Its time for everyone on both sides of the clean energy push to pay attention when a renewable energy advocate of the North American leader in the energy transition makes a emergency public address to highlight shortfalls in solar/wind and that changes are needed if they want to provide reliable energy. This is what we saw on Monday in California Governor Newsom’s public address. We had to replay it before we tweeted [LINK] “Need reality check on #solarenergy for reliability. Surprise, from CA @GavinNewsom, not an oilman. CA will be diligent “to guarantee protocols, processes, forecasting that’s more sober, around the potency of solar”. #NatGas will be needed.” It seems like the rotating blackouts have exposed the shortfalls in California’s energy mix related to solar power capacity inefficiencies, wind power inconsistencies, insufficient battery storage, insufficient natural gas power reserve, and less import potential after July. And a planning issue as these are all well known risks. It can’t be easy for Newson, a strong renewable energy advocate, to acknowledge these items. Give him credit for placing an urgency to deal with this electricity crisis before the November 2022 California governor election. The world’s economy has taken a huge hit and government’s debt has massively increased from COVID-19 impact. But that hasn’t seemed to deter the world’s energy transition. Its why Newsom’s underlying message should be noted by both sides. This is real data, real life impact, and its reaffirms that the energy transition will be bumpier and take longer than aspirations and expectations. This should not be a surprise. And its not a warning of doom from anti climate change people. This is not just a California issue, it’s a world issue. Our June 11, 2020 blog “Will The Demise Of Oil Take Longer, Just Like Coal? IEA and Shell Highlight Delays/Gaps To A Smooth Clean Energy Transition” highlighted the recent IEA reports that the world is behind in its energy transition. Newsom’s reality check comments is more than a pause, rather he realizes they need to take a step back in items like phasing out natural gas if California is to have reliable, but expensive, electricity. It also means oil and natural gas should surprise to the upside post 2020. But most of all, its time for governments, companies and investors on both sides of the energy transition to pay attention.
California has been the US leader in the energy transition. The reason to pay attention is that California has been leading North America in the energy transition whether it be in renewable energy, pollution, auto emissions, reducing natural gas for cooking, etc. It is the leader and really accelerated its push following the smog problems of the 1970’s. And it shows up in the data. The below table shows how renewables % of total electricity net generation have increased from 29% in 2010 to 53% in April 2020, compared to total US of 10% in 2010 to 23% in April 2020.
Renewables % of Total Electricity Net Generation
It was a tough 4 days for California and, to his credit, Gov Newsom recognizes changes are needed. The heat wave across the west coast has been causing serious issues for California’s electric grid as air conditioners are used heavily and more people are spending time inside due to COVID, with total cases now topping 600,000 in California. This combination pushed the limits of the California power grid, a grid that gets over 50% of its electricity from renewable sources. Beginning on Friday, a series of rolling blackouts have been making their way through California as renewable generation faulters and natural gas generation capacity, which has been decreased in recent years, cannot make up for the lost power. California ISO warned at 2:30 pm on Friday that 3.3 million homes and businesses could lose power. They declared the first Stage 2 power emergency since 2006 due to excessive heat at 6:59 MT. The announcement warned that if people do not limit their electricity consumption that they could move to Stage 3. Half an hour after the Stage 2 warning, they declared a Stage 3 power emergency which was “ordering utilities to implement rotating power outages to protect the stability of the grid”. Bloomberg terminal reported that up to 2 million customers may have been hit in rotating blackouts. California was hit with another Stage 3 emergency on Saturday night which came with yet another round of rotating blackouts, though to a lesser extent, affecting ~200,000 customers. On Monday, they issued yet another Stage 2 Emergency alert, though it was lifted later that day “thanks to consumer conservation and cooler than expected weather”. The situation was much the same on Tuesday with a reverted Stage 2 Emergency. This situation has prompted Gov Newsom to open an investigation into the reliability of the power grid, stating they need to have “forecasting that’s more sober, around the potency of solar”.
California looked to have adequate reserves coming into the summer. On June 2, NERC issued its “2020 Summer Reliability Assessment” [LINK], which forecast a 20.9% Anticipated Reserve Margin vs a 13.7% Reference Margin Level. California was viewed as one of the better off regions coming into the summer. The problem with seasonal analysis is that NERC is the summary numbers and graphs are based on the season and don’t show the risk within the season. The NERC graph warned there could be shortages under extreme conditions. But their text does get address some of the timing issues that we note below on why say its no one should be surprised by the risk in solar, and hydro for power delivery in California in mid-August.
