California Blackouts A Lesson In Not Rushing Green Transition; Important Role For Natgas

Written By: Paul Wells
Published: Daily Oil Bulletin


A series of rolling blackouts on California’s renewable energy-dependent power grid during a mid-August heat wave should serve as a cautionary tale against rushing the green energy transition and highlighted the important role natural gas needs to play going forward, say some industry experts.

“I don’t want to say it’s a wake-up call because the call has been there for several years. It’s pretty clear that at times like what happened in California, renewables can do what they can but if it’s a hot summer day and there’s no wind and turbines aren’t really turning and your solar panels might be going full crank — but that’s a very small percentage of the installed generation base — you’re going to have problems,” said Martin King, senior analyst with RBN Energy.

“If the generation was there they could have sent it. But they didn’t have the generation because many of the outlets they used to fall back on for some base-load gas have been shut down and there’s two nuclear power plants that got shut down a few years ago. So there’s 1,000 megawatts of power gone,” he added.

The rolling blackouts in California — which intermittently affected hundreds of thousands of residents — came amid a heat wave in the state that saw power demand surge as air conditioning use soared.

According to U.S. Energy Information Administration (EIA), renewables’ percentage of total electricity net generation in California have increased from 29 per cent in 2010 to 53 per cent in April 2020, compared to total U.S. of 10 per cent in 2010 to 23 per cent in April 2020.

Current state law requires California to get 60 per cent of its electricity from renewable sources such as solar panels or wind turbines by 2030, and 100 per cent from zero-emission sources — a broader definition that could include hydropower and nuclear — by 2045. Last year, the state was up to 32 per cent renewable electricity and 55 per cent zero-emission electricity, recently released data from the California Energy Commission shows.

In light of the blackouts, in late August state officials temporarily reversed a decision to shut-in four natural gas-fired plants by the end of this year and allowed them to stay operational for a few more years to help prevent more outages as California continues its fast-paced transition to cleaner energy sources.

Around the time the California blackout occurred, Canadian Prime Minister Justin Trudeau and Chrystia Freeland, Canada’s new finance minister, indicated they are committed to a “green” recovery post-COVID-19 though firm details have yet to be announced.

“I think all Canadians understand that the restart of our economy needs to be green. It also needs to be equitable. It needs to be inclusive. And we need to focus very much on jobs and growth,” Freeland was quoted in a Bloomberg/BNN report.

On Sept. 16, an independent task force made up of experts in financial and environmental policy called on Ottawa to spend $55 billion over five years on clean energy and measures to cope with climate change to kick-start a Canadian economy battered by the global pandemic.

The question is whether federal officials will take a pragmatic approach in its plans to transition to a greener energy mix and systems even with the warnings offered by the situation that played out in California.

 “Will anybody actually listen to the warnings at the end of the day? I’m quite skeptical about that. There are a lot of people that have their heads in the clouds over renewables and they’re going to save the world no matter what. They’re so high in the clouds that they can’t hear practical voices on the ground saying we need to look at this a little bit more closely,” he said.

Dulles Wang, research director, North America Gas at Wood Mackenzie Ltd., said that while what happened in California was more of a power market issue, it reiterated the firm’s long-held belief that natural gas is “important in its role to firm-up” renewable generation.

“That’s why in our view we do think that some of the peaking facilities will still very much be needed to combine that with renewable generation to provide that firm supply on the power side,” he said.

“I think the California story does highlight the importance for more gas-fired generation, at least in the near term. But we do think that [battery storage] technology is evolving. The way we look at it at Wood Mackenzie is that maybe for the near term — the next five, seven years or maybe a little longer than that — there will be a role for gas peaking to continue to firm-up a lot of renewables to help support the energy reliability issue,” he added.

“But we are also actively watching the cost of battery storage as a competing method of renewable firm-up that could potentially compete with gas peaking and provide that needed firm-up service for renewables. So we are looking at battery storage. We are tracking the costs and also unique technology breakthroughs.”

