[co-author: Richard Mroz]
The decision signals potential new scrutiny for co-located energy generation and data center projects as concerns grow about grid impacts.
Takeaways
- Although decided primarily on procedural grounds, the Federal Energy Regulatory Commission (FERC) decision points to increased regulatory scrutiny on large co-located energy users as policymakers adapt to rapid demand growth from data centers driven by AI development.
- FERC’s decision underscores the importance of meeting procedural standards when deviating from pro forma interconnection agreements.
- The decision, and FERC’s recent technical conference on co-located loads, brings attention to the trend of siting data centers near nuclear facilities and illustrates the regulatory complexity of such projects.
On November 1, 2024, the Federal Energy Regulatory Commission (FERC) issued an order rejecting PJM Interconnection’s amended interconnection services agreement (“amended ISA”) with Talen Energy subsidiary Susquehanna Nuclear LLC and PPL Electric Utilities Corporation. The amended ISA would have increased the amount of load sent from the Susquehanna nuclear plant to a co-located Amazon Web Services (AWS) data center from 300MW to 480MW. Co-located loads are defined as customer loads that share a physical site with generating units and can be directly served by those units rather than through the broader transmission system.
The amended ISA would have facilitated additional direct power sales from the Susquehanna nuclear power plant to the data center. The project at issue is one of several projects in a growing trend of co-locating data centers near power generation facilities, and nuclear power plants in particular.
Exelon and American Electric Power challenged the amended ISA, asking that FERC either reject it or set it for hearing. The companies argued that the amended ISA did not adequately protect against unfair cost shifts that would burden ratepayers. Even though the data center and nuclear plant were directly connected, with the physical interconnection to facilities behind the point of generator interconnection, the companies alleged that the arrangement would nonetheless rely on the PJM grid. Accordingly, the challengers asserted that under the amended ISA, the co-located load at the AWS data center would effectively receive services from the PJM transmission system without being subject to corresponding transmission costs, improperly shifting significant costs to ratepayers. The PJM Market Monitor, an independent entity tasked with monitoring compliance and practices in PJM markets, supported these challenges and expressed its view that the ISA contained significant policy decisions that had not been properly reviewed by the PJM stakeholder process.
Susquehanna and PPL disputed these characterizations, arguing that the structure of the ISA and the project ensured that the data center would remain isolated from the grid and would prevent behind-the-meter load from unexpectedly drawing power from the grid during outages. This, they explained, would protect the PJM transmission system and increase reliability. They also emphasized that FERC had previously approved the 300MW of co-located load under the original ISA, and that PJM’s study process found the increase of 180MW would not have an impact on reliability. On the legal front, the companies argued that the challenger’s stance would essentially federalize behind-the-meter electric equipment, which was beyond FERC’s jurisdiction.
FERC sided with the challengers, holding that PJM failed to meet its burden of showing reasoning for the changes to the ISA, which deviated from PJM’s pro forma ISA. Under Order No. 2003, any interconnection agreements that deviate from PJM’s pro forma standards must be justified by reliability concerns, novel legal issues or unique operational factors. FERC concluded that PJM failed to meet this high burden, as the proposed changes lacked sufficient evidence to demonstrate they were necessary for one of these reasons. Although the decision rested primarily on PJM’s inability to meet the standard for deviating from the pro forma ISA, the analysis also raised questions about potential impacts to grid reliability and market efficiency, and the precedent that could be created by approving the ISA.
FERC’s decision was 2-1, with Commissioners Mark Christie and Lindsay See siding with the challengers. FERC Chair Willie Phillips dissented. Phillips characterized the decision as creating a national security risk, given the critically important nature of data centers and the race for artificial intelligence development between the United States and other nations. Despite the concurring and dissenting opinions, the order essentially was decided on the procedural basis that the record did not substantiate a change to the standard form of the ISA.
FERC’s rejection of the amended ISA came the same day as it held a technical conference, where stakeholders discussed the broader implications of co-locating large energy users like data centers at generation sites. Key takeaways from this conference included concerns about cost allocation and grid reliability, echoing the issues raised by Exelon and AEP. The conference highlighted the challenges in establishing appropriate tariffs and rules for co-located loads, particularly regarding who bears the costs of system upgrades and how such loads should participate in wholesale markets.
The proceeding highlights the potential for increased scrutiny of and opposition to large co-located energy projects. The outcome, coupled with insights from the technical conference, indicates that FERC is focusing on this issue as the energy sector anticipates rapid demand growth from data centers. FERC’s decision will likely inform the regulatory environment for similar future projects, and developers may require sophisticated power purchase agreements to anticipate and provide for contingencies. Understanding these developments is crucial for anticipating regulatory challenges and aligning such projects with emerging standards.
The issue of how data center deployment will impact energy markets is going to be a very active and continuing area of discussion for FERC, and this decision is just the first in what will be an evolving policy landscape. The pace of change in the development of data centers using nuclear and fusion technologies has outpaced the development of policy frameworks at FERC and among state regulators on how to balance this type of deal and the impacts it could have on commercial and residential electric customers. We expect this will be an active area of discussion between the incoming Trump Administration, including the new Secretary of Energy, as well as relevant House and Senate oversight committees.
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