JUICE: Downsizing Gas Power

25 Apr 2017

The day of reckoning is nigh for gas-fired power in California.

A growing oversupply of power—created by California’s race to build renewable power plants— has depressed wholesale electricity prices to the point that operators often can’t bring in enough money to run gas plants day-to-day, much less cover the major maintenance work needed to keep them running. Never mind profit.

Power prices in the California Independent System Operator’s real time energy market fell from $55/MWh at the beginning of 2014 to about $35/MWh at the end of 2015. They haven’t moved back up since then. Generators continue to report losses to their shareholders.

PowerPricesSource: California Independent System Operator, April 24, 2017

Yet, the prospect of generators deciding which plants to pull the plug on has state energy agencies spooked.

If generators close gas plants in the wrong places, state officials worry blackouts will occur.  The threat will last at least until alternative facilities are put in place—like storage batteries and automated power management systems that reduce energy use on peak demand days in homes and buildings.

Unfortunately, nobody knows right now just where those places are and it could take years for the state and the grid operator to figure out.

That’s why generators are proposing a stopgap measure that would work this way: The California Public Utilities Commission would require the state’s investor-owned utilities to enter resource adequacy contracts with gas-fired generators that run three to five years. This would give the state time to study which gas plants are really needed and develop an orderly closure plan for others.

Such an approach, gas plant operators emphasized April 24 at a California Energy Commission meeting held to discuss the dilemma, would be fair to plant workers. Likewise it would be fair to communities where plants are located, many of which are small rural towns where generators provide major tax revenue for essential local public services, from police and fire protection to education.

At the same time, it would prevent inadvertent blackouts from plant closure decisions made without having the benefit of the complicated studies needed to fully understand the impact on grid reliability.

However, this would cost ratepayers money. On top of that, utilities are worried that the added costs could wind up falling on fewer and fewer shoulders as great and rapid changes occur in the electricity business.

The added cost of the resource adequacy contracts, for instance, would come at a time when the community choice aggregation movement is growing and when more utility customers are making and storing their own power with rooftop solar systems and battery packs for nighttime needs. State officials believe that by 2020, local governments running community choice aggregation programs will be purchasing 40 percent of the state’s power for their residents and businesses rather than utilities.

Such changes, utilities note, already are compounding the downward pressure on wholesale power prices. They have turned the state’s utilities largely into sellers of power they have contracted for on behalf of customers who now make their own power or are part of community choice programs. Utilities that once bought power from the independent gas-fired power plant generators are now competing with them in state’s wholesale market.

Generators warned state officials that they’ll have to begin closing gas plants as early as next year if the state does not require utilities to enter into multi-year resource adequacy contracts with them. They add that the contracts should be offered only for plants that meet the state’s flexible ramping requirements and minimize greenhouse gas emissions.

The alternative is to close their plants and run the risk of blackouts or to try to string them along on a year by year basis—as it has done in recent years—with one-year resource adequacy contracts or seasonal reliability must run contracts with the grid operator.

State officials could view the generators’ warning and proposal as a line in the sand drawn to intimidate them. On the other hand, excess power supplies have been a growing problem in recent years and one can only wonder why state energy agencies haven’t figured out already where gas plants can be closed without undermining grid reliability.

That’s why the generators’ proposal seems fair, both to the companies, many of which also have invested heavily in renewable power and battery storage and largely are allies of the state on environmental objectives, and also the plant workers and communities where the facilities are located.

—William J. Kelly

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