Raymond James Ltd. analyst Jeremy McCrea agreed that the situation that transpired in California reinforces the importance of natural gas as a needed component of the power generation mix.

“California goes through these spikes every couple of years in terms of not having enough energy and renewables aren’t making the cut here. And one of the issues you’re seeing in California is you got rid of your nuclear plants, you got rid of all your coal plants and now you’re pretty much relying on natural gas and renewables to cover everything,” he said.

“The issue, though, is it basically shows you can’t run your entire energy structure just with renewable energy. So what they’re basically saying is, ‘OK, we can’t go 100 per cent renewables for everything. We’re going to need some kind of conventional energy source like natural gas where you can quickly flip it on and quickly flip it off.’

“That’s because you can’t do that with nuclear, you can’t do that with coal and you can’t do that with hydro, so pretty much the only thing you have to do that is natural gas. The situation that happened in California shows that natural gas is going to be around for quite a long time and it’s not going away anytime soon.”

Source: Evaluate Energy. Click on the table above to view it in a larger format.

‘Reality check’

Calgary-based SAF Group, a private equity and credit investment firm, doesn’t think California’s “reality check” will have any significant impact on national governments, including Canada’s, that are “pro climate change.”

“Our view has been that, if having to deal with the historic impact of COVID-19 on economies and national debt levels isn’t deterring climate change ambitions, then nothing will,” the firm said in a recent research note called Time To Pay Attention, Electricity Crisis Leads To California’s Reality Check On Renewable Energy Shortfalls To Deliver Reliable Electricity.

“But the reason why we don’t see California’s warning … impact a country like Canada is that the national government isn’t the one to take the blame for power interruptions or high electricity costs. Rather, any failure on power tends to be placed on a state or province or local level.”

SAF Group said it saw that example in Canada during an Aug. 18 press conference announcing the appointment of Freeland as Canada’s finance minister.

“There was no concerns on record national debt levels, rather Freeland said ‘Canadians understand that the restart of our economy needs to be green’ and Trudeau said ‘This is our chance to build a more resilient Canada, a Canada that is healthier and safer, greener and more competitive … This is our moment to change the future for the better,’” SAF Group said in its note.

The firm added that California’s “reality check” on solar/wind reaffirms the energy transition will be “bumpier and take longer” than expected.

“This won’t change the world being on a path to a clean energy transition. But it is real data that shows it’s not on track to deliver what it thought was in position to deliver,” SAF Group said.

“Look at California identifying two major linked shortfalls: an energy mix that doesn’t have sufficient capacity to deliver reliable electricity and forecasting that doesn’t seem to take into account some fundamental risks from solar, wind and hydro generation,” it added.

California dreaming: Opportunity for western Canadian producers?

WoodMac’s Wang said Canadian natural gas producers may be able to take advantage of the situation in California and compete for increased market share of volumes imported into the state.

“What the market volatility in California has shown is California — at least for the next five to 10 years — will still be a premium market for gas demand until battery storage becomes widely available. We do think the market still needs natural gas to support the renewables,” he said.

“At the same time we do think western Canadian supply is low cost enough to even out-compete some of the Rockies supply to take more market share in northern California and the Pacific Northwest market. We do think if there’s an opportunity to compete into the California market that’s where western Canadian supplies could head toward.”

Likewise, King noted that California natural gas prices spiked during the heat wave on amped-up demand and that Canadian companies already sending volumes to the Sunshine State benefitted and should continue to do so.

“Guess for guys like [Tourmaline Oil Corp.] that have been playing that market it’s great for them. If I look at the SoCal Citygate prices [in mid- to late-August] from about the start of the week of Aug. 17 or so it was $4, $5, $6 per mmBtu and one number I looked during that time was north of $13,” he said.

“You only need a few days of that type of price to make up really for the rest of the year. You can cash flow a lot of money in just a very short period of time.”

“It was very supportive for Station 2 and Alliance pricing. So it definitely helps and the amount of exports going down through Huntington picked up by about 50 per cent [in mid- to late-August] over about eight to 10 days just based on the increased demand.”

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