Closing of San Onofre nuclear plant to increase California's reliance on natural gas

By Scott DiSavino

NEW YORK (Reuters) - California's growing reliance on natural gas to fuel its power plants will increase and power prices will remain elevated following Southern California Edison's decision to retire a crippled nuclear power plant.

Both reactors at the 2,150-megawatt (MW) San Onofre plant will be permanently closed due to uncertainty over the cost and timing of restarting one of the units, said SCE, a unit of California energy company Edison International, on Friday.

While the grid agency has warned that the loss of San Onofre could cause rolling outages this summer as use of air conditioners soars, old and new power plants fueled by natural gas will likely pick up the slack.

"Any time you have a large plant closure, it affects both existing plants as well as future planning to replace the energy the plant was producing," said John Chillemi, west region president of NRG Energy Inc, which has more than 5,000 MW of gas-fired generation in California at 11 sites.

"I can tell you that when (San Onofre) first went off-line, NRG experienced increases in power generation at our southern California-based energy stations," said Chillemi.

Because the San Onofre reactors have been shut since January 2012, analysts said there should be little immediate impact to electricity or gas markets from SCE's decision not to seek regulatory approval to restart the nuclear plant.

"We kind of knew San Onofre might not come back this summer. Now we know for certain," said Paul Patterson, energy analyst at Glenrock Associates in New York.

SHUT DOWN TO KEEP PRICES ELEVATED

The year-long nuclear outage has already kept California wholesale prices higher than they should have been, according to an annual report from the grid's department of market monitoring.

Without San Onofre's output, the state relied on more expensive gas-fired generation and experienced significantly higher grid congestion costs that were borne by all customers, not just those in Southern California, the report said.

Thanks to an abundant supply of cheap U.S. natural gas produced from shale and California's ambitious goals to reduce greenhouse gas emissions, gas now supplies more than 60 percent of the state's power, up from 50 percent in 2000. Hydro, renewables and nuclear power make up the balance, according to federal data.

San Onofre produced enough power to supply more than a million average California homes and replacing its output could add roughly 360 million cubic feet per day (MMcf/d) of gas demand for the state, said energy analyst Teri Viswanath of BNP Paribas in New York.

Loss of the San Onofre plant and increased reliance on natural gas will challenge California's effort to cut carbon dioxide emissions.

Analysts said the state must now make sure the grid remains reliable without San Onofre. The plant not only supplied megawatts but allowed much-needed power from outside the state to flow to Southern California.

"All would breathe easier if more generating capacity were available in Southern California," said Hugh Wynne, senior research analyst at Sanford C. Bernstein & Co in New York.

This summer, companies completed several grid upgrades to help avoid potential rolling outage conditions in Southern California.

In addition, programs to curb electric use during periods of high demand have been expanded.

NEW PLANTS COMING ONLINE

In Southern California alone, new generation includes three gas-fired plants - Edison Mission's 500-MW Walnut Creek plant and Competitive Power Venture's 850-MW Sentinel plant. NRG's 550-MW El Segundo plant is expected to be in service soon.

In addition to new solar plants under development, Chillemi said NRG has other projects waiting in the wings.

"We have projects in advanced development in Southern California like the Carlsbad Energy Center and expansion at El Segundo that could help meet the need," Chillemi said.

SCE officials said talks about how to replace the San Onofre generation have already begun with the grid agency and the public utility commission, but gave no details.

Calpine Corp, another big California generator with almost 6,000 MW of gas and renewable generation in the state, is building two gas-fired plants - the 120-MW Los Esteros and the 464-MW Russell City.

A spokeswoman for Dynegy Inc said the company has been looking at a possible repowering of its existing 165-MW Oakland facility in Northern California.

AES Corp also has plans to replace some of its older generating units with more efficient units. Officials at AES were not immediately available for comment.

(Additional reporting by Eileen O'Grady in Houston and Jeanine Prezioso in New York; Editing by Lisa Shumaker)