Title : How Renewables Are Displacing Natural Gas from the West Coast -- RNB Energy -- Septermber 25, 2107
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How Renewables Are Displacing Natural Gas from the West Coast -- RNB Energy -- Septermber 25, 2107
RBN Energy: How renewables are displacing natural gas from the west coast.The rise of renewable energy has transformed power markets in the U.S. West Coast states, particularly California. The Golden State has added significant renewable power generation capacity in recent years. Additionally, record precipitation in the Pacific Northwest and California this year boosted hydroelectric generation in the region. These factors have reduced the natural gas market share of power generation in California and other Pacific Coast states, which has important implications for the U.S. gas market as a whole, especially considering that the Eastern U.S. is increasingly oversupplied and pushing its gas supply westward. Today, we look at the year-on-year changes in the West Coast power generation sector and their effect on the gas market this summer and longer term.
As we noted in our latest gas supply-demand series, Summertime Blues, increasing generation from renewable sources has made a notable dent in the natural gas market share of power generation this summer. This isn’t a new trend, but one that’s been developing over the past several years. What’s different now is that as less natural gas is needed out West, particularly in California — the second largest natural gas consumer in the U.S. after Texas — it has the potential to exacerbate oversupply conditions in the Central U.S., which is already being targeted by growing gas production from the Marcellus and Utica shales that is pushing south and west.
We’ve discussed the various factors driving the huge changes in energy balances in California previously in California Sunset and California Scheming. One big factor has been the state’s push for renewable energy and energy efficiency. In 2011, the state enacted a renewable portfolio standard (RPS) law that required every utility and other electricity retailer to serve 33% of their load with renewable energy by 2020. That target was later increased to 50%. In early 2013, California regulators also implemented a carbon cap-and-trade market, which effectively acts as a tax on non-renewable energy imports and in-state energy production (see AARGH Matey! Cap'n Trade Sails On in California). The program resulted in higher power prices and incentivized higher imports of power sourced from fuels with low or no carbon emissions, such as hydroelectric generated power from the Pacific Northwest.
Another factor has been changes to generation infrastructure in the state, some of it mandated and others due to poor economics or operational problems. The state has been working to meet federal standards by retiring 3,800 MW of older gas-fired plants in southern California by 2020 that use “once-through cooling,” an outdated technology that releases cooling water after only one use instead of recycling it. Outside of those plants, the state also has been targeting other aging and inefficient plants for retirement. But perhaps the biggest impact has been from the shut-down of the two-unit, 2,250-MW San Onofre Nuclear Generating Station (SONGS) — what was the largest power generator in the region (see Play Me A Songs). The facility began having operational problems in 2012, and in June 2013, Southern California Edison (SCE) decided to permanently shut down the facility. The loss of one of the largest, relatively low-marginal-cost generators in the region meant more gas would be needed to help meet demand and maintain reliability standards. But it also spurred state regulators to accelerate plans to get more wind and solar power into the market and increase the RPS target to 50%.
These factors have dramatically changed the generation capacity profile in the state over the past several years. To understand the capacity changes affecting this injection season in particular, we turn to the Energy Information Administration’s (EIA) Electric Power Monthly data as of June 2017, the most recent month available, shown in Figure 1 below. In June 2017, net summer electricity generation capacity from renewable sources in the West Coast states, including California, Oregon and Washington, was up by 2.4 gigawatts (GW), or (4%) year-on-year to 66.1 GW from 63.7 GW in June 2016 to 66.1 GW this past June. Nearly all of that increase — 2.2 GW (~92%) — was in California, which went from nearly 27 GW of renewable generation capacity to 29.2 GW by this June, with most of the increase coming from solar generation capacity additions. At the same time, net summer capacity from fossil fuel generators is down by a net 1.9 GW (4%) in the three states combined. In California alone, it’s down more than that, by 2.2 GW (5%) year-on-year, but that’s partially offset by an increase of 445 MW of capacity in Oregon.
Figure 1 Source: EIA (Click to Enlarge)
In the past couple of years, California utilities and their regulators have also contended with problematic natural gas storage facilities. In early November 2015, SoCal Gas reported a leak at its 168-Bcf Aliso Canyon storage facility near Los Angeles, which required a lengthy repair process that included drilling new wells. By early 2016, state regulators had stepped in to halt any further injections of gas into the facility until all the wells were inspected and approved. It wasn’t until July of this year that SoCal was approved to resume injections again at Aliso Canyon and that too is to a limited extent. Specifically, it was approved to reinject only up to 28% of its total capacity, or about 47 Bcf. Moreover, since that approval, there remains uncertainty about the future of the facility, as the restart continues to face resistance at the local and state level. That situation also was exacerbated in July of 2016 when a routine inspection found a leak at Pacific Gas & Electric’s (PG&E) McDonald Island storage facility (east of metro San Francisco/Oakland, CA) leading to a ban on injections there as well. This facility was allowed to return to service in October 2016, but also at a lower capacity of 75 Bcf, down from 82 Bcf prior to the incident. These storage disruptions have further limited generators’ use of natural gas in the state.In addition to the regulatory and structural factors, this year in particular there’s also another, more short-term dynamic at play — record precipitation. Record snowfall in California last winter nearly erased a multi-year drought in the state and left it with abundant water supply for hydroelectric generation. While this may not repeat each year, it does give us a clue about the potential for gas-fired generation to be displaced when the incremental renewable capacity coincides with a high water year.
If we look at the latest (June) generation data from the EIA for natural gas versus hydro and renewables in California, Oregon and Washington combined, as shown in Figure 2 below, we can see that total generation in the state in June 2017 (blue “total” bar) was flat to slightly higher this year at nearly 34 terawatt hours (TWh), compared to 33.6 TWh in the same month last year (orange “total” bar). But generation from hydro supply jumped 4.4 TWh (34%) year-on-year to 17.3 TWh, compared with 12.8 TWh last June. Renewables were also higher, but only marginally at about 7 TWh, up 2% from 6.9 TWh last June. In stark contrast, natural gas-fired generation fell sharply, down 2.7 TWh (25%) to just under 8 TWh, from about 11 TWh last June. In the process, gas-fired generation went from 32% of total generation market share to 19% this June. Hydroelectric generation rose from 38% to 40%. Despite outright increases in generation from renewable sources, renewables actually lost market share on a percentage basis, going from 20% to 16% this June.
Figure 2 Source: EIA (Click to Enlarge)
As we noted above, hydroelectric generation will ebb and flow each year as Mother Nature dictates. But the structural changes happening with generation capacity will continue to affect natural gas market share in California and the West Coast longer term. This has implications for the U.S. gas market and not just in the West. As more gas is unleashed from the Marcellus/Utica into the Southeast and Midwest markets, it will intensify competition with other gas supply that feeds those markets and displace those other suppliers, pushing them to also seek out other markets, such as the West. But what the generation data so far tells us is that the West Coast may not be able to increase its gas consumption beyond a certain point in anything but perhaps a low water year.In the next episode of this series, we’ll look at how the power generation trends are affecting gas flows in the region.
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