A sharp rebound for hydro levels on the Continent this spring is keeping European power prices low despite strong gains for generating fuels gas and coal and a rally for EUA carbon allowances, S&P Global Platts analysis shows.
Spanish hydro stocks have fully recovered from last year's drought and are now above the 10-year average at 15 TWh with hydro output running 50% higher so far this year, data shows.
In Switzerland, reservoirs have been run empty to make space for strong expected inflows from near record snowfall this winter in the Alps with the Swiss TSO estimating 16-17 TWh potential from the snowmelt.
"The hydro level is huge all over Europe, so it will have a big [negative] impact on power prices from mid-May," one trader said.
In addition, France's nuclear fleet seems back to normal with summer availability well above 2017 levels, while Germany's 100 GW of wind and solar keep setting records on an almost monthly basis adding to a bearish supply picture for European power for May and June.
Outright power prices for May across key European markets are barely above levels last April, despite gains for coal and gas prices, both up over 20% from a year ago, while EUA carbon allowances have more than doubled to trade at levels not seen since 2012.
This has pushed front-month generation margins for German coal-fired power plants deeply negative to an all-time low, Italian gas margins to three-year lows and even turned Spanish front-month gas generation margins briefly negative, Platts data shows.
French gas-to-power demand has already fallen to zero at times with no coal plants running, while the UK has been without coal-fired generation for over three days, according to TSO data.
SNOW MELT HAS STARTED IN ALPS
European power traders are now bracing for a hydro glut next month as the snow melt has started across the Alps.
According to Swissgrid, snowfall this winter was the highest in over 20 years with an estimated hydro potential of 16-17 TWh once the snow starts to melt over coming weeks.
How much of this can be stored in reservoirs and turned into electricity remains to be seen, but hydro flows will be higher than in previous years in the coming weeks, a spokesman for Swissgrid told Platts this week.
Swiss hydro reservoir levels have dropped to a 20-year low just under 10% of the total 8.8 TWh reservoir capacity ahead of the expected strong inflows this summer, weekly government data shows.
The picture is similar in France, Italy and Austria but with data often lagging and reservoir stocks neeeding to be replenished.
Hydro output across France, Spain, Italy and Germany in the first quarter already was up 4.3 GW on the year, more than offsetting gains in power demand this winter, data from Platts Analytics shows.
RAIN IN SPAIN
Spanish hydro stocks have fully rebounded from last year's drought and are now above the 10-year average just below 15 TWh, according to weekly data from the environment ministry.
Stocks have risen 9 TWh since October, the highest replenishment rate since 2011 and nearly double the five-year average for the period.
Hydro output so far this year is up over 50% at 11 TWh, according to Spanish grid operator REE.
An unplanned nuclear outage with the 1 GW Vandellos-2 reactor offline for over four months this spring will limited the replenishment of hydro stocks somewhat.
Spanish utility Iberdrola forecast Tuesday gains of up to 77% for its annual hydro production in 2018 to 13-14 TWh as conditions have completely turned around since last year's exceptional dry spell.
Spanish hydro capacity usually hits its annual high in May before falling during the high-demand summer months.
SPREADS REBOUND FOR Q3
Power generation margins are rebounding for Q3 especially across Southern Europe with Italian and Spanish demand peaking during the summer months, when hydro overflows from the snow melt will also have vanished and hydro reservoir stocks getting more important again during the generally dry summer months.
In Italy and Spain, Q3 clean spark spreads are Eur8/MWh higher than for May, while German clean dark spreads for modern coal plants are back in the money at around Eur2/MWh for Q3 rising to over Eur7/MWh for Q4, Platts data shows.
But while Italian and Spanish Q3/Q4 spreads are back to normal, German coal and gas generation margins remain at multi-year lows despite the seasonal rebound, with outright power prices not yet fully reflecting the gains for generation fuels and carbon.
One reason for this is continued gains in renewable capacity not yet offset fast enough by conventional plant closures across the region.
Negative generation margins and under-utilization rates of power plants will increase the economic pressure on Germany's oldest power plants to close, with the new government also debating how to phase out coal over the next decades.
Over the next five years, however, the planned nuclear exit with closure dates for the final seven reactors set in stone in addition to any additional coal closures across Europe will squeeze conventional supply margins especially at times of low renewables production.
