Renewables bill to shift California natgas outlook

Natural gas consumption faces an uncertain future in California pending the passage of legislation that requires the state to plan for 100pc of electricity to come from renewable or zero-carbon energy sources by the end of 2045.

If signed into law Senate Bill 100 (SB100), or the "100 Percent Clean Energy Act of 2018",will extend and expand policies previously established in the California Renewables Portfolio Standard (RPS). That program already requires sellers of electricity, such as publicly-owned utilities, to procure increasing amounts of renewable energy over time in order to displace fossil fuels.

The new legislation accelerates California's RPS program to reach 50pc renewables by 2025, and 60pc renewables by 2030. Beyond that time, California's electricity needs must be met by zero-carbon energy resources. In addition to renewables, this could include methods such as carbon capture and storage, or nuclear power.

The bill, which has already passed the California Assembly and Senate, is now on the desk of California governor Jerry Brown (D).

Currently, natural gas provides about one-third of California's electricity. California has 34,380MW of natural gas resources connected to its grid, although not all of that generation is in use at the same time, the California Independent System Operator told Argus.

Pacific Gas and Electric (PG&E) is likely to shut California's final remaining nuclear facility, Diablo Canyon, when operating licenses for its two units expire in 2024 and 2025.

BTU Analytics analyst Andrew Bradford told Argus the bill was "symbolic" as California's shift towards prioritizing renewable energy generation has been underway for some time.

New gas-fired power plant development in California has effectively halted. In June 2017, California regulators deferred plans to rebuild and modernize several plants in southern California so that an independent study could examine the possibility of renewable energy alternatives.

Members of a California Energy Commission committee in October 2017 also recommended the rejection of a proposal from NRG Energy to build the Puente Power Project, a gas-fired power plant in Ventura County.

In January, the California Public Utilities Commission ordered PG&E to solicit bids for clean energy resources to replace three natural gas-fired power plants in northern California. And in March, NRG Energy said that it will close three gas-fired power plants in southern California before the end of the year for economic reasons.

California consumes about 8 Bcf/d of natural gas, sourced from the Permian basin, the Rocky Mountains, and Canada. Only 1.1 Bcf/d is currently delivered to gas-fired power plants, or 14pc, Bradford said.

In comparison, the utility and industrial load has averaged about 6.9 Bcf/d so far in 2018, making up about 86pc of deliveries into California.

A demand loss of 14pc would likely result in smaller gas pipeline deliveries in California. Gas prices across the west would need to respond to adjust to the market to decrease supply to meet lower demand levels, Bradford said.

Natural gas is transported to California through several different pipelines, such as the El Paso Natural Gas and Transwestern pipelines, both of which obtain supply from the Permian and San Juan basins. Kern River Gas Transmission moves gas from the Opal hub in the Rocky Mountain production region into California, while Ruby pipeline transports gas from that same hub to the Malin hub on the California-Oregon border.

TransCanada's GTN pipeline also connects to the Malin hub, transporting gas south from the Canadian border and Foothills pipeline.

Matthew Hong, director of research, power and gas at Morningstar, told Argus the new legislation is "structurally bearish" for the natural gas market in California. But because the target date of 2045 is more than two decades away, it is too early to tell what the legislation will do to the gas industry and prices.

Hong said that the renewables legislation could increase the risk of higher electricity prices in California, but noted that over the past summer California also experienced "exceptionally high" gas pricing, which can also lead to higher electricity prices.

Gas prices soared this summer on hot weather conditions in southern California, ongoing pipeline maintenance and repairs in the region, and restricted use of the Aliso Canyon storage facility.

According to Hong, solar will likely play a significant role in making up for lost energy from natural gas, in addition to energy storage and wind generation.

California lawmakers will also likely be watching Hawaii, the first state of pass legislation to move to 100pc renewable energy. The state has a goal of 70pc by the end of 2040, and 100pc by the end of 2045.

Depending on how that transition progresses, California may slowly change its approach, based on lessons learned from Hawaii, Hong said.