Who Will Pay What? The Struggle Over Co-Location of Data Centers Next to Power Plants

Guest post by Jim Willis of Marcellus Drilling News.

We’re still coming to grips with understanding how the power generation market works with respect to providing electricity for AI data centers. Data centers can potentially be huge and important new customers for natural gas—especially Marcellus/Utica molecules, as some 25% of all the data centers currently operating in the country are located in northern Virginia, where they use M-U molecules.

In February, we brought you a post to help you better understand the various scenarios for how powergen gets provided to these data centers (see A Better Understanding of AI Data Centers & On-Site Powergen).

Susquehanna Nuclear Generating Station, by Jakec - Own work, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=39686146

We later added a new category/term to the list: co-location. Also in February, FERC fired off a directive to PJM Interconnection, the country’s largest electric grid operator (covering PA, WV, and OH, among other states), asking PJM to explain how it handles co-location (see FERC Launches Investigation of PJM Grid Co-Location of Data Centers). This increasingly popular AI data center electricity arrangement allows the computer warehouses to connect directly to power plants. FERC launched an investigation into how PJM is doing it. PJM just responded…

In brief, a data center can get its power by:

1. Connecting to the local utility company’s electric lines. This sometimes involves waiting years for the grid to ensure that providing power to the data center won’t rob electricity for other customers, like residents and businesses. The AI arms race is on, and waiting years to connect is not a good option.

2. Building and operating their own on-site power plants. However, that’s not the business they are in. Entering that business becomes a distraction from the core mission.

3. Partnering with power generators (owned by the local utility or an independent power producer) by building and operating a plant specifically for a data center. Or, a data center can build next to an existing power plant, allowing the data center to connect directly to the power plant without having to connect to the local grid.

It is that third option that FERC is investigating at PJM. In its “show cause” order, FERC asked PJM and stakeholders to explain why PJM’s colocation rules are “just and reasonable” or to offer rules that would pass agency muster. Talen Energy, Constellation Energy, and PSEG Power are among the companies that are considering hosting data centers at their nuclear power plants in PJM (the same principle applies to co-locating with gas-fired plants).

FERC established a comment schedule enabling the agency to respond by June 20 (i.e., issue new regulations). FERC said it could make a decision on a PJM proposal within three months.

Meanwhile, PJM, in comments back to FERC made on March 24, said its existing rules are just and reasonable. The grid operator also offered five conceptual colocation options that have been proposed by stakeholders or developed by PJM. Sounds like a FERC/PJM showdown.

Utility Dive reports:

The PJM Interconnection’s response to the Federal Energy Regulatory Commission’s investigation into the grid operator’s rules for colocated loads indicates FERC may not approve new regulations by mid-year, as some people initially thought, according to utility-sector analysts.

FERC on Feb. 20 launched a review of issues related to colocating large loads, such as data centers, at power plants in PJM’s footprint. The outcome of the review could set a precedent for colocated load in the power markets FERC oversees.

Talen Energy, Constellation Energy and PSEG Power, a Public Service Enterprise Group subsidiary, are among the companies that are considering hosting data centers at their nuclear power plants in PJM.

In its “show cause” order, FERC asked PJM and stakeholders to explain why the grid operator’s colocation rules are just and reasonable or to offer rules that would pass agency muster. FERC established a comment schedule that enables the agency to issue a response by June 20. The agency said it could make a decision on a PJM proposal within three months.

However, instead of proposing new colocation rules, PJM on March 24 said its existing rules are just and reasonable. The grid operator also offered five conceptual colocation options that have been proposed by stakeholders or developed by PJM.

PJM urged FERC to issue “detailed guiding principles” that the grid operator could use to craft colocation rules for the agency’s approval.

The lack of a proposal from PJM likely extends FERC’s review process, according to analysts.

“FERC may still act on the show cause order in June, but we don’t rule out a new iteration of process instead of a clear policy decision,” ClearView Energy Partners analysts said in a client note on Friday.

