Ep. 026 - PJM's $12B Modeling Mistake Is Hitting Ratepayers Again (Datacenter, Energy)

This is my mother's background. We got crystals that help you sleep. We've got Buddha. We've got a kiwi or a looks like a kiwi.

Yeah, that's a kiwi from from New Zealand, right? They lay the little green eggs that turn into fruit.

Yeah, I love those.

They're really tasty. Hello everyone. Welcome back to Seminolysis Weekly. We've got episode twenty-six, and we are here with. Robert Boswell. We're going to talk all about US ratepayers wasting $12 billion of money that they don't have to waste because PJM is making a modeling mistake and they want to do it again. Rob, welcome to the show, man. I appreciate that you're there in your man cave with the crystals and the kiwi. It's looking great.

Yeah, yeah, yeah. I gotta, you know, gotta balance out Bring out my feminine side, I guess. Yeah. Well, I mean, I love the crystals. Who doesn't love crystals? Yeah.

We're going to have a nice feminine podcast where we talk about the electricity grid in Pennsylvania and Maryland today and Virginia. Okay.

Okay.

Let's start with the basics. So the high-level call that you guys are making here is that, 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 Americans are going to see their power bills rise.

Well, and yeah, that's the thing. They don't necessarily have to. So PJM stands for Pennsylvania, New Jersey, Maryland, but it's actually 13 states. 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. It's not all of, all of those states. Some of them are partial, but yeah, it's a bit of a mouthful for the acronym to be all of the states. Uh, so they—

But this is US East 1, like, like this is Data Center Alley.

This is 66 million people. This is Data Center Alley. This is the largest grid by electricity delivered in America, or the largest, uh, sort of operational area. In America. And it's also what's driving a lot of the narrative around data centers driving up electricity prices. Like if you, you know, hundreds, maybe thousands of articles, 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. 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 has seen by far the largest rate increases due to increase in demand. And that's, yeah, we, our 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 or not really even market design, more like sort of bureaucratic auction design.

Okay. Let's dig into that specifically. So PJM is unique when compared to other grids, even in the US, in the way that they do these auctions, right?

Yeah. So it's normal in electricity, in electricity markets to have kind of real-time markets and then like more ahead-of-time markets. 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 operates well. 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, or you're running them for like refurbishments or, yeah, life extensions, things like that. You're basically just trying to keep some give in the system. And PJM is unusual where they run this for the entire system. And so every power plant can bid into this, like Fully existing ones that are completely paid off. 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've got a small price increase on the Y axis that's multiplied across the entire X axis. And because this is a very large grid, because it's the largest grid in America, that can lead to some quite large price spikes, which is what we've seen.

Yeah. And this is definitely why Maybe people talk a lot about how as AI data centers or just energy demand in general in the US increases over time, we need to solve this with baseload, but also variable capacity because there's fluctuations in demand throughout the year. This is not implying that there's actually variable capacity for the entire grid in PJM. It's just saying that they pay for everything and they do their planning upfront with this market. auction-style approach, and that's going to lead to, well, let you tell me what's that leading to in this case. Yeah.

So what's happening is that for various reasons, PJM has a constrained supply. So in the article, we kind of map out the supply curves and you can see the supply curve lift, literally sort of shifting left as you are having fewer power plants that are able to join this auction even as demand is going up. And this is because PJM delayed its auctions for a while. It's now running its auctions with very little lead time. So like once you sign one of these contracts, you need 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. And so there's very sort of constrained supply and more constrained supply is the more it shifts to the left, but also the more vertical it is. Yes. You've got the— got it there. Like if demand then moves at all, Price jumps. And, you know, this is, that's very normal in markets. If you constrain supply and then demand increases, you know, you get scarcity pricing. And that's basically what's happening here. So 2 things are happening simultaneously where PJM is constraining supply through bad auction design, not giving enough warning, and not signing long enough contracts such that new supply can't enter the market. And then also it is inflating demand. Which is the main focus of what we get into in this 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. And it has bought more than it needs to in 2 previous auctions, which is where the $12 billion comes from. 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 ratepayers at risk of further price increases. 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. 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, the supply modeling and that as well.

Yeah. Well, maybe first put the $12 billion excess payment in context. Like this is actually still a large percentage of the total consumer spend on power. Yeah. On PJM.

