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Drought shrinking California hydro, increasing reliance on thermal, imports

Highlights

Imports down from about 25% year on year

Thermal July generation highest in six years

Hydro resources down annually last three years

The ongoing drought in California has caused significantly lower hydro generation levels as the weather forecast continues to call for above-normal temperatures, setting up a perfect storm for late summer when demand is strongest as consumers crank air conditioning units seeking relief.

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The California Independent System Operator's summer assessment assumed significant drought and identified late summer as the period of greatest risk for hydro resources.

"The hydro system in the ISO produces a different amount of energy each year," ISO spokeswoman Vonette Fontaine said. "This year's production will be below the average of the historical hydro energy production."

With a majority of the state listed in extreme and exceptional drought by the US Drought Monitor, hydro generation has dropped from 7.3% of the total fuel mix in 2020 to less than 5% so far this year, according to ISO data.

"It appears the ISO hydro is running about 1500 and 1000 aMW less than last year," said Michael Griswold, principal at Ansergy, a Seattle-based energy market analytics firm.

The situation is amplified this year following low hydro levels in 2020, continued drought across the region, wildfires threats that already impacted imports into the state and continued supply concerns after rotating outages in August 2020.

It's a cumulative impact that's been growing, said Morris Greenberg, senior manager of North American Power for S&P Global Platts Analytics. Between end-June 2019 and end-June 2020, Sacramento Basin reservoir content declined by 3.7 million acre-feet and between June 2020 and June 2021 content fell by 4.3 million acre-feet.

The ISO reported hydro - large and small combined - averaged 28% lower year over year for the July 1-13 period, Greenberg said, adding hour ending 8pm output was down about 10% during the same period. Hydro and thermal outages are running significantly higher this year, about 3-4 GW, Greenberg said, with second order impacts, such as higher air temperatures or cooling water temperatures, likely partly responsible for derates at thermal units.

Thermal fired up

"The drought reduces available hydro capacity throughout the state by several thousand megawatts," said Gary Ackerman, Foothill Services Nevada president and Western Power Trading Forum former executive director. "The gap must be made up using other power resources such as natural gas, power imports and renewables."

ISO renewables, including wind, solar, geothermal, biomas and bigas, have increased 8 percentage points year on year to average 34% of the total fuel mix so far in 2021, according to ISO data. Likewise, thermal generation so far in July has averaged over 40% of the total fuel mix, up 7 percentage points month on month, to surpass renewables in the fuel stack, according to ISO data. It's the highest July thermal generation in six years despite SoCal city-gate spot prices 205% higher year on year so far in July, according to S&P Global Platts pricing data.

Thermal generation will need to offset the hydro decrease, which means higher heat rate units will be called upon, Griswold said, adding greater plant factors for some plants will result in a higher probability of forced outages. The reliance on other resources to meet demand given the shortfall in hydro means coastal once-through cooling natural gas plants have to work more hours, Ackerman said.

"These are older plants that were going to be retired but are eking out energy to the best of their ability given the circumstances," Ackerman said. "Basically, these plants must be available and produce energy in greater volume in part due to the hydro shortfall. It puts more wear and tear on these older units."

Despite their own concerns about increasing reliance on an aging fleet, the ISO board recently approved a 40-year-old gas plant for reliability-must-run status to meet reliability needs as the grid operator works to address the more than 245 GW of renewables and energy storage in the interconnection queue. In March, the ISO board designated a 34.5-MW cogeneration plant as an RMR resource and in December a 250-MW cogeneration plant received an RMR contract.

ISO President and CEO Elliot Mainzer has said RMR transactions are an action of last resort.

The ISO forecast peak demand to reach 50.968 GW this summer when last year's extreme weather events were included in the historical weather database. That is 5.2% higher than the 2020 forecast. Peakload reached a high of 46.967 GW Aug. 18, 2020, a three-year high, according to ISO data. The all-time ISO peakload record is 50.27 GW reached July 24, 2006.

June peakload averaged 5.6% higher year on year and July peakload so far has averaged 4% higher than 2020, according to ISO data.

