ICIS Power Perspective: The Iberian Peninsula droughts – hydro at risk, gas-fired power on the rise

Source: Heren


Between April and December 2017, the Iberian Peninsula has experienced a devastating drought. High temperatures combined with low precipitation have led to dramatically low water reserves. In Spain and Portugal, hydropower generation has been heavily affected and gas generation had to step in. The following analysis provides different interactive scenarios to assess the risk of not reaching the 2020 renewable energy targets.

Main points

Droughts in Portugal and Spain

  • In October/November 2017, the majority of Portugal's territory suffered under extreme to severe drought conditions (European Parliament link)
  • At the same period, Spain was facing a similar situation with 2017 being the third driest year on record (El Pais article and following Graph 1)

  • Financial support from the European Comission is possible as mentioned in an answer to Portugese MEP Fernando Ruas in December 2017:
    • “Hydropower, which is an important component in the energy mix in Portugal, may be negatively affected and could merit a reflection on the gradual shift towards other renewable energy sources” and that “Support from the European Regional Development Fund […] is possible in this regard" (link to answer)


Unusable Hydro capacity

  • Portugal:
    • Between 2014 and 2016, hydro power generation covered 29% of the country's power demand
    • Hydro power generation with run-of-river and reservoir output decreased by 66% and 45% respectively in 2017 compared to 2016 (Graph 2)

  • Spain:
    • Hydro power generation covered less power demand compared to Portugal, 12% between 2014 and 2016
    • In Spain, average hydro reserves over the year 2017 were 37% lower than in 2016 and the run-of-river potential sunk by 53% (Graph 3 and Graph 4)

Impact on power generation: Hydro crumbles, gas steps up

  • In Portugal, hydro power generation decreased by 47% when comparing the period April-December 2017 to April-December 2016 (Table 1)
    • Fossil-fueled power production, in particular gas, stepped up with a 13% increase for coal and 62% for gas
    • Power exports (negative exchanges in Graph 2) decreased by 46%
  • In Spain, hydro got hit even stronger with a 50% drop between the two periods (Table 1)
    • Increase in gas power production was not as strong as for Portugal but still a decent rise of 19% while coal power generation increased by 11%
    • Imports increased by 44%

Impact on power prices: 20% rise and no import silver bullet

  • The marginal cost of hydro power generation is lower than gas and coal and therefore is prioritized in the merit order
  • Both Portugal and Spain witnessed a 20% rise in power prices (Table 1) on the back of gas replacing hydro
  • Facing high power prices neither Spain nor Portugal have greater additional import options
    • While Portugal is only interconnected to Spain and Morocco, Spain only has France as an import option but the lack of interconnector capacities to France do not solve the issue (PowerPerspective customers, see our Analysis)

Future hydro capacity forecasts clash with drought reality

  • An increase of hydro capacity in drought affected countries means they are at risk of not being able to translate that potential into actual generation
  • Hydro power generation can be distinguished into two groups:
    • Water reservoirs are mainly used for peak load hours as they can easily be turned on or off – only highly flexible generation assets such as gas can replace water reservoirs in the energy mix
      • Some water reservoirs are additionally equipped with a pumping function which allows to store energy  by pumping water back into the reservoir during times of power oversupply
    • Run-of-river hydro plants deliver baseload power – coal or nuclear plants can serve that role too
  • So overall, if Spain's and Portugal's future expected hydro capacity translates into significantly lower hydro generation in the short-term to mid-term, coal and gas power generation will have to step in

No additional gas capacity due to low utilization rates

  • Portugal:
    • With rising gas power generation in the past years, annual utilization rates of gas plants have steadily increased from 4% on average in 2014, to 15% in 2015 and 22% in 2016
  • Spain:
    • Gas power plant utilization was even lower with 9% between 2014 and 2016
  • Assuming a gas utilization rate of up to 80% this means both Spain and Portugal have sufficient free capacities to fill the gap left by decreasing hydro power production

Scenario Analysis: 2020 renewable targets at risk

  • Although both countries are forecasted to make their target, the dire water scarcity situation of the Iberian region and the potential step up in coal and gas could put both Spain and Portugal on the path of missing their 2020 renewable targets
  • The two countries' 2020 renewable energy electricity targets (link) are as followed:
    • Portugal: 55.3%
    • Spain: 40%
  • Graph 5 and 6 provide an interactive scenario analysis you can choose between three different hydro scenarios:
    • low: 2017 hydro generation - high drought
    • average: average hydro generation as seen between 2014 and 2016 - average water supply
    • high: 2016 hydro generation - high water supply
  • Additional solar and wind generation from projects planned until 2020 are included (For PowerPerspective customers analysis for Portugal, analysis for Spain)
    • Portugal solar load factor: 0.25
    • Spain solar load factor: 0.3, wind load factor: 0.25
  • The gap between the forecasted demand and the historical average generation in the respective drought scenario can be filled by different shares of additional coal, gas and renewable generation
    • In the interactive graphs below you can insert different substitution combinations and assess the effect on the renewables share

  • In a low hydro scenario, Portugal with its relatively high share of hydro generation is highly endangered to miss its 2020 renewable target – the gap of 10.6 TWh would have to be filled by 3.2 TWh additional generation from renewables
    • This equals an additional renewable capacity of 1.5 GW (load factor: 0.25)
  • Due to the lower share of hydro and the lower renewable energy targets, Spain would reach a renewable target share of 44.0% in 2020 in the low hydro scenario without additional renewable generation and thus reach the target in our model

Yann Andreassen is Senior Analyst - EU Carbon & Power Markets at ICIS. He can be reached at Yann.Andreassen@icis.com

Simone Lischker is Analyst - EU Carbon & Power Markets at ICIS. She can be reached at Simone.Lischker@icis.com

This analysis for ICIS Power Perspective subscribers was originally published on 19 February 2018 10:08 CET.

Our ICIS Power Perspective customers have access to extensive modelling of different options and proposals. If you have not yet subscribed to our products, please get in contact with Neil Dewet (Neil.Dewet@icis.com).