The Exchanges

Q in that order. So let's start in the mid-Atlantic. I want to get to this DOE emergency order and the, you know, concept of data centers bringing their own generation and all that, but I want to get there after we talk about what's happening in that market at the high level. So start me off with the 30,000 foot view. Like, what is the state of affairs in PJM?

A Yeah. Look, there's been a lot of change, and the change has been quite rapid. When we rewind back just a couple of years, we had capacity clears that were going off between 30 and 50 dollars per megawatt day, and that compares to a little bit over 300 dollars a megawatt day in the more recent clears, uh, and subject to the cap in the capacity auction mechanism. Those low clears were in many ways, I think, sending the signal that we had more than enough capacity to We had a period of time between, let's say, 2008, the great financial crisis, and, ah, really the last year or two where there was virtually no demand growth in the PJM market. And in the absence of that demand growth, the environment was really one where new assets were being added to the market to replace older assets, less efficient assets, higher fixed cost assets. Uh, along with the addition of renewable projects supported oftentimes by state-level mandates or corporate procurement. So in that environment, there wasn't a need, and there was certainly no price signal to go actively develop and build new generation outside of renewables. And that's the backdrop really Kind of shifted really quickly over the last couple of years as probably a combination of factors hit the market and has driven up demand growth from that very quiet, virtually no demand growth, almost a market stasis to the real need for new generat…

AI assessment note: “capacity clears that were going off between 30 and 50 dollars per megawatt day”

Q It seems like a lot of the focus, both from a policy perspective and also a market perspective, is on, let's build as much new gas generation as quickly as we can to meet the capacity need in BJM. And it sounds like you're saying, to some extent, yes, but that actually isn't necessarily the, the savior, especially in the near term. Is that right?

A Yeah. When I look at the resources that we have available, Large scale gas is a 20, 30 plus new resource. In the interim, there are other things that we can do. We can add demand response. We can add batteries. We can upgrade existing facilities. We're working on the conversion of some of our combustion turbines to combined cycle power plants that can be done more quickly than building something that's completely de novo. We have a project where we can swap out combustion turbine blades and get dramatically more capacity. So there are different things that we can do as a bridge to large scale, completely de novo, new generation. But if that's what we're hanging our hat on, we need to anticipate that that's an end of the decade plus project. Deliverable at large scale resource.

AI assessment note: “Large scale gas is a 20, 30 plus new resource. In the interim”

Q of events where they make a lot of money in a short period of time. So what does it say about this merchant storage in Texas that We haven't seen those kinds of spreads in general, and then when this weather event shows up, it doesn't result in these sustained really high prices. Is that, like, is there a wave of merchant storage in Texas that's really hurting right now?

A I think the short answer is yes. I think that this last event in, in Texas probably, and I haven't reconciled, looked at the forward graphs, but I would expect that this was a disappointment from a power markets perspective. This, uh, forward price signal turned into a period of oversupply, turned into a period where we had very low spread clears. And so part of the, the flow through of the signal will be that those forward hedging opportunities are less robust, uh, Now that we've learned that we have 10 gigawatts of incremental supply of some sort ready to respond, along with a pretty well-performing system, when we have extreme situations, it takes some of that risk of extended periods of peak pricing out of the market. And so the probability of that happening goes down, and the available margin for the, uh, available margin for the existing resources, batteries being one of the big new entrants into the ERCOT market, uh, really, the, the, the air gets let out of the balloon.

AI assessment note: “I think the short answer is yes.”

Q there is a capacity shortage in PJM, which is what's causing all the consternation and why the Trump administration turned its attention to it and so on. Is there, in your mind, was that a, a failure of market design or foresight in PJM? Or is it just like, this is a natural result of the fact that people didn't predict how quickly data center demand was going to grow?

A I think all of the best minds who are focused on this market didn't anticipate how quickly this shift occurred, and we went from that moment of very little to no demand growth to hints of data center growth on the back of the emergence of ChatGPT And that happened almost overnight. From a power markets perspective, it really virtually happened overnight. And our planning horizons when it comes to large-scale gas-fire generation aren't measured in months. Today, I would say they're really measured over the course of four to five years between the realization that there's a need And all of the activities that are required to go from realization of the need to fulfilling the need and delivering a power plant.

AI assessment note: “didn't anticipate how quickly this shift occurred”

Q then in comes DOE with this emergency order, um, on top of that, kind of a separate, it seems separate and apart from the existing process. PJM capacity mechanism. Can you, I guess, first just describe what that DOE order is meant to do, or what the thinking is behind it, and then we could talk about, is it a good idea, and does it fit with the existing paradigm?

