A Bleak Energy Winter on the West Coast – The Energy Institute Blog

What does record natural gas prices tell us about the cost risks of fossil and renewable energy?

The United States and much of Europe collectively breathe a sigh of relief as warm winters and increasing natural gas supplies offer prices much lower than expected. But on the west coast we have seen the oppositeSince early December, spot prices for natural gas in parts of California, the Northwest, and the Southwest have been at least three times higher than those further east. Since most of the marginal generation comes from natural gas, electricity prices have followed gas to extreme levels.

This came amid discussions about phasing out gas stoves and limiting oil and gas drilling sites in California. It makes for a good story that it’s all the Left Bank retribution for not being. But the story does not match reality.States affected own small amount of natural gas When Over 95% imported.

(sauce)

The large price difference between the West Coast and the rest of the country indicates limited transportation capacity between regions. Pipeline explosions from 2021 decrease in capacity To move gas from our source of supply in Texas and surrounding producing areas. Problems with these pipelines have been seen before, with government investigations sometimes Found out that companies use to further limit their supply and raise their prices.just like california petrol price controversyit is difficult to determine whether the spike is entirely due to actual scarcity or exacerbated by sellers strategically reducing supply.

Daily PG&E Citygate Spot Natural Gas Price ($/MMBTU) (sauce)

Had it not been for the unusually cold weather and unusually low inventories in the West, shipping problems alone might not have caused prices to skyrocket. inventory problem One reason for this is that storage locations are hampered by leaks and other operational issues. It was an almost complete storm of factors pushing up the price of natural gas.

And now those prices are reaching the customer’s bill.

From wholesale to retail

The good news for some utility customers is that the impact of gas spikes on retail prices will be mitigated through long-term contracts, ownership of some pipeline rights and some financial hedging.Northern and Southern California spot prices are closely tracked, while Southern California gas customers 4 times Northern PG&E customers less than 2 timesHedging usually doesn’t save you money on average, but it can significantly reduce the variability of your costs.

(Source: Energy Information Administration and company website linked above)

Another (kind of) good news for our residential customers is that the commodity cost of gas in normal times is less than half of the retail price we pay. The rest will be used to pay for pipes and other infrastructure, as well as public purpose programs. They haven’t seen the same spike, so overall prices haven’t risen as much as the commodity cost of gas.

renewable energy hedge

Proponent of renewable energy Point out Wind and solar power not only offer significant environmental benefits, but also have much lower cost variability. These variable energy resources (VER) bear almost all costs up front as capital. Less susceptible to fuel cost fluctuations Kind of like the geopolitical shocks we saw last year. A natural hedge!That’s right, but if the purpose is to protect clientthe discussion is a bit more complicated.

After all, another area of ​​discussion and research how much is in the electricity market more Unstable wholesale electricity prices will make the VER dominated market. Fluctuating generation and fluctuating demand make market price changes more extreme than in the past. And since these extreme prices can last for a long time, Max taught me how to pronounce them. Dunkel flute (Doon Kalflauta).

(sauce) Dunkel flute

The problem is that while the costs of wind and solar power are predictable, the output is less predictable. Therefore, VER holders’ earnings will be more volatile, even though their costs are more stable.storage is somewhat reduce this problembut I wouldn’t rule it out unless storage gets very cheap.

But if the boom and bust of producer profits is the mirror image of consumer billing shocks and smiles, can’t we strike a deal that reduces risk on both sides? Yes, no.

yesAs long as the seller has product to deliver and the buyer knows how much he wants to consume, both sides agree in advance on a reasonable price that will not spike or plummet when overall demand is tighter than supply. You can do the opposite. This contract avoids the extreme wealth transfer that trading at market prices creates when supply and demand go awry.

NoThis is because sellers are mitigating risk only if they price an output that they know has a high probability of being obtained.And if you don’t see the contracted quantity, especially on the day the price hits the stratosphere, or Buyers end up needing much more than they contracted for.

On average, a wind farm in a given location will produce a certain amount each year and respond to a certain price level on average, but risk mitigation is not about averages. If the wind isn’t blowing during the high prices that farms are contractually obligated to deliver, what appeared to be a hedge could become a burden and drown the company in debt.Gas-fired power plants face some problems These risks, as we saw in Texas two years ago. Of course, suppliers with different renewable energies in different locations can reduce quantitative risk, but it makes business and contracts more complex.

A few seconds after I posted this, a comment appears below claiming that this whole problem would be avoided if the consumer owned the power generation, like rooftop solar. Unfortunately, it doesn’t. Owning a generation has almost the same effect as the hedging contract we just discussed. The cost of delivered products is stabilized, but the quantity risk is not reduced. Even if that customer with its own power generation is connected to the grid, there is a risk that it will have to buy additional power when prices are high or sell power when prices are low. . When they are not connected to the grid, they perfectly adapt to the mismatch between supply and demand. This is the case in my brief experience. Inverter use during power failure Not so much fun.

Wind and solar power offer immense environmental benefits and substantial cost savings. It can also make the economy less vulnerable to fossil fuel price volatility, but with important tradeoffs. For each technology (wind, solar, battery, demand flexibility, nuclear, geothermal) to successfully package all parts of the energy transition and avoid future energy scarcity winters (or summers) We need to have a clear eye. , and others – can be brought to the table.

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