A majority of the signals for California gas this summer are bearish, largely due to the growth of renewables, although there are a few bullish offsetting factors such as SoCal’s continued storage issues and growth in upstream demand.
An abundance of cheap hydropower will only continue to flood the West Coast power markets in the coming months. Genscape anticipates above-normal levels of precipitation across the West Coast stretching from central California to northern Washington. Based on this forecast and with current snowpack levels already well above normal, Genscape expects strong, potentially record-breaking, hydro generation in California and the Pacific Northwest through the spring and early summer. With this cheap power available to meet baseload, natural gas plants throughout the Western Interconnection that typically run around the clock will likely be priced out with increasing frequency. However, natural gas peakers will continue to be relied on to provide additional power during times of peak demand.
Solar generation capacity, both utility-scale and behind-the-meter, continues to grow throughout California. Due to recent additions, utility-scale capacity now exceeds 10GW while behind-the-meter nears 5GW. The added solar capacity impacts power prices not only in California, but throughout the entire Western Interconnection. In an area stretching from Wyoming to Arizona, it is now becoming commonplace for power prices to fall into negative territory during peak solar hours. The California ISO will likely be curtailing solar generation with increasing frequency due to limitations on the transmission system and in order to maintain grid stability. However, Genscape expects that many natural gas units will have to cycle off during the midday due to loading orders and the fact that it is simply not as economical for gas plants to run through such weak pricing.
California wind generation is also expected to be strong this spring, running about ten percent above normal. Unlike solar generation, this will be a product of weather rather than capacity additions. Genscape meteorologists expect more low pressure systems than normal to move through the California footprint during the spring, providing the state with additional cheap energy, particularly in the morning and evening hours when wind generation is strongest.
Genscape is currently seeing conditions for El Niño Southern Oscillation (ENSO) to transition from neutral status to El Niño status by late spring. While normal temperatures are expected in California and the Southwest, slightly above-normal temperatures are expected in the Pacific Northwest. Based on current forecasts, Genscape sees little upside risk to power demand in the coming months.
There are, however, some bullish supports for gas. SoCal’s Aliso Canyon situation remains ongoing, with the facility still unavailable for injections and only used for withdrawals in emergencies. The pipeline is also conducting extensive modifications to its other three storage facilities, which has decreased storage operating capacity since the beginning of March. The long-term outlook is mixed. These modifications, which include changing from tubing-plus-casing injections and withdrawals to tubing-only, will translate to decreased daily transaction capacity. However, this work also represents a significant investment in SoCal’s storage infrastructure, and is intended to reduce the risk of another Aliso-like leak event. With the continued concerns surrounding storage, SoCal’s dependence on imports remains elevated.
Growing upstream natural gas demand in the Desert Southwest and Mexico could also present a bullish counter to the bearish California renewables situation.
On the Mexico front, the country is in the midst of a massive restructuring that will allow greater non-governmental market participation. This is being done to help support growing demand, increase supply diversity, and offset declining Mexican oil and gas production. As a result, Mexican imports of U.S. natural gas, particularly from the same West Texas sources that partly feed California, have been rising. Three new U.S. export capacity projects have recently come online, allowing Mexico even greater access to the U.S. supply. Increasing capacity for exports to Mexico has the potential to siphon off gas from the Southwest before it reaches the Golden State, meaning that California’s prices may feel increased upward pressure to compete with Mexican demand.
Within the U.S. Desert Southwest, natural gas-fired generation has also been growing in correlation with declines in coal-fired generation. For example, El Paso pipeline serves the most demand in Arizona, and its weather-normalized deliveries have grown substantially over the past three years. This growth is part of a larger trend of increased natural gas-fired generation in Arizona. In 2016, gas passed coal as the largest generation source for the state. Concerns about the potential retirement of the 2250 MW Navajo plant in northern Arizona by the end of the year also exemplify this trend.
A moderately eventful nuclear refueling season could also represent another bullish factor for California’s gas outlook. Month-long maintenance events are planned for three large western nuke plants this spring: Arizona’s Palo Verde 2 begins its turnaround in early April, California’s Diablo Canyon 1 at the end of April, and Washington’s Columbia Generating Station begins in mid-May. All have nameplate capacities in the 1100-1350 MW range, meaning that their absence creates the potential for replacement gas burn up to 175-215 MMcf/d in each case.
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