As California reels from the consequences of high natural gas prices this winter, as well as the ripple effects on the electrical sector, some experts are encouraging policymakers to focus on lowering the state’s reliance on natural gas in the first place.
According to a study released in February by the California Independent System Operator, natural gas prices have been higher than average seasonal levels since late November and through the end of January. As a result, CAISO power prices increased as well, averaging more than $250/MWh in December, a fivefold increase over the previous year.
The California Public Utilities Commission conducted a meeting earlier this month to discuss high natural gas prices, and their effects on electricity markets, and to hear from experts on how to address them. The first priority is “reducing our reliance on natural gas in California and advancing policies that would support California’s [greenhouse gas] emissions goals, particularly around building and transportation electrification,” said William Walsh, vice president of energy procurement and management at Southern California Edison, at the meeting.
Complicated relationships between gas and electricity
At the peak of the gas price increase in December, the commodity natural gas price in Southern California was about eight times that of the previous December’s average price, as well as higher than the rest of the country. As a result, CPUC President Alice Reynolds stated at the conference that customers in California have been facing extreme sticker shock – average residential gas bills in Southern California have jumped two to two-and-a-half times what they were at the same time last year.
“We need to be aware that we’re conducting a truly significant transformation in California to decarbonize our economy right now, which means migrating away from our dependence on gas. “There are a lot of complicated interactions here between gas and electricity uses, as well as the impacts on consumers’ bills – and we need to look about the entire picture when we think about mitigation techniques,” she said.
Effects on electricity costs
The consequences for the electrical market have been severe. California’s power markets are heavily dependent on the gas market, and natural gas producers provide roughly half of the state’s electricity. According to Molly Sterkel, a program manager with the CPUC’s energy division, natural gas generators are still the marginal resource in the electric market.
More broadly, the Western area now has fewer electricity supply sources to fall back on when gas prices rise, according to Becky Robinson, a chief economist at CAISO. Normally, if a resource becomes less economically viable in the electricity markets, other resources are dispatched in its place. However, because of factors such as the continuous retirement of coal facilities across the West, “there’s just a bit less switching available for the market to do.”
According to Eric Gimon, senior fellow with Energy Innovation, California encountered similar challenges during the electrical crisis of 2000 and 2001. During that time, demand for gas increased since the hydroelectric sector produced significantly less energy, causing gas prices to skyrocket.
There are several ways for policymakers to protect against price increases and keep electricity from becoming expensive.
“First and foremost, you want people on long-term locked-in [electricity] contracts,” Gimon explained. One advantage of California’s power industry is that renewables are typically on long-term contracts, which means their prices are locked in at the time the contract is signed and a large portion of the grid’s supply is unaffected by these pricing.
“And because California is attempting to decarbonize, we are attempting to lessen our exposure to gas – so if we accelerate some of these plans, we will reduce our exposure to gas prices,” he explained.
According to Brian Turner, policy director for Advanced Energy United’s Western states, demand-side management is one of the strongest short-term measures that policymakers and consumers have at their disposal to mitigate the impact of gas and electricity price swings. This can include modifying electricity use through consumer behavior as well as the usage of advanced energy equipment.
“Many of the new advanced energy devices that are available and on the market allow consumers to do it without having to worry about it too much – they can set it and forget it,” he said.
According to Turner, a potential long-term option is pulling California off of its reliance on volatile gas prices by adding additional clean resources such as renewables, clean firm resources, and battery storage.
At the CPUC meeting, Fred Heutte, senior policy associate with the NW Energy Coalition, agreed that the main cause of the problem is not the markets, but an overreliance on natural gas. Furthermore, the state must consider supply options and reserves, and “increasing the reliance on gas for reserves on the electricity side is really not going to be the answer.” Instead, the state can consider building more batteries, utilizing available hydro storage, and, in the long run, enlisting load and resource diversity throughout the broadest Western footprint possible.
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