Hydro draining

The contribution of hydro resources in the total fuel mix has declined significantly over the last three years, Ackerman said. For the first six months of 2019, 2020 and 2021 the respective hydropower production was 14,042 GWh, 7,203 GWh and 4.332 GWh, showing a 50% reduction in each year from the previous year.

Hydro resources are 45% of normal, assuming that full reservoirs and average stream flows constitute "normal," Ackerman said.

Shasta reservoir, the largest in the state at 4,552,000-acre feet capacity, is currently at 34% of total capacity, or 46% of the historical average, according to the California Department of Water Resources.

"Reservoir levels are a great indicator of future energy," Griswold said. "The current levels are locking in energy for this summer. Whether hydro energy is impacted this winter and spring by reservoir elevations will be determined more by incremental precipitation over the next six months."

The water forecast year runs October through September. The attention on reservoir levels is hyper focused in spring as temperatures rise and snowpack melts into rivers leading to reservoirs.

About 75% of hydro capacity in the region is not in California, but still impacts California through imports, Griswold said.

ISO imports have averaged about 22% of the total fuel mix this year, down from about 25% in 2020, according to ISO data.

"British Columbia is enjoying a good water year, the US Northwest not so much, but all reservoirs are full going into summer meaning that the ties will be loaded as they would be in other similar years," Griswold said.

Summer outlook

The two critical factors for the rest of the summer are the availability of power imports and production from the coastal once-through cooling plants, Ackerman said.

"Wildfires have and will continue to be a risk factor in terms of available transmission, Ackerman said. "We saw last week the impact of the southern Oregon Bootleg fire on the AC paths into California. It triggered flex alerts although the CAISO loads weren't anywhere near historical highs."

Drought conditions in the Pacific Northwest are a major contributor to the import decline, Greenberg said.

"Supply will remain tight due to low hydro in California and the Northwest, along with coal retirements and outages," Greenberg said. "The inland Southwest is better though due to restart of Harquahala Generating Station [in Arizona] and return of the summer monsoon, which has increased precipitation and lowered temperatures."

San Juan plant status is a wild card, Greenberg said. Unit 1 at the plant, slated for retirement in June 2022, collapsed June 30 and is expected to return later this month.

"It all depends on temperatures, especially in Los Angeles. We haven't seen the big heat event in LA, nor have we seen the coincidental heat across the [Western Electricity Coordinating Council region] needed to stress the system," Griswold said. "The odds of coincidental heat are greatest in August and early September, so the jury is out."

Additions needed

Not nearly enough capacity has been added to make up for the loss in hydro resources this year, Ackerman said.

"The state needs to wake up and realize that natural gas generation needs to be bolstered in order to remove the CAISO from operating on the edge," Ackerman said. "Apparently, the wakeup call hasn't been heard yet."

All new capacity is either solar, wind or batteries, and none of those can reliably impact the hours from 5 pm to 7 am, Griswold said.

There was 1.150 MW of solar added to the ISO in 2020 and 76 MW added so far this year, with an additional 1.13 GW expected to come online by the end of the year, according to S&P Global Platts Analytics. In addition, there have been nearly 475 MW of battery added year to date, with another nearly 1 GW expected by the end of the year.

Peak solar output is up, but both average output and hour ending 7 pm output for July 1-13 was flat year on year, Greenberg said.

"We have started seeing battery discharge in the 500-1,000 MW range during early evening hours which is significantly higher year on year," Greenberg said. "If expected additions occur on schedule, batteries may offset the loss in peak hydro output but that would still leave the problem of making up for lower imports."

Power forwards trending higher

Power forward packages have been at record highs for months on summer supply concerns.

SP15 on-peak July rolled off the curve at $109/MWh, 211% higher than where the 2020 package ended, according to S&P Global Platts data. On-peak August is currently in the mid-$140s/MWh, 272% higher than its 2020 counterpart last year and has reached more than 300% higher.

Likewise, NP15 on-peak July rolled off 189% higher than its 2020 counterpart, with on-peak August currently in the low $130s/MWh, 263% higher than the 2020 package a year ago.

The high forward prices continue with SP15 on-peak September currently 206% above the 2020 package a year ago, with NP15 on-peak September 200% higher.