Mark Zanetto 0:06
Welcome to the Baxtel podcast, where we map the data center world to provide you the intelligence you need. I'm Mark sneadow, the sales operations and talent manager here at Baxtel today, on the program, we have Steve Smith baxtel's Practice Lead for data center and energy. Steve, you sent me an article titled, FERC rejects interconnection pact for talent, Amazon data center deal at a nuclear plant. Read the article. Thought it was really interesting. But this is the reason why we're we're having this show, is because I want you to try to break this down for us in why this matters, and do us a favor right from the start, if you're not necessarily new to datacenters, but what's FERC and how is it connected to datacenters?
Steve Smith 0:50
Well, thanks for having me, Mark. It's great to be here. So FERC stands for the Federal Energy Regulatory Commission. It is the government entity that actually regulates the electrical grid in the United States, the US is kind of weird in this regard, in that it doesn't have a single electrical grid. We actually have a patchwork of multiple independently operating grids that are all interconnected to each other. So you've got one New England, you've got one in Texas, you've got one that stretches across the Midwest, et cetera, and they are all run by these nonprofits called regional transmission organizations or RTO's. The one in question in this article is called PJM. It stretches from Chicago to Delaware. It's absolutely massive, as a ton of customers, a ton of power, and all of these RTOS kind of run these electricity markets called wholesale electricity markets, that allow utilities that are generating power and customers that are using that power to match supply and demand in real time and basically maintain the stability of the grid and allow the grid to operate in an economically efficient manner. FERC exists, kind of with oversight over all those RTOS, over the entire grid, to make sure that all of them play by some baseline level of rules. They all kind of have their own unique way of doing business, but there's a baseline that the federal government sets in the name of reliability and to ensure fair cost sharing, since end users, you and me flipping on the lights in our house are ultimately picking up the tab for all the electricity that flows through the grid. If that makes sense,
Mark Zanetto 2:36
it doesn't even if it didn't, I would take your word for it, so good. As a part of this. What is the talent Amazon data center deal? That's kind of the baseline of this, of this article,
Steve Smith 2:49
yeah, so this is actually, this is probably the most relevant piece to datacenters, specifically, taking a step back and kind of think of like the industry context here, largely because of generative AI data center growth right now is huge. There's been more capacity announced in the next three years than has been built in the last two decades. Per Baxtel data I would say we'll see how much of all that announced capacity actually comes online. There are a lot of people trying to get into the space and develop data centers, and there isn't necessarily enough power to go around. So the kind of limiting factor that has come up in this space is around power for these data centers, massive data centers, that are powering, you know, chat, GPT, Amazon, web services, etc. Nuclear power is kind of a unique power source in these what we've seen in the past decade or so in these wholesale markets that I mentioned is that it's at a significant disadvantage because those markets are matching supply and demand in real time, and that price of power is constantly shifting. Ideally, you would have a power source that can ramp up or down to meet demand as necessary. Nuclear power can't do that. Nuclear power, you basically start up a nuclear reactor, you connect it to the grid, and then you run it at full power for close to a year, and you shut it down, refuel it, and do it all over again. The reason for that is pretty technical. It's related to directly related to how nuclear reactors work themselves. But given that they're at a significant disadvantage in the wholesale market, because when there's a lot of power coming into the grid and not a lot of demand for that power, say, sun shining really brightly in California, winds blowing really hard in Kansas, you can actually have power prices