The Wall Street Journal reports,"New Yorkers negotiating slushy streets are even less likely than usual to sympathize with Lake Tahoe's skiers grumbling about patchy snow. But dry weather on the West Coast, even as East Coasters get dumped on regularly, affects more than just the slopes—it is a big deal for energy markets, too''.
''More than half of California is classified as being in a state of extreme drought, according to the U.S. Department of Agriculture. Recent storms have brought some snow to parched slopes—including Tahoe's—but they come very late: California's snowpack is just 10% of normal levels, according to Citigroup. The problem extends up the coast, with the Northwest River Forecast Center reporting earlier this month lower-than-normal precipitation in the region this season''.
This matters because almost half of U.S. hydroelectric generation capacity lies in California, Washington, Oregon, Idaho and Montana. California, the country's second-largest electricity market behind Texas, got 17% of its power this way in the decade ending 2012, with the proportion rising to more than one-fifth in some years.
So if rivers are low, the state has a problem—even more so when other sources of energy are stressed as well.
California Independent System Operator, which manages most of the state's grid, earlier this month issued an alert calling on electricity users to conserve demand. Low hydropower supply is one issue; Teri Viswanath at BNP Paribas puts the state's available capacity at about 40% of the level at this time last year.
Adding to this is the fierce cold and snow battering New York and a host of other places across the U.S. Natural-gas fired power plants make up more than 60% of California's capacity, so these take the strain when the rivers run dry. The problem is when the rest of the country needs gas for heat, supplies can be constrained.
That might sound strange in an era of shale abundance. But this winter has reminded the U.S. that even with lots of gas in the ground, time lags, pipeline constraints and freezing weather can cause price spikes around the country. The benchmark wholesale price traded up to almost $5.50 per million British thermal units in late January from $4.19 at the end of 2013. In about the same time, prices for gas entering southern California roughly tripled to more than $15.
Barclays estimates low water supply will boost gas demand in California and the Pacific Northwest by about 400 million cubic feet a day this year. That doesn't sound like much in a market of roughly 71 billion cubic feet a day. But with U.S. gas consumption projected to contract this year, it is a fair bet that producers will take extra demand where they can get it.
Bigger gains may be found among electricity firms, particularly merchant generators that can fill the gap left by low hydropower. Jon Cohen at ISI Group suggests Calpine may benefit.
It has about 6.6 gigawatts of capacity in California, according to SNL Energy, making it the state's second-largest merchant generation operator. Furthermore, combined-cycle gas turbines, which can be switched on relatively quickly to capitalize on tight power markets.
account for 5 gigawatts of that—almost five times the size of the next-largest operator.
Mr. Cohen points out that perhaps half of Calpine's Californian capacity is contracted already and it is unclear what, if any, hedges the company has in place for those plants. Speaking to analysts last week, Calpine's president suggested the drought could mean some "second-quarter upside" for the company's Californian fleet.