Yeah. So over the last 4 auctions, they spent $63 billion and $12 billion of it we estimate was avoidable. And all $12 billion is actually from the first 2 auctions. The, because of primarily Governor Shapiro, but also other sort of political pressure, price caps were put in. And these price caps mean that actually sort of demand and supply were kind of so out of whack, was so constrained that even this modeling adjustment wouldn't have had enough of an effect to sort of change things. But in the first 2 auctions, in the auction for 2025-26, these run June to July. So that, yeah, split years, '25-'26 and '26-'27 would've saved $7 billion and $5 billion respectively. And yeah, so $12 billion in total across those 2 auctions if they'd modeled this differently. And there's only such a huge effect because supply is so constrained, because you are working right at the edge of this supply curve and it's going kind of vertical, which, you know, they shouldn't do ideally. That's why you have these like huge price increases.

Yeah.

Can you dig into both of those in a little more detail?

Yeah.

So yeah, I've talked about the supply, I've talked about the supply going vertical a bit, which is, yeah, you're not given enough warning. The interconnection queue is the other thing. So PJM is currently just very slow to get connected to the grid if you're a new power plant because of various things that, 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 how they run that process, which have introduced a lot of delays. And they're running these auctions on way too little warning. So these auctions should be run on kind of 3 years warning, and even that's a bit tight in my opinion, but they've been run on 1 to 2 years warning. And so you just can't get a power plant up and running. And so there's really constrained supply. And then the thing that we're actually really getting into in this modeling effort is that Power plants are more efficient in the winter. They get cooled down more easily if they're a coal or a nuclear power plant. But most importantly, for a gas power plant, the air inlet, the air is denser. So the power plant is easier to be cooled and it also is running more mass. It's basically just a more efficient system. There are also certain ways in which cooler temperatures help with electricity systems in general, but the main one is the dense air going into gas turbines. And this has been proposed in the past where currently PJM just runs it as if it's summer all year round, right? It just basically acts as if they have summer ratings efficiencies. And as much as, you know, endless summer would be a lot of fun, it's simply not the case. You know, winter, yeah, winter will come. Winter is coming. And so it inaccurately forecasts that or inaccurately models that in its, in when it's deciding how much to And then the other factor that we model, so we model sort of 2 things that change how you understand the current power plants operating. One is that, and the other is imperviousness to winter. So winterization or weatherization. So during Storm Elliot in 2022, but then also during the polar vortex in 2014, power plants came offline due to componentry freezing or due to pipelines cracking. And a lot of effort has been put in since to prevent this from happening again, to make sure that— because a lot of these components actually failed within their operational margins, so they should have been fine. It wasn't the case that the weather was so bad that it was sort of physically impossible to keep these things online. If they had been properly winterized, then this shouldn't have happened. And so there's been federal orders, there's been various local mandates, et cetera, to winterize these units.

Mm-hmm.

However, and the graph you've got up on screen explains this well, the way that PJM models this is purely backwards looking. So they only look at when power plants have failed in the past and then extrapolate that out into the future. And as any good financial professional knows, past performance is not a predicate for future performance. And so 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. 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, but also you would, you would prevent yourself from overbuying. You prevent, you prevent the system from, yeah, spending more than it needs to.

Okay. Can you, can you explain the auction concept there again? 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 PGM for the power that they're producing.

Yeah. So the key thing is that it's, it's megawatt days is the— God, I'm going to lose all of our listeners at this point. The moment I said that, just cut. The unit is megawatt. So it's capacity. It's not generation. It's not how many electrons are actually made. It's kind of ability to make electrons. Um, it's like paying a farmer for having a field as opposed to paying them for the wheat that comes from the field. It's kind of capacity to produce. And, um, it's so that you have this reliability margin. It's so that, it's so that, you know, that on the worst possible day of the year, you make sure that there's enough electricity. Not all markets have this. 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, I don't know, sensible or kind of well-insured approach. And so what literally happens is PJM runs an auction and says that we need whatever it is, 160 gigawatts of capacity on our worst possible day. We need that much. So we're going out to market and we're buying 160 gigawatts of capacity. And they actually, they draw a price curve. They say, oh, if it's really cheap, we're willing to buy 170 gigawatts, right? Because like, you know, that extra margin is worth it to us. Oh, if it's really expensive, then, then this is the price that we're going to kind of top out at. And they literally draw a, you know, straight out of like a, like an economics textbook, they draw a, they draw a demand curve. Um, and then they run an auction and people bid and people just say, right, I'm willing to pay whatever. Uh, and here's the amount of capacity that I'm bringing to the table. Then that draws the supply curve. Each one of those bids is like a dot on this supply curve. And then wherever the 2 cross, that's your price and that's your quantity. But the key thing is everyone gets paid this price. So if you bid in at $5 a megawatt day, which a lot of people, you know, do, that is a price that people bid. That's not excessively small. You will still get paid $300. a megawatt day if that's what, if that's what the last unit needs. 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.