WECC-California/Mexico Seasonal Risk Scenario
The risks to relying on renewable energy were well known – its late in the summer, its hot, its humid, winds have been mild, and not enough battery storage capacity. California Governor Newsom made a major address on Monday to address the California electricity crisis. We listened to the address [LINK] and made a transcript of some key sections. In the address, Gov Newsom said California has ‘to understand the conditions that led up to it”, referring to the Friday and Saturday rotating blackouts. We have to believe his need to understand are more related to forecasts, coordination, etc because the risks to renewables are well known. Putting aside the issue of reducing natural gas peaking plants for reserve, there were no surprises in the key factors that impacted power reserve and force the rotating blackouts. (i) Its late in the summer. California and Pacific Northwest hydro generation always peaks earlier in the summer. This happens every year. And means that in mid August, there is less California hydro generation and less available Pacific NW hydro generation for imports after late June/early July. (ii) Its hot. Every solar view says that solar panel lose efficiency in very hot weather. This is not a secret. Solar panel efficiency is normally rated based on 25C/77F and really hot weather can hurt efficiency by 10-20%. (iii) It was humid. Gov Newsom said they have they have to understand “what it means when there’s higher humidity like we’ve experienced, and the impact that has on solar”. Every solar view says that humidity reduces solar panel efficiency. This is not a secret. Most estimates also tend to be in the 10-20% range. (iv) Wind power is unpredictable. This is not a secret. Newsom said “The fact that while we’ve had some peak gust winds. wind events across the state have been relatively mild. By the way, that’s a good thing from a fire suppression perspective. That’s unfortunate moment more broadly as it relates to addressing the episodic nature of the renewable portfolio.” (v) California’s battery storage for electricity is immaterial to its supply needs. In our later graph, battery storage is a faint red line and is basically nothing in the total supply scheme. On Monday, Newsom said California has to understand its energy mix and “our current protocols with exports of energy to west coast states, and our capacity on storage, in particular, that needs to be substantially improved. Technology is catching up our efforts and needs to be advanced in this space.”
Northwest Hydroelectric Output by Month
And the risks to renewable power’s daily cycle were well known – not enough reserves from “polluting” gas plant to offset solar’s daily power crash after 5pm. We should note that Newsom made a point of referring to natural gas plants as “polluting gas plants”. The big increase in solar power has changed the peak risk period for power outages. Traditionally, the peak risk period is when there is peak demand, which is 5-6pm. Who hasn’t heard the requests from utilities to do things like don’t run your dishwasher at dinner time. And normally, as power demand declines after dinner, the power crisis is over. That is different now in areas like California with significant solar. Newsom said “we identify the peak hours roughly 3 pm about to 9, 10 pm. say 3 to 10 pm are the peak hours. I can explain in a moment why those evening hours become the most precious as regards to our concerns. Particularly as it relates to the sun going down, utilization of solar.” And this means that more natural gas reserves are needed after the peak demand 5-6pm period. Not having sufficient gas plant capacity is a key factor to what forced CAISO to implement rotating blackouts on Friday and Saturday nights once the known capacity constraints were impacting solar.
Sources of California Electricity on Aug 14, 2020
Newsom says California has to be aggressive to have an energy mix that provides reliable electricity. The key message from Newsom’s Monday speech was that California needs to be able to provide reliable electricity. He isn’t changing the game plan of an energy transition, but he is saying what they are doing isn’t meeting the primary goal of an energy mix that provides reliable electricity. And that they will be more aggressive in providing reliability. He has to deal with the shortfalls of solar and wind, and the lack of storage noted earlier. He even grudgingly acknowledges the need for natural gas, he can’t get rid of the existing gas power, he needs more. Newsom said “but in the process of the transition. In the process of shutting down. Understandably, the desire and need to shut down polluting gas plants. And the desire to go from old to the new. In that transition and the need to shut those down, comes the need to have more insurance. Comes the need to recognize that there has been by definition, demonstrably in the last few days, and what we expect over the next few days, gaps in terms of that reliability. We cannot sacrifice reliability as we move forward in this transition. And we’re going to be much more aggressive in focusing our efforts. And our intention in making sure that is the case. We need to make sure that we have a demand response system, and we have reliability that meets the expectation that we’ve all forecasted around issues of climate change. and around the prospects that this is not the last quote unquote record breaking historic heat dome, an experience that we will have in this state, in this region or in this nation or in our hemisphere in our lifetime. Quite the contrary, this is exactly what so many scientists have predicted for decades. Its manifesting quite acutely here on the west coast of the US. also manifesting in droughts, not just wildfires, and not just the issue of concerns around high quality, low cost, reliable energy for people that must have that support for their health, for our economic prosperity and the like.”
