First Look: FERC Discusses Co-Location of Large Loads

Co-located load – will it help keep the lights on when the impending onslaught of new electrical load hits the nation's grid in the upcoming years? Questions regarding an aging grid that is being stretched thin and whether rate payers could be left footing the bill were all on the table during a technical conference led by the Federal Energy Regulatory Commission (FERC) on Nov. 1, 2024.

The technical conference focused on the growing issues associated with the co-location of large loads, primarily data centers and generating facilities. The discussion involved a broad range of stakeholders, including FERC commissioners, representatives from Independent System Operators (ISOs) and Regional Transmission Organizations (RTOs), independent power producers (IPPs), data center industry representatives, state public utility commissioners (PUCs), consumer advocates and state legislators.

The discussion highlighted significant concerns regarding resource adequacy and grid reliability posed by the growth of behind-the-meter co-located load and potential generator retirements. Panelists debated the definition and implications of co-location, with differing opinions on whether it constitutes a necessary solution or a potential detriment to grid stability. Significant disagreements arose concerning cost allocation and the fairness of potential cost shifting from large-load customers to residential ratepayers. While some participants advocated for allowing market mechanisms to address these challenges, others stressed the need for clearer regulatory frameworks and suggested a halt to certain co-location arrangements until those frameworks were established. State regulators emphasized the importance of collaboration between federal and state entities to ensure grid reliability, affordability and equitable cost allocation, particularly given the diverse policy landscapes across different states. While no final decisions were made, the conference served to illuminate key issues and concerns, prompting a call for further investigation and collaborative rulemaking to address resource adequacy and transmission challenges in the context of rapidly increasing large-load demand.

Key Discussion Points

• Load Forecasting. A major theme concerned the difficulty of accurately forecasting large load growth, particularly from data centers and artificial intelligence (AI) applications. The rapid pace of development has outstripped historical trends, making reliable forecasting challenging, potentially resulting in overinvestment or underinvestment in grid infrastructure.
• Co-Location Definition and Approaches. Panelists identified a key distinction between loads connected to the grid (front-of-meter) and those directly connected to a generator at the same site (behind-the-meter), with the latter raising unique regulatory and cost allocation questions. Panelists discussed alternative approaches to serving large loads, such as building new generation facilities or upgrading existing ones.
• Reliability Impacts. Panelists expressed concerns about the potential for system instability resulting from the loss of generation capacity when dedicated to behind-the-meter loads, the unexpected and instantaneous loss of a significant portion of distributed data center load due to a single line fault and cybersecurity risks associated with large loads.
• Cost Allocation and Rate Design. Panelists addressed the equitable allocation of costs associated with serving large loads, noting the inadequacy of current rate designs in reflecting the true costs and benefits of load flexibility and suggesting reforms to better incentivize efficiency and cost-effective resource allocation. Panelists noted the complexity of transmission cost allocation, particularly in multistate scenarios, and highlighted the need for clarifying state versus federal jurisdiction.
• State/Federal Jurisdiction. Panelists noted the division of responsibility for resource adequacy, retail rate-setting and transmission planning and emphasized the need for increased collaboration between FERC and state PUCs to ensure a consistent and equitable regulatory framework that promotes economic growth and protects ratepayers.
• National Security and Economic Development. Panelists discussed the strategic importance of ensuring reliable power for data centers crucial to national security and economic competitiveness and the potential for large data center loads to anchor energy infrastructure development.

Individual Panel Summaries

Panel 1: Overview of Large Co-Located Load Issues

The technical conference's first panel offered an overview of the pressing issues associated with co-locating large loads with power generating units. This panel included representatives from various RTOs and ISOs, including PJM Interconnection LLC, the Midcontinent Independent System Operator (MISO), the New York Independent System Operator (NYISO) and the Southwest Power Pool, as well as personnel from the North American Electric Reliability Corp. (NERC), American Electric Power (AEP) and various stakeholder organizations.

The panel emphasized the difficulties inherent in forecasting large co-located loads, given the fast pace of development of data centers and cryptocurrency mining, as well as the challenges these circumstances pose for electrical reliability and resource adequacy. RTO and ISO representatives walked the commissioners through how they are trying to gauge the growth of such loads, from coordinating with transmission owners, vetting generator interconnection requests and conducting surveys.

The panel further addressed the question, posed especially by FERC Commissioner Mark Christie, of whether co-located load should nonetheless bear the costs of relying on the transmission grid. Panelists disagreed about the degree to which such loads actually rely on grid services, while advocates for such loads noted that they uniquely bear the risk of power outages by their co-located generators. Panelists did largely agree on the difficulty in generalizing among co-located loads due to their different technical configurations and demand needs.