So can you explain again the concept of getting credit for a power plant that has winterized? Um, yeah. Yeah.

So every, every power plant gets given gets rated for how reliable it is. And that, that, that determines its volume. So you can be, uh, so for example, nuclear power plants are rated higher than gas power plants because they're considered more reliable. They're considered more kind of robust. Uh, and so if you are a, um, 1,000-megawatt nuclear power plant, you get rated at about kind of 90%. So say 93%. Um, and so you get more money basically per your power plant than a gas-fired power station, which might be rated at say 80%. And if you say, right, we actually think this is a really good gas-fired power station, this is like a really well winterized, it's in a really good location, it's got a very short pipeline, the various things, you know, really well built, good design. Actually, we think that should be worth 85%, 88%, and it should get more money. By bidding, it should be able to bid into that auction with more volume basically, and then it gets more money. And this money is literally, it's a year, it's covering a year and you get paid the money. I don't know how to say it more simply than that. You just sort of, that money just gets, just comes in. There are ways to violate the contract, but short of violation, it's just revenue. It just comes straight in the door. Yeah.

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 their power plants to be better winterized. And then they don't get paid more money.

Yeah. I mean, it's hard to, it's hard to say to what extent this is out of the goodness of their own hearts because, um, NERC, N-E-R-C, uh, National Energy Regulatory Commission? Anyway, uh, they've, they told them to do this. They said, right, it is now a legal mandate for you to go and winterize your plants. And there was a number of other mandates to do this as well. They were also fined. The ones that failed during Storm Elliot were fined. So they have financial reasons to, you know, go and not do that again. But there's, yeah, there's kind of 2 things going on here. 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. But then also the system's just overbuying. If the system is not You know, recognizing the value of what it already has, i.e., how reliable its existing power plants are. It then goes to market and asks for too much. 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. And to be clear, this is very much a range. We're not kind of putting, we're not saying this should be the number. We're just saying like, there is a lot of margin in here. That PJM could be accessing as value. Like it could be saving this money for its ratepayers if it were more accurate in terms of how it rates technology. I mean, my idea, like, look, 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.

Yeah.

Pretty bureaucratic, pretty democratic in an interesting kind of way, in a complicated way. And so it very much takes onto itself deciding how much capacity is needed and all of this sort of central planning versus other grids that are, you know, the famous one at the other end of the spectrum is Texas with ERCOT, which are much less centrally planned and much more decentralized. And Yeah, this currently PJM is due to odd reasons of governance and system modeling. It is failing at keeping up with the times. It hasn't seen demand growth in a very long time, arguably in about 2 decades, and it is really fumbling the bag now that demand growth has turned up. 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 are very high fixed cost. You know, you've got the pylons, you've got the power plants, you've got all of this physical infrastructure. So as a commodity, it's incredibly high fixed cost. And so there are great economies of scale. 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. And also with data centers, because they're, you know, these value-creating or money-printing machines, they're sort of, this has got to be by far the largest differential between like cost of electricity in versus value out that has ever existed in an electricity system. That's like an amazing opportunity for electricity to get really cheap because they can invest in these systems and they can grow the system, drive the efficiency. They've got loads of vested interest in making this system work. And if you look at I don't want to stand too hard for the data center industry, but like, if you look at the transcripts and the meeting minutes, the data centers are really coming into this with a lot of solutions, and they are more than happy to put the money where their mouth is on most things, you know, with some exceptions, right? I'm sure there are exceptions. There are always exceptions, but they are meaningfully pot committed to this region, right? 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. And they're currently going, right, well, either we figure this out or I'm moving to Texas, right? Those are my, those are my sort of options as an individual, but also these companies and these organizations. So they want to make PJM work. And it's a real shame that, yeah, PJM's not figuring this out.