A Yeah, we'll wait to see how it's implemented, and there will be a process at PJM. There will be a variety of parties that will provide their input. So I think we, we know conceptually what the governors and the White House have proposed here, and in short, I think the concept is, um, That large data center loads that are driving a lot of the reset in these markets, they're creating the demand growth, uh, they're creating the need for new supply, should be responsible for paying for that new supply, and the cost of getting it integrated into the grid And I think that there is some good rationale there, and why is it different than past practice? One, these loads are extraordinarily large. Two, we've gone through this, again, very short period where prices for building a new large generation resource went from, let's say, for a combined cycle 10 years ago, we could build a new combined cycle for A little bit over a thousand dollars per KW. And today, the cost for building that same combined cycle has doubled to tripled, and it's happened again in a very short planning horizon. So, bringing that incremental capacity on, integrating it into the grid, Will have a very real impact on costs, and so if there were a way, and I think that this is the drive behind the executive order, if there were a way to allocate that specifically to the customer that's creating that dynamic, that woul…

AI assessment note: “large data center loads... should be responsible for paying for that new supply”

Q not that the weather event exactly disappointed, but we never saw the price spikes and the extended price spike that You have, you saw in Yuri, and, and that I think a lot of, uh, merchant generators and batteries probably were hoping for, to be honest. Be, and you, you made the point that maybe it's because the market performed well at sending a price signal ahead of time, right?

A Yeah, I think the price signal ahead of time tells a generation owner or a retail supplier to get out there and hustle and figure it out ahead of time. That means turning plants on ahead of time. That means making sure that you have fuel oil and that if you need to change and run your plan on fuel oil, that you do that ahead of time to avoid potential gas flow interruptions. It means if you're a retail provider picking up the phone and calling big customers and saying, hey, there's a big event coming. There might be ways for us to provide you with an economic incentive to conserve during that period of time. And so I think all of these things help gear the market up. And I think this may have well been a test case where the market said forward pricing is going to be very high. And what we saw is a lot of demand response in effect emerge that wasn't getting paid a capacity payment, some of which might've been, but We saw similar dynamics in PJM as we did in ERCOT, where, um, demand response was not called in PJM. ERCOT doesn't really have a demand response mechanism, um, but in both markets, we saw over 10 gigawatts of demand that should have shown, shown up based on the weather conditions and based on normalizing those weather conditions to what actually occurred that didn't show up. It's not that the weather came in and it was a dud. The weather was real, but the load didn't s…

AI assessment note: “Yeah, I think the price signal ahead of time tells a generation owner”

Q As an independent power producer, or I guess for that matter, a demand response company, whatever, as somebody who's selling capacity one way or another, are these like boom times? On the outside, you'd assume so, right? This is, this is where you want to be. You want to be on the selling side in an undersupplied market. Is it as simple as that, or is it more complicated?

A I think it is more complicated in part because the mechanisms are not yet clear. I think we had a market mechanism, have a market mechanism that is still reasonably clear. You know that you can clear in the capacity auction. You know that there's a deep market there. That market clears well over a 100,000 megawatts of load and supply. With a stable set of rules, you can look back at history, you can look back at where you last cleared, and you can make a good approximation of where you will clear and carry that forward into the future. Any one year has an enormous amount of volatility over it, but if you have a clear set of rules that you believe to be durable, you can invest on the back of that. I think it's a robust time for all sorts of ideas on what What kind of options might solve these problems? And as we discussed, they really range the gamut from demand response to batteries, to, uh, upgrades at existing facilities, to new fuel storage at existing facilities, to completely new large-scale generation resources.

AI assessment note: “I think it is more complicated in part because the mechanisms are not yet clear.”

Q super notable, right? Like, 10 gigawatts of load that was expected to show up didn't show up. There is no formal demand response program, but it's a price signal, and so this is like maybe the most stark example that I've seen of load responding to price at that kind of scale. What do we know about what kind of load it was? Like, who, who were these 10 gigawatts?

A So I don't know that we know definitively. I think we have to make assumptions about Where, where is the, where are the large loads? I think you, you think about demand response, and generally you're looking for Businesses where somebody is responsible for energy costs. Where, where somebody has, their sole job is to figure out how they can minimize the amount of money that a company pays for procuring energy, and in some cases it may be an even more significant business decision where there, there's an opportunity cost associated with foregoing that production. So, um, I think we, we certainly know that Even at much lower prices and, and with a much shorter notice that there are Bitcoin miners who can turn around and curtail their production, I would imagine that there are data centers now positioned to provide demand response into the market. I know that there's a lot of other industrial and petrochemical load in Texas, for example, that that's well positioned to respond to high prices. Uh, some of the LNG loads who also had very high price signals to not export gas may also have had and received price signals not to consume electricity off the grid. So there, there's a range of potential sources, and again, the question is, do we have the notice for that information to percolate and for those users to, to respond?

