Wildfires Spur Surging Los Angeles Power Costs: Energy Markets

Photographer: Andrew Harrer/Bloomberg

Power lines stand in front of office buildings in downtown Los Angles. About a quarter of California’s electricity comes from outside the state, delivered by long-distance lines that are often in remote areas vulnerable to hot weather and wildfires. Close

Power lines stand in front of office buildings in downtown Los Angles. About a quarter... Read More

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Photographer: Andrew Harrer/Bloomberg

Power lines stand in front of office buildings in downtown Los Angles. About a quarter of California’s electricity comes from outside the state, delivered by long-distance lines that are often in remote areas vulnerable to hot weather and wildfires.

Los Angeles wholesale power will probably reach record premiums versus prices in San Francisco this summer as the long-distance transmission lines needed to make up for reduced local capacity are threatened by wildfires.

Southern California power spreads have already jumped to their widest of the year as the region has been unable to replace the generating capacity lost with the permanent shutdown of the San Onofre nuclear plant. Hydroelectric output, which normally supplies about 15 percent of the state’s power, has dropped to the lowest level since 2008.

Several large fires have caused “reliability challenges,” the California Independent System Operator Corp., which manages the state’s power grid, said in a report dated July 8. A fire that spread across almost 30,000 acres north of Los Angeles last month triggered “multiple forced outages” on lines that connect to Northern California and the Pacific Northwest, the ISO said.

“Location is everything in California,” Julien Dumoulin-Smith, an analyst with UBS AG in New York, said in a June 14 telephone interview. “The problem is you have a constrained area and retirements. It’s a positive driver for power prices.”

Power for August delivery at Southern California’s SP15 hub, which serves Los Angeles and San Diego, was valued at $52.75 a megawatt-hour yesterday, $4 more than Northern California’s NP15 hub, according to broker prices compiled by Bloomberg. That would be a record average for the peak-demand month for power in the state. NP15 serves cities including San Francisco.

Power Premium

SP15 traded at an average premium to the northern region of $7.35 a megawatt-hour during the first six months of 2013, the most since at least 2001, based on IntercontinentalExchange Inc. data compiled by Bloomberg. The premium, which was up from $2.43 in the same period last year and the five-year average of $1.21, traded at $3.80 yesterday.

The spread for spot prices widened to $11.55 a megawatt-hour on July 10, after the Diablo Canyon 2 nuclear reactor northwest of Los Angeles tripped offline, ISO prices compiled by Bloomberg show. An electrical disturbance on a 500-kilovolt line caused the unit to shut, according to plant owner PG&E Corp. and a U.S. Nuclear Regulatory Commission report.

The price difference between the two hubs ballooned this year as unusually low precipitation cut hydroelectric supplies. PATH 15, the largest intrastate high-voltage corridor, has been operating at reduced capacity since last August, limiting the flow of power from north to south, according to YES Energy, a power-market data provider based in Boulder, Colorado.

Power Imports

PATH 15, a collection of three high-voltage lines, has only made 58 percent of its capacity available to power suppliers this year because of maintenance, according to YES and the Western Area Power Administration in Lakewood, Colorado, which holds a 10 percent stake in the system.

About a quarter of California’s electricity comes from outside the state, delivered by long-distance lines that are often in remote areas vulnerable to hot weather and wildfires. A failure on a 500-kilovolt line between Arizona and Southern California in September 2011 left more than a million people without power for almost 12 hours.

The California ISO has warned that extreme heat in the San Diego and Los Angeles metropolitan areas may prompt calls for energy conservation to avoid blackouts, especially if wildfires force transmission line outages.

More Wildfires

California firefighters have responded to about 3,500 wildfires this year, up from 2,400 fires in the same period in 2012 and 56 percent above the five-year average, Daniel Berlant, a spokesman for the state Department of Forestry and Fire Protection in Sacramento, said by telephone yesterday.

“We’re not even into the busiest months yet,” he said. “Typically, September and October are when we see the largest and most destructive fires.”

The fire last month caused shutdowns on the 500-kilovolt Midway-Vincent transmission lines connecting Northern and Southern California, and the Pacific DC intertie linking Southern California with the Pacific Northwest, Stephen Berberich, chief executive officer of the California ISO, said in the July 9 report.

“It kind of shows how hair-raising the fire season may be this year,” Berberich said yesterday at an ISO board of governors meeting in Folsom, California. “This could be a long, hot summer. Combine that with fires and we have a perfect mix where we could have issues.”

Hydroelectric Impact

Abundant hydroelectric generation last year mitigated the loss of the 2,200-megawatt San Onofre Generation Station, located about midway between Los Angeles and San Diego. The plant was shut in January 2012 after a radioactive leak and unusual wear on steam generator tubes was discovered.

As of May 31, reservoir storage in California was 15 percent below average and precipitation was 25 percent lower than the norm, the state water resources department said June 1.

“The snowpack is miserable this year,” Ted Thomas, spokesman for the state Department of Water Resources, said by telephone July 10 from Sacramento. “On April 1, when it’s normally at its peak just before it begins to melt and run off into reservoirs, it was less than 50 percent of the historical average. And now, of course, it’s pretty much gone from the mountains.”

The nuclear shutdown and below-average hydroelectric generation will increase reliance on natural gas to produce electricity, said Stephen Schork, president of Schork Group Inc., a consulting group in Villanova, Pennsylvania.

New Plants

“It’s going to be a very volatile summer for power and gas out there,” Schork said.

New generation from gas-fired plants such as the Walnut Creek, Sentinel and El Segundo stations will be feeding supplies onto the grid this summer, Berberich said.

“They are helpful but I don’t want to exaggerate how much help that they have because they are outside of the specific local area that San Onofre is in and they are still constrained by transmission,” Berberich said in a June 7 media call.

Southern California power prices for the strongest demand hours of the day, known as the on-peak period, will be 19 percent higher this summer than in 2012, after normalizing for higher gas prices, Himali Parmar, a consultant with ICF International Inc. (ICFI) in Fairfax, Virginia, said in a June 27 report.

“Significant congestion” is expected on major transmission routes in Southern California, including PATH 26 from the North and PATH 46 from west of the Colorado River, causing regional prices to diverge, Parmar said.

Lost Generation

The region expects to face even lower production capacity later in the decade because of environmental rules, according to Caroline Choi, vice president of integrated planning and environmental affairs for Southern California Edison, which has 4.9 million customers in central, coastal and southern California.

“There are a number of coastal facilities that will be retiring” as a result of state policy regulating the use of water to cool power plants, known as once-through cooling, Choi said at a June 17 hearing in Sacramento.

Between the units shut by the regulations and the retirement of the San Onofre plant, Southern California Edison’s territory stands to lose almost 9,000 megawatts of generation, representing more than one-third of the region’s peak demand, she said.

Transmission Opportunities

Duke Energy Corp. (DUK), which co-owns 72 percent of PATH 15, sees an opportunity to build new transmission lines as power plants shut and the state shifts toward solar and other renewable sources, Phil Grigsby, head of commercial transmission at Duke in Charlotte, North Carolina, said in a June 11 interview.

The California ISO’s most recent transmission analysis shows the west Los Angeles region alone will need 3,000 to 4,600 megawatts of new generation to replace the power retired because of the water-use regulations.

Locating new plants and transmission to support them will prove challenging, Choi said.

“The transmission system was built to move power from costal into the populated areas,” she said. “Siting could face opposition.”

To contact the reporters on this story: Naureen S. Malik in New York at Nmalik28@bloomberg.net; Lynn Doan in San Francisco at ldoan6@bloomberg.net.

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net.

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