As California drives towards a 100% renewable grid, its energy mix is beginning to change. The author discusses why California’s existing hydropower facilities will likely benefit.
By Michael Ferguson
California’s energy mix is set to irrevocably change. By 2045, only renewable sources will supply California’s energy needs, as per former Governor Jerry Brown’s SB 100 bill. With this move, the Golden State has raised the bar for renewable proliferation across the U.S., even as its largest utility faces bankruptcy.
Even SB 100’s most ardent supporters still recognize the difficult road ahead. So, what are the challenges? For one, experts fear that the current generation of renewables may be unable to meet the transmission grid’s baseload demand. Solar and wind generation are by definition intermittent resources and, barring an abrupt uptick in the scalability and technological advancement of battery storage, could prove an unreliable replacement.
Herein lies an opportunity for incumbent hydro assets. In fact, the state’s hydropower facilities could play an active role in meeting California’s ambitious mandate. While solar and wind secure reliability, hydropower will likely prove an important partner in meeting the state’s power demands. In all, while new hydro generation is cost-prohibitive and unlikely, hydropower’s existing facilities will likely see some financial upside.
California’s evolving energy mix
Meeting the mandate’s lofty ambition will necessitate an unprecedented shakeup of California’s energy mix — a transition that is already under way. Coal generation has ceased entirely, and nuclear power is winding down, with the final nuclear station, Diablo Canyon, set to close in 2024. The largest casualty among the incumbent grid will likely be gas-fired generation, which currently contributes about 33% of the state’s power. Also, given that gas-fired generation supports the reliability of the California grid, something that is particularly sensitive to policy makers, finding a suitable replacement remains critical to the mandate’s success.
Two asset types likely to play a leading role are solar and wind — which comprise the lion’s share of new renewable installations to date. That said, determining the extent that their market penetration will increase requires a more nuanced analysis. Solar and wind rely on ever-changing and hard to predict weather conditions, which means their energy production experiences huge variations across the day. For solar and wind to consistently meet California’s energy needs, its excess generation would need to be stored. For this, energy solutions would likely require further technological developments and a 200-fold increase in battery deployment — the cost of which is prohibitive but which should become more attainable in the next decade.
Hydropower’s Californian renaissance?
Not all of California’s load-bearing services fall outside the scope of SB 100. In fact, California’s existing hydropower facilities are well-positioned to benefit. Hydropower production can be adjusted to ensure baseload demand is met. And as California addresses the reliability concerns of intermittent resources, the ability to offer load following services may prove invaluable. What’s more, their longer anticipated asset lives could mean that hydropower is even more compatible with the ambitious mandate. Even assets of advancing age, which constitute the majority of California’s hydropower fleet, can easily be maintained for a further 50 years or more with continued capital spending. And unlike solar and wind repowering, this spending tends to be gradual, which can improve credit quality.
But the extent of hydropower’s role should not be overstated. Given the high costs, complicated planning, and environmentally disruptive construction phase, new generation is unlikely. In fact, hydro has experienced flat growth across the country since the 1970s. Without considerable changes, new generation will likely remain stagnated in California, too.
Given California’s recent climate history, concerns also surround the practicality of hydropower. The period between fall 2011 and fall 2015 was California’s driest since records began. If enough water is not available, hydropower’s reliability and operational endurance would, unsurprisingly, be adversely affected.
That said, barring any new capacity, it seems that existing hydropower assets can still play a complementary role: They provide similar load-bearing services to gas-fired generation and, unlike solar and wind, come with their own battery. Thus, as California phases out fossil fuels (and before “plus storage” solutions become more mainstream), hydropower is well-placed to be a key beneficiary.
Michael Ferguson is director, sustainable finance with S&P Global Ratings.