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Calif. lawmakers OK replacing Diablo Canyon with greenhouse-gas-free power

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Calif. lawmakers OK replacing Diablo Canyon with greenhouse-gas-free power

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Views differ on pricing effects

Bill seen by some as a 'reckless act'

Houston, Aug. 27 2018 — California lawmakers have passed legislation mandating the replacement of the Diablo Canyon nuclear plant's 2.2 GW of capacity with greenhouse-gas-free generation, which the governor is expected to approve. The proposal drew mixed reviews Monday from industry observers regarding its impact on power markets.

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The California Assembly gave its final approval for Senate Bill 1090 last week, and bill was ordered to be "enrolled and engrossed" on Thursday, which means it is being converted into a clean copy for the signature of Gov. Jerry Brown, a Democrat who has a record of supporting carbon-free energy.

SB 1090 requires the California Public Utilities Commission to "ensure that integrated resource plans avoid any increase in emissions of greenhouse gases as a result of the retirement" of Pacific Gas & Electric's nuclear facility, which is slated for 2025. It also requires the full funding for a "community impact mitigation settlement," which is designed to lessen the likely economic effects of the loss of jobs related to the plant's retirement.

A staffer of the governor said Brown will not express an opinion on the bill until it arrives on his desk, but several industry observers expressed confidence that Brown will support it.

"California has a strong track record in seeking clean energy objectives, which is among the reasons this bill passed both the state House (67-1) and Senate (31-4) with overwhelming support," said David Cherney, an energy markets expert at PA Consulting, in an email Monday. "It is unlikely the Governor will veto a bill with such broad support."

Morris Greenberg, managing director of North American power at S&P Global Platts Analytics, said PG&E is likely to replace the plant's capacity with "energy efficiency, solar and wind along with storage necessary to firm and time-shift output."

PRICING EFFECTS

"Removal of inflexible supply should relieve some downward pressure on mid-day energy prices, [but] may increase volatility at other times," Greenberg said in an email Monday.

The bill's passage and likely enactment represents "good news for baseload generation outside of California," Greenberg said, as it "increases the value of diversifying load and generation sources."

Lawrence Makovich, IHS Markit vice president and chief power strategist, said the bill would actually "perpetuate the California in-state electric generation profile as a supply portfolio relying heavily on fossil-fueled resources for years to come," because the "'carbon-free' resources will likely increase the need for natural gas-fired generation to back up and fill in for the intermittent resources."

"The initiative will likely reinforce the suppression of wholesale energy prices and shift costs toward fixed rather than variable costs and reinforce the expanding gap between California retail prices and the US average retail price," Makovich said in an email Monday. "This creates additional momentum for customers to find cost relief through Community Choice Aggregators and direct access mechanisms."

Scott Miller, Western Power Trading Forum executive director, wondered whether SB 1090 might "lead to more renewables that have no home at many hours and thus leading to 'dumping' renewable power at bargain prices for neighboring states."

"If that happens, will it undermine the resources of [Energy Imbalance Market] entities getting dispatched and selling into a saturated market?" Miller said in an email Monday. "It would represent another intervention into the market that would have uncertain effects on everyone else's resources and investments. Soooo California."

A 'RECKLESS ACT'

Gary Ackerman, president of Foothill Services Nevada and former executive director of the Western Power Trading Forum, described the bill as a "reckless act" that could needlessly cause serious problems for the utility.

"PG&E's load in 2024 is likely to be less than half of what it is now because of the migration to CCA service," Ackerman said in an email Monday. "Thus, for whom is the 2.2 GW needed?"

In contrast, Timothy Fox, a ClearView Energy Partners vice president and research analyst, described the bill as a "proactive approach to address the implications of the Diablo Canyon closure," because PG&E's June 2016 decision to close the units at the end of their current license periods "established an unprecedented 100-month window for stakeholders to address capacity shortfalls and impacts on the surrounding community."

PA Consulting's Cherney pointed out that "traditional concepts such as 'baseload' power are becoming less relevant" in places "with strong clean energy aspirations, such as California."

"The question is how can we have a clean, reliable and affordable electric grid with increasing penetrations of variable energy resource such as wind and solar," Cherney said. "There is no question that storage will need to be a part of the solution. This will include battery technologies such as lithium-ion, and potentially more traditional forms of storage such as pumped hydroelectric power."