Yeah. Maybe we could go back to that demand side. 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 and then they immediately blame the demand side as you're describing.

Yeah.

Like there's so many more data centers being brought online, therefore there's more demand for electricity. 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. And so therefore, you know, more demand chasing fixed supply means increases in prices. And I think while that dynamic exists to an extent, we have made 2 cases in sequential articles. One is that there is a lot The forecast, PJM's, in a previous article, PJM's forecast for actual data center demand was being criticized because it was less accurate than our model. And now we're also talking about the supply side being, you know, an issue and being criticized. Is there something beyond the modeling, better modeling, like that they could be doing to actually upgrade the grid itself? And maybe you can just talk about like generally What's going on with electricity grids right now? Like what's the technical stuff that everybody's struggling with?

Yeah, I think key thing I'll just pick up on there is that you said, you know, fixed supply, right? Like, yes, if demand goes up with a fixed supply, then price goes up, but there's no reason why supply needs to be fixed, right? Like 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 more efficient and more modernized than old supply. And we can get into nuances there. But on the electricity system, I think the, the opportunity that's being wasted here is, yeah, basically deployment of batteries. Like that's probably a very big one. There's a huge amount of opportunity for bringing down the price of electricity through better Deployment of batteries.

Yeah. Is there something in the transmission of electricity in the substations, in the transformers? Is there something to do with the actual like power lines in the grid, 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.

This is a, yeah, this is, this is a 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—

Sure.

PJM, PJM has been described as too big to function. 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. And so it's basically saying, right, if we deliver a power plant here, In Washington, D.C., or, you know, in Washington, D.C., but in Virginia, can it reach Illinois? Can it reach sort of the other end of PJM? Like, is there enough space in those wires? And you arguably just shouldn't do that. You should arguably try to have much more localized work. And this way you'd be able to connect power plants, be able to connect new demand to the grid much faster. And so a lot of grids do this where they basically just say, right, okay, we're actually just doing sort of operability areas. 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. And PG&E, 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 that says that PJM is building more grid than it needs to. It's because it's doing its— people call it copper plating, where you basically just turn the entire area into wires such that it's basically just like copper plated. And so that is, that is a potential criticism of PJM, which I, you know, I have read elsewhere and I'm sort of, I'm susceptible to because I know that happening, you know, you might be able to tell from my accent, I'm British. It's something that we've done in Britain. Uh, in Britain, we've, we've arguably significantly overbuilt our electricity system, um, for different reasons to PJM. 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. Um, this kind of infrastructure is hard to build. Um, and so there is some, there is some degree of that going on, 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. And then it can also be done over time where new demand needs to be bringing new supply and, or at least linked to new supply. It doesn't necessarily need to be bringing it to themselves. Like that's what these capacity auctions are supposed to do. They're supposed to help bring new supply online to meet new demand. But they're just very bad at doing it.

Makes sense, man. Um, where should we go from here? Is there anything that, uh, we haven't covered that you think we should?

So the emergency auction is the, is the kind of the next thing. So like, uh, PJM models that it currently has, well, it, that it had, that it will have by 2028, '29, 6.8 gigawatts shortfall, that it'll be short of what it forecasts to demand to be then versus what it'll have as supply by 6.8 gigawatts. This is partially because of the price caps, meaning that these auctions didn't kind of clear. But it's frankly, even if there hadn't been the price caps, I think the price caps were probably the right thing to do given other constraints. But yeah, price caps were probably the right thing to do given other, given the other constraints. But yeah, so you've got the 6.8 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. So you'd save more than half. And this is important, one, because it would just save that money. It would just save that kind of 3.8 gigawatts of procuring it. 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. So PJM has these big complicated votes. It has over 1,000 members. They're split down into 5 groups. Each one of the groups votes, and you need the equivalent of 66% to get anything through. So surprise, surprise, a lot of, a lot of the time things don't get through. But they actually did agree on a different auction design that didn't have this problem. The PJM's board has decided that it is going to sign these contracts. So these are long-term contracts going out to 2042, which is a good thing. Long-term contracts are good for new capacity. But they don't necessarily have a counterparty. PGM doesn't have its own money, right? PGM just has ratepayers' money. It just kind of passes through these costs to ratepayers. And the theory is that PGM is going to pass this through to new demand load in the form of data centers. But it's not a given that this new load appears, right? So it could contract out, it could contract 6.8 gigawatts of new load out to 2032, 2042, 2043. So out sort of 11 to 15 years. Depending on the start date, and then not have anyone to pay for it. And so it would have to go on existing ratepayers because if you're a data center looking at this, and we go into this in depth in the article, but 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. There's a very high price cap of $555 a megawatt day, which over the full 15 years could be up to the amount that they're trying to contract could be up to $21 billion. And if you're the data center, you don't really know what you're agreeing to. This is all still being decided. This auction's going to happen pretty soon. It's happening September, October this year. So yeah, end of next month, basically. And they, I think there's a very real possibility that data centers don't turn up, don't, don't take on these liabilities. And then PJM is stuck there holding, holding the bag and PJM can't hold the bag because it doesn't have its own money. So that, so what's going to actually happen is the existing ratepayers are going to hold the bag.

