As California reels from the impact of high natural gas prices this winter – as well as the ripple effects on the electricity sector – some experts are urging policy-makers to focus on reducing the state’s dependence on natural gas in the first place.
Natural gas prices have remained at higher than normal seasonal levels since late November and through the end of January, according to a report published by California Independent System Operator this month. As a result, CAISO electricity prices also increased, averaging more than $250/MWh in December – a fivefold increase since last year.
In all, CAISO’s energy market saw additional wholesale costs of $3 billion in December, and $900 million for the first 25 days of January.
Earlier this month, the California Public Utilities Commission held a meeting to discuss the high natural gas prices, their impacts on electricity markets, and hear from experts on ways to address them.
The very first “is reducing our reliance on natural gas in California and advancing those policies that would support California’s [greenhouse gas] emissions goals, especially around building and transportation electrification,” William Walsh, vice president of energy procurement and management at Southern California Edison, told regulators at the meeting.
In addition, industry experts also stressed the need to ensure customers have information about these kinds of events, as well as look at ways to bolster demand-side load management on both the electric and gas side.
Complex interactions between gas and electricity uses
At the height of the gas price spike in December, the commodity natural gas price in Southern California was almost eight times as much as the average price the previous December, as well as higher than the rest of the country. As a result, ratepayers in California have been experiencing severe sticker shock, CPUC President Alice Reynolds noted at the meeting – average residential gas bills in Southern California increased two to two-and-a-half times what they were compared to the same time last year.
“We need to be mindful that we’re undertaking a really monumental transition in California to decarbonize our economy right now, which means transitioning away from our dependence on gas. There are a lot of complex interactions here between gas and electricity uses, and the impacts to customers’ bills – and we need to be considering the big picture when we think about mitigation strategies,” she said.
Earlier this month, the CPUC moved to accelerate the climate credit, that California ratepayers normally receive in April, to lower customer bills. The credit ranges from $90 to $120, according to the CPUC. Simultaneously, California Gov. Gavin Newsom, D, is urging the federal government to investigate the natural gas price spike, and take a closer look at whether it is the result of market manipulation, anti-competitive behavior, “or other anomalous activities.”
Gas prices in the West touched their highest annual point in the second half of December and began to subside in January, although still at a relatively high level. CAISO pointed to several reasons for that in its recent report: colder than usual temperatures in the West and Canada pushed up gas demand; there were lower gas storage inventories than usual – in part because of the higher gas usage during the heatwave California experienced last summer; as well as California’s lack of local gas supply and position at the end of the interstate pipeline system.
In addition, pipeline maintenance work in West Texas reduced the amount of natural gas flowing west and raised gas prices in Southern California, the U.S. Energy Information Administration said in a January report.
Panelists at the CPUC meeting pointed to other reasons for the high gas prices. For instance, the prolonged drought in California has drastically reduced hydroelectric generation output in the market as compared to last year, Gillian Clegg, Pacific Gas & Electric’s vice president of energy policy and procurement, said.
“What that has meant is that that electricity has to be replaced – and it’s been replaced by gas-fired generation, increasing the demand for gas being used for electric generation,” she said.
Impacts on electric costs
The impacts on the electricity market have been significant. California’s electricity markets are heavily interdependent on the gas market, and its natural gas generators provide about half of its electricity generation. It’s still common for natural gas generators to be the marginal resource in the electric market, according to Molly Sterkel, a program manager with the CPUC’s energy division.
“What that means is that the natural gas generators frequently act as price setters – electricity prices are commonly just a simple multiplication of the average heat rate of gas plants at the time and the price of natural gas,” she said.
December was the single highest month of wholesale electric costs that California has seen in the last five years, according to Sterkel. It’s unclear, however, how the wholesale costs will flow through to customers, since different market participants – including the investor-owned utilities and community choice aggregators – have different hedging strategies for their electricity portfolios, she said.
Since power markets are most of the time price-takers, policy-makers need to be cognizant that while electricity prices are regional, gas prices are national, continental and increasingly prone to global market forces because of the rapid increase in liquefied natural gas exports, said Fred Heutte, senior policy associate with the NW Energy Coalition.
More broadly, the Western region finds itself in a situation where it has fewer electricity supply sources to switch to when gas costs rise, said Becky Robinson, a principal economist with CAISO. Ordinarily, if a resource becomes less economic in the electricity markets, other resources would be dispatched instead. But with factors like the continued retirement of coal plants across the West, “there’s just a little less switching available for the market to do.”
“This underscores the inter-relatedness of the gas markets and the electricity market and I think in terms of some of the potential… things to consider going forward, thinking about coordinated planning between and across the gas and electricity space could be very important…” she said.
California faced similar issues during the electricity crisis of 2000 and 2001, Eric Gimon, senior fellow with Energy Innovation, told Utility Dive. At that time, demand for gas increased because the hydropower sector was producing a lot less energy, leading the price of gas to shoot up.
There are different ways policy-makers can protect against these price spikes and prevent electricity from becoming so unaffordable.
“First of all, you want people to be on long-term locked-in [power] contracts,” Gimon said. One advantage that California’s power sector has is that renewables tend to be on long-term contracts, meaning their prices are locked in at the time the contract was signed and a lot of the grid’s supply is not affected by these prices.
The cheapest and best way for regulators to mitigate the impacts of high natural gas prices, however, is improving electric and gas demand flexibility, said Gimon.
“And because California is trying to decarbonize, we’re trying to reduce our exposure to gas – so if we accelerate some of these programs, we’ll reduce exposure to gas prices,” he said.
Demand-side management is one of the best short-term policies that policymakers and consumers have at their fingertips to mitigate the impact of gas and electricity price swings, according to Brian Turner, policy director, Western states, with Advanced Energy United. This can include adjusting electricity use through consumer behavior, but also using advanced energy devices.
“Much of the new advanced energy devices that exist and are coming on the market allow consumers to do that without having to think too much about it – they can set it and forget it,” he said.
And a potential long-term play is getting California off dependence on volatile gas prices by adding more clean resources, like renewables, clean firm resources, and battery storage, said Turner.
As energy officials in California conduct their long-term power planning, “they need to update their projections of gas prices so that that volatility is reflected… so as you’re making a long-term resource decision, the volatile, risky gas investments are less attractive…” he said.
Heutte agreed at the CPUC meeting that the root cause of the issue is not the markets, but overdependence on natural gas.
“We have a double-binded scarcity pricing [issue] in both the gas and power markets but because power is a gas price taker, it puts us in a very tight spot during these market price spikes,” he said.
A high priority for the NW Energy Coalition is providing customers with information during price spikes like these, and regulators should also look at reforming hedging and fuel cost adjustment policies and dramatically accelerate electricity and gas demand-side load management, he said.
In addition, the state needs to look at supply alternatives and reserves, and “extending the dependence on gas for reserves on the power side is really not going to be the answer,” Heutte said. Instead, the state can look at adding more batteries, using hydro storage that’s available, and in the longer term, enlisting load and resource diversity across the widest Western footprint possible.
As California seeks to do this, conversations around better connecting the broader Western grid will become especially important, according to Sarah Steinberg, director at Advanced Energy United.
That includes better transmission as well as “creating that market platform, where states can both be exporting and importing according to their needs and access clean energy wherever across the West it is being produced at any given time – so that reduces the need for these individual [gas] plants that set that high marginal cost,” she said.