California's headlong rush toward an eventual renewable portfolio standard (RPS) goal of 33% of the state's power coming from environmentally clean resources by 2020 could greatly expand the market from natural gas-fired power generation, according to Steve Hoffmann, senior vice president with NRG Energy Inc. With wind power back-up is key. He pointed out that during a recent heat wave less than 2% of the wind power connected to the system was actually functioning.
Diversifying electric generation fuels may expand, not lessen, the influence of gas in the next five to 10 years, he said from his perspective running NRG's western operations."California has thrown its fate into the gas markets for future generations," Hoffmann said last Tuesday during an interview with NGI. "There is still a prohibition on coal, a long lead time any other nongas resource, plus renewables are a touchy subject right now."
A stepped-up RPS goal beyond the 20%-by-2010 target now in place means a renewable portfolio dominated by wind, according to Hoffmann, which he thinks translates into a low on-peak capacity factor of about 5%, judging from the state's wind availability during recent heat waves.
"With that type of capacity factor you are going to have to back it up with fossil fuel-based generation. When we hit our system peak [over the Labor Day weekend] we had 3,200 MW of wind connected to the CAISO [California Independent System Operator] grid, and only 51 MW were actually functioning."
Ironically, Hoffmann said, on the same day of the peak-demand push, state energy policy leaders were meeting to discuss the effect of the RPS targets on future costs to California utility ratepayers.
"It is clear, you are going to have to build some gas-based redundancy into the grid, and in that sense, natural gas becomes an important commodity. We think the Rockies production and some of the pipelines into California will be as meaningful to our [power plant] supply and pricing as liquefied natural gas [LNG]."
But Hoffman isn't convinced that LNG market supplements offer a great deal of stability. "We are concerned that the LNG projects in general are a less reliable supply because the Pan-Pacific LNG market is very competitive. People tend to make shipments to those places with the greatest netback. And in the case of California, the LNG gets regasified in Baja and then has to be repatriated coming into the interstate system as a potentially 1,300 Btu gas.
"So you have a permitting issue [in California] on the Wobbee [heating value] index, and you also have some of the greenhouse gas issues running headfirst into LNG because it is a little richer gas and has a little more carbon."
Having expressed some indifference toward LNG, Hoffmann, whose job includes supervising two major power plants in Southern California, acknowledged that NRG keeps track of the various western proposals, ranging from the doubling of the Sempra terminal's capacity to building other plants in North Baja California or along the California coast and in Oregon. "The fact is that it is not the gasification issue that will drive the supply, but the liquefaction side of the formula that will decide how much LNG makes it to this market," he said.
"The producers are not building liquefaction facilities out of the production areas nearly as fast as gasification terminals are being proposed on this side. These are facilities that will be competing for the same ships. A second facility may make some sense, but the proponents still have to compete with China, Japan and the other pan-Pacific countries for LNG supply."
Meanwhile Hoffman thinks LNG will have minimal impact on western prices. "We don't think Sempra Energy and its LNG facility [at Costa Azul along the north Pacific Coast of North Baja California] will necessarily affect the price of gas. We expect the LNG off the Sempra plant to be priced right at the current California-Arizona border prices."
Taking a broader view, Hoffmann said the overall wholesale electricity market has improved somewhat since the meltdown in the 2000-2001 crisis, but progress is slow and there is still quite a bit more improvement that needs to happen as far as NRG is concerned.
"We don't see a full-blown capacity market until probably the 2010 time frame. There is progress, but it is painfully slow. I think people are going to see how MRTU [CAISO's market redesign] gets implemented. There are a lot of dynamics in play -- greenhouse gas legislation, the fate of some transmission projects, the RPS, and then the difficulty in getting anyone to build a merchant plant, and plants tolled to the utilities are pretty much obligated for 10 to 25 years.
"On top of all this, there are 10,000 MW of potential plant retirements in California in the next five years."
In response to the question of whether NRG would think about selling its California assets anytime soon, Hoffmann said NRG has "made a real strong commitment" to the state as evidenced by the nine-month turnaround on the repowering of a Long Beach peaking unit now under contract to Southern California Edison Co. That experience "encouraged" the eastern-based independent power plant operator, but it is not ready to buy or develop additional projects at this time.
"Clearly, this is a very different regulatory and legislative environment, and the governor has been very supportive of a progressive energy policy," Hoffmann said. "Are we willing to double-down in California? Not yet. Our intention is to repower our existing sites, be a responsible market participant and operate the plants reliably so we can take advantage of an emerging market in 2008 through 2010."
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