As gas plants struggle, California seeks new flexible capacity strategies

With up to 6 GW of gas plants at risk of closure, energy planners are scrambling for new compensation techniques and zero-carbon alternatives

ccelerating clean energy and climate goals in California have policymakers thinking in unprecedented ways about how to manage the state’s power system.

California’s utilities already face a 50% renewable energy mandate to hit by 2030, and now lawmakers are debating even more ambitious targets.

A pending bill in the state Assembly would institute a 60% renewables mandate by 2030, a 40% emissions reduction, and set a 100% renewable energy target for state planning purposes. It’s already been passed by the Senate.

But California’s grid operator, the California Independent System Operator (CAISO), says the state faces a complicated energy trilemma in reaching those goals: Renewables over-generation, excess natural gas capacity, and a potential shortfall of flexible generation.

Policymakers are just beginning to understand how to deal with it.

“We’re not going to be able to achieve our long term carbon reduction goals without reducing natural gas,” said Laura Wisland, senior energy analyst at the Union of Concerned Scientists (UCS). “We will have to replace a lot of the natural gas generation that provides energy and reliability services with non-carbon resources like renewables, energy storage, load shifting, and targeted energy efficiency.”

Today’s system is much different than Wisland’s vision. Natural gas generation was 53.8% of the CAISO installed power mix in April. Renewables were 29% of the mix, with solar providing 14% of demand and wind 8.5%. CAISO forecasts natural gas generation will serve 61% of the state’s peak demand this summer, with 13.7% to come from solar and 2.5% from wind.

Jan Smutny-Jones, CEO of the generator trade group Independent Energy Producers Association, said California must move “in a rational way” toward its goals.

Natural gas will not “abruptly disappear” because “that would be very bad for reliability and affordability,” he said. And more gas capacity could even be added through “peaking facilities that specifically address local reliability requirements.”

Robert Laffoon-Villegas, spokesperson for utility Southern California Edison, summed up the situation.

“As renewables become a bigger factor, California will need less natural gas,” he said. But, for now, it provides “critical support to the electric grid.”

All that means California needs “a plan for the orderly phase out of natural gas generation,” said David Olsen, a member of the CAISO Board of Governors. Without it, stakeholders, especially those in the natural gas industry, “are confused.”

California’s energy stakeholders — including utilities, regulators, the system operator and vendors — must work together to develop that plan, Olsen said. It must include “a mechanism for maintaining the financial viability of the owners of natural gas plants,” because the state continues to need them.

But stakeholders also have to figure out “how to get to a very low carbon system,” Olsen added. “That will require a lot more resource diversity, including more renewables. And demand side resources will be a very big part of the mix.”

As California’s energy community works through those questions, their plans could well provide a model for other states as they look to deep decarbonization.

How much gas is too much?

Recent headlines raise questions about California’s natural gas dependence.

When the Aliso Canyon natural gas storage facility went offline in late 2015, it “dramatized the insecurity of relying on natural gas,” Olsen said. A leak in the facility outside Los Angeles put fuel supplies for gas generators at risk, leading regulators to approve expedited battery deployments, push customer-sited efficiency, and allow some gas plants to burn diesel during peak hours.

Security problems, liability problems, and emissions problems “have always been there” in the gas system, Olsen said, “and the state has chosen to ignore them.”

In 2016 two large natural gas plants declared bankruptcy in California — the 578 MW Sutter Energy Center and the 1,200 MW La Paloma plant — because they could not make sufficient revenues in the CAISO wholesale markets.

Other markets have issued warning signs for gas generators as well. In May, Panda Temple Power’s 758 MW Texas natural gas plant declared bankruptcy. It reflected a continuing downward trend in natural gas asset value. According to UBS, Calpine’s 432 MW Bosque plant sold for $528/kW in the ERCOT market in 2012. In 2015, Energy Future Holdings sold two plants with a total capacity of 637 MW for only $440/kW.

GenOn Energy, recently purchased by NRG Energy in 2012 for an estimated $1.7 billion, just filed for bankruptcy with debt of $1.8 billion. Its 15 GW of generating capacity is 61% natural gas-fired. Independent power producers and power market experts across the country say a natural gas capacity glut is likely to drive further plant shutterings.

Already, some in California appear to be recognizing the risks of an over-reliance on gas. This month, the Los Angeles Department of Water and Power announced it will reconsider a $2.2 billion natural gas investment plan, and prioritize “renewable resources to meet demand.”

LADWP’s reversal followed a major Los Angeles Times investigation of California generation. It found the state will have the capacity to generate “at least 21% more electricity than it needs by 2020.” That over-capacity costs utility customers $6.8 billion more for power than they paid in 2008, when they used 2.6% more electricity, the Times reported.

California’s residential electricity rate now averages $0.154/kWh, up 12% since 2008. The U.S. rate averages $0.104/kWh, down 3% in the same period.

The system was overbuilt to protect reliability, California Public Utilities Commission (CPUC) President Michael Picker told the Times. The required operating reserve margin is 15%. CAISO’s summer 2017 forecast puts its reserve margin at 19.5%.
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