ICIS Long-Term Power Analytics: Portugal to become cheapest European market post-2030

This story has originally been published for ICIS Long-Term Power Analytics subscribers on 8 April.

Due to relatively low demand, strong renewable investment conditions and restricted interconnection capacity, Portugal will become one of the most oversupplied and weakest European power markets over the coming decades. ICIS’s new 2050 long-term power forecast that we expanded across to Southern Europe at the end of March explores three possible scenarios for emissions reduction pathways in Portugal: a Base Case outlook, a High RES and a Low RES pathway.

ICIS modelling shows that Portugal will produce sufficient renewable generation to satisfy its domestic demand by 2030 and 150% by 2040, driven by strong wind and solar growth in the country. This results in a strongly bearish trend in wholesale power prices, with Portugal becoming the cheapest market in Europe from the mid-2030s onwards.

2050 country extensions

• We have expanded our coverage of several north and western European countries out to 2050 from November 2020 and recently launched our extensions for Spain, Portugal, Italy, Switzerland, Greece and Cyprus at the end of March
• Within these forecasts we have created three scenarios that each represent a different pathway for GHG reduction, capacity build-out and prices, and the scenarios are differentiated by carbon prices, demand, technology developments and cost assumptions
  • Long-term capacity build-out for renewables and gas plants is determined by our investment model, which considers financing and operating costs, lifetime and load factor assumptions, investor hurdle rates and natural resources and is linked to the Horizon model to determine when and where capacity will be added. See our investment model description for more information
  • In terms of emission reductions, in our base case we assume that a 2050 net zero GHG target is put in place at a European level, but that only a 90% reduction is achieved (compared to 1990). This is in contrast to the High RES scenario, where a net zero GHG European economy is achieved, and the Low RES scenario, where only a 75% reduction in emissions is achieved
• Our updated assumptions and finalised data is now available on our platform
• For the purpose of this analysis we will discuss the Base Case unless otherwise stated

Analysis

Renewable expansion

• Portugal is already capable of satisfying approximately two-thirds of domestic demand from renewable sources
  • The country produces electricity to cover 25% of domestic demand from onshore wind and an additional 25% by hydropower but just 5% from solar according to our 2021 Base Case forecast
• We expect strong renewable capacity growth in the country over the next decade, as is the case in much of southern Europe
  • In Portugal, onshore wind and solar capacity will grow much faster than in other markets over the next 30 years relative to the current installed 7GW – see chart below
  • Compared to other regional markets, we expect Portuguese renewable capacity growth to be strong due mainly to favourable investment conditions for onshore wind and solar
  • Growth is even stronger in our High RES scenario

Source: ICIS

• While we do expect strong price cannibalisation in particular for solar as we also see in Spain, we nevertheless envisage that Portugal will steadily add renewable capacity up to 2050
  • Our investment model assumptions expect capture prices to fall, but crucially remain above the Levelized Cost of Energy (LCOE) of onshore wind and solar consistently between 2025 and 2050 meaning that capacity additions continue at a steady rate to 2050

Source: ICIS

• With Portuguese demand growing at a slower rate compared to other regional markets, but renewable capacity expanding at a faster rate, the result is that we expect Portugal to produce renewable energy to meet 100% of domestic demand before 2030 and 150% by 2040
  • With no significant growth in hydropower capacity and slow development in the offshore wind sector, this additional renewable generation comes almost exclusively from onshore wind and solar
  • Portugal has relatively low demand, stable hydropower generation, no nuclear capacity and will close all existing coal assets in 2021
  • This means that its share of renewables is already considerably higher than other mid-sized European markets such as the Netherlands and Belgium that generate around one-third of demand from renewables
  • We expect Portugal to only increase its share relative to these markets over the coming decades

Gas and emissions

• Much like Spain, we expect Portuguese emissions reduction to be rapid due a fast gas-fired generation phase-out
  • We expect Portugal to reduce emissions by 75% by 2030 relative to 2021 -from 12 million tonnes of CO2 to below 3 million tonnes of CO2
• Portugal’s share of gas in the power mix falls quickly, from around one-third of the generation mix (20TWh) in 2021 to one-eighth (9TWh) in 2030, 3% in 2040 and 0% in 2050
  • This is an even faster than in Spain, which also sees gas play a minor role in the generation mix by 2040

Source: ICIS

Strong exporter

• Portugal becomes a strong exporter post-2030 flowing its excess renewable generation to Spain for the most part
  • This export increase comes mainly via Spain, which will import an annual average of 19TWh in the 2030s from Portugal, up from 4TWh in the 2020s
  • Morocco will also steadily net import more power from Portugal driven mainly by electricity demand growth expectations in North Africa, though the increase in exports is much more moderate than we see between Spain and Portugal
  • With renewable buildout at its fastest in our High RES and slowest in our Low RES scenario, net exports differ between the three scenarios as a result

Source: ICIS

Interconnection capacity

• Despite exports steadily increasing in Portugal, due to geographical restraints sharing only one land border with Spain, we do not foresee very high levels of interconnection expansion
  • Sub-sea connection to external markets such as Morocco that will be first completed in 2022 is generally expensive and we do not currently envisage Portugal connecting to other markets this way
• Overall, this restricts the potential for Portugal to export its excess renewable power generation and this has a strong depressive impact on Portuguese prices

Source: ICIS

Market impact

• We expect a strong bearish trajectory for Portuguese prices relative to other European markets as a result
  • Attractive renewable investment conditions, low demand and restricted interconnector expansion will mean that the high rate of renewable capacity expansion will eat into domestic prices to a greater extent than other markets with high renewable growth that are able to export more, such as Spain
• The result is a strong depressive impact on prices that sees Portugal as one of the cheapest markets in Europe post-2030, an effect even more evident in our High RES pathway that sees faster and greater renewable expansion

Our ICIS Long-Term Power Analytics customers have access to extensive modelling of different options and proposals that are now extended out to 2050. If you would like to find out more about our Long-Term Power Analytics products, please get in contact with Justin Banrey (Justin.Banrey@icis.com) or Audrius Sveikys (Audrius.Sveikys@icis.com).