Okay. And then you were basically saying that there was a coalition that was making this case against how this is going to work and they got overruled.

Yeah. They, they basically said that PJM just shouldn't take on the liability and then pass it on. The data centers 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. And then 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. That's debatable. But yeah, I mean, 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. And so if our modeling is correct and they don't need that much power, then they didn't need to overrule the membership. Like that's, that's the thing. It all comes back to, it's very important if you're centralizing—

Sorry, hold on. They, they, they have this vote, they get more than 2/3 required, and then the board just overrules it and says, no, you're wrong. Yeah.

Why have the board? I have to put it in understanding. I mean, I, yeah, it's quite, it's quite something. 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? No, not, you know, democracy doesn't work in all cases. But yeah, it does, it does seem—

It's democracy until you do something we disagree with.

Something like that, yeah. I mean, but then again, the board, Yeah, there are plenty of times that I wish the board had overruled the, like, 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. You know, you, you need, you need a, a politics thesis and like 3 psychiatrists to actually get to the bottom of, of the, of the back and forth of like what's actually gone on in PJM, which is not something that I go into at any great depth in, in, in the newsletter. Um, but. Yeah, a lot of, you know, plenty of people are more than welcome to look into that in their own time.

Maybe we can loop around, you can grab your crystals from behind you and then we can make some forecasts here. We can ask the oracle about which, what the zodiac signs of different board members are and, you know, you can really, really get to understand it. Is Mercury in retrograde while this vote was going on or what?

Yeah. I like, honestly, it's, The complexities of it and the motivated voting and the ability to veto and the vested interests. And because, yeah, like a lot of the people voting are existing generators, right? So they're currently getting windfalls off the back of this. They're getting windfalls off this kind of constrained supply and increased price. Um, and I think a lot of them also want to build new power plants. So like, you know, that's not to say that they're all just kind of sitting on their hands. Like, it's just, it's a highly complicated system that PJM has built. 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. And my interpretation of that was that it's too big to function in terms of its bureaucracy and its governance. Like it literally can't function. It can't navigate its own systems of governance. And it's also just physically very large, but being a large grid shouldn't be a problem, right? Electricity grids benefit from scale. Being big is good if you're an electricity grid, so long as you're able to make the design choices and make the governance choices that mean that that works. It means that you actually benefit from those efficiencies of scale. But yeah, PJM is really struggling and it's got a lot of political engagement now with governor's races coming up at the end of this month. Not the end of this month, end of this year, sorry, in November. We've got a whole, we've been digging right into data center moratoriums and there's loads of chatter in Ohio all over the place for the political problems around this. And it is very frustrating. But again and again, PJM is the evidence for data centers leading to price increases. And, you know, surprise, surprise, if you suddenly start trying to explain that it's actually the nuances of market design, people view it as not as catchy. It's not as— Yeah.

I mean, maybe not on the technical side, but I'm getting the sense that there's some potential investigative journalism opportunities here, or that there's some soap opera style drama that could be coming up if you're sitting in on some of these board votes and stuff. So maybe we can hook in some viewers to the PJM board votes.

