The Tap is Closed

We started the week of June with a daily price OMIE rising up to 40 EUR per MWh. The good (cheap) prices, lived these months of 2016, are being lagged behind and the main reason is the withdrawal of hydropower. A withdrawal that usually occurs in early May and that makes the third quarter the most expensive one, when there are higher prices in the daily market and in the futures market:

The share of hydropower in the appeal of the PBF has been outstanding so far this year, as many as more than 40% of the energy mix compared to 2015. The share of hydro, coupled with the good winds, technology with more weight in the energy mix, has driven to power prices not seen since 2010 and has made May 2016 the cheapest compared to other months of May previous years. A behavior totally opposed to 2015 prices:

As we mentioned, the participation of hydraulics has been exceptional this year. And many will wonder why this year and not in 2015. To solve this we must understand that, unlike most clean energy, hydropower is manageable, particularly power plants prey walk. They are those that, by building a dam or using an existing one, can regulate the flow. As a result, the level of participation depends on the decision of the agents who manage these infrastructures.

Spain has a total capacity of 55,000 hm3 reservoirs, of which 40% of that capacity corresponds to hydroelectric dams. In our country hydropower installed is 17,792 MW, accounting for 19.5% of the total power capacity, occupying the second place being surpassed only by combined cycle gas, totaling 27,200 MW. Catalonia, Galicia and Castilla y León are the regions that have the largest installed capacity in the hydropower sector, being the areas with the largest hydroelectric resources within Spain. A Map of the largest plants of 20 MW (indicates the name of the 10 plants of 300 MW) is showed below:

In Spain there are 20 plants over 200 MW representing 50% of the total installed hydroelectric power. Generally these plants are formed by a reservoir where the water is retained, a dam or curtain which supports the thrust of water and a central with turbines that generates electricity. All looks like a complete hydraulic power pack. Of these 20, the 10 largest known as the crown jewels are:

Central Aldeadávila in the Douro river of 1,243 MW and managed by Iberdrola
Central José María de Oriol, Alcantara Extremadura 957 MW and managed Iberdrola, located in the second largest reservoir in Spain and fourth in Europe (maximum 3,162 Hm3)
Central Villarino in the river Tomes, Extremadura of 857 MW and managed by Iberdrola
Central Cortse-La Muela in the Júcar River, Valencia 630 MW and managed by Iberdrola
Central Saucelle in the Duero River 520 MW and managed by Iberdrola
Cedillo River Tagus 500 MW and managed by Iberdrola
Estany-Gento Flamisell Sallente in the river, La Torre de Cabdella of 468 MW and managed by Endesa
Central de Tajo de la Encantada in the river Guadalhorce, El Chorro 360 MW and managed by Endesa
Central de Aguayo 360 MW in San Miguel de Aguayo (Cantabria) and managed by Viesgo
Mequinenza 324 MW in the river Ebro and managed by Endesa

These plants along with the rest of hydroelectric plants, smaller, are grouped in 6 watersheds with the following installed power: North of 4,879 MW, Duero of 3,887 MW, Ebro-Pyrenees of 3,425 MW, Tajo-Júcar-Segura: 4,349 MW, 226 MW of Guadiana and Guadalquivir-Sur of 1,025 MW. Each watersheds combines the power stations that share a single natural drainage system, i.e., the waters are drained to the sea through the same river, or to a single lake. In these basins exist about 36 reservoirs. When a reservoir is opened, all plants located downstream use the flow to generate energy.

It seems difficult to monitor daily power prices if the participation of such energy depends on the opportunity perceived by the agent that manages the reservoir and decides whether or not to release the water. However, management has limits as:

– Guaranteeing ecological flow.

– The maximum capacity of the reservoir

The first ecological flow is defined as: the water needed to preserve ecological values; natural habitats that shelter a wealth of flora and fauna, environmental functions such as dilution of pollutants, damping climatological and hydrological extremes and landscape preservation. At the time of closure, the flow downstream of the dam must be maintained, ensuring the ecological flow throughout the period of filling the reservoir that can last several months. The way to ensure this minimum flow varies from case to case, and should be anticipated in the design of the dam.

The second is defined as the sheet at its peak which it is always significantly below the crest elevation (top of the dam); which should never be reached to ensure the integrity of the infrastructure to retain the impounded water. The capacity limit also varies from case to case, but all are governed by the Technical Guide Security Dam and is called “Maximum Level Normal” (NMN).

Hence, the data that could indicate hydropower level of participation should be the level of hydroelectric reserves. That is, there should be a relationship between the level of reserves, the share of hydro and, to a lesser extent, because there are other factors such as the participation of wind, a power price range. Here is a summary of the performance of this technology since 2012 with the level of reserves obtained in April (rainy month) including wind:

According to historical data, the fill level does not ensure the same level of participation but if follows that: if the filling is less than 50% the partition will not be greater than 10%. As for power prices, it shows that a higher level of participation of hydraulic over 20% will lower prices in average of 30 € / MWh.

Still, we see that neither the level of reserves allows to know the performance of the plants. This figure is still not the solution, especially when investigations take place by the CNMC for possible price manipulation in the wholesale market by producers. Recall that in June 2014 CNMC announced the opening of disciplinary proceedings against Iberdrola on suspicion of tampering to alter the prices in the wholesale electricity market. The facts on Competition investigating the dates between 30 November and 23 December 2013. And the research focused on several facilities of the basins of the Duero, Tagus and Sil rivers where the entity could have retained water. According to the regulator, the power company Article 60 of the former power law was violated, which represented a serious penalty of up to 25 million euros to Iberdrola.

Hence in the current electoral landscape proposals arise to recover hydroelectric plants. The agreement between Podemos and Izquierda Unida by which they concur together in a single candidacy in the upcoming elections squarely 26J affect the interests of the electricity sector, and reservoirs managers. One plan would be the recovery of hydroelectric whose concessions to private companies expire plants by the State. The reasons advocating for hydroelectric power plants managed by public institutions are varied:

– Hydroelectric power plants were built mostly decades ago, when electricity generation was regulated, and in some cases including public investment so their investment costs have already been recovered. Thus, the liberalization of the electricity system in 1997 established a new framework in which these plants became known recipients of “fallen benefits of heaven.” These arise when making use of a public good such as water for private purposes in a marginal system, prices are very high. Being a public good, they understand that the benefits should be allocated to all Spaniards.

– In the energy model offering a mix of renewable energy, hydroelectric production should not be guided by the opportunity cost. Being a manageable technology, its performance should be purely technical to support other renewable energies such as wind irregular participation or solar photovoltaic.

The pact Podemos and Izquierda Unida is presented as a very ambitious project for the hydraulics that, if it overcomes all obstacles, such as the lack of existing concessions knowledge, will lead to a new wholesale market behavior. That is, we could see the seasonality of current daily prices we mentioned at the beginning of this article arriving to an end.

Marta Merodio | Energy Consultant