SoCal Gas city-gate's winter strip hits new high as California increases reliance on gas

SoCal Gas city-gate's winter strip climbed to a fresh year-to-date high in the week started Aug. 22 as an increasingly weak hydropower outlook deepens California's expected reliance on gas-fired generation even as pipeline constraints limit gas inflows into the region.

The Southern California benchmark's November-April contract average reached $6.78/MMBtu Aug. 23, according to the most recent S&P Global Platts M2MS forward curve data, up nearly 40 cents from the start of the month. The location's December and January contracts have both surpassed $8/MMBtu, with December at $8.24/MMBtu and January at $8.22/MMBtu, reflecting market concern about sourcing sufficient gas to meet winter demand.

Worsening hydropower conditions have led California officials to bring additional gas-fired generators online and delay the retirement of others, in compliance with an emergency order from Governor Gavin Newsom.

The California Energy Commission and Department of Water Resources are in the process of procuring five additional 30 MW gas-fired generation sites while working to identify other generation possibilities, according to comments made by Ted Craddock, deputy director of the DWR State Water Project at an Aug. 17 commission meeting.

A number of aging gas-fired power plants have been designated as reliability must-run, delaying their retirement, including the 34.5-MW Kingsburg Cogeneration plant and 28.56-MW Agnews combined-cycle plant.

CAISO planning officials had hoped that a slate of newbuild battery storage projects scheduled to come online in August might help alleviate grid reliability concerns stemming from summer demand and low hydropower generation. However, a number of those projects have been delayed, leaving a possible gap in the case of high demand days that gas will now have to fill.

Hydropower outlook

Hydropower generation in the CAISO footprint has come in 43% lower this summer compared with last, averaging 35 GWh/d May 1-Aug. 22 of this year.

The drop has been driven by worsening drought conditions. Close to 88.4% of California is experiencing extreme drought, up from 73.3% three months ago, according to the US Drought Monitor. Just 3% of California qualified for this designation last August.

Water levels at Lake Oroville in northern California have fallen to record lows, prompting the state's Department of Water Resources to take the 750-MW Hyatt Powerplant offline for the first time in its history Aug. 5.

Similarly, the first-ever water shortage declaration on the massive Colorado River has raised alarm for hydropower generators whose reservoirs depend on its flows.

The Bureau of Reclamation, a federal water management agency, said it would reduce downstream releases from Glen Canyon Dam and Hoover Dam in 2022, citing declining reservoir levels and low runoff conditions in the Colorado River Basin.

Limited inflow capacity

Even as CAISO increases its reliance on gas-fired generation, pipeline maintenance has reduced inflow capacity into the SoCalGas system.

Most recently, El Paso Natural Gas declared a force majeure Aug. 15 on its Line 2000 due to a pipeline failure near the town of Coolidge, Arizona. In a Aug. 24 update, EPNG said it will continue to substantially reduce operating pressure on the entire Line 2000 system until further notice.

Operational capacity through Ehrenberg, a major inflow point for EPNG-to-SoCalGas flows, was slashed about 480 MMcf/d. S&P Global Platts Analytics data showed that this has so far translated into a drop of around 220 MMcf/d in Ehrenberg receipts to average 620 MMcf/d since Aug. 15, down from a 30-day average prior to the maintenance July 17-Aug. 14.

SoCalGas system has a full schedule of planned summer maintenance projects, reducing capacity through the Southern Zone by 475 MMcf/d, Northern Zone by 740 MMcf/d, Blythe Sub Zone by 363 MMcf/d, Needles/Topock by 1 Bcf/d, and Topock Sub Zone by 552 MMcf/d as of Aug. 24, according to the company's maintenance schedule.

Storage

Despite the limitations placed on inflows this summer, SoCalGas system has managed to fill gas storage to near-capacity, with Platts Analytics data showing storage levels consistently sitting above 80 Bcf/d since Aug. 17.

Premium pricing in the cash market has helped lure flows West.

Spot SoCal Gas city-gate commanded a hefty premium to cash Henry Hub so far this summer, averaging $1.84 May 1-Aug. 24, nearly triple last summer-to-date's average of 66 cents.

If the SoCalGas system is able to maintain storage levels through possible hot weather events in late August and September, having ample reserves of gas in storage could provide some cushion against high prices as the market heads into winter.