By Tim McLaughlin

BOSTON, July 9 (Reuters) - Costs to balance power on PJM, the largest U.S. grid, have spiked this year to astronomical levels during extreme weather, exposing strains from overloaded transmission lines and booming data-center demand.

While such price spikes are not typical of PJM's operations, they have sharply increased the overall cost of balancing electricity supply and demand. Those costs are ultimately passed on to homes and businesses through electricity bills.

During last week's heat wave, PJM briefly paid market-clearing prices up to $28,000 per megawatt to power plants and other resources to rapidly adjust their output to keep supply and demand of electricity balanced. That spike in the cost of regulating the second-by-second changes in PJM's supply and demand was more than 100 times higher than the average cost this year, according to a Reuters analysis of PJM data.

Balancing is essential to an electric grid's operation. A large imbalance of up to several minutes can lead to rotating blackouts, according to federal regulators.

PJM confirmed a price spike of $27,698 per megawatt happened about midday on July 2. On that day, electricity demand surged as sweltering temperatures boosted air conditioning use in PJM's territory, which serves 67 million people in the Mid-Atlantic, South and Washington, D.C., areas. And PJM's unrestricted peak load of 168 gigawatts set an all-time record, the grid operator said in a preliminary report.

Reserve deficits and massive congestion on power lines bringing electricity to greater Baltimore, Delaware and the world's largest data center hub in northern Virginia contributed to elevated market-clearing prices throughout last week's heat wave, according to PJM operations data published on its website.

PJM is a grid already under stress as electricity demand rises faster than the grid operator can plug in new resources to meet the needs of data centers, electric vehicle charging, heat pumps and air conditioning use. As a result, PJM capacity prices for providing power during peak demand have increased by more than 1,000% since 2024, imposing billions of dollars in additional costs on customers.

"Those increases have occurred while new generation projects remain delayed and uncertain large-load forecasts are allowed to influence planning and prices as though the demand is guaranteed to materialize," said the Ohio Manufacturers’ Association, which represents factories and steel mills that have faced steep increases in electricity prices.

PJM spent $217 million on regulation service to balance supply and demand in the first quarter, up 215% from a year earlier, according to its financial reports. During a late-January cold snap, the market clearing price for regulation surged to $47,192 per megawatt, compared with an average of $139 per megawatt for the month.

Last year, PJM initiated market reforms to make the balancing service more efficient and less costly, but its outside market monitor says more work needs to be done.

"The objective of PJM’s regulation market design should be to minimize the cost to provide regulation. The new design, as actually implemented, does not meet that goal," Monitoring Analytics LLC, PJM's watchdog, said in a May report.

"While the new market design corrected a number of issues with the old design, new issues have been identified in the new design," Monitoring Analytics said.

The watchdog says PJM's formula overestimates the cost of providing regulation service because it assumes power plants must give up far more electricity sales than they actually do. That can make compensation appear much higher than necessary and push regulation market prices to unusually high levels.

PJM said in April its updated methodology more accurately reflects the revenue generators sacrifice when they reserve capacity to balance the grid, taking into account both operating constraints and their energy production schedules.

Before PJM reforms, about 14% of regulation-market payments were tied to compensating generators for revenue they could have earned selling electricity if they had not been providing grid balancing service. After the change, that fell to less than 2%, according to the grid operator.