Are Long-Term Power Capacity Shortages in Our Future?

The energy transition is happening … and it is presenting some challenges

Over the 2022 Christmas holiday weekend PJM Interconnection, one of the largest U.S. electrical grid operators, narrowly averted plunging the 65 million people it serves into darkness. Myriad issues including extreme weather conditions (especially a very significant temperature drop in an extremely short period of time) resulted in unexpected levels of demand that the company wasn’t prepared to handle. Thankfully, PJM was able to avoid rolling blackouts by curtailing exports to neighboring regions and calling for conservation and voluntary load reduction.

Unfortunately, capacity shortages and their consequences could become more common in the future if challenges associated with several aspects of the energy transition are not adequately resolved. Below we explore these challenges, and how they can be addressed.

The stalled PJM interconnection queue is problematic

Power production accounts for approximately 25% of greenhouse gases produced in the U.S., so transitioning to renewable energy sources is a key component of the current administration’s plans to fight global warming. The recent passed $370 billion climate bill provides massive subsidies for wind, solar and batteries, which has caused the number of proposed renewables projects to soar. However, conventional power plants are retiring faster than these new renewable projects are being completed, which could cause declining capacity reserve margins that would impact overall resource adequacy.

As noted in PJM’s recent report, “Energy Transition in PJM: Resource Retirements, Replacements & Risks,”  the historical rate of completion for renewables projects is just 5%. This is due to numerous factors including permitting challenges, insufficient grid infrastructure and more project applications than operators can efficiently process. PJM is so inundated that it will not process new interconnection queue applications until 2026.

The PJM report also states that 21% of its current installed capacity, or 40,000 GW, is at risk of retirement by 2030. In addition, it reveals that long-term load forecasts show demand growth of 1.4% per year across its footprint over the next 10 years, with certain zones experiencing as high as 7% annual demand growth due to onshoring, reshoring and the insatiable appetite of data centers for electricity.

Renewable energy sources such as standalone wind and solar are intermittent and depend upon weather conditions to be available. Ideally, long-duration storage or flexible dispatchable resources could make up the difference, but the amounts required are orders of magnitude greater than what is currently planned. In the meantime, other legacy fuels such as coal or oil often step in to fill the gaps.

How to address looming capacity issues

Various solutions have been proposed for addressing the new supply entrance/legacy supply exit mismatch that could cause future capacity shortages. However, one solution will not be sufficient—several solutions from the generation, demand and transmission sides will be needed to address the issues in a comprehensive manner. These solutions include:

Storage paired with solar and wind (hybrid projects)

One solution from the renewable generation side is hybrid projects that combine different energy sources, for example, battery storage (at least four to six hours duration) combined with solar or wind power. In these scenarios, the battery stores excess energy generated from renewables during off-peak periods for use when demand is higher during peak periods. These hybrid projects can help bridge gaps in power capacity and improve overall grid reliability.

However, while there are plenty of hybrid projects in PJM’s interconnection queue, many project sponsors are increasingly seeking to drop the storage portion from these projects. The reason often cited for this is that the projects are not receiving the proper price signals from current PJM wholesale markets to move forward in an economic manner. This could ultimately exacerbate capacity issues and make PJM grid reliability more difficult by increasing the number of pending standalone solar and wind projects.

Fast-start electrical generation

Another approach that shows promise is flexible “fast start, fast ramp” electrical generation. This approach uses natural gas-powered turbines or reciprocating engines to quickly ramp up or down output in response to changes in energy demand or availability. When used in conjunction with renewables like wind and solar, they increase grid reliability by balancing supply and demand in real time. Denton Municipal Electric Cooperative in Texas is a good example of an electricity provider using this approach to balance their extensive renewable energy generation portfolio.

PJM market changes

PJM and other ISO/RTO wholesale market reforms are an additional piece of the solution. By incentivizing the building of more flexible and dispatchable renewables generation with capacity, energy, and ancillary services, they could go a long way towards achieving clean energy while also avoiding long-term power capacity issues. On the regulatory side, the PJM Board of Managers recently instituted a Critical Issue Fast Path (CIFP) process to address the highest priority PJM capacity market issues, which will help alleviate looming capacity shortfalls and maintain overall grid reliability.

Interconnection process improvements

A very critical part of addressing capacity challenges involves streamlining the interconnection process to help more renewables and other projects reach completion faster. PJM is actively working on this—it is currently transitioning to a “first ready, first served” approach that studies projects in clusters instead of one at a time. The California Independent System Operator (CAISO) is currently looking at ways to streamline its interconnection processes as well.

Policy changes

Federal policies are also critical for ensuring that PJM and other grid operators can meet demand well into the future. This is already happening to a certain extent, with FERC proposing interconnection reforms involving the above-mentioned cluster approach and other changes designed to improve interconnection queue processing speed. FERC is also considering reforms to the transmission planning process that will help streamline the necessary transmission buildout to accommodate increasing renewable generation.   

Working together to achieve balance

At the end of the day, there isn’t one magic bullet that is going to make capacity issues disappear. Grid operators, renewables developers, lawmakers and many other stakeholders need to come together quickly and do their part to enact changes now that will achieve balance between supply and demand in the years to come.

Contact us for more insights on this topic or help with your utility, power generation or infrastructure projects.