Title: The Capacity Crunch, Part One
Speakers: Josh Combs and Brian Harms
Josh Combs (00:07):
Good morning, Brian. Good to see you today.
Brian Harms (00:09):
Yeah, good to see you as well, Josh. And I’m glad we’re gonna be talking about a very interesting question in terms of capacity crunch.
Josh Combs (00:15):
Yeah. And the capacity crunch, I think is something that everyone in the energy industry is facing. I know that from the utility perspective, utilities are balancing many competing demands and needs from the need to kind of meet decarbonization goals, but also ensure that that reliability is maintained and that we’re obtaining capacity from all available resources. From the developer perspective and just the overall marketplace, what are you seeing?
Brian Harms (00:43):
Yeah, well, it’s nice because Troutman obviously represents kind of the whole panoply of folks from utilities, as you said, to independent power producers, to developers, to financiers, to investors. So you have everybody who’s really interested in renewable energy, right? That’s been even before the IRA, but now the IRA has kind of accelerated that, both for renewable energy and kind of for storage too, which I know we’ll touch on later. But when we though, “Hey, this is it. We’re just gonna do renewable energy,” suddenly there are these tensions in terms of supply chain, in terms of the COVID, in terms of where things are coming from, that just creates an issue of, well, how quickly are we gonna get there? Really more of a timing issue than anything else. Right. And while the IRA is a great thing for developers and others, it’s also good for utilities, quite frankly.
And I know that’s something we’re gonna touch on here, because it’s what are utilities going to do? What’s going to happen? I think what it comes down to is we need to make… It’s on the one hand, the decarbonization and on the other hand, the reliability.
Josh Combs (01:53):
That’s right.
Brian Harms (01:54):
And making sure those both are met because we wanna keep the lights on.
Josh Combs (02:00):
That’s right.
Brian Harms (02:00):
And that’s like almost number one.
Josh Combs (02:03):
Right.
Brian Harms (02:03):
And then number two, we wanna get me to decarbonization. Now, some folks wanna flip that, but in the end, I think that’s where we are.
Josh Combs (02:10):
And I think you’re exactly right about the timing and that’s where we’re seeing utilities traditionally use the integrated resource planning process to focus on long-term needs and identify how long-term needs are gonna met. But because of these timing issues, utilities are coming back, our utility clients, and updating those IRP plans to ensure that as those tensions are being balanced and we’re balancing the need for renewable energy, the reliability need and the need for capacity, that we’re not at all jeopardizing reliability and that we are in fact keeping the lights on. And I think that we’re seeing those IRP updates also address load growth as well. And that’s kind of another cog in the wheel that has to be addressed with… We’re seeing data centers, these large data centers, coming into jurisdictions.
And so that’s another thing that has to be addressed within a certain timeframe. So timing is, I think, a very important factor that both developers, utilities, and state commissions are having to address.
Brian Harms (03:16):
Yeah, absolutely. And I think you mentioned it before, kind of the all of the above. We gotta look at everything at this point. We’ve heard that for several years as renewables are becoming… I think a lot of utilities were like, “Hey, fossil fuels have a place, nuclear has a place, hydro has a place. All these other resources that we have, they need to be considered as a part of making sure we get to the right decarbonization goals, but we probably have to use other things to get there.” And I think there’s a little bit of lip service maybe at some point on that, but in truth, I think now with this tension that we’re having, it’s becoming clearer that natural gas, coal, while folks are saying, “Hey, we gotta get rid of these things,” well, they have a place.
And I think it comes down, and it’s because of capacity. Right.
Josh Combs (04:06):
And it’s
Brian Harms (04:06):
Because of the need for reliability, safety, and economy. What’s interesting is renewables have come down in terms of economy and value. But you still have so, because they don’t have fuels and you don’t have the fuel costs like a natural gas or coal.
Josh Combs (04:23):
That’s right.
Brian Harms (04:24):
Which also would kind of… You were mentioning kind of the more of the traditional markets, but the organized markets, kind of the deregulated markets, usually have capacity products, usually have these other products, ancillary markets that kind of, ancillary service markets, I should say, that renewables are able to kind of fit in in different ways, and do different things. Storage can also do different things different ways. I said, “But they still are in the same kind of underlying crunch issue of, hey, we still need to have these things happen.” We saw in the winter storms where basically gas pipelines froze up.
Josh Combs (05:04):
Right, right.
Brian Harms (05:04):
And suddenly gas units that you expected to be there for peak load – mm-hmm. When, oh my gosh, we gotta run everything full out, if you’re a organized market, if you’re a PJM, if you’re a MISO, and all of a sudden you couldn’t do that because there were these issues. It wasn’t gonna be renewables, it was the gas stuff. That’s right. So it all makes it very difficult, and it makes it very difficult for folks, especially in the utility industry, how do they go about it? Because there’s the economy, but there’s also the reliability. And so it’s like, how do you make those decisions like you’re talking about in the IRP situation?
