I would try to rationalise it along these lines:
Stepdad is not one Grandad of 2 (the place your father would have had).
He is either 1 of three, or he isn’t Grandad.
Your child will always have Grandad in heaven (or however you describe it) who was mummy’s dad and Grandad who is daddy’s dad. They may also have a third grandad who is actually daddy’s stepdad.
Whether daddy’s stepdad is also a grandad needs to be 100% based on your husband’s feelings about his stepdad. It’s nothing to do with replacing your father - it is whether your husband feels he played/plays a fatherly role (in addition to his biological father) or not.
He is not taking your dad’s place ever. He’s either an additional grandparent, or he is not. That’s not your choice, but it is also not his choice or your MIL’s choice. It’s dependent on your husband alone.
My mum is a stepmum. In relation to my half sibling’s children and their children, I am auntie, but she is not grandma. I am great auntie, but she is not great grandma. That choice wasn’t hers, or my father’s, it was my half sister’s, based on how she sees my mum. And it’s absolutely fine - it’s the norm for our family. In turn, my half sister’s husband (stepdad to her children) is grandad to the youngest step grandchild but not the older one (the grandchildren have different mums, who are sisters) again based on the different wishes of the mums. It’s all fine and no bad feeling washes around any of it.