PROTECT CALIFORNIANS FROM VOLATILE ENERGY PRICES

This winter, Californians saw their highest electricity and natural gas prices in years, up five and eight times, respectively, at their December peak compared to prices during the previous winter. The good news is that prices have since tumbled, and regulators are now working to ease the bill shock customers are experiencing.

But regulator efforts, aimed at smoothing bills and preventing future similar price spikes, are just one part of a broader strategy needed to insulate customers. As we look to the future, a pivotal set of choices about how to cut California’s carbon emissions raises profound uncertainties about the future of gas demand and prices. Alongside preventive measures, a serious program to fully protect Californians from volatile prices must also grapple with the uncertain effects that decarbonization could have on the gas industry and, subsequently, on energy prices.

With customers still reeling from high bills, it has been easy to pin blame on local electric and gas companies. But the reality is that energy prices are prone to volatility. Fluctuations do not come from local gas distribution utilities, which send gas to consumers at cost and don’t profit from sales, but rather are the consequence of fluctuations in supply and demand.

The key to understanding today’s volatile natural gas and electricity prices, and potential protections against them, is found in how California’s energy system is linked to the rest of the nation and globe. Four big forces are at work.

First, networks for producing and delivering gas are integrated regionally and nationally, so much of what we observe locally depends on circumstances across the rest of the country. In February 2021, a deep freeze devastated Texas, stifling gas exports and pushing Southern California prices to almost triple those in recent months. California imports almost all of its gas, so even distant events can be felt here.

Second is weather. Cold snaps can bring low temperatures to entire regions along with sharp increases in gas demand for heating that are hard to predict. During December’s low temperatures, gas prices as distant as the Canadian-U.S. border rose in lock-step with those in California.

Third, to a growing degree, global factors play a role. Gas once bound for national inventories is now being liquefied and shipped out of American ports to Asian and European consumers short on supply and willing to pay handsomely to acquire it. Analysts say the United States’ ability to export gas, set to expand 40 percent by 2025, could raise domestic prices.

Fourth, while gas and electricity are distinct businesses, their physical networks are linked. In California, gas is burned to generate nearly 40 percent of electricity, so high gas prices lead to high electricity prices. When alternatives, like hydro and nuclear power, are unavailable, these repercussions are even stronger.

According to analysts, several of these forces were behind December’s volatile prices: sustained cold weather caused record-high gas demand for heating; pipeline maintenance restricted flows from the Northwest and East; and, California gas storage, at historic low levels, couldn’t bolster supply. (The federal government is looking into whether producers squeezed supply to artificially raise or sustain prices and the Public Utilities Commission is investigating root causes.)

In this context, regulator proposals to shield customers — reducing gas use, increasing gas storage and better financial hedging schemes — make sense. All help to balance short-term supply and demand.

Looking to the future, however, a strategy to shield customers from volatile prices must grapple with a fifth big force: how we choose to cut carbon emissions. Though there’s wide support for solutions like energy efficiency, renewables, electric vehicles and batteries, the situation with natural gas is uncertain.

Some are moving away entirely: several municipalities have banned new gas hookups in buildings, the Energy Commission is assessing strategies for building electrification and gas system decommissioning, and the Air Resources Board recently took steps to ban sales of home gas appliances after 2030.

At the same time, gas utilities and other municipalities are heeding Europe’s example and exploring strategies to blend decarbonized fuels like biomethane and hydrogen into the gas system, build new hydrogen pipelines, convert gas power plants to green hydrogen, and replace backup diesel generators, used during power outages, with hydrogen fuel cells.

Moving past fossil gas rests, most likely, with a combination of electrification and decarbonized fuels. Each has advantages; both were recently bolstered by the federal government through billions in new incentives. However, it’s hard to know precisely which users might adopt new fuels and which will prefer electric devices. Nor is it known when shifts to new options might occur, nor whether such shifts will bring new shocks.

All of this uncertainty in gas demand, and in turn in gas prices, merits precaution. Tangibly, that means proactive measures like risk mitigation plans that insulate customers from price fluctuations and programs that support those least able to transition to new devices and fuels.

Over time, regulators should update these programs as they learn more about costs and performance, feasibilities, and adoption rates. Uncertainty calls for riskaverse strategies that can learn quickly and shift in light of new evidence.

Hanna is an assistant research scientist with the Deep Decarbonization Initiative at UCSD and lives in Pacific Beach. Carlton is a research associate with the Deep Decarbonization Initiative at UCSD and lives in Normal Heights. Smillie is a Ph.D. candidate with the Department of Engineering and Public Policy at Carnegie Mellon University and lives in Pittsburgh.