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. 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 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].”

The overall wholesale electricity market has improved somewhat since the meltdown in the 2000-2001 crisis, Hoffmann said, 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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