that go negative. You can have you can basically be paying the utility, or the utility has to pay to put their power onto the grid. And nuclear power plants can't ramp down in order to not pay those negative prices. For probably close to a decade, as renewable penetration has significantly ramped up and renewables have gotten really cheap, you've seen nuclear power plants basically become uneconomical to operate because of those negative prices. That being said, that inability to ramp is actually a benefit when it comes to data centers, because data centers have to have 24/7 always on power. They run at one power level, 24 hours a day, seven days a week until the end of time. So nuclear's normal disadvantage is actually a major advantage compared to other clean power sources when it comes to powering data centers. Tech companies know this. All these tech companies that are building this data center, these data centers have carbon free mandates. They want clean power. They want carbon free power. And nuclear fits the bill better than wind and solar do, so they're paying a premium for that power. Microsoft actually struck a deal to restart a nuclear power plant for the first time in American history that they're paying like an 80% premium on the price to what we're seeing in wind and solar. So it's a huge advantage. It's something that tech companies are very keen on doing with this deal. Specifically, Talon energy operates the Susquehanna Nuclear Power Plant in Pennsylvania, which is in I mentioned PJM the that that is the idea that oversees the grid there, and they struck a deal with Amazon where Amazon would build a data center on site next to the nuclear power plant and connect it directly to the nuclear plant. So in theory, the nuclear plant is sending a portion of its power to the data center and not sending it into the grid. And so it's basically what we call behind the meter, which is to say it's not regulated by the wholesale market. They're not selling that power into the market. And theoretically that power is not actually under first jurisdiction. Okay, I
Mark Zanetto 7:01
read something like this, what is, what is the interconnection pack? The headline references,
Steve Smith 7:05
yeah, so that's kind of the third piece of this. So, like we had, we had FERC, which is overseeing all this. We had talent on Amazon, you know, trying to get nuclear power for a data center. The last piece of this is the interconnection pack, or actually, it's called the technical term, is the internet interconnection services agreement. These are agreements that generators. So nuclear plants, coal plants, solar plants, strike with the RTOS. So in this case, PJM, that layout, it's basically the Ts and Cs for connecting to the grid. It basically tells you what you can and can't do. It's a massive document, so it's a very large, very detailed, very detailed document, again, driven by that, that emphasis on reliability and security and making sure that connecting a massive load to the grid or taking a massive power off the grid doesn't destabilize things. So in this case, this is a this is a weird instance, because Amazon was only taking a portion of Susquehanna power and the rest was going to be sold into the grid. So Talon negotiated an ISA interconnection services agreement with PJM that deviated from PGM is normal, or pro forma agreement. Because it deviated from the normal agreement, it had to be submitted to FERC for approval. It just important note is that Amazon was already approved to take about 300 megawatts from Susquehanna that was approved a few years ago, this additional one that was filed about a year and a half ago, this for an additional about 200 megawatts, up to almost a gigawatt of power. So you're basically taking an entire nuclear reactor to power this one data center over the next 10 years or so.
Mark Zanetto 8:50
That's crazy. So let me ask you a question. How did this end up in front of FERC?
Steve Smith 8:58
So they struck this deal, they submitted the agreement. And other utilities, excellent, Eb, American electrical power filed objections to it. They did not want to see this happen for a variety of reasons. First of all, they said that, you know in Talon claimed that the data center won't be taking any power from the grid, and it's tough to understand whether or not that would actually be the case. Sorry, go ahead.