AI assessment note: “I don't know that we know definitively. I think we have to make assumptions”

Q but According to price signals, then I would have anticipated. And I guess the question to you is, should we be planning around price signal based flexibility as a significant contributor to alleviating these like capacity crunches in whatever market I recognize or kind of uniquely structured to deliver it, but just abstracting away from the market context is that, do you view that as like a real sustainable thing?

A Look, I, I would certainly hope so. I think that when we look at the grid that we have, we utilize it at, on the order of a 50% capacity factor. So we can squeeze so much more out of the investments that we've already made on the grid. And oftentimes when we talk about the price increases and the investment that's needed, it's really to drive a solution for that Marginal need. If we can avoid that marginal need through, again, a combination of price signal and time, we can utilize what we have to a higher capacity factor, which can allow us to drive down the costs of the grid, to drive down the costs of delivered energy. Uh, so I think that this is a moment that I, I think identifies an opportunity where We found, I think this is in some ways a miraculous thing that can only be driven by a free market where people saw this incredible price signal and decided that it was in their interest to use less at that peak. One thing that was interesting was that subsequent, a couple of days after the extreme weather in ERCOT, we did have a day where prices went to well over 500 dollars per megawatt hour for an extended period of time, and I think that was because a lot of the system exhaled. We weren't running everything at maximum capacity. We weren't prepared for the need for Every last resource to be online and ready to respond. Everyone was exhaling, buying less gas, maybe shifting o…

AI assessment note: “Look, I, I would certainly hope so. I think that when we look”

Q to do, and we ended up where we needed to be, or is there some risk? Because I guess from the outside, it seems like there is concern that despite the market signal now being there, We may still not get enough capacity, certainly suit enough. So is your view that like, let it play out and it's going to be fine? Or should we be ringing the alarm bells?

A These markets are pretty complicated and there are a variety of different resources that we can look to to fulfill the needs of the market on different timelines. One of the things that we, uh, watch as, as a, as a resource that can respond the absolute fastest is demand response. I think that's a good place to start. So if you look at demand response and what's happened to demand response over the last several auctions, um, we haven't had much more demand response participation in spite of the fact that the price signal has gone from virtually no payment for capacity to a very meaningful incentive through the capacity payment to, uh, to bring capacity to the market. And again, I think we need to recognize that there's a A rotation inherent that's happening now where demand response for so many years was a resource that was almost never utilized. So we had demand response. We had these companies that were Promising to respond. They were taking a payment as consideration for their capability to turn their utilization down. They were almost never asked to actually turn their utilization down because again, the market was not tight. There were sufficient resources. There weren't many events where they were being called upon to perform. And now over the last couple of years, we've shifted into an environment where the market is Becoming tight, and they're being asked to perform wit…

AI assessment note: “These markets are pretty complicated and there are a variety of different resources”

Q the emergency order. I guess I don't really understand how it interacts with the broader PJM capacity Market, though? Like, will a project be a part of both? Or is it like, uh, you know, Meta or Google or whoever will, through this emergency auction, sign up a gigawatt, there will be a gigawatt of new capacity, and that's not going to be considered in the broader PJM capacity market?

A I think all of those things are yet to be determined and yet to be worked out, probably through a stakeholder process at PJM, but I think that the concept is that If this growth is to continue, um, I think that there is a real argument that for the ongoing social license for these large loads to come into a market, that they will need to be responsible for their price impacts. One capacity auction, and we can talk about all of the complexity that comes into, to your point, procuring this into a market, but I think one of the drives here may well end up being a more robust bilateral market where hyperscalers proactively, instead of being forced into an auction, but proactively go out there and procure resources that are well positioned to supply them with what they need and have the lowest Impact on the rest of the grid and system so that they can be brought in at the lowest cost and brought in with the lowest risk around executing all of the grid upgrades that are required to integrate them. So this emergency procurement, which prior to PJM's most recent load update would have been for six gigawatts. I think one of the questions is post load update. Is it now three gigawatts? Are we procuring capacity? For a 20, 27, 20, 28 shortage, the only viable form of capacity may well be demand response. It may be some batteries. It may be integration of batteries behind existing intercon…

AI assessment note: “I think all of those things are yet to be determined and yet to be worked out”