There is no paradise without water

One year ago, I wrote an article about the impact of the French Nuclear Power in the Spanish Energy System and its capacity to influence significantly the Power Spot Prices (OMIE) of the Iberian Peninsula as well as other neighbouring.

The nightmare lived last winter was possible thanks to the agglutination of several bad ingredients:

• Nuclear crisis in France that affected part of supply capacity responsible for internal consumption as well as energy export
• Extremely cold temperatures that caused a high demand for gas and power for heating
• Dry winter with few rainy periods
• Jump in oil prices due to the oil output cut agreement established between OPEC and non-OPEC members
• Bullish trend of coal prices due to drastic environmental policies applied by China to cut the CO2 emissions
• Supply disruptions in Argelia’s pipeline that connects the African continent to the south of Europe – top gas supplier for the Iberian Peninsula.

Luckily, the Spring came with milder temperatures reducing the energy demand in Europe and giving some room for the nuclear park in France to recover from unscheduled shortages, and giving hope for some price relaxation throughout the year.

We are now in November and the yearly average is at 51.12 €/MWh, one of the highest prices for Spot electricity ever registered in Spain

From different news and analysts’ opinions, the year is being mainly affected by three key-drivers:

1. The nuclear situation in France that affects directly the imports and exports levels of energy to/ from Spain
2. The lack of participation of hydropower plants in the energy mix due to the low levels of water reserves
3. The price of coal

But which one is the most relevant?

Nuclear power and the imports as price buffer

France can absorb 75% of its electrical demand by relying only in its 63 GW of nuclear energy capacity. Spain and, by consequence, Portugal, take advantage of this French cheap power source importing energy on a daily basis, which minimizes spikes in the Spot power prices in the Peninsula. As we can see from the chart, since the last semester of 2016, imports from France means cheaper prices compared to periods where Spain becomes a net exporter to its neighbour. Although greater imports don’t mean directly cheap prices, it’s possible to affirm that the imports work as a buffer to prevent power prices to rise. Still the situation of 2016 was different with January to May registering minimum prices for OMIE and showing good levels of energy export. This can be explained by the healthy levels of renewable energy (wind and hydro) available at the time.

Wake up call for coal

Coal sector got hit pretty harsh between 2014 and 2016 with coal API2 reaching a price per tonne below 38 $, leading to believe that the Era of the dirtiest combustible on Earth was close to an end. But in 2016 everything changed, or better said, China changed (its energy policy) and the recovery of coal began reaching the 87 $ / tonne in less than 2 years.

The nuclear crisis in France forced several countries to burn coal and gas to generate enough power for internal use and even to supply France in the peak of last Winter. Situation that was supposed to be punctual but lasted and lasted until today.

Crossing the Spot Monthly Prices with the monthly participation of coal in the Spanish Energy Mix is obvious that a less use of coal corresponds to more participation of renewable energy technologies or less demand, leading to cheaper Spot prices. On the other and more use of coal directly affects upwards the prices of the day-ahead product. BUT, the price of coal did not directly affect the final price of OMIE as we can see for the different summers presented in the Chart 4 where even having significantly distinct prices for the commodity, the volumes used were the same resulting the same levels of Spot prices of electricity.

Please Let the Rain Come!!!

The Iberian Peninsula is facing one of the worst dry seasons in history with Spain having to go back 20 years ago to experience similar scenarios and Portugal 87 years (YES, 87!). This catastrophic situation has been avoiding the participation of Hydropower plants to contribute for the energy mix at the same healthy level witnessed in the last couple years (2015-2016).

In Spain, hydropower available capacity can generate 5 to 7 GWh and it represents 20 to 30% of energy mix. However, these optimum values only occur if the water levels are significantly high, above the 400 000 hm3. Figure 6 shows the evolution of the participation of hydropower in the Spanish Energy Mix as well as the evolution of the Spot Price.

It is possible to affirm that the evolution of the Spot Power curve follows the amount of Hydropower use, with the lowest Spot prices corresponding exactly to the months where the participation of hydro was higher. This is caused by the called “hueco térmico” (Thermic hole) which is the amount of the energy demand that needs to be filled with fossil fuels after all the renewable generation available is allocated.

You’re right if you’re thinking that the same happens the when it comes coal; that it’s easily explained by the use of coal as the first technology to participate in the energy mix, replacing the hydropower. Nevertheless, the price of the coal does not affect directly the price of the electricity, so what is the main driver?

Hydropower plants as price-makers

Hydropower is a renewable source of energy and, as other renewable technologies, this one should help lowering the price of electricity. However, that’s not exactly what’s happening or at least not the best way possible.

As we explained in an article about the SPOT market, OMIE’s price is the result of several price coupling between the supply and the demand for each hour of the day. In terms of logic of this market strategy, the renewable technologies should be the first to sell its volumes at lower prices, leaving the remain energy demand for the thermal technologies based on coal and gas, technologies with higher costs, increasing the final price.

However, that is not what is happening in Spain according to the charts 7 and 8.

The chart number 7 shows that in 45% of the hours of 2016, the price couple was set by hydropower (34% Hydro with pumping system and 11% without), and in terms of price range, the Hydropower defined the electricity price at maximum levels 65% of the times.

We can still say that is somehow logic because 2016 was a good hydrologic year with great levels of water reserves allowing the energy companies to use their dams freely. Besides that, the healthy levels of other renewable energy participation, allowed them to mark the price in off peak hours.

Now let’s take a look at 2017 by analysing the Figure number 8. Once again, the scenario is quite similar, hydropower is responsible to define the power price in 47% of the hours between January and October of the current year, 47%! And as you recall, we are facing one of the worst dry seasons in history! So, we have MUCH less water in our rivers and dams, but we still have this technology defining the price even more times that in 2016.

Giving a look at the price ranges, the current average value for the Spot Price of 2017 is 51.21 €/MWh, so if we go to the chart 9, we can see that over that price range, 66% of the prices are defined by the hydropower with some participation from natural gas.

More questions to be asked

To answer the initial question, hydropower is unquestionably the main price-driver of the Spot Power Market in Spain which rises some questions about the way this source of RENEWABLE energy is being managed by the major energy companies. It is interesting what we have been witnessing regarding the participation of hydropower in the energy mix with the current water crisis that is striking the Peninsula. Spain has overcapacity and alternatives to this technology such as natural gas, so why are they using the water? Is it about environmental issues? What about water supply restrictions that are already being applied in the centre of Spain, what about the dry rivers and effluents of the Douro’s river that are drought?

In terms of price coupling, besides the obvious question of how can a price ascend to the 100 €/MWh when the commodities’ prices needed to produce electricity are bullish but not extremely expensive (with the exception of coal), we should ask how is the hydropower marking the prices at such high levels?

The market opportunity is really attractive for the owners of the hydropower plants that are (let me say) the same owners of the coal and gas power plants, but at the same time, could this be about a possible worst scenario case where this drought situation continues beyond this winter? Are they trying to compensate for a possible period without having any water to generate electricity?

Not discarding the other options analysed in this article (nuclear power from France and the participation of coal at current price levels) we need rain and we need a good snow season to fill our dams for next Spring or the scenario is unlikely to change unless…

Jorge Seabra | Energy Consultant