A jump in demand for natural gas, supply constraints and aging infrastructure has left the region vulnerable to price spikes
(Bloomberg) — A cold, rainy winter in California has exposed the challenges that can arise when a poster child for the clean energy transition isn’t fully ready to make the leap from fossil fuels.
California residents who rely on natural gas have complained of monthly energy bills approaching $800, Governor Gavin Newsom has called for an investigation into prices, and manufacturers of everything from steel to cement have said the only way to cut costs would be to move to another state.
The problem: limited storage, damage to a key pipeline and a surge in demand have sent the state’s natural gas prices to multiples of what it fetches elsewhere in the country. While California has long been at the forefront of the push into cleaner energy, its ambitions belie its reality – on some days, gas-fired generation can still make up more than half of electricity supplies in the region, and it burns more of the methane-rich combustible each year than France.
“Unfortunately for Californians, they’re going through this bumpy energy transition where everything doesn’t just fit exactly,” said Eugene Kim, a research director at consulting firm Wood Mackenzie Ltd. “It’s a battle between longer-term energy transition versus your immediate needs.”
For years, California’s politicians and regulators have hawked ambitious climate proposals that poured investment into the energy transition, while moving away from natural gas and nuclear generation and discouraging significant investment in storage and pipeline capacity.
At the same time, a years-long drought followed by a wet and chilly winter at first stymied the state’s hydropower capacity and then crippled its short-term solar generation. The gap has left California ill equipped to deal with any surge in demand or disruption to supply, both of which have happened in recent months.
Colder-than-usual temperatures meant residents have cranked up their heating and left working gas stockpiles in the Pacific region, which also includes Oregon and Washington, at their lowest level for this time of year since at least 2010.
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Unlike oil, which can be moved around in its natural state, gas must be pressurized and transported through a complex and expensive network of pipelines. The incentives in California to expand and update systems are low, given demand is expected to fall as the energy transition accelerates, and opposition from environmental groups can be fierce. Many pipelines are decades old and vulnerable to damage from extreme weather.
California relies on interstate pipeline imports for more than 95% of its supply. A lot of that comes from the Permian Basin in New Mexico and Texas, where producers have sometimes paid buyers to take their gas because limited pipeline capacity leaves supplies stranded in the region. The problems have been exacerbated by lingering disruption from a fatal 2021 explosion in Coolidge, Arizona, which hit a sprawling pipeline network managed by Kinder Morgan Inc. that helps supply the Los Angeles area.
Other places including New York, New England and countries in Europe have had similar constraints, especially since Russia’s war in Ukraine disrupted international supply chains. While some regions have been spared predicted blackouts after a milder-than-expected winter, California is an example of what can happen when the opposite transpires, a phenomenon that’s likely to repeat itself as climate change makes weather patterns more unpredictable. Meanwhile, governments around the world are committing to climate goals that will make the need for alternative energy sources even more urgent.
In California, Newsom is looking for more explanations: On Feb. 6, he asked the Federal Energy Regulatory Commission to look into whether market manipulation, anticompetitive behavior or other activities have driven up the cost of natural gas. At a hearing held by the California Public Utilities Commission the following day, a speaker for one state representative said that high energy bills top the list of issues that constituents are calling about. In December, spot peak wholesale power prices were up 270% compared with a year earlier, data compiled by Bloomberg shows.
Those elevated prices led to additional costs estimated at nearly $4 billion in December and January, according to the state grid operator.
Under the state’s regulatory regime, utilities can’t increase the price of fuel to make money and must pass any costs or savings onto their customers. Still, a consumer watchdog has called for the California attorney general to look into utility Sempra’s role in the doubling of gas bills, and whether its operating subsidiary SoCalGas was adequately prepared for the winter. Tariffs have risen for customers of many utilities.
SoCalGas Chief Infrastructure Officer Rodger Schwecke said at Tuesday’s regulatory hearing that the utility met state requirements heading into winter. The utility said it supports Newsom’s probe into the higher gas rates.
The surge in natural gas prices is also adding to the costs of making goods in California.
Lance Hastings, chief executive officer of California Manufacturers & Technology Association, said that while residential customers might be able to limit the use of gas in their homes to offset price hikes, businesses don’t have that option. They can stick it out or, in what he calls a “worst-case scenario,” relocate to somewhere cheaper.
“We are essentially stuck with the price of natural gas in California,” he said. “It’s admirable to get us to a future that will have a reliance on different energy sources. We just don’t have the technology at the moment, or the partnership with government and others, to get there.”
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