US: Rising solar capacity unlikely to shift CCA price

17 April 2014 15:35 Source:ICIS

More than half of the new electricity generation capacity in California is expected to come from solar power by 2020, but traders believe it could only have a minimal impact on the California carbon allowance (CCA) market in the short term.

California is expected to add 8.73GW of additional capacity by 2020 with 67%, or 5.9GW, of that expected generation coming from the solar sector, according to data from the Energy Information Administration (EIA), an independent energy research agency.

The surge in solar power is the result of companies looking to comply with the renewable portfolio standard, which requires at least 33% of California power to come from renewable sources by 2020, and utility companies aiming to reduce their carbon compliance under the cap-and-trade programme.

Market participants said most of the future solar generation capacity is already priced into the current CCA market because of the renewables mandate, meaning it likely would not cause allowance prices to dip significantly in the future. CCAs are trading around $12.00/tonne of CO2 equivalent for current vintages.

However, some traders said the rising solar capacity may be a bearish signal for CCAs if the power replaces CO2-intensive sources, such as coal, or hydroelectric generation returns to its normal levels. Hydroelectric power was down in 2013 because of a state-wide drought, and was likely replaced by out-of-state imports or natural gas power, traders said.

A broker said the future solar generation capacity helped to mitigate the drop in power from hydroelectric sources and the loss of the 2.2GW San Onofre Nuclear Generating Station (SONGS), which should have been a bullish signal to the CCA market.

“Solar is the main reason the market hasn’t flinched,” the broker said.

Natural gas rising

Natural gas-fired power has been increasing due to the loss of CO2-free power from the SONGS.

California gets a majority of its power – around 131TW in 2012 – from natural gas-fired power plants, according to data from the California Energy Almanac. Unspecified sources of power from out-of-state imports accounted for 50TW or the second-highest generation source.

The state is expected to add 1.7GW of additional natural gas-fired capacity by 2020, according to EIA data. The state added 6.3GW of capacity as a whole in 2013, with gas-fired capacity accounting for about 4GW of that figure, according to the EIA.

The state has been trying to wean itself off in-state coal-fired generation. About 1% of California power comes from coal-fired sources, according to the California Energy Almanac. Dan X. McGraw

By Dan X. McGraw