Gravel2Gavel Construction & Real Estate Law Blog
In January, we discussed the Statement of Principles jointly signed by the National Energy Dominance Council and governors across the mid-Atlantic region—framing accelerating demand (especially from large-scale data centers) as an emergency reliability issue for PJM Interconnection, L.L.C. (PJM), the nation’s largest power grid operator. That policy signal is now becoming a near-term, accelerated procurement and contracting exercise. On April 8, 2026, PJM notified stakeholders of a critical issue fast path reliability backstop procurement process. PJM subsequently released a request for information (RFI) with respect to a proposed Reliability Backstop Procurement (RBP)—a one-time mechanism intended to attract significant new capacity to address projected reliability shortfalls driven by large-load growth.
RBP compresses what is often a multiyear market and regulatory conversation into a fast-moving set of commercial choices. Developers, large loads, utilities and capital providers should be preparing now for (i) an accelerated bilateral contracting window and (ii) a standardized PJM-led backstop procurement if bilateral deals do not clear enough capacity.
From Policy to Procurement: A Compressed Timeline
PJM’s proposal is large by any measure. PJM is targeting approximately 14.9 gigawatts (GW) of new capacity through the RBP process, which is layered on top of an already constrained capacity market and a projected long-term shortfall that could reach 50 to 60 GW over the next decade.
Key milestones (as proposed):
- An RFI was issued on April 17, 2026 (responses due May 6, 2026) to gather market input on participation and contracting preferences from generation developers and supply-side participants, large load customers, electric distribution companies and load-serving entities.
- A bilateral contracting window is expected to run from September 2026 through March 2027.
- A centralized procurement process would follow beginning in March 2027 and last approximately four to six months.
PJM may refine its approach, particularly the timing, of the procurement framework based on the information provided in response to the RFI.
A Two-Phase Procurement Framework
At the center of the proposal is a two-phase structure that prioritizes bilateral contracting before turning to a centralized, PJM-run procurement as a backstop.
Phase I (Bilateral Contracting)
During a six-month period starting in September 2026, load and supply can contract directly. PJM (with a consultant) would provide confidential “matchmaking” support, but PJM would not be a counterparty to these transactions. What this means in practice:
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- No pro forma agreement and no required deal structure—parties can negotiate bespoke arrangements (traditional power purchase agreements (PPAs), tolling, resource adequacy-style capacity contracts, or hybrid structures).
- Many-to-one matching is permitted—large loads can aggregate supply from multiple projects, and single projects can serve multiple counterparties.
- For hyperscalers and large-load customers, Phase I is the primary opportunity to tailor risk allocation, pricing mechanics, milestones, security and remedies.
Phase II (Centralized Backstop Procurement)
If a capacity shortfall remains after Phase I, PJM would procure the balance on behalf of electric distribution companies (EDCs) through a pay-as-bid process. The product is expected to be capacity only, with commitment terms proposed to range from two to fifteen years.
The proposed payment construct is a contract-for-differences (CfD) tied to capacity market outcomes. In effect, the resource receives its agreed contract price (net of auction prices): If the auction price is below the contract price, the resource receives the difference; if above, the resource pays back the difference. This structure is intended to preserve market participation while creating a more stable capacity revenue stream.
In the RFI, PJM seeks input on risk-allocation considerations and notes that final structure and mechanics will be informed and refined based on the RFI responses and stakeholder comments.
Commercial Terms and Risk Allocation: Where the Work Is
The RBP is designed to pull incremental supply forward—but the proposal places meaningful execution risk on developers.
Key risk and diligence points for participants include:
- COD requirement: Eligible resources must achieve a commercial operation date (COD) by June 1, 2031.
- Interconnection: Projects proceed through the existing interconnection process—no expedited pathway is proposed.
- Network upgrades: Developers bear network upgrade cost risk (with no adjustment to the commitment price if costs increase).
- Credit and collateral: Participants must satisfy credit support requirements tied to the net present value of potential penalties over the commitment term.
- Performance/penalties: Participants should model exposure under performance expectations and penalty mechanics (including the interplay with financing covenants).
Costs and Who Ultimately Pays
Procurement costs would be allocated to EDCs on a pro rata basis and are expected to flow through to load. The proposal also contemplates mechanisms to transfer obligations to better align costs with where load growth actually materializes.
For large-load customers—including data centers—this reinforces a core directional theme: Incremental reliability procurement costs are increasingly expected to follow incremental load.
Strategic Considerations for Stakeholders
For data centers/hyperscalers and other large loads:
- Decide whether to pursue Phase I bilateral capacity arrangements versus accepting Phase II cost pass-through exposure.
- Align capacity contracting with interconnection strategy, on-site generation options and timeline-to-load requirements.
- Evaluate co-location, behind-the-meter and other self-supply strategies as a hedge against policy and cost-allocation volatility.
For generators and project developers:
- Stress-test development schedules against the June 1, 2031, COD requirement (permitting, equipment, fuel, interconnection, and engineering, procurement, and construction (EPC) strategy).
- Structure bids and contracts to account for interconnection and network upgrade risk, performance obligations, and credit support.
- Use Phase I to pursue tailored offtake and risk-sharing structures that support bankability.
- Engage with investors and financing providers to evaluate the bankability of two- to fifteen-year terms of CfD-backed capacity revenues and settlement mechanics.
For utilities/EDCs and regulators:
- Refine procurement targets and cost recovery frameworks in coordination with state commissions.
- Monitor and, where appropriate, shape mechanisms that allocate costs to incremental load growth.
- Prepare for implementation questions that will surface quickly once stakeholder feedback is received.
Near-Term Action Items (Next 30–60 Days)
- Respond to the RFI with concrete preferences on product design, term, security and settlement mechanics.
- For large loads: Begin internal approvals and negotiation playbooks now—Phase I timelines will not accommodate slow contracting cycles.
- For developers: Map project readiness (site control, permits, interconnection status, equipment lead times) against Phase I and Phase II milestones and begin conversations with investors and lenders to assess bankability of these new structures.
Moving Forward
RBP creates immediate decision points. Bilateral contracting is likely the best opportunity to shape outcomes and capture value; centralized procurement is a critical backstop but will be more standardized and less flexible.
Pillsbury’s Energy, Projects and Data Center teams are actively advising clients on contract structuring, interconnection strategy, and investment and financing considerations. Please reach out to your Pillsbury contact or any member of our team to discuss how these developments may affect your projects or investment strategy.
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