Will California’s Drought Affect Energy Prices?

Calfornia’s ongoing drought led to a 60 percent decline in in-state hydro generation from 2011 to 2014, reports the Sacramento Bee. Research firm ICIS says that forecasters believe it will decline further this year. ICIS also reported that, according to the California Independent System Operator (CAISO), in-state hydro capacity available during peak summer months will decline 6 percent vs 2014, though an extreme scenario puts the decline at 22 percent.

CAISO believes a moderate increased summer load combined with new solar generation will offset the drought’s impacts. The Sacremento Bee reported that last year solar growth was enough to offset 83 percent of the reduction in hydropower last year. Since 2011, however, the majority of the lost hydro generation has been replaced with gas. Hydro costs 2 cents per kWh while gas costs 4 cents, according to the Sacramento Bee. Areas like Sacramento, which relies on hydro for 25 percent of its generation, could see moderate power price increases as a result of the drought.

In turn, despite a mandate that generators decrease their carbon footprints, California’s emissions have risen 8 percent. The ICIS article quoted a carbon trader who noted the drought “hasn’t hit carbon yet” but could in the future. While it remains to be seen what will happen with the state’s carbon market, it seems likely that gas will continue to replace hydro as long as the drought persists.

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