Ask the Experts: Ongoing Impacts of COVID-19, California Blackouts3 min read
In our monthly Fortunato & Friends Webcast series, we offer our customers the opportunity to submit questions to learn more about economic factors and marketplace trends that may affect their future energy purchasing decisions. Most recently, customers requested further information on the ongoing impacts of COVID-19 on energy and financial markets and recent blackouts in California.
Constellation’s team of market experts addresses them here:
“How much of the recent natural gas supply price reduction was from COVID-19 (less commercial usage) versus over-supply suppression adjustments that may take longer to balance out supply and demand?”
Gas prices last winter and spring of 2020 were dominated by strong production levels and a lack of cold weather (3rd warmest winter nationally since 1950). Low gas prices stimulated coal-to-gas switching in dispatching power generation, which helped to keep demand strong. Hot summer weather, flat production at ~87 Bcf/day, a rebound in LNG export demand from 3 Bcf/d to 5 Bcf/day, and strong demand from power generation all combined to support prices and reduce the storage surplus to about +15% over the five-year average. Recent movement in NYMEX in August and September where it traded between $1.80 -$2.50/MMBtu reflect the state of the market where we have production flat at ~85-87 Bcf/day, rising LNG exports and below normal temperatures in the eastern half of the Lower 48 along with lingering cooling demand out West from record above-normal temperatures. Normal winter weather (i.e. 10-year normal) would provide greater demand when compared to the winter of 2019-20.
“Is the United States more likely to see inflation or deflation at the end of this COVID crisis?”
To date, COVID-related sequestration has resulted in a more deflationary environment than inflationary. However, the Federal stimulus has supported markets and prices, and recent comments from the Federal Reserve have been more supportive to modest inflation after the pandemic. The Fed announced in its recent Jackson Hole conference in August that it would look to keep inflation near +2% annually and would not limit it to +2% before beginning to raise interest rates.
“I keep hearing about the need for increased battery storage for California. The amount of power needed during the last heat wave would require a massive battery bank. How would that work?”
Batteries at this point are generally modular and in containers similar to tractor trailers, so placing them on generation sites or transformer sites would probably be the answer. CAISO established a goal of procuring 1,325 MW of battery storage by the end of 2020, and while the CPUC has approved procurement of new storage to be built exceeding that initial capacity requirement, recent estimates indicate that operational year-end capacity could still be well below 1 GW and further is not expected to be entirely on-line until 2024. As the recent events of August and September have illustrated, it appears the state will need thousands of megawatts, and it will presumably take several years to get there, all of which does not even take into consideration if the industry can scale up production of the raw materials needed.
Check out this CAISO link on facts around battery storage and some key pilot projects.
“Do you see any other states that could experience the same or similar reliability problems that are occurring in California now?”
States with inadequate baseload generation and high amounts of renewables without adequate storage are likely most vulnerable. A state like Texas, which can get very hot, has considerable wind generation and not much in the way of storage, comes to mind.
A quick look at the ERCOT fact sheet shows that there was 82 GW of expected capacity for this summer (26 GW is intermittent wind), and load reached 74.1 GW, below last year’s 74.8 GW record. Wind output was strong in mid-afternoon hours (3-4 PM) at +5 GW versus last summer at 1-2 GW, and this was a key difference because ERCOT operates as an energy-only market with no capacity market. High prices are supposed to be the signal for new builds to occur, but low gas prices and a large buildout in renewables (primarily wind but now solar) has kept real-time summer prices in ERCOT low, with the exception of 2011 and 2019.
Every month, Fortunato & Friends, a live webcast interview, will feature a special guest on a topic related to driving factors impacting the energy market. Register for the next Fortunato & Friends webcast on October 6th with David Brown, SVP of Federal Government Affairs and Public Policy at Exelon to discuss the upcoming election and its potential impact on energy policy.