Mark Zanetto 9:34
No, just say. What's your what's your assertion there? Do you think that that's like a factual statement, or
Steve Smith 9:41
I'm, no, I'm actually skeptical. I'm actually sympathetic on to this argument to a certain degree. Because while, you know, while the data center does take a pretty constant load, there are always little fluctuations that can happen. And you know, when you're saying there, because they're they're nothing, they're not basically taking entire nuclear plant off the grid. And. Back into the data center. It's like part of the power is going to the data center. Part of the power is going to the grid. The way electrical distribution works, all of that power has to be synced up, has to be at the same frequency. You have to be balancing voltages across it, load balancing across it. And so there is some potential for, you know, power to flow to and from the grid as you're doing that, as you're doing that work. The other utilities argument is, if that's the case, what the ISA that Talon sign said is that they didn't have to pay what are called transmission costs and service costs. Reason for that being they weren't, they weren't connected to the grid, so they didn't have to bear any of the cost of that. Now, the way this, when you get your electric, when you get your electrical bill comes in the mail, if you, if you, if you look at it, you pay, I don't know, I pay a lot of I'm in Massachusetts, so I pay like 24 cents a kilowatt hour. It's insane. But let's say, let's say you're, let's say it's 20 cents a kilowatt hour. If you look at how that breaks down, you'll actually see on the bill that only probably like 12 cents of that 20 or 14 cents of that 20 is from generation, from actually producing the power. The rest of it is what are called transmission and distribution costs, which are actually the cost of maintain, building and maintaining the grid. It's, it's a huge chunk of it, and with the amount of electric electrical power that the country has been deploying over the past decade, and the fact that our grid is aging, and we haven't been doing a ton of work. We're doing work to maintain it, but not enough work to maintain it. The grid is getting older, and so those costs have just been going up and up and up over the past decade or so. This deal with Talon and Amazon basically exempted them from having to pay those costs and other utilities like, well, that's not cool, because those costs are not those. Those costs that you're not paying, you're not gonna get passed on to our customers. A couple other objections. One is that the original PJM, the document that outlines PS rules called the called the tariff, only allows for two kinds of loads. It allows for network loads, which are loads that are connected to the grid and participate in the market, and point to point loads, which would basically be like, I build a plant I connected to a load. It never touches the grid. It's just those two things are connected to each other. This, like I said, they're not taking a full plant offline to power this thing. So this doesn't really fit in either of those categories, and PJM just said characterize it as not network load, which is kind of a limbo state, but it doesn't actually fit under the framework that PJM has agreed to operate by so stuff like that, and a number of a number of different understandable objections from the industry,
Mark Zanetto 12:41
fair enough. So in the end, what did FERC decide?
Steve Smith 12:46
So FERC decision was a unexpected, I think a lot of you know industry watchers did not expect them to just straight up kill the the ISA, but it was also a pretty narrow decision. So the ruling itself, which you can find on first website, it's like, it's like 60 pages long. The first 40 pages of it is all the back and forth between these, between, you know, Talon and Susquehanna and PJM on one hand, and then all the objectors on the other hand. And they went back and forth, like, four times over this and in the end, FERC actually didn't rule on the merits of a lot of those claims. They basically just said that in order to amend an ISA and do, like, a deviation from the pro forma Isa, there's a fairly high bar to meet, as far as like how unique the circumstances, and they said PGM didn't meet that bar. A big reason for that, according to the commissioners, is because we could definitely see these kinds of agreements becoming more common, and so if suddenly, like a lot of hyperscale data center developers are co locating next to large power plants and taking part of the power off of them. That's no longer a unique circumstance. This might be a first of a kind right that's not necessarily going to be unique. And so because of that, they is a very narrow it was a very narrow ruling in the sense of that was just like you just didn't meet the bar for deviating. They kind of left open a lot of these questions on the merits of, you know, like I was saying, like the capacity resources, the, you know, how the load is designated, that kind of stuff. It that, actually, or go ahead? Yeah,
Mark Zanetto 14:35
no, I was gonna, I was gonna ask. I was just kind of, I wouldn't say, off script, but had a question kind of about FERC in general. Like, as you were talking about the commission and how the ruling was, you know, they didn't exactly rule on the merits of what the parties were going back and forth over, who is, who? How do you get appointed in to a commission at FERC? Like, how does, like, you may. Those decisions, because that's, I think that is even more interesting on on this, because there could be some underlying issues with who, who's, who's making these really kind of
Steve Smith 15:10