Panelists also addressed FERC Commissioner David Rosner's question regarding the circumstances under which a co-located generator should be available to provide backup power to the grid, particularly during emergencies, and how the co-located load should be compensated for curtailing its usage during these times. Data center advocates on the panel emphasized that large loads often have private contractual arrangements addressing circumstances under which load must curtail its usage in order to allow the generator to sell power into the market. They argued that were this curtailment mandated, then the loads should be properly compensated with capacity payments.

Panel 2: Issues Presented By Large Co-Located Loads

The technical conference's second panel included Independent Market Monitors (IMMs), representatives from IPPs and data center industry representatives. The panel generally supported the development and implementation of co-located loads but stressed the need for accurate load forecasting and continued developments of the transmission grid to ensure reliability and resource adequacy moving forward.

The panel emphasized the issue of resource adequacy posed by co-located loads' desire for speed to interconnect in combination with the need for new generation. Panelists explained that co-located loads are a response to market inadequacy and driven by the need to access the market. Panelists also noted that co-located loads may not be the only solution, and other possible solutions should be explored through the transmission grid and market reform.

Commissioner Christie expressed concerns that current generation resources, paid for by the rate base, should not be able to execute PPAs with co-located loads and that these loads should instead be served by new generation. Further, the PJM IMM noted that co-location is merely a distraction, and the real problem – reliability – must be addressed by new generation development.

Lastly, the panel discussed possible rate design and market solutions. IPP and data center representatives stressed the need for clarification from FERC on the delineation of FERC versus state authority and the interconnection process.

Panel 3: Roundtable with State Representatives

The technical conference's third panel included state regulators from Indiana, Pennsylvania, Illinois and the District of Columbia, as well as a Maryland state senator. The panel supported the development of co-located loads such as data centers while maintaining a strong interstate grid. The panelists recognized the need to address issues posed by co-located load arrangements through careful planning and roundly welcomed collaboration with FERC in addressing those issues.

The panel's discussion touched on a number of significant topics, with the conversation repeatedly highlighting the need for clarity in defining federal and state jurisdictional responsibilities and the need to ensure resource adequacy. The panelists urged FERC to take the lead in defining those jurisdictional lines, with particular attention to transmission planning and ensuring greater transparency at the RTO/ISO level. One panelist suggested that FERC should temporarily halt approval of non-network co-location projects until it develops guidelines for such projects.

On resource adequacy, retail competition states that have "outsourced" resource adequacy to an RTO or ISO now see the growth of co-located load projects that remove significant generation from the wholesale market outpacing the market's ability to provide additional capacity in a timely manner. The state representatives agreed that captive ratepayers should be shielded from substantial cost increases attributable to co-location projects. For example, Maryland has estimated that the removal of 1,000 megawatts of capacity from the grid would cost ratepayers $332 million. Several panelists noted that generation assets now proposed for use in co-located load arrangements had been paid for by utility ratepayers.

As with preceding panels, there was general agreement that co-located loads such as data centers should pay their "fair share" of costs associated with their projects. The panelists, however, recognized that defining "fairness" would turn on what services those projects might receive from the grid and costs created by co-located load exiting the grid. In states that employ traditional cost-of-service regulation, ratepayers protection could be afforded through special tariffs that would allocate costs to co-located load projects.

Finally, the panel recognized that behind-the-meter co-located load arrangements constitute retail sales to an end user, something traditionally subject to state regulation. Commissioner Christie suggested that such arrangements in a non-retail choice jurisdiction might violate utility's exclusive service franchise.

Next Steps

Though no formal decisions were made at the conference, it did serve to gather information and perspectives to inform future FERC rulemaking and policy development. The conference provided a platform for raising key issues and exploring various viewpoints, with several suggestions for future action emerging:

• further research and analysis on load modeling, reliability impacts and appropriate cost allocation methods for co-located loads
• improved load forecasting techniques necessary to reduce uncertainties and prevent overinvestment or underinvestment in grid infrastructure
• enhanced collaboration and information sharing between FERC, RTOs/ISOs, state PUCs and other stakeholders to formulate effective and equitable policies
• review and potential reform of existing rate designs and tariff structures to better reflect the costs and benefits of various grid services and incentivize load flexibility
• clarify state and federal regulatory roles and responsibilities to avoid conflicting jurisdictions and ensure consistent application of rules
• consideration of a moratorium on certain co-location arrangements pending further regulatory guidance, particularly focusing on those which remove capacity from the grid without appropriate compensation or offsetting investments

The conference concluded with a commitment to foster further discussion and collaboration among all stakeholders involved.

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