EIA: High water jacks up hydro output, torpedoes power prices

Increased hydroelectric output in the Pacific Northwest drove daily, on-peak prices of electricity below $10 per megawatt hour in late April at the Mid-Columbia trading point on the border of Washington and Oregon, said the U.S. Energy Information Administration in a May 29 “Today in Energy” report.

The availability of low-cost hydropower in the West also depressed prices at the California-Oregon border and helped offset prices that had been up in northern California as a result of nuclear outages, EIA noted. The Pacific Northwest has large amounts of hydroelectric capacity, and the variable cost of producing electricity from this capacity is minimal because there is no fuel cost.

“Consequently, when the water flows, large amounts of hydropower are generated, and wholesale electricity prices drop,” said EIA. “But peak water flow is typically a seasonal event influenced by melting snowpack, so the price-reducing effect of hydropower normally lasts only a few months each year, typically in the spring and early summer. The Bonneville Power Administration (BPA) operates the largest electric system in the Pacific Northwest, including most of the hydroelectric units.”

The increased hydroelectric output lately has also helped moderate wholesale power prices at major electric power hubs in California, as significant levels of power from the Pacific Northwest flowed south via transmission lines. The combination of warm and wet weather in April and May in the Pacific Northwest melted low-elevation snow, filling hydroelectric dam reservoirs on the Columbia and Snake rivers.

The relatively cheap electricity available from hydropower also displaced other sources of supply. Use of natural gas for power generation in the Pacific Northwest declined steeply in March as hydro output increased, EIA pointed out. The agency didn’t mention any impacts on the relatively scant amount of coal-fired capacity in the region. TransAlta Corp.’s (TSX: TA) (NYSE: TAC) Centralia coal plant in Washington state has traditionally been something of a swing power supplier that depends on hydro availability for its dispatch level.

TransAlta, based in Canada, said in an April 25 financial report covering the first quarter of this year: “In the Pacific Northwest, average [electricity] spot prices were comparable to the same period in 2011 with 2011 being negatively impacted by higher than normal hydro production and 2012 being impacted by low gas prices.”

TransAlta also reported that the Centralia coal plant, called Centralia Thermal, is having an accounting problem with its inventory of Powder River Basin coal. “During the quarter, we recognized a pre-tax impairment charge of [C]$34 million related to the coal inventory at our Centralia plant,” TransAlta wrote. “The impairment resulted from the de-designation of the hedges at Centralia Thermal and the continued low price environment in the Pacific Northwest. During the quarter, we de-designated and recognized [C]$85 million of pre-tax gains related to ineffective hedges at Centralia Thermal, which had previously been used in calculating the net recoverable amount of the coal inventory at Centralia Thermal. The de-designation prevents us from including these contracts as part of the net recoverable amount of the coal, and with the continued low price environment we recognized an impairment charge on the coal inventory. The net [C]$51 million impact associated with the hedge de-designation and inventory impairment has been adjusted in calculating earnings on a comparable basis.”

The TransAlta report also said: “Market prices and the success of contracting will influence the asset values at Centralia Thermal. Continued low prices could result in an adjustment to the current [C]$757 million carrying amount of the plant and the associated tax asset of [C]$238 million. Because any such determination will be based on future events and circumstances no assurance can be given as to the timing or amount of any impairment, although it is possible that such an adjustment could be material and could occur in 2012.”

The Centralia coal plant is Washington’s largest baseload power source with a net capacity of 1,376 MW.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.