The Spanish wholesale electricity market could be exposed to price spikes over the mid-summer months, with the country’s power generation mix already stretched amid evidence of a heavy reliance on limited coal-fired production.
Latest monthly information from Spanish transmission system operator REE showed coal-fired power generation in June almost doubled year-on-year to 5.3TWh.
Coal-plant availability stood at 95% on Wednesday, while 80% of total installed capacity was firing, leaving excess, available capacity at just 15% of the system’s total, and very little room for volumes to increase.
Meanwhile production from nuclear power has fallen away compared to the previous year amid a heavy outage programme, as has hydropower generation.
Traders agreed that, given the tight supply situation and the dynamics of the generation mix, a run of hot weather and accompanying lift in electricity demand would inevitably trigger pronounced price spikes.
The Spanish day-ahead pool price published by market operator OMIE has hovered around €55.00/MWh since the start of week 29.
One source said if values were to rise 18% to €65.00/MWh, this would already constitute a “spike” as it is would be well above corresponding levels elsewhere in Europe.
In week 28, average day-ahead prices were volatile, closing in a wide €10.10/MWh range with a low of €38.82/MWh.
While the risk of hot weather could trigger a rapid build up of long positions which would push up prices, traders agree that Spain is somewhat unprepared for a potential heat wave – meaning a generation shortfall would see fundamental-driven premium layered on top of sentiment-based premium.
“There is potential [for price spikes], but it would depend on the weather. Coal is running at maximum now and a unit can always break down,” one trader said.
Gas-fired capacity is available, but this in itself would do little to cap price rises with the Spanish gas market among the most expensive in Europe.
Electricity flows from France into Spain continue to be strong, running at around 1.2GW of the 1.4GW available capacity on Wednesday with the same nominated for Thursday, because of a substantial premium on the French side.
The French day-ahead price published by EPEX Spot has averaged around €25.00/MWh since the start of July – just half the Spanish equivalent.
If the Spanish pool price spikes, the market is likely to attract further imports from France, using what little spare capacity remains on the interconnector.
In the case of a heat wave and rising demand, hydropower generation would immediately come under pressure, traders said, because available capacity would struggle to sustain a fortnight of high temperatures.
“The hydro can make a difference, but then water runs out. With coal or gas, you can always buy more,” one source said.
At the end of week 28, a lack of rainfall pushed hydro stocks below 71%, according to latest data from environment ministry MAGRAMA ( see EDEM 15 July 2014 ).
This has added to what was already a swift draw-down of stocks in comparison to the previous year in spite of actual volumes generated falling, because of the dry conditions.
Hydro producers can also opt not to generate electricity, sending bullish signals into the day-ahead pool, sources said. “It’s one thing to have the water stocks. It’s another to actually use it.”
One trader said: “Prices are quite [strong] on the forward curve already, but on the prompt there is potential for spikes.
“Especially if producers decide they don’t want to sell their hydro [generation] at €65.00/MWh and they want €100.00/MWh.”
The August ’14 contract last traded on Tuesday at €49.10/MWh, according to data submitted to ICIS, raising the likelihood of physical volumes being sold on the prompt as opposed to hedged forward, further supporting the front-month.
Although Spain is showing signs of warming up, a sustained heat-wave is not yet on the cards. Meteorologist Weather Service International predicts Spanish temperatures will float around 2°C above the summer average going into the start of the week ahead with unsettled conditions later in the week.
A recent change in weather patterns at the end of June caused meteorologists to revise their predictions for July down, to expect cooler-than-normal temperature in Southern Europe ( see EDEM 24 June 2014 ). So far, Spain has had fairly mild weather which has capped spot prices.
But despite this, the day-ahead outturns continue to be one of the most expensive in Europe, underscoring the system’s relative price exposure to a demand pick-up.
For instance, for Wednesday delivery, the Spanish day-ahead exchange price settled at
a major €23.75/MWh premium to the French equivalent, and this was despite a higher wind generation forecast for Wednesday in Spain which weighed down on the product.
The same Spanish number held a €19.21/MWh premium over Germany and a €11.17/MWh premium over Italy. Sophie Udubasceanu