Josh Combs (05:41):
Yep. And utilities, the regulated utilities have that obligation to serve, obligation to keep the lights on. So it’s always at the forefront as they’re making decisions. And you were talking about the economics, and it’s true that some of these updates that we’re seeing at state utility commissions are seeing that delaying the retirement of some of that legacy generation is, in some cases, actually more economical and beneficial to customers, just in terms of a pure dollars perspective. And it also helps during this crunch period that we ensure that reliability is not jeopardized. So it is an interesting time. There’s so many different kind of balls in the air and – Yeah. And we’re all focused on keeping the lights on at the end of the day.
Brian Harms (06:26):
Yeah. Yeah, agreed. And I think for the longest time, when we saw several clients, I mean, on both sides, on all sides, that there was this definite IRA or non-IRA with the tax credit markets, you had folks able to present PPAs that were more economical –
Josh Combs (06:46):
Mm.
Brian Harms (06:46):
Than a self-build option.
Josh Combs (06:48):
Right.
Brian Harms (06:48):
For instance, for a utility to actually build the things. I think the IRA has created a situation where you have more ability for a utility company to say, “Well, actually, I can build it and it’s just as economical as a PPA or could be as economical as a PPA, which we didn’t have before.
Josh Combs (07:08):
That’s right.
Brian Harms (07:09):
I also think storage, which a lot of people are kinda like, “Hey, this is how we’re gonna be able to firm up renewable energy that’s an intermittent resource. We can firm it up by putting that renewable energy into storage and then using it when it’s needed. I think that’s also a place where we’re gonna see utilities kinda thinking, “Hey, there’s…” ‘Cause there’s multiple uses of storage, obviously. Yeah. Both at a grid level and just for the transmission grid itself, but also from a generation perspective of, “Hey, maybe we need some energy that’s gonna be produced versus other things.”
Josh Combs (07:43):
And I’ve heard kinda storage described as somewhat of a Swiss army knife. It can serve whatever kinda need that a utility may need, depending on what’s going on at the grid at that point. And the IRA has unlocked some of those opportunities – mm-hmm. For the first time to where storage is something that’s economical and beneficial to customers, as well as, like you said, having this self, maybe a self-build makes most sense. And the IRA really has unlocked kind of – Yeah. A utility’s ability to have that truly all of the above strategy – Yeah. To ensure that that reliability is maintained.
Brian Harms (08:20):
Yeah. And I’d be remiss not to say, because I didn’t explain a little bit why there’s this difference between PPAs and self-build. And the reason that a developer could take advantage of an investment tax credit or the accelerated depreciation, they’d be able to take a credit. Basically, it’s a timing issue. They’d be able to take credit for it quicker than a utility that would have the tax normalization rules. We’re not tax lawyers. Yes. And tax normalization usually glazed eyes. So, but tax normalization would say, “Hey, you gotta take it over a period of time and recover it from the customers over a period of time.” And at the end of the day, that’s just economically one’s here, you get more of the economics earlier through the PPA versus here where you don’t get it as quickly and now that’s kind of possibly changing a bit, so.
Josh Combs (09:13):
And I think that that’s something that just in terms of timing, state commissions, they’re looking at that because they have their constituents and the customers right now and to be able to see some of that benefit, more near-term immediate benefit makes these options more attractive from a regulatory perspective as well.
Brian Harms (09:31):
Yeah, exactly. And it’s interesting because we’ve talked about the storage a bit, but just like with renewables, I think storage is starting to hit this situation where there’s a pinch on supply chain, there’s a pinch on some materials that go into batteries that are hard to find or very rare, rare minerals, those types of things. And so therefore we go back to what you were just talking about, which is fossil fuels, these things that we thought would be, coal for certain, hey, it’s getting retired, right? Mm-hmm. And natural gas, “Hey, what’s happening here?” But all of a sudden, you hear people talking about, “Well, if we’d have to do solar plus storage versus just a combined cycle gas plant, and I’m looking at those dollars, hmm, they’re a little closer.” That’s right. That’s right.
It’s not the easier decision that it might have been several years ago where it’s like, “I gotta get the renewable energy. I’ve gotta get the decarbonization goals.” And so remember, it was expensive and it came down.
Josh Combs (10:36):
Right, right.
Brian Harms (10:37):
Once it came down, suddenly it’s like, “Yeah, I’ve gotta do these things.” And now I think it’s kinda like, again, this tension point where, okay, where are we landing?
Josh Combs (10:47):
Yeah.
Brian Harms (10:47):
And what do we do with these fossil fuel plants or other plants that we might have been retiring, but now we gotta think about whether it’s useful for our customers.
Josh Combs (10:58):
And I mean, they really can, and I think in some instances, what we’re seeing around the country be a bridge, right? To ultimately meet those decarbonization goals, to innovate with technology, delaying the retirement of some of those facilities is helping to ensure that those goals are met, and that ultimately we are able to move in the industry away from fossil fuels. But using them as a bridge – mm-hmm. Right now during this crunch is certainly turned out to be beneficial for customers in certain circumstances.