No wonder, he wants to provide reliable electricity, California electricity is expensive. Its easy to see why Newsom believes it is important to deliver reliable electricity to Californians. At the price of electricity in California, its fair for Californians to expect reliable electricity. California’s move to renewable has brought California the 6th highest electricity prices in the US and its electricity prices are only exceeded by Hawaii, Alaska, Connecticut, Rhode Island, and Massachusetts. Its electricity prices are about double. As a general rule, California’s electricity prices are generally double its neighbours Nevada, Oregon and Washington, and 50% higher than Arizona.
Average Electricity Price For All Sectors (Cents per kWh) – Western US States and Total US
California’s lack of sufficient storage reminds there is the need for an integrated electricity system that needs more than solar and wind power. One of the key themes from our June 11, 2020 blog “Will The Demise Of Oil Take Longer, Just Like Coal? IEA and Shell Highlight Delays/Gaps To A Smooth Clean Energy Transition” [LINK] was that the energy transition is massively complex, its not just adding more wind/solar. On June 9, Bloomberg Green story “Shell’s CEO Worries About a Disorderly Energy Transition: Q&A” noted the Shell CEO comment that is over looked by most everyone. He said “the energy transition is massively complex. It will require orchestration on a scale that the world has never seen.” We think the most overlooked aspect of the energy transition is that it is much more than just adding more solar and wind to replace some portion of the fuel supply. One of the major challenges is replacing an electricity grid that has been built on fossil fuels, nuclear and hydro delivering high intensity energy on a continuous as needed for whatever is needed basis. Again, its not just adding solar and wind, its having the proper electricity storage, generation and delivery system to support this fossil fuels out/renewables in switch. One of the shortfalls of California’s energy mix is the lack of electricity storage. Our graph earlier Sources of California Electricity on Aug 14, 2020 showed battery storage (faint red line) was negligible.
We don’t expect California’s lesson being learned will deter most national governments climate change ambition. We don’t think California’s realty check will have any significant impact on national governments (ie. Canada) that are pro climate change. Our view has been that, if having to deal with the historic impact of COVID-19 on economies and national debt levels, isn’t deterring climate change ambitions, then nothing will. But the reason why we don’t see California’s warning solar potency impact a country like Canada is that the national government isn’t the one to take the blame for power interruptions or high electricity costs. Rather any failure on power tends to be placed on a state or province or local level. Yesterday, we saw that example in Canada in the press conference post the appointment of Chrystia Freeland as Canada’s Finance Minister. There was no concerns on record national debt levels, rather Freeland said “Canadians understand that the restart of our economy needs to be green” and Trudeau said “This is our chance to build a more resilient Canada, a Canada that is healthier and safer, greener and more competitive”, “This is our moment to change the future for the better,” and “We can’t afford to miss it because this window of opportunity won’t be open for long.”.
But other states and provinces will likely at least pay attention to California’s pivot and warning on renewable energy shortfalls. California has been the leader in the energy transition in the US with others following in their footsteps. California’s reality check on solar potency and wind variability should be acknowledged by others, but we won’t be surprised if other states and provinces don’t see California’s energy mix reliability problems as their potential risks. But we do believe Newsom’s pivot and reality check on solar, wind and storage will get some attention at state and province level governments ie. where voter blame is ultimately placed. The challenge is that they will be up against national government initiatives. Newsom is not up for re-election until November 2022. But we suspect he wants to have the reliability concerns dealt with before that election. He likely hasn’t heard of former Ontario Premier Kathleen Wynne, whose Liberal party was blown out of the water by Conservatives led by Doug Ford in great part due to Ontario’s high electricity prices from its move to shut down natural gas power. There is a setup for increasing conflict in Canada and in the US. In Canada, we have already seen some of the provinces push back on the carbon tax. That will only increase with any increased carbon push in Canada as implied by Trudeau yesterday. In the US, our July 28, 2020 blog “Biden To Put US On “Irreversible Path to Achieve Net-Zero Emissions, Economy-Wide” Is a Major Negative To US Natural Gas in 2020s“ [LINK] would see a major acceleration of any renewable risk if Biden is elected. We expect California’s realty check will inevitably cause that timetable to be delayed.
