Natural gas prices for electric generation in California last year decreased 30%, but overall wholesale power prices decreased only 2% for the year because of offsetting lower hydro-electric supplies, increased congestion and the loss of 2,000 MW of nuclear generation for the year, according to an annual market report released Monday by the state grid operator.

For analytical purposes, the California Independent System Operator (CAISO) uses gas prices to set the marginal cost of power, so when the grid operator’s analysts “normalize” gas prices, power costs last year really increased 28%, according to Eric Hildebrandt, CAISO director of market monitoring, who emphasized that the overall market remained competitive.

The CAISO report noted that 1,300 MW of gas-fired generation was added in the state last year, and more than 2,000 MW are expected to be added this year, but increasingly the new combined-cycle gas unit revenues — excluding resource adequacy or bilateral contracts — are falling below the annualized fixed costs of new generation.

“Net operating revenues for many — if not most — old existing gas-fired generation are likely to be lower than the going-forward costs of these units,” according to the report. A lot of that generation capacity is located in transmission-constrained areas, but it is crucial to allow more intermittent renewable-base generation to be brought on the state grid system.

“Most of this capacity also will need to be replaced or repowered to comply with the state’s restrictions on use of once-through-cooling. This investment is likely to require some form of longer term capacity payment or contracting.”

Based on CAISO’s analytical assessments, new gas-fired units’ revenues are falling far short of their annualized fixed costs. And under current market conditions, CAISO concluded that “new generic gas-fired capacity does not appear to be needed at this time.’

CAISO also acknowledged that a “substantial” portion of the state’s 15,000 MW of older gas-fired capacity is located in transmission-constrained load pockets and is needed to meet local reliability requirements.

Under the CAISO market design, annual fixed costs for existing and new gas-fired units critical for meeting reliability needs on the statewide grid can be recovered through a combination of long-term bilateral contracts and the spot market. The grid operator’s market monitoring department annually calculates to what extent spot market revenues could contribute to annualized fixed costs for the typical new gas-fired generation plant. Both CAISO and the Federal Energy Regulatory Commission track the metric.

“The results of this analysis using 2012 prices for gas and electricity show a decrease in net operating revenues for the hypothetical new gas units compared to 2010,” the report noted. “The 2012 net revenue estimates for hypothetical combined cycle and combustion turbine units continued to fall substantially below the estimates of the annualized fixed cost for these technologies.”

CAISO’s calculation for 2012 is that the hypothetical combined-cycle unit earned about $38/kW-year in Southern California, compared to potential annualized fixed costs of $176/kW-year.

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