The PJM Power Surge: FERC’s Co-Located Generation Query and PJM’s Fast-Track Gamble

FERC has issued a “Show Cause Order” on co-located generation for data centers while also approving PJM’s fast-track interconnection plan to accelerate new or existing power plants. Both actions could reshape gas demand and infrastructure investments, with added potential for co-location rules to impact pipeline use and fast-tracked approvals to drive new gas-fired generation.

Natural gas infrastructure stands to gain from PJM’s interconnection plan, but co-location rules for data center-driven generation could shift demand unexpectedly, and could have impacts beyond PJM by serving as a potential model for co-location tariff structure nationwide.

Background: The Convergence of AI Growth and Interconnection Reform

The rise of artificial intelligence and cloud computing is forcing a major recalibration in PJM, where data center expansion is driving record electricity demand. According to PJM’s 2025 Long-Term Load Forecast Report, peak summer load is expected to increase by nearly 30 gigawatts by 2030, with data centers as a primary driver.

At the same time, PJM is undergoing a fundamental overhaul of its interconnection process, which has created a logjam of projects awaiting approval. Historically, interconnection requests in PJM were handled under a first-come, first-served model. But this approach failed to keep pace with the surge in new project proposals, leading to a massive backlog — an issue not unique to PJM — which prompted FERC to issue Order 2023 mandating a shift towards cluster studies, as we discussed in Spark or Static? FERC’s New Generator Transmission Interconnection Rule.

PJM’s new cluster model is expected to improve efficiency eventually, but it has temporarily slowed the approval of new projects, exacerbating concerns over how PJM will meet its growing load requirements, particularly for its capacity market — which aims to create a reliable grid by paying generators to ensure future power availability.

This rapid demand growth plus the interconnection constraints spurred dual intervention in PJM:

1. On February 20, 2025, FERC issued a Show Cause Order compelling PJM to clarify how it treats co-located generation.
2. On February 11, 2025, FERC approved PJM’s fast-track interconnection process for up to 50 new power plants to meet reliability concerns.

Co-Located Generation: A Test Case for Nationwide Tariff Structures?

Co-located generation is a growing strategy for data centers seeking stable, cost-effective power. By pairing with an on-site generator instead of relying on the grid, data centers can bypass certain transmission costs. This raises key questions for PJM’s tariff system, including who should pay for upgrades and grid reliability.

The Show Cause Order highlights the legal and financial gaps in PJM’s current treatment of these facilities. The order raises several key regulatory questions in six key categories:

• Jurisdiction and Tariff Adequacy – whether FERC or states control co-located facilities and if PJM’s tariff needs updates.
• Transmission Service and Cost Allocation – how co-located loads use the grid, who pays for transmission costs, and whether new service categories are needed.
• Ancillary or Other Wholesale Services – whether co-located loads rely on services like black start, how costs should be allocated, and if new service categories are necessary.
• Interconnection Procedures and Cost Allocation – whether PJM’s study process fully assesses co-location impacts, if new interconnection requirements are needed, and how upgrade costs should be allocated.
• Capacity Market, Reliability and Resource Adequacy – whether PJM’s market rules reflect co-location’s unique operations and when load reductions should be required for reliability.
• Other – whether co-location lowers costs or congestion, raises security risks, or requires tariff updates to clarify federal vs. state jurisdiction.

The stakes extend beyond PJM as whatever happens could spur similar rules nationwide. PJM has 30 days to respond, either by defending its existing tariff or proposing reforms.

Fast-Tracked Power Plants: A Boost for Natural Gas Infrastructure

Even as FERC scrutinizes co-located generation, it has greenlit PJM’s Reliability Resource Initiative (RRI), a temporary measure to fast-track up to 50 new power plants outside the standard approval process. The RRI expands PJM’s tariff to address grid reliability concerns identified in its 2023 report, Energy Transition in PJM: Resource Retirements, Replacements & Risks. It modifies eligibility for Transition Cycle #2 — the final phase of PJM’s revised interconnection process — prioritizing near-term, high-reliability projects with at least 10 MW of unforced capacity.

The RRI scoring system prioritizes projects based on two key evaluation criteria:

1. Market Impact Criteria (65 points maximum):
   1. UCAP (Unforced Capacity) value
   2. ELCC rating (Effective Load Carrying Capability) — ability to meet peak demand
   3. Location — favoring constrained grid areas with higher reliability needs
      
      
2. Commercial Operation Date Viability Criteria (35 points maximum):
   1. Planned in-service date — favoring projects that will be operational sooner
   2. Project support — readiness indicators such as permitting and financing
   3. Uprates — existing projects that can increase capacity
   4. Headroom — available transmission capacity to support new generation

Based on this scoring, PJM is prioritizing resource adequacy (65% weight) to address reliability concerns, favoring projects with high UCAP, stable ELCC ratings, and strategic locations. This criteria inherently benefits natural gas plants, which provide reliable, high-capacity generation. Unlike wind and solar, gas plants avoid ELCC constraints and offer consistent UCAP contributions, making them top candidates for the RRI.

Commissioner Judy Chang’s dissent is worth noting. She warned that the RRI prioritizes slow-to-develop gas projects over faster alternatives and may not address PJM’s reliability gap until after 2030. Stakeholders will be watching closely to see how it gets implemented.

Pending PJM Generation Approvals

PJM’s current interconnection queue highlights the limited role of natural gas in the project pipeline. We used the latest EIA-860M data to analyze pending generation projects from independent power producers and electric utilities, excluding commercial and industrial generators, which do not supply power to the grid.

Most pending projects are non-firm, intermittent renewables like solar and hydro. Natural gas makes up just 1.2% of proposed capacity, with only two gas plants — both by Wolf Summit Energy in West Virginia. Of the 103 projects slated for near-term operation, these gas plants stand out as strong candidates for RRI’s fast-track approval due to their alignment with PJM’s reliability criteria.

Conclusion and What’s Next

FERC’s rulings will shape PJM’s energy infrastructure and set precedents for managing AI-driven demand growth and interconnection reform. If co-located generation faces new restrictions, demand could shift back to grid-connected plants, reinforcing the need for more natural gas infrastructure. The Show Cause Order could reshape co-located generation economics, while PJM’s fast-track process may accelerate centralized gas development. A FERC ruling on co-location could also set a tariff precedent for other grid operators, influencing on-site generation agreements nationwide.

Key dates: PJM’s response to the Show Cause Order is due March 24, 2025. RRI applications run from February 28 to March 14, with project selections expected in Q2 2025.

What to watch: Which projects PJM selects for RRI and whether the program influences future grid planning. If successful, it could be replicated in other data center hubs like OH, IA, and IN.

If you would like additional information on AI co-location or evolving power regulation, please contact us.