monumental decisions. Yeah, that that's actually great. That's a great point, and it is actually this is something that a lot of people highlighted about this decision is that was kind of weird. So far, is made up of five commissioners, and they're they're appointed by the President. Right now, there are two Democrats and two Republicans on the commission. The chairman is a guy named Willie Phillips, who used to be a Public Service Commissioner in in DC. But this was strange, because two of the Democratic members recuse themselves from the ruling. They did not participate in ruling. Interesting, so the ruling actually ended up being two to one. It was the two Republican commissioners ruling against PJM and Chairman Phillips dissenting from that, um, which is an interesting I don't, I don't want to get necessarily, too much into the politics of it, because I don't want to speak at school and on, on what, yeah, no, we're thinking. But that is, that is, in fact, how, how that goes. And they, the two Republicans, in their, in their opinions, didn't, you know, shut down the idea that we're going to do this. This actually does. I think one of the reasons why they ruled so narrowly is because this actually ruling on the merits would have interfered with a lot of policy work they're doing. Actually, it was kind of weird. On the same day that they ruled, they FERC held a technical conference with testimony from three panels that took over the course of like, four hours about this very issue. So they knew, when they were holding this technical conference, they knew this opinion was, you know, going to come out that day. And I think they wanted to, rather than let PJM do this on like a one off basis, I think they wanted to put it through a much more rigorous policy analysis perspective that being said, Chairman Phillips did call out, you know, you know, his main objections to to not to ruling, his objections to ruling against PJM, were this a national security thing? You know, AI generative. AI is a is a potential national security technology and securing our grid and secure our power sources to power datacenters like this is it is a potential national national security issue. So it remains to be seen how, how that plays out. But that was I thank you for calling that out, because that was a very interesting piece of this, that that was kind of a little bit of a head scratcher as far as how it broke down. Yeah, for sure, all right,
Mark Zanetto 17:43
probably the last question. So where does this leave things in the industry as a whole?
Steve Smith 17:48
So this probably kills like these, like halfway deals like this. For the time being, PGM will likely either have to renegotiate this agreement to fit within their pro forma Isa, or more likely, FERC is going to have to provide guidance on how these arrangements work moving forward, and that, that was the purpose of that technical conference that the day that it came down, Talon did ask for a hearing. Actually, yesterday they filed for for to hold it. FERC didn't hold any hearings over this. It was just, it was just like documentation submissions back and forth between the parties. So they actually asked for a hearing to rehear it and potentially reverse the rejection that will happen at some point in the next year. Amazon said that they're still going to build their data center next assess what Hannah, they're still going to, you know, even if the power situation isn't worked out, they still want to work move forward with that development, as far as, like the industry more. So that's kind of like the this current deals in limbo. This type of deal is potentially in limbo, and we'll see, like, if there's anything like that, like this, that that comes to fruition the next year or so. At the same time, there are still other avenues that data center developers are taking with regards to nuclear. For example, Microsoft struck a deal earlier this year I mentioned, where they're paying a massive premium to Constellation Energy in order to restart the Three Mile Island Power Plant. Form this, like clean energy center at the Three Mile Island site, build a data center there and basically just devote that reactor to that data center. So that one you recall, yeah, yeah, it's, it's a big it was a big deal when they announced it, because I don't know sure how many people really saw that? Much really saw it coming? Because it's a tremendous amount of power. It's a gigawatt of power to power a single, single data center, the constellation CEO, they had an earnings call the week after this decision came down. The CEO is still like this. Is still bullish about it. You recall I mentioned, like the two different. Times loads, like network loads or point to point this that starting up Three Mile Island and connecting to the Microsoft data center, to my knowledge, would be solely point to point. It wouldn't connect to the grid. It'd be a devoted resource. So that's still an option, like we could still potentially devote power plants directly to data centers. That's what a lot of new nuclear reactor developers, small modular reactor developers, advanced reactor developers, like these new technologies that are like, walk away safe, these different materials, different fuels, different technologies to make nuclear. You know, as safe as it possibly can be, a lot of what they're talking about are those kinds of things. So yeah, and then I think also that there is still a sense of collaboration. And the commissioners, in the opinion, were still very open to they didn't shut the door on on doing things like this. They just said, effectively, like we need, you know, to go through the process and work together and collaborate with with industry to make sure that we're creating the best solutions possible while maintaining grid reliability and grid stability.
Mark Zanetto 21:03
Okay, well, Steve, thank you for giving insight into our ever-changing data center environment, and that's our show today. Thanks for tuning in as we broke down the Talend Amazon data center deal and FERC decision. These developments are shaping the future of data centers in energy, and we'll continue to watch how it all unfolds. We'll see you next time you.