Brian Harms (11:28):
Yeah, and I’ve always said, even early on for renewables, as I was helping to build a ton of renewables and getting renewables deployed, I always thought, well, it’d be good if they’d support natural gas because I always thought natural gas still creates that ability to basically be used when the wind’s not blowing, be used when the-
Josh Combs (11:52):
The sun’s not
Brian Harms (11:53):
Shining. Sun’s not shining. Right. Exactly. And then obviously storage has become more of a in vogue, “Hey, we could use this.” But I think this transition period suddenly, all the things I was saying come into full focus in terms of, “Hey, we do need to have all arrows in the quiver approach –
Josh Combs (12:11):
That’s right.
Brian Harms (12:11):
That we’ve heard so many folks talk about.” I mean, especially on the utility side, but I think there are others out there who just think about energy policy and go, “We really need to consider more than just solar – That’s right. And we need to think about other things too.” And I mean,
Josh Combs (12:25):
And we’ve talked a lot about reliability, but just to your point, you gotta think about grid security. And so when you’re looking at all of these tensions that we’re balancing, ensuring grid security during moments of peak demand or other scenarios that could happen, it’s important to have base load resources and to have options, so have the Swiss Army knife of storage, have solar, natural gas, or whatever you need to bridge you through this crunch. But in terms of the future, right? Right. What, how do you see some of these things like the pinch in the storage market or just this capacity crunch? What do you kinda see on the horizon from that perspective?
Brian Harms (13:10):
Well, I think ultimately storage is gonna, we’ve called it a game changer in the past. It will continue to be. I think this pinch will be short-term. Now, the funny thing is that when we talk short-term or long-term, we’re talking 10, 15 years. Right. I mean, a lot of people might be thinking, “Oh, that’s one or two years.” No, no, no. Short term still means, like, 10 years. But it’s just gonna take that to kind of fill through. And I also think that we’re in a very interesting R&D time, research and development time in terms of, hey, what’s a better way for solar to be done? What’s a better way for storage? What’s a better way for wind? I mean, all of it’s going to, it’s all getting better. It’s kind of like semiconductors .
It’s like computer chips. It’s the same type of thing where, I mean, it’s almost like when I think about solar modules, there’s always a better one six months later. That’s right. There’s always a better one. There’s always a better one. There’s always a better one. And so to me, unlocking, which is what we… IRA does this to a great degree. Unlocking the ability to have factories and to have production, especially US production, and kind of develop and research and figure out better ways to do things. That’s gonna be the key. And that’s just gonna take a little bit of time.
Josh Combs (14:19):
Yep, yep.
Brian Harms (14:19):
That’s gonna take some time. But once we get there, I do think that’s gonna be a big player. But the other one that I keep hearing about, and I’m gonna pass it back to you – … Is modular nuclear. That’s
Josh Combs (14:31):
Right. Yeah. A lot of
Brian Harms (14:32):
People are talking about modular nuclear as something that’s a realistic potential player. And I think nuclear is so unique from the fact that it doesn’t have the emissions aspect. Right. Does have the used fuel – mm-hmm. Spent fuel aspect. But it’s a very interesting idea, versus kinda like, obviously here in Atlanta or in Georgia, we got vogal. That’s right. A big util – That’s right. Big nuclear. That’s
Josh Combs (14:57):
Right.
Brian Harms (14:57):
But this modular nuclear is interesting. I mean, what do you
Josh Combs (15:00):
Think about that? In the pre-IRA world – Yeah. I don’t think that modular nuclear – Yeah. Was even something that was discussed. But you are seeing utilities across the Southeast and regular utilities across the country propose the modular nuclear, at least explore what does that look like in terms of economics? How can that fit into our all of the above strategy? So I think that that is something definitely that utilities will continue to explore. And I think that ultimately, you were speaking to what short-term means and – mm-hmm. Mm-hmm. Just in terms of timing. And while 10 years may seem like a long time to people that aren’t in our world. Right, right, right. Typically the IRP process is 20 years, 25 years, 30 years.
Absolutely. So even moving into a 10-year kind of horizon is something that in terms of planning and preparing and meeting needs, that’s an adjustment for regulated utilities. And I definitely think that that’s something that we’re gonna continue to see utilities and regulators kind of address.
Brian Harms (15:58):
Yeah.
Josh Combs (15:59):
Yeah.
Brian Harms (15:59):
No, I agree with that. And I think it’s going to be a hard time because when we talk about tripling load growth in some places or whatever the number is, you have to keep the lights on, as you said. And that’s where that’s the preeminent. And so then if you can do that with renewable resources and storage, great. If you can’t, then you gotta think about other things.
Josh Combs (16:26):
That’s right.
Brian Harms (16:27):
So, and it’s a thorny issue. It’s one that’s not easy to answer. It’s one that everybody’s gonna be grappling with over next couple decades probably. I’ll be retired and you still be grappling with it.
Josh Combs (16:39):
I’ll be in that chair. Yeah,
Brian Harms (16:41):
Exactly.
Josh Combs (16:41):
You
Brian Harms (16:41):
Will be. So, but it’s a… I don’t wanna say it’s a fun issue to talk about, but it’s a very interesting issue to talk about. Yeah. I’ve really enjoyed talking to you today, Josh.
Josh Combs (16:53):
Me too. Absolutely. Okay. Thanks, Brian.
Brian Harms (16:55):
Yep.
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