April 26, 2018 | Kevin Adler & Barry Cassell
The state of California, once a prime location for greenfield and brownfield gas-fired power plant development, has lately become somewhat unfriendly to new gas-fired power as it pursues aggressive greenhouse-gas reduction and renewable energy goals.
Regulators there have been lately rejecting gas projects that they had once encouraged, and they have been promoting alternatives like battery storage, demand response, renewables and energy efficiency.
In this issue of Get the Point, we look at the current state of gas-fired power projects in California and how legislation and regulation are affecting the future outlook.
The future is flat
In 2017, natural gas deliveries to California end users averaged about 5.8 billion cubic feet per day (Bcf/d), of which about 1.85 Bcf/d (32%) flowed to power plants for electricity generation.
In February 2018, the California Energy Commission (CEC) issued its final report on the state’s energy trends for 2018-2028, forecasting that the state’s total natural gas demand will grow an average of 0.55% per year during the next decade. That’s a small enough gain. But due to renewables and the state’s ongoing emphasis on energy efficiency, California’s natural gas demand just in the electric generation sector is expected to decline by about 2.5% by 2028 (cumulative, not per-year basis).
At the most basic level, the power industry in California knows that it is being pushed to procure power from renewable sources more rapidly than almost any other part of the country.
Gov. Jerry Brown (D) signed the state’s Renewable Portfolio Standard in 2015 that requires retail sellers and publicly-owned utilities to procure 50% of their electricity from eligible renewable energy resources by 2030. Brown in 2015 also issued an executive order to establish a greenhouse gas reduction target of 40% below 1990 levels by 2030.
The impact of the RPS for California can be seen in the graph below (blue is gas and other non-renewable power sources; green is renewable power).
Source: California Energy Commission
Coal-fired power is all but absent in the state, with its only source being imported power produced by the Intermountain Power Plant in Utah. To indicate how much California wants to disincentivize the use of coal power, a fee of $15 per megawatt/hour (MWh) is levied on all coal-fired power that California utilities purchase.
The bottom line is that the existing gas-fired generation will operate “less frequently and at lower load factors,” said CEC. Despite a temporary rebound in gas demand in 2024-2026 that is linked to the anticipated retirement of the Utah Intermountain Power Plant coal plant (which is set to be replaced by a 1,200 MW gas-fired unit at the same site), the trend is clear (see graph).
As power producers and utilities look at the trends, they must consider the timing of their investments. A gas-fired plant usually needs at least 30 years of operation to gain a return on the original construction investment. But if an electric utility is only offering, say, a 10-year power purchase agreement (PPA), and carbon constraints are only due to get tougher over time, where is the incentive right now to build a plant with a 30+-year lifespan? Much or all of that last 20 years will be in the post-2030 period, after the renewable energy and greenhouse-gas reduction targets are fully in force.
On top of those issues, California has enacted a once-through-cooling (OTC) policy, which mandates shutdowns, repowerings and/or retrofits of a series of power plants along the Pacific Coast. For each gas power plant in the state, the owner/operator must weigh the cost of complying with OTC with the anticipated revenue from providing power.
The California ISO (CAISO), which oversees the state’s energy grid and coordinates its operations with the Western Interconnection Power Grid, considered the impact of the OTC in its final "2018-2019 Transmission Planning Process Unified Planning Assumptions and Study Plan," which was published on March 30. CAISO wrote that various gas-fired plants covered by the OTC rule, like the 629-MW Pittsburg plant of GenOn Energy, have already been retired (in 2016). That same challenging cost structure led GenOn on Feb. 6 of this year to retire the 430-MW Mandalay plant, well ahead of a 2020 OTC compliance deadline. Indicative of the trend in the state, utility Southern California Edison (SCE) has said it will replace the power provided by the Mandalay plant with renewable energy and energy storage options. More is coming, GenOn’s Ormond Beach plant, 1,516 MW, will be retired as of Oct. 1 of this year with no on-site replacement capacity.
Another stealth issue for California gas-fired power is the growth of something called community choice aggregators (CCAs) in the state. These are organizations, usually sponsored by local governments, that gather together ratepayers that in many cases had been served by one of the big investor-owned utilities, then contract directly for power, pretty much always from a solar project. This means that the big investor-owned utilities – SCE, Pacific Gas & Electric (PG&E) and San Diego Gas & Electric (SDG&E) – are increasingly reluctant to sign long-term PPAs with gas-fired power developers, especially for large power projects, since their customer base is rapidly being eroded by the CCAs.
California power demand today
OPIS PointLogic tracks daily data on gas offtake by 31 power plants in the state, which gives a window into much of the current gas demand for the power sector.
The graph below shows the gas for power that is tracked for each pipeline (bars), as well as both the OPIS PointLogic and U.S. Energy Information Administration’s modeled total gas demand by the power sector (lines). The summer surge in power demand for air conditioning purposes is very apparent.
Given the headwinds described above, it wouldn’t be surprising if power providers cut back on their planned investments in expanded or new gas power to the state. Indeed, there has been some negative news lately, but some positive news as well. The new projects might incorporate features friendly towards renewables (such as storage) that could keep them viable even as the state moves towards its low-carbon goals.
The following is a summary of key project-related developments tracked by OPIS PointLogic since the start of 2018, identified as those that indicate cutbacks or cancellations of gas projects and those that indicate projects that might go forward.
However, some good news can be found in the last few months for gas-fired power in California.
Summing up, it’s clear that California’s utilities are adjusting to the new reality that is arriving quickly. They are closing their least efficient gas-fired plants that can’t be cost-effectively upgraded to meet the OTC rule, and they are investing in renewable generation and storage. But at the same time, gas-fired power is hardly going away in the state, and gas for direct heating and industrial purposes also remains a substantial demand source.
OPIS PointLogic will continue to track the plans for expansion and closure of gas-fired power in California, as well as the pipelines and storage facilities to serve them.