California Sunset - Radical Shifts in the Golden State's Power and Gas Markets - Part 2

After averaging more than a nickel below Henry Hub all this year, the California Border natural gas price spiked to 66 cents/MMbtu above Henry on Friday.  This kind of price volatility is no surprise to anyone following the radical shifts in California energy markets, starting five years ago when the state legislature enacted its 33%-by-2020 renewable portfolio standard (RPS) law.  By mid-2015, more than 14,000 MW of new solar and wind power had pulled down gas demand in California to the point that natural gas prices at the SoCal Border were averaging a negative basis to Henry Hub.  Still not satisfied, last year California legislators voted to establish a 50% renewables target for 2030.  On top of it all, the West Coast was coming up on a La Niña year that would bring more rain –– and hydroelectric generation –– to the Pacific Northwest and eventually into California. With all that renewable power (solar, wind and hydro), California seemed headed for an unprecedented period of low gas prices, but it did not turn out to be so simple.  In today’s blog, we continue our look at California’s power and gas markets with the events and drivers that shaped late 2015 and the first six-plus months of 2016, and consider what’s to come. 

In the first episode of California Sunset we discussed the events that transpired between 2011 and mid-2015 that reshaped the Golden State’s energy markets.  Not long after the RPS law was passed, California shut down the nuclear generating plants at San Onofre, regulators expedited the build-out of new transmission lines to move more solar and wind power to market, and the state implemented a carbon cap-and-trade program. The market responded by building new solar projects and wind farms, which displaced the need for gas generation, especially through the middle of most days.  

Through the fall of 2015, the West Coast was expecting a La Niña weather pattern, which favored above-normal precipitation in northern California and the Sierra Nevada mountain range along the state’s east-central regions.  If this came to pass, California would have been walking into uncharted territory in 2016, with hydro generation up an average of 2,500-3,000 MW from 2015 on top of all the other increased renewables. As the rains came, though, so did the unwanted news of a valve leak at one of the natural gas storage wells at SoCal Gas’s Aliso Canyon storage facility (near Los Angeles) in early November of 2015. It quickly became known that the valve leak could not be fixed by normal protocol and that a pair of relief wells would need to be drilled so engineers could access and fix the leaky valve. To do so, they would have to drain the facility down to its minimum level. As this gas flowed out of Aliso Canyon storage and into the market, it lowered SoCal cash prices even as the gas market was already reeling from increased renewable penetration and higher hydro output.  Much of this excess gas went into PG&E’s system or was pushed back into the Desert Southwest.