US: Drought impact on CCA prices muted by fuel sector, participants say

The ongoing drought in California has not yet impacted carbon allowances, but market participants say the historically low snowpack should result in additional emissions and increase California carbon allowance (CCA) demand from power sector entities.

California got 9% of its 2013 power from hydroelectric power plants inside and out of the state, according to the most recent data from the California Energy Almanac, a state agency. Imported and in-state hydro sources made up 27TWh of the 296TWh used in the state in 2013. The California Energy Almanac has not reported 2014 totals yet.

The California Energy Commission, another state agency, reported that in-state hydro generation fell to 14TW in 2014, or roughly 6% of the in-state power. Those numbers are expected to remain flat or decline in 2015 because of the worsening drought in the region, market participants said.

The snowpack, which feeds reservoirs later in the year, was only 5% of the historic average on 1 April, or roughly 30 percentage points below the same time last year. All of the 12 reservoirs are currently below historic averages, state data shows.

Market participants said the drought’s impact has not been felt in California just yet.

“There is no snowpack,” a carbon trader said. “[The drought] should impact power prices, but it hasn’t hit carbon yet. It could bleed over to carbon at some point.”

A carbon broker said the market was seeing a muted impact because of the inclusion of the fuel sector this year. The broker said the increased emissions because of the drought would be dwarfed by the increased demand from the fuel sector.

The broker added that the lost hydroelectric power could also be replaced by increased generation from solar or wind sources. In general, however, lower hydroelectric power has typically been offset in California by increased natural gas-fired generation.

The California Independent System Operator (CAISO) reported during its March board meeting that available summer hydro capacity should decline 6.2% to 5,905 MW in their base case estimate. The extreme scenario was 4,628 MW, a 22% decline from 2014.

CAISO said the drought impacts would be offset by moderate load growth during the summer and 2,135 MW of new generation, which is nearly all from new solar power sources.

2015 outlook

Large rainstorms in the winter helped to add capacity at some of the largest reservoirs in the state, but the low snowpack should leave less hydroelectric power later this year.

According to data from the Energy Information Administration, California produced nearly 1.7TW of hydroelectric power in January, a 4.6% increase over January 2014. Both numbers are roughly half the 3.4TW produced in January 2013.

Hydroelectric power will likely stall later in the year as the low snowpack in 2015 reduces capacity at California reservoirs.

Pacific Institute, a nonprofit research firm, wrote in a report published in late March that those below-average hydro numbers should result in generation below historic averages and should result in more emissions from the power sector. Dan X. McGraw