The inside story of the "capacity auction" of America's largest power grid: Without price controls, the AI boom would have driven electricity prices up another 60%.

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The latest capacity auction results from PJM Interconnection, the largest grid operator in the United States, reveal a grim reality: the surge of artificial intelligence and data centers is pushing the US power system to its limits.

In the 2027/2028 base residual auction that ended on December 17, the generation capacity price in the PJM market surged to $333.40/MW-day. This price not only broke the record set in July, but also reached the price ceiling approved by the Federal Energy Regulatory Commission (FERC). By comparison, the average price from 2017 to 2024 was only $108/MW-day. This steep increase highlights that competition for power resources has reached a fever pitch.

However, the most shocking data in this auction report is hidden in the appendix. The report details show that, if the price ceiling were removed, the simulated market clearing price would actually reach $529.80/MW-day. This means that in a completely unregulated market environment, the immense demand brought by data centers would have pushed electricity prices up by nearly 60% over the current "capped price."

Goldman Sachs noted in its analysis of this auction that, while prices were as expected, procurement again failed to meet reliability requirements, exacerbating concerns about resource adequacy. As reserve margins fall and new capacity additions are scarce, the US electricity market is facing a tough tradeoff between “AI development” and “grid stability,” and future electricity bills face significant upward risk.

Data Center Demand Surge and Supply Bottlenecks

The expansion rate of the US data center industry is significantly tightening the power market. Data show that in November, the US data center power demand capacity increased by 1.6 GW in a single month (a 4% month-over-month rise), far exceeding the 0.26 GW average monthly increase between 2017 and 2024, bringing the total US data center capacity to 44.6 GW.

The PJM market, which covers key regions including Virginia’s “Data Center Alley,” is the eye of this demand surge storm. Among all regional power markets, PJM had the largest new capacity addition at 0.45 GW, with Virginia alone contributing 0.27 GW. This rapid growth in demand directly led to last summer’s spike in real-time power prices and drove up capacity prices.

Despite strong demand, the supply side is responding unusually slowly. Goldman Sachs points out that, while Trump promised to revive nuclear power, actual new capacity is coming online at a sluggish pace. In this auction, only about 350.7 MW of new generation and about 423.6 MW of upgraded capacity were procured, with total cleared capacity around 134,747 MW. This reflects that even high prices have not effectively stimulated a large amount of new capacity to enter the auction.

The Hidden Real Costs

The core risk revealed by this PJM auction lies in "shadow prices." Simulated data in the report appendix show that, without regulatory price ceilings and floors, all prices for 2027/2028 (except in the DOM LDA region) would have cleared at $529.80/MW-day.

This figure is not only 60% higher than the actual clearing price, but also significantly higher than the $388.57/MW-day in the simulated auction for 2026/2027. This means that, under similar conditions, the expansion of data centers has potentially pushed up electricity costs by 40% within a year.

Even more concerning is that, even assuming a totally unregulated scenario with prices spiking to $529.80, the grid could only attract about 800 MW more cleared capacity. This suggests that the largest US grid system faces physical hard limits—even at much higher prices, in the short term it simply cannot “generate” the tens to hundreds of GW of new electricity needed for the AI and data center cycle. It is estimated that without price regulations, associated wholesale electricity costs would increase by $990 million.

Deteriorating Grid Reliability Indicators

The auction results further confirm a decline in grid reliability metrics. In this auction, the reserve margin dropped from 18.9% last time to 14.8%, about 5 percentage points below the target reserve margin of 20%. This drop in a key indicator is a direct signal of tight supply.

Goldman Sachs analyzes that the increase in Effective Load Carrying Capacity (ELCC) from 69% to 92% in this auction drove up demand response by 1,847 MW, but factors such as the addition of battery resources have not fundamentally reversed the shortage in supply. In terms of types, the cleared generation resources were basically the same as the last auction, showing structural stagnation.

Goldman Sachs warns that the next round of auctions scheduled for June 2026 (for the 2028/2029 delivery year) faces huge uncertainty, because that round has not yet set FERC-mandated price caps and floors.

If current simulated uncapped price growth is extrapolated, PJM’s next round of prices may be in the lower to middle range of $600/MW-day, nearly double the current level. Goldman Sachs believes that if the next auction has no cap and the market remains tight, it will have an extremely negative impact on utility bills. As market observers have said, unless structural changes occur before next year’s auction, America will face the dilemma in 2026 of having to choose between "AI development" and "air conditioning (AC) electricity use."

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