Mild weather, bearish gas to offset hydro risk in European power markets

OUTLOOK

• Precipitation levels downgraded for most of Europe

• Nordic levels buck trend

• Warm weather and bearish gas limit risk premium

LONDON (ICIS)–Weather conditions will be far drier across most of Europe in January than previously thought, but with chances of an extensive cold spell evaporating and gas fundamentals broadly bearish, the bullish impact on power prompt markets will be limited.

In contrast precipitation levels in the Nordics have been revised upwards month on month, which will boost depleted regional hydroelectricity stocks and limit the region’s prompt premium to continental European power prompt markets.

PRECIPITATION LEVELS TO PLUMMET

The Alpine region will face unseasonably low levels of precipitation in January with large downward revisions in the region and neighbouring countries month on month. Dry, warm weather in recent weeks has contributed to the decline in regional hydroelectricity stocks while below-average French nuclear availability has been observed, a bullish factor for some prompt power markets.

European Centre for Medium-Range Weather Forecasts, sourced via MetDesk, on 5 January expected that French, Swiss, Austrian, German and Italian rainfall for January will be lower than previously forecast in December.

Italy will experience the driest weather conditions, with most of the country to see precipitation levels only up to 25% above the model climate normal (1993-2016). Neighbouring countries will experience a similar fate with the exception of Germany where precipitation levels will climb 100% above the model climate normal in the northern parts of the country.

France may be vulnerable to the changing forecasts with margins already under some pressure due to below-average nuclear availability. Short-term MetDesk forecasts released on 6 January indicate French precipitation will be more than 40% below averages in week 2 and 3.

Meanwhile, the latest data collected from French grid operator RTE shows that nuclear availability will be below the 2014-2018 average up until 31 January. The greatest downgrades occur during week 2 with availability averaging 87%, 6% below the five-year average. Nuclear is a dominant source of electricity generation in France and the country is western Europe’s most thermosensitive power market due to high shares of residential electric heating and inflexible nuclear in the generation mix.

MetDesk forecasts show that French wind output will be below normal during the first half of week 2.

However, the French power prompt is expected to face some bearish pressure during week 2 and week 3 with temperatures forecast to be above seasonal norms. A similar pattern is expected in neighbouring countries, weighing on demand.

Recent ICIS analysis has also highlighted that ample incoming LNG supply and rising gas storage withdrawals should reduce the risk of prompt price spikes in the power and gas markets from week 2. A total of 26 LNG cargoes is expected to berth at European terminals in January, a yearly jump of 30%.

PRESSURE ON NORDIC PREMIUM

The Nordics will experience wetter weather conditions in January than previously thought, with Norwegian precipitation levels set to surge month on month and weigh on the region’s prompt market relative to German prices.

ECMWF forecasts that Nordic precipitation levels will more than double the climate normal for January with most of Norway and northern Sweden towards the higher end of the scale.

Norway has the greatest installed hydropower capacity in the Nordics and hydroelectricity stocks will be revived quickly with short-term MetDesk forecasts indicating precipitation will be up to more than four times seasonal norms in weeks 2 and 3.

Scandinavia is a major power exporter to the rest of Europe, and the expectation of very wet weather should help push the Nordic power prompt down towards the German equivalent. The Nord Pool Nordic market day-ahead system price averaged €36.79/MWh in January, €4.83/MWh above the EPEX SPOT day-ahead auction for Germany. Germany is forecast to experience below-average wind output during week 2 and week 3 which will further affect the Nordic premium.