Citi Research published a report yesterday on the impact of the West Coast drought. Lead analyst Sharriar Pourezza and colleagues suggest that the recent significant rains have made a real difference to the area, although they note the amount of rainfall/snow is nowhere near enough to “bust” the current severe drought and that the dry weather pattern is likely to return soon.
Even if the dry weather returns, the analysts see no problems with the California Independent Power Operator (CA ISO) power grid this summer. They do, however, predict that California power prices will increase by around 6% due to less hydro-generated power and the need to use more expensive natural gas to meet electrical demand during peak season.
“We conclude that CA ISO is not likely to have system-wide reliability issues this summer as we see mid-teens reserve margin in the majority of our scenarios. We see dispatch curve shifting up by ~6% which should translate into similar increase in wholesale power prices. We do not see a larger magnitude for price changes due to the flatness of the supply curve.”
West Coast: Modestly higher summer power prices
The Citi reports argues the drought will not have a major impact on summer West Coast power prices because of a flat supply curve and the fact that relatively high operating margins for CA ISO provide some wiggle room. “As the share of hydroelectric output in CA fuel mix has been declining since 2010, CA ISO is likely to continue meeting the shortfall in hydro by the mix of incremental renewables, increased imports from other regions and dispatching incremental gas fired power plants. At this juncture, we see min. impact to pricing.”
West Coast: Potential for gas price squeeze
Pourezza et al. do highlight the possibility of a squeeze in gas prices due to lower than projected hydroelectric generation if the drought worsens. “Low hydro generation and the need to refill gas storage on the West Coast likely put a strong pull on gas supply. Low gas storage in Western/Eastern Canada and the US Midwest should also increase the competition for gas. Canadian gas would need to be priced high enough to fill storage, pushing Alberta’s AECO prices close to Henry Hub in spring/summer and narrowing the AECO-Chicago basis.”