It will likely take FERC until late this year to approve changes to PJM’s colocation rules, according to Capstone analysts.

Morgan Stanley analysts said their “base case” expectation is a FERC decision in September. “We were hoping for a more definitive proposal to move the process forward more quickly,” the analysts said.

In its response to FERC, PJM noted that any colocation rules may be affected by state laws. “Regardless of what co-location arrangements are ultimately sanctioned by the commission, permitted by the states, and elected by developers, participants involved in co-location arrangements should pay the costs of any grid services they consume and the arrangements must be reliable and operationally manageable,” PJM said.

PJM also said it prefers that colocated load be deemed front-of-the-meter, “network” load, a designation that would require a colocated data center, for example, to pay for certain grid services.

Among the options PJM floated, it said it preferred three of them, partly because they would maintain resource adequacy. The colocation options are:

• Load that elects to be network load and brings its own generation (preferred).

• Load that will cut its electric use during grid emergencies (preferred).

• Load that elects to be network load and that participates as demand response (preferred).

• Load connected to the grid with protections to avoid delivery of system energy to serve the colocated load (less preferred).

• Load connected to the grid with protections to avoid delivery of system energy to serve the colocated load or for the co-located load to receive back-up service from PJM with permission (less preferred).

PJM’s colocation options “bode poorly” for Talen’s proposed colocation arrangement at the company’s majority-owned Susquehanna nuclear plant with Amazon Web Services and other behind-the-meter deals, Capstone said, noting PJM gave the only “true” behind-the-meter proposal a “less preferred” grade.

“We view PJM’s three front-of-the-meter … options as most amendable to the broadest pool of stakeholders, yet these would erode economics for merchant generators and data centers relative to the ‘isolated’ arrangements previously sought,” the research firm said.

Responses to PJM’s comments, and those filed by other stakeholders, are due April 23.

From RTO Insider:

In comments on a FERC investigation, PJM said there are several pathways to bolster the ability for large consumers to benefit from co-locating with generators.

“What PJM and the industry need now is commission guidance on a path forward based on the record developed in this proceeding,” the RTO wrote in its March 24 response to the investigation into whether the RTO’s tariff can accommodate co-location without compromising reliability or consumer rates (EL25-49).

The investigation was opened in February after FERC rejected an agreement between Amazon Web Services and Talen Energy to expand a data center co-located with the Susquehanna nuclear plant in Pennsylvania, by modifying the generator’s interconnection service agreement to reduce its output to PJM. (See FERC Launches Rulemaking on Thorny Issues Involving Data Center Co-location.)

PJM’s comments laid out three approaches to co-locating load already permissible under the tariff and outlined five more that could be developed to recognize more possible configurations or limitations imposed by state laws.

The existing options cover arrangements where the load is co-located but not sharing a point of interconnection (POI) with the generator; shared POIs where the load is metered separately from the generator; and behind the meter (BTM) generation.

For data centers and the sorts of large consumers now pursuing co-location, PJM said the first two options are preferable because of the high reliability they carry, with the generation retaining its capacity status and the load paying for ancillary service and network integration transmission service (NITS) charges.

Having the load in front of the generator’s meter avoids relying on protective schemes that could fail; provides the consumer with more stable service; makes any curtailment management simpler to implement; and allows for more “comprehensive and holistic” system planning, PJM argued.

The BTM approach was designed for smaller loads with a proportional amount of on-site generation, which is capped by the tariff. Due to the inability to ensure reserves to cover the BTM resource, it can’t be given capacity status, and the load must procure capacity and NITS equal to its net consumption during coincident peaks.

Options 4 and 5 could apply to configurations where the load is behind a protective mechanism to prevent the consumer from drawing energy from the grid if the generator goes offline. The latter also allows the load to request permission to use PJM’s system as a backup.

The two are the only options that allow co-located load to avoid being designated PJM network load and allocated NITS and capacity costs. Ancillary service charges still would apply on the grounds that the generator benefits from network characteristics such as regulation, black start and reactive capability that inherently pass through to the load.

