Natural gas soared past coal as the second-most used source of electricity production in the Spanish system in August.
And the role of Spain’s combined-cycle gas turbine (CCGT) fleet is likely to remain strong into 2018 to make up for a shortfall left by reduced hydropower output.
Spanish clean spark spreads – a measure of CCGT plant profitability – are relatively strong for September and Q4 ‘17 at current forward curve values, boosted by the increased power market risk premium linked to hydropower stocks.
Spreads in excess of €10.00/MWh for a 49.13% standard efficiency unit indicate that even the least efficient plants should be able to run profitably as baseload generation.
But the spread is far less attractive for Q1 ‘18, dropping to around €5.00/MWh. This means average efficiency plants will struggle to turn a profit if generating baseload at current forward prices, once operational costs are take into account.
The likelihood is therefore that gas will retain its current role in the Spanish power market at least for the remainder of this year.
As a result, natural gas prices on Spain’s PVB hub will be an important price driver of the power market.
Gas-fired power generation met 3.5GWh of electricity demand from 1-31 August 2017, a 73% increase year on year, according to Spanish grid operator REE. Only nuclear power held a bigger share of the country’s electricity mix in August.
Nuclear power was also the biggest source of power in August 2016, and the year as a whole. At that time Spain’s CCGT fleet was the fifth largest provider of electricity behind wind, coal and hydro.
The impact of the missing hydropower production has been felt further across the energy complex. Increased demand for Spanish CCGT output has supported gas prices, which in turn has made the country an attractive destination for LNG exporters. Only Italy and Greece have higher LNG prices in Europe.
Spain’s gas grid operator Enagas expects 17 vessels into the country’s regasification plants over September. This is only slightly down on the average of 18 vessels per month between June and August. By comparison there were 14 vessels in September 2016.
Spot purchases of Qatari LNG soared over August as utilities moved to build stocks and avoid being short of gas in the event of a cold snap, as occurred in winter 2016-17. However import data indicates Spanish buyers are now confident the risk of tightness has been avoided, which should free up Qatari supply for the UK market (click here to read ESGM story).
Meanwhile the profitability of coal-fired power has been hit by international coal prices on the Rotterdam coal futures market setting a succession of multi-year record highs on a bullish run that began in May.
Demand for gas from the electricity sector has ramped up over this summer in response to a cocktail of factors alongside hydropower.
Hydro stocks would usually be drawn down over the dry summer months but low stock this year has severely hindered output. Stocks are not expected to recover until the winter.
In addition, August has also been a poor month, and 2017 a poor year so far, for wind output, which dropped by around 9% year on year in August, and by 11% for the year to date. Wind output is difficult to predict so volume it may return to a normal level.
At least in the short-term, strong wind supply has been forecast for Friday and over the weekend.
Low renewable supply over August has also coincided with a 1.6% year on year increase in electricity demand.
There is little flexibility in nuclear power to meet the shortfall of renewable supply to in turn meet increased demand. Nuclear production also dropped slightly in August in comparison to last year. email@example.com