David Millar serves as principal for markets, legislative and regulatory policy at Wärtsilä Energy in North America.
Investor-owned utilities are grappling with the dual challenges of decarbonizing their power portfolios while maintaining resource adequacy. Electricity demand is growing for the first time in decades. IOUs must spend substantially to keep up. According to S&P Global, IOUs will spend $210 billion and $215 billion in 2024 and 2025. They expect CAPEX growth to continue at least 5% annually through the next decade.
IOUs have long favored larger projects that benefit from economies of scale. However, the evolving dynamics of the energy market suggest investing in smaller, modular, flexible and decentralized power plants is a smarter approach.
A changing supply stack requires a change in IOU investment strategy
Most industry experts agree that renewables will one day be the primary generating resource for the electric grid in the United States. Wind, solar and electricity storage costs continue to decline. They also benefit from an expected $1 trillion in federal government subsidies. According to a recent Lawrence Berkeley National Lab study of the nation’s interconnection queues, there are nearly 12,000 projects representing 1,570 GW of generator capacity actively seeking grid interconnection. Solar, storage and wind comprise 95% of those projects. However, renewables and two- to four-hour storage won’t solve all electricity system needs, especially in light of an estimated 83 GW of thermal plant retirements in the next decade. For the time being, new natural gas generation is necessary. This notion is supported by our review of 68 electric utility integrated resource plans, covering about 30% to 40% of U.S. demand, which shows utilities are planning to build over 40 GW of new gas capacity by 2030.
The need to add new non-duration limited thermal capacity is urgent. According to the most recent assessment by the North American Electric Reliability Corp., most of the country is at high or elevated risk of a generation capacity shortage, especially over multiple days during extreme weather events. PJM Interconnection, the nation’s largest energy market, recently warned that about 24 GW to 58 GW of thermal resources — or 12% to 30% of the its installed capacity — are at risk of retiring by 2030 without a clear source of replacement generation. Like PJM, many ISOs have been forced to ask aging and polluting coal and gas plants to delay their retirement dates. These “zombie” power plants have been operating long past their expected useful life.
Why small, flexible and modular is a better fit for the future grid
Facing the need for new dispatchable generation, the typical IOU playbook has been to build large combined-cycle natural gas power plants. For example, Georgia Power is asking regulators to “fast-track 1,400 MW of new gas-fired power plants in the next three years.” Duke Energy is requesting 9,000 MW of new gas. Tennessee Valley Authority’s latest IRP anticipates 6,600 MW of new gas-fired power plants to replace coal plants and serve growing power demand.
We believe investment in large, inflexible gas resources, particularly combined cycles, is a costly mistake. Modeling indicates that generation portfolios of solar, wind, battery storage and highly flexible peaking and balancing gas generation outperform reliance on combined cycles. While combined cycles more efficiently convert natural gas to electricity, they still cannot outcompete renewables in today’s energy markets. Their inflexibility makes them poor fits for rapid ramping up and down to follow renewables.
By contrast, utility-scale reciprocating engines, which generate between 10 MW and 20 MW each, are often deployed modularly in power plants up to 400 MW. As the most flexible thermal technology, engines can start up and achieve full load in less than five minutes, with zero start-up costs or minimum run times. Furthermore, they can operate on low gas pipeline pressures or seamlessly switch to diesel for additional resiliency.
Regulatory risk is another reason IOUs should reconsider investments in large traditional resources. The U.S. Environmental Protection Agency recently finalized a proposal to regulate existing coal and new gas-fired thermal generators greater than 25 MW, meaning small reciprocating engines would avoid regulation. New combined cycles would have to add costly carbon capture equipment, further eroding their economic viability. The 25 MW threshold is a wise move by the EPA. Small peaking and grid-balancing generators have a light environmental footprint while providing critical reliability.
Tucson Electric Power embraces small and flexible generation
Tucson Electric Power has committed to a carbon-free portfolio by 2050 and will exit from coal by 2032. In 2020, TEP built a power station with ten gas-fueled engines on an existing power plant site, which had previously housed 1950s-era coal and gas steam turbines. Part of the California ISO’s energy imbalance market, the plant is so efficient and flexible that operators had to ask CAISO to limit the number of times it calls on the plant because they risk using up all five of their air permit allowable starts by 11 AM. On a typical day, the engines run to meet morning and evening ramps and sometimes overnight, allowing TEP’s solar fleet to take over during the day. Plant operators report they’d take ten more engines if they could, especially given how critical they will be to ensuring reliability after TEP’s final exit from coal.
Getting to net zero with engines
To achieve 100% clean energy, TEP and other utilities may need to transition their thermal fleet to clean fuels like green hydrogen. Today, engines can blend up to 25% hydrogen by volume, and plans are underway for a 100% hydrogen-capable engine by 2026. These engines will allow utilities to invest in the highly flexible, non-duration limited resources they need for resource adequacy while also providing an option to blend or switch completely to clean fuels as supplies become available in the future.
While many uncertainties remain, IOUs should adopt a low-risk, no-regrets strategy by investing in engine power plants alongside renewables and storage. Now is the time to let go of the bigger is better paradigm and embrace small, modular, flexible and resilient generation.
