Natural gas prices in California for the rest of 2021 were...

Natural gas prices in California for the rest of 2021 were trading at their highest in years on expectations that the extreme drought in the U.S. West will cut hydropower supplies and force the state to rely more on gas-fired power plants this summer.

That would make it tough for California to reduce carbon dioxide emissions this year and shows how difficult it would be for the most-populous U.S. state to keep the lights on if it starts shutting gas-fired plants in the coming years as it moves toward getting all electricity from carbon-free sources by 2045.

So far in 2021, hydro generated just 7% of the power produced in California versus 46% for gas. The rest came from solar (23%), wind (14%) and nuclear (9%).

The last time California experienced such a severe drought was in 2014 when just 8% of the power generated in the state came from hydro and 61% from gas. That compares with a five-year (2016-2020) average of 16% for hydro and 46% for gas. "We expect West Coast natural gas pricing to catch a bid as it is still the primary fuel of baseload generation capacity in California," analysts at Tudor, Pickering, Holt & Co said, noting that the state will likely need to boost gas imports by 6-7% to offset lower hydro output.

Gas prices at the PG&E Citygate in northern California were trading around $4.32 per million British thermal units (mmBtu) for the balance of 2021, according to data from the IntercontinentalExchange, which would boost the annual average to $4.14.