed up with then-Chairman Rich Glick and then-Commissioner Alison Clements under the Biden Administration to limit bonus payouts, or 50 basis point adder, that utilities earned to boost returns from building transmission lines that they could pass on to ratepayers.
• Christie said this “FERC candy” given out to build transmission lines was meant to induce companies to join regional grids, not be paid out in perpetuity over decades; They should be more like re-enlistment bonuses Marines get to extend their service, he said.
• “It’s fair to say I’m going to try and get two more votes” to get the necessary backing to bring in such an initiative, Christie, a former Marine, said.

(Updates with analyst comment in 10th paragraph.)

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