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2013 Wildfires: How they impact energy market pricing

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With September being the busiest month for the Atlantic’s hurricane season, the West Coast braces itself for another season: Wildfire Season. Both seasons have something in common: they have the ability to affect energy market pricing.

Wildfire season begins when firefighters have the appropriate equipment and personnel in place to battle the toughest wildfires. This is typically in May, when grasses and other vegetation at lower elevations begin to dry out. Just as hurricane season is expected to be busier than normal, so, too, is the wildfire season in the western U.S. California is facing its driest year since accurate records began in 1895, with 98% of the state now in a drought.

One impact of the drought has been reduced generation output from hydroelectric dams, which contributed to higher power prices in the spring. But drought also increases risk of fire. According to CalFire, more than 4,700 separate fires have charred the state so far this year - 1,300 fires above average. And one of the largest in California’s history is currently raging in one of our most treasured national parks, Yosemite National Park.

The Rim Fire, which began August 17 and is burning along the northwest ridge of Yosemite National Park, has grown to become the 13th largest in California’s history. The fire, so far, has consumed 234 square miles of forests, and containment is estimated at just 15% as of Monday, August 26. Despite ash falling like snow on the Hetch Hetchy Reservoir, the source of 85% of San Francisco’s drinking water, and smoke limiting visibility to 100 feet, the quality of the water being piped to the city 150 miles away remains good.

The San Francisco Public Utilities Commission also shut down two of the three hydroelectric power stations fed by water from the reservoir, and cut power to more than 12 miles of transmission lines. It’s not known at this point whether the fire destroyed the lines. The loss of power has forced the utility to spend $600,000 buying power on the open market. The Rim Fire is only one of a dozen burning across California right now, with more than 8,300 firefighters battling nearly 400 square miles of fires. While the tourist mecca of Yosemite Valley, just 20 miles away from the fire, is clear, the Lake Tahoe basin is thick with smoke, and many outdoor activities have been cancelled in Reno, Nevada.

Although power prices for the residents of the Bay Area may increase due to the costs of replacement power, CAISO prices, on the whole, appear to be unaffected by the wildfire. CAISO wholesale prices have been affected more by the closure of the San Onofre Nuclear Generating Station (SONGS). The shutdown of the SONGS is partially to blame for a 59% increase in wholesale electric prices during the first half of the year. The EIA said the closure also caused a “large and unusual separation” in power prices between the northern and southern parts of the state. Southern California prices were much higher. Higher natural gas prices and implementation of Cap & Trade regulations also contributed to higher prices.

Because wildfires generally occur in less densely populated areas, they tend to affect energy supply and demand less, and their effects are more localized. We may see a rise in spot prices in the affected local areas, but they don’t usually move the market for all terms the way a hurricane has the potential to do. Among the many factors that affect energy prices, wildfires are probably not at the top of the list, but they can and do have some effect on certain energy markets.

Some information for this post is derived from USA Today’s article Ominous warning about California’s wildfire season.

Posted: August 28, 2013