Incentivizing New Dispatchable Generation: Controversial but Useful

     The creation of the Texas Energy Fund to invest in and basically subsidize baseload, or rather dispatchable power generation has resulted in low-interest loans being selected to help build 17 new natural gas plants totaling 9.781 MW of capacity. Thus far 72 applications have been received for loans. These plants are approved for $5.38 billion in loans. The fund is not limited to natural gas but is dominated by natural gas because that is the most desirable dispatchable resource based on reliability and other factors. As the graphic below shows most of this new generation will be derived from simple cycle and internal combustion reciprocating gas engine plants. Less will go to combined-cycle gas plants, which are more efficient but less flexible.  After a four-to-eight-month diligence phase, which is scheduled to span between four to eight months, the loan agreements will be finalized and first disbursements are expected by the end of 2025. Power Magazine’s Sonal Patel explains:

“The TEF loans, which must have a term of 20 years with an interest rate of 3%, may be used to either finance upgrades to existing dispatchable generation facilities that increase capacity by at least 100 MW or fund the construction of new dispatchable generation projects with a minimum capacity of 100 MW. Eligible new projects, notably, also qualify for a completion bonus grant of up to $120,000 per MW if interconnected by June 1, 2026, or up to $80,000 per MW if interconnected before June 1, 2029.”

Source: Power Magazine

     ERCOT is facing high load demand growth in the years to come, and this is combined with the problems with reliability revealed by 2021’s winter storm and regular hot weather events that strain the grid. Below is a graph showing expected capacity additions. Remember this is capacity so the lower natural gas capacity has a utilization rate (capacity factor) nearly double that of wind and nearly triple that of solar. Solar and wind are operated at full capacity unless over-generating, while natural gas, especially in simple cycle peaking plants, is throttled up and down as demand increases and decreases, resulting in downtime when demand is low. This forced downtime means that returns of investment are forced down as well. The need to back up solar and wind forces the utilities to build less efficient and more carbon-intensive simple cycle combustion turbines and reciprocating gas engine peaking plants. While storage and renewables are very important resources in Texas, they do decrease overall reliability and trigger the need for new investments in dispatchable resources.

     The PJM power market’s recent capacity auction prices indicate a strong need for new generation in the region. Wind and solar are not likely to make up much of that needed supply so states may move in a similar direction as Texas did. In Pennsylvania, it was recently reported that “Sen. Gene Yaw, R-Williamsport, shared his proposal to create a Pennsylvania Baseload Energy Development Fund, which would give low-interest grants and loans to electricity generators to build, maintain, modernize, and run their plants.” He argues that since Pennsylvania provides about 25% of PJM’s baseload generation and there is a need for more, then incentivizing dispatchable generation makes sense. PJM expects more coal retirements and more old gas retirements in the years ahead and needs replacement baseload plants. Current high interest rates are also affecting new plant financing. For PJM it was pointed out that “of the 162,000 megawatts in the queue, solar and wind comprise 83,000 megawatts and another 50,000 megawatts are energy storage projects. Natural gas projects account for fewer than 5,000 megawatts.” Clearly, there is a need for more natural gas plants in PJM and as coal plants are retired that need will grow. It is not unlikely that some coal plant retirements may be delayed.

      One could make a very good argument that states incentivizing dispatchable generation is not just increasing reliability but also keeping costs lower for ratepayer consumers. Reliability needs to be ensured one way or another. Reliability investments can be difficult because they are often responses to short-lived demand or short-lived weather and temperature events. That means that reliability investments may have short-lived utilization and very low overall utilization rates as is common for gas peaking plants. Investing in these plants is often not profitable for utilities. Thus, incentives are welcome. One might call these investments fossil fuel subsidies, but their functions often involve backing up variable renewable power and replacing it as it goes offline at night for solar or in low wind times. Backup is necessary. Thus, these investments are also a hidden subsidy for renewables since without the variability of renewables many would not be needed.

 

 

References:

Natural gas subsidy plan rolled out to stabilize the grid. Anthony Hennen. The Center Square. August 30, 2024. Natural gas subsidy plan rolled out to stabilize the grid (msn.com)

Texas Moves Forward with $5.38B in Loans for 10 GW of New Dispatchable Power Projects. Sonal Patel. Power Magazine. August 29, 2024. Texas Moves Forward with $5.38B in Loans for 10 GW of New Dispatchable Power Projects (powermag.com)