The generator also would be assigned any network upgrade costs associated with its output being reduced. Both are considered “less preferred” by PJM due to the risk of the protective schemes misoperating, causing the load to receive energy from the grid. PJM wrote that there was an event in November 2023 during which Susquehanna had an unplanned outage, and the load appears to have remained online and taken service from the grid.

Requiring ancillary service charges for co-located load was a sticking point for stakeholders considering several proposals for revising the RTO’s rules in 2023, along with jurisdictional questions about whether the load receives wholesale or retail energy.

The Markets and Reliability Committee ultimately rejected an Exelon-sponsored proposal that would have metered the generator and load separately, while allowing the generator to offer its full accredited capacity to PJM and requiring the load to pay for a capacity commitment through load serving entity charges. (See “Proposed Rules for Generation with Co-located Load Rejected,” PJM MRC Briefs: Oct. 25, 2023. https://www.rtoinsider.com/98794-ferc-rulemaking-data-center-co-location-pjm/)

“Ancillary services pass through transmission lines, not the air. Therefore, cost causation principles appear to support allocating co-located arrangements ancillary service costs (at a minimum),” PJM wrote. “Further, simple netting may not capture the costs ‘caused’ by co-located data center arrangements. Indeed, it is possible that such arrangements (depending on how they are structured) could avoid all costs because they would always net to zero (meaning the entire data center load is supplied by the co-located generator).”

Option 6 seeks to incentivize large loads coming onto the grid to bring their own generation by expediting interconnection studies for co-located resources. The generation still would be responsible for its own interconnection costs, and the load would be allocated NITS, energy and capacity charges.

Option 7 would allow co-located load to reduce its capacity obligation by committing to curtailing when requested by PJM in advance of anticipated emergency procedures. The load would not be included in the load forecast, and it would receive less priority to service from PJM, while the generator would be able to offer its capacity to PJM.

Building on existing demand response rules, Option 8 envisions changes to federal and state environmental rules around backup generation to allow the load to remain online when the co-located generator is required to serve PJM load by expanding the number of hours that reciprocating internal combustion engines can operate.

While broad changes to the capacity market design are not necessary in PJM’s perspective, it said some configurations might require new exceptions to the requirement that capacity resources offer into the energy market. Non-network load cannot be supplied by committed capacity, so for a resource holding a commitment to be dedicated to co-located load, it would need to request for its capacity status to be revoked. That process requires either a FERC order or approval from PJM and the Independent Market Monitor following a determination there would be no market power implications.

“Simply put, absent commission guidance to the contrary and PJM authorization, PJM cannot be in competition with non-capacity backed co-located loads for the output of a capacity resource. PJM cannot be simultaneously responsible for ensuring the energy needs of the PJM region and unsure whether a capacity resource will decide to serve PJM loads or co-located loads. Sellers should not be afforded the economic choice of following through on capacity commitments or incurring capacity resource deficiency charges and/or non-performance charges,” PJM wrote.

Jurisdictional questions also remain, with PJM arguing that some states grant exclusive franchises to public utilities that could prevent co-located load from accepting service from any entity other than the local utility. In some cases, there could be a regulatory gap where FERC does not hold jurisdiction over non-wholesale electric sales and states only regulate transactions where a sale is to the public. The comments noted the residual nature of the RTO’s capacity market and said there’s an opportunity to explore how bilateral transactions could fit into the co-location paradigm.

“State law regulatory particulars may, in certain instances, determine whether particular co-location arrangements will be regulated by the states or permitted by states with a franchised public utility model. As such, the propriety of the co-location arrangements proposed … are subject to different state law requirements that could disqualify certain options,” PJM wrote.

Creating enough electricity for AI data centers is new and uncharted territory. We’ll figure it out.

#FERC #PJM #Nuclear #Talen #DataCenters #AI #Colocation #Electricity #NaturalGas

For more great articles on natural gas development every single day, subscribe to Marcellus Drilling News using this convenient link.