I, yeah, I need to, I have 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. I'm sure— I hope there are some journalists slogging it out, trying to sort of walk the corridors of these meetings, but sadly I doubt that there are. I don't think it sells copy. It's a hard thing, right? Like, lots of electricity grids, or lots of electricity systems, have this problem where for kind of understandable reasons, they try to bring industry into the decision-making process. And then there's regulatory capture, right? It's like very classic regulatory capture where you bring industry in, industry is just much more motivated to actually understand and control the system than anyone else is, right? The generators and the transmission and the distribution, this is their entire job. This is entirely impossible for existence. Yeah, this is totally played out. And so they immediately take over. We have the— in Britain, we have these whole— we have all these complicated systems of what are called industry codes, and it's how, like, the system is run. It's like the rules of the system, and they're written by the players. They're written by the people who are in the system, and there's ostensibly this kind of overarching regulatory body that is supposed to kind of mediate this, but they get run rings round, and, like, of course they do. Because these guys are just much more financially motivated to understand and guide the system than the regulators are. And that's what's happening here as well, where like— it really confuses me. 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. It really confuses me who is on whose side, who the kind of players are, when the board can overrule or when it can't overrule. There are— PGM really is just like a stack of contracts. That's all it really is in terms of its actual existence. There are like 3 contracts, which all of the utilities and generators have signed. And these are unbelievably complex contracts. And that's all that these things really kind of are, is just like agreements to operate under the terms of these contracts. And yeah, it's not like a— 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 like, um, it's got utilities that have been vertically disintegrated. So you've separated out all 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. uses because it's got all these different rules. So like 10% of the system doesn't even participate in this auction, right? 10% of the system are vertically integrated utilities that just say, nah, we're good, we've covered our own demand, we've got our own supply, we're gonna do our own thing. It's like, okay, off you go. So yeah, this thing is just infinitely complex. And I basically agree with the FERC chair that like it's too big to function. You either need to single significantly simplify 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.

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. If anybody from Netflix or HBO is listening out here and wants to make— wants to bring Kevin Spacey or Paul Giamatti in to play FERC regulatory chair and cover the politics. 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 such a funny— it's such a kind of, 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 clusterfuck, right?

Yeah.

Like, I would love— 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 electricity price debate stems from PJM. Because if I, if I were willing to bet, I honestly think it's something like 40%. I think something like 40% of the kind of first-tier debate is from this kind of stuff. And then arguably a lot of that 60% is just downstream of the 40%, right? A lot of just like The Facebook posts or the, like, tweets, etc. So it's just unbelievably frustrating. So you look at all the other grids and it just isn't happening because this is like a completely resolvable problem, right? Demand go up, supply go up. You have forecasts for that reason. You know, life goes on. 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 overpowered. pay. You literally just say, look, like, you just have to pay more than your fair share because you're making absolute bank. And the data centers would be like, yeah, totally cool with that. Because this way, we actually get to get billed rather than not get billed. Yeah.

Yeah. Okay. Is there a way to turn this around and end this on a happy note? How about we say this? 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. I mean, the counterargument, the counterargument is you can't be too careful, right? Like, it's fine to overpay and to have more capacity than you need because, yeah, you can't be too careful. Electricity is incredibly important. But—

Yeah, you should be able to bring on more load now. You should be able to fund these guys to build out new power plants that they want to build by giving them more money. All at the expense of the American taxpayer.

Yeah. Yeah. I mean, I can give the negative case against the positive case, but I feel like that defeats the point of the positive case.

Try to end positive here, man. We did 40 minutes of negative already. All right. Sounds like we're just, yeah, unfortunately going down.

No, we need to come with like more positive pieces on the utilities that we like. I mean, we obviously like ERCOT and PGM can still turn it around, right? They really can. These auctions are only every year, as in like they only cover the year that they cover. So the moment you time them out, you stop paying those high prices, right? These are not necessarily baked in for very long periods of time. So the auctions currently last until partway through 2029. So, you know, only 3 years. only 3 more years of, yeah, 3 more years of higher rates and then they can come back down again. So it's not too bad in the grand scheme of things. 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. You can do, you know, bring your own power in terms of behind the meter or backup power. You can do batteries for like increased utilization. You can even do demand flexibility, either of the data center or of other people. Gently skeptical of demand flexibility of data centers, but they're definitely very impressive people working on that. And so yeah, hope that, hope that they're right.

Awesome. Okay. Well, really appreciate you coming on today. I enjoyed this time, learned a lot. And yeah, good job.

Thanks, man. You too.

All right. Oh gosh, here we go. We're stopping.