Everyone should pay attention, California’s reality check on solar/wind reaffirm the energy transition will be bumpier and take longer than expected. We believe governments, companies, and investors on both sides of the energy transition should pay attention to Newsom’s straight talk and reality check. California has been the North America leader in clean energy transition. This week’s rotating blackouts and power capacity shortfalls and Newsom’s reality check that they need to provide reliable electricity is really more than a pause, it’s a step backward that will inevitably lead to items like more “polluting gas plants”, at least for in reserve. This is real life data and a major acknowledgement (admission) that their leading renewable energy mix can’t provide reliable electricity. Newsom didn’t mention a focus to provide reasonably priced electricity. This won’t change the world being on a path to a clean energy transition. But it is real data that shows its not on track to deliver what it thought was in position to deliver. Look at California identifying two major linked shortfalls: an energy mix that doesn’t have sufficient capacity to deliver reliable electricity, and forecasting that doesn’t seem to take into account some fundamental risks from solar, wind and hydro generation. Give Newsom credit, he making sure they do this reality check now to prevent bigger problems in the future. It has to inevitable that there will be some slow down in the pace of the energy transition process. Perhaps just as important, we expect California’s forecast will have greater element of risk or conservatism, which should allow outsiders to see a slow down in the energy transition.
Its not just California, the world is way behind on its clean energy transition. This reality check is that its more than California, it’s the world is behind on energy transition. On May 27, we tweeted [LINK] “Seems clean energy supply + related grid/infra won’t be anywhere close to meet aspirational goals of many countries” based on the IEA’s just released that morning major report “World Energy Investment 2020” [LINK]. The IEA reviews investment in the full spectrum of energy including in 2020 and provided some excellent insight into the implications of the capital, or lack thereof, for the future. The IEA notes the required investment capital for clean energy wasn’t being spent in 2019 and COVID-19 made the investment gap larger in 2020. Prior to 2020, the IEA estimated clean energy spending was relatively flat for 2015-2019, before declining in 2020. As is happening in almost every sector, the world economy crash in 2020 has led to be declines in invested capital in all energy sectors, including power and clean energy. In discussing renewables, one of the many shortfall IEA comments was on slide 90 “Current investment levels are not aligned with a sustainable pathway. Compared with the average annual investments projected in the IEA SDS, power sector spending in 2019 was about 35% short of the level required a decade from now. There is a continued need for capital reallocation to meet energy security and sustainability goals, to bring in more low-carbon power and to ensure that renewable-rich systems can operate with sufficient system flexibility. The largest projected growth in investment to align with such a pathway would be required in solar PV and wind, on average an extra USD 160 billion of spending each year. Electricity networks would require an extra USD 150 billion from today’s levels, in addition to a higher level of capital for other renewables and nuclear.”
IEA’s Estimated 2019 and 2020 Invested Vs Future Required Investment
Oil and natural gas should surprise to the upside over the midterm – the demise of oil and natural gas will take longer, just like coal. Newsom has had to acknowledge there weren’t enough “polluting gas plants” to provide the reserve to avoid the rotating blackouts on Friday and Saturday. The simple conclusion is that it means oil and natural gas will be needed longer than expected to fill the gaps and provide the critical support for electricity system. Oil and natural gas markets have been crushed in 2020 by the massive hit to demand from COVID-19. Demand is recovering but it will take time to eliminate the surplus oil and natural gas/LNG inventory. But we expect to see a jump up in prices as markets get visibility for the surplus to be eliminated. The other reason to be bullish on oil and natural gas in 2021/2022 is that its not just the delayed energy transition will be mean stronger mid term demand for oil and natural gas. It will happen as the impact of low oil and natural gas exploration and development spending hits global oil and natural gas supply. The impact isn’t felt today with the demand loss and surplus inventory. But yesterday’s BHP’s economic and commodity outlook [LINK] included a simple but fundamental reminder of the basics of commodities supply “COVID–19 has altered many things but it does not alter geology or define the frontier of operational efficiency in each commodity sector. Besides demand, these are the two most critical factors for identifying marginal sources of long run supply.” BHP sees “an expected structural demand-supply gap through at least the mid-2030’s” for oil. One reminder is that oil prices typically gap up or down as markets have visibility towards the near term. Look for oil and natural gas to jump up as markets have visibility that the surplus is on track to be eliminated.