By Liam Denning / Bloomberg Opinion
California is an elemental maelstrom branded as a laid-back idyll; a “beautiful fraud,” as environmentalist Marc Reisner put it. The pitch has faltered in recent years, as first wildfires and now torrential rains have claimed lives, wrecked infrastructure and displaced whole towns. Yet the atmospheric rivers deluging the state today may offer a silver lining of sorts later this year, during California’s summer blackout season.
Risk of wildfires is one factor that can prompt electricity shutoffs in California during the summer. A more prosaic reason is that hot evenings can raise demand for air conditioning just as the sunset switches off the state’s vast, but variable, solar energy, pushing the grid to its limits. Recent summers have seen Sacramento resorting to appeals for power conservation and even emergency payments for backyard generators to keep the lights on during heatwaves.
The backdrop to all this is prolonged drought. Not only does that raise the risk of grid-busting wildfires, it dries up a resource that as recently as 2019 supplied a fifth of California’s grid-power: hydroelectricity.
The Oroville Dam in northern California offers a useful illustration. In 2017, heavy rain left Lake Oroville so full it threatened to breach the dam and flood towns downstream along the Feather River. By the summer of 2021, the water level had dropped so low that the dam’s hydroelectric plant was shut down for the first time in more than 50 years of operation.
When hydropower falters, California burns more natural gas for dispatchable power generation (that is, plants that can be switched on or off as needed). Chart the state’s electricity flows from each source and they form a mirror image.
Relying on gas to fill that gap is expensive and cuts against ambitious decarbonization goals. It is also increasingly risky because those same goals have led gas-fired plants to close, with capacity dropping by 16 percent since 2013, thinning out that buffer.
This summer, however, it may not be needed as much. Of 17 major reservoirs there, 11 are currently filled above their historical average level for this time of year, according to the California Department of Water Resources. Only four were at the start of the year. The largest reservoir, Lake Shasta, began 2023 only 34 percent full; it is now up to 70 percent. Snowpack in the Sierra Nevada, a further stockpile of potential hydropower fuel, is well above average.
Even this doesn’t necessarily guarantee a resurgence in hydropower for the state, if current floods end up giving way to renewed dry conditions. In addition, that sequence of events might also spur growth in vegetation only for it to then dry out, paradoxically raising the risk of wildfires later in the year. And California’s hydropower resources form but one part of a wider system stretching up the West Coast. Oregon’s reservoirs, in particular, look drier than average. Still, the Energy Information Administration currently forecasts a 53 percent rebound in California’s hydropower generation this year, which would take it to its highest level since 2019.
If that mitigates the risk of blackouts this summer, it doesn’t bode well for an already flooded natural gas market. Having scraped $10 per million BTU only last August, benchmark gas prices have since collapsed to less than $2.50. California is the third-largest state for gas consumed in power generation and the second-largest for gas consumption, period, behind Texas. Back in 2017, when Oroville was brimming, the amount of gas burned by California’s power plants fell 10 percent that summer, helping to drag down U.S. gas consumption overall.
Beyond dampening gas this summer, California’s hydropower revival points to a structural challenge building against the state’s gas-fired power plants.
Reservoirs are like batteries, albeit ones charged by the volatile supply of clouds; supply only likely to get more volatile as climate change supercharges California’s natural tendency toward extremes. California is now also adding batteries of the more traditional kind to its grid. In broad terms, these soak up excess power generated by solar panels in the middle of the day which can then be released to meet that surge in demand for grid-power when the sun goes down. California leads the nation in terms of battery deployment.
When California set a new record for power demand last September, its batteries equated to only about 7 percent of that peak. They still had a noticeable impact. Analysts at CreditSights observe that while both California and Texas endured heatwaves last summer, peak power prices in California did not spike to the same degree, when adjusted for natural gas prices (because gas-fired power plants are often the marginal supplier of electricity, gas plays a big role in setting market prices). The implication is that California’s batteries effectively took market share from the least-efficient gas plants there in meeting peak demand, curbing price increases.
As batteries spread, spurred on by new subsidies under the Inflation Reduction Act, they will cut into natural gas demand in California during those peak, and highly profitable, hours during blackout seasonl; just like hydropower in the wettest years but without relying on the weather gods. Note also that the second biggest state for batteries is Texas, an emerging solar superpower that also has the highest gas demand of any state. Lurking within California’s swings between drought and deluge lies a structural shift remaking the economics of U.S. gas and power.
Liam Denning is a Bloomberg Opinion columnist covering energy and commodities. A former investment banker, he was editor of the Wall Street Journal’s Heard on the Street column and a reporter for the Financial Times’s Lex column.
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