Fundamentals: Spanish power risk premium increases as hydro recovery halts, imports spike

Spain’s already tight hydropower stock has fallen for the first time since it started to recover at the start of February, triggering a major increase in electricity imports.

And the immediate outlook is for stocks to remain unseasonably low with only limited recovery out to at least 6 April, according to forecasts from Spanish meteorologists El Tiempo.

Changes in hydro capacity tend to be reflected in movements in the front month and quarter contracts. Both have been strong in Spain in recent sessions as the market prices in increased risk associated with low hydro stocks and the likely need for more expensive forms of power generation to be pulled into the merit order going into summer.

The dry weather outlook could feed into a continuation of this trend.

Low consumption should cap gains however. Demand has been relatively low so far in March compared to 12 months ago. Temperatures will be slightly above average for the time of year out to 2 April, according to European meteorologist WSI. Any change in weather-related demand will only be very limited.

Record imports

Hydropower stocks dropped by 1.5 percentage points to below 46% of their maximum over the seven days to Tuesday and remained significantly below the long-term average for the time of year, according to Spain’s environment ministry.

The low hydro stocks have limited Spain’s hydro energy output. From 1 to 28 March hydro facilities produced 2.6TWh of electricity, down 39% from 12 months ago, according to grid operator REE.

In response non-renewable sections of Spain’s power mix as well as imports have all ramped up production. Spain has been a net daily importer for each of the seven days since 21 March, and net import flows have reversed on only two days between 1–28 March.

In January Spain was a net exporter of approximately 530GWh, but then imported a similar amount in February. By contrast, from 1 to 28 March, Spain has imported 1,300GWh. This is Spain’s highest net inflow since at least January 2014, when REE’s information portal Esios first made data available.

The biggest source of imports to Spain is France, which is almost certain to remain a net exporter for the foreseeable future, according to latest over-the-counter trading information showing large premiums in the region of €15.00/MWh on the Spanish front month and front quarter over France.

Spanish wind power output will lift from a low on Wednesday to a peak of 11GWh on Saturday before falling again into the start of the following week, according to ICIS analyst forecasts. Wind power output is usually the strongest driver of day-ahead contracts. jon.stibbs@icis.com