Southbound French power flows slump in August

Barcelona — Net French power exports to its two largest south European neighbors -- Italy and Spain -- have failed to recover after strict lockdown conditions depressed second-quarter demand in all three countries.

France-Italy volume has been around one third of its year-ago level during August while Spanish volume has fallen to 2% of what it was in 2019.

That was after cross-border price spreads fell in the wake of COVID-19, data from the three national grid operators -- Red Electrica de Espana (REE), Reseau de Transport d'Electricite (RTE) and Terna -- showed.

Net cross-border volume from France to Italy fell from 905 GWh in Aug. 1-20, 2019, to 306 GWh in the same date range in 2020, Terna data showed, with tighter spreads causing Italy to export increasing amounts of power to France, particularly in the hours around midday.

That compares with zero hourly flow from Italy to France for the entire Aug. 1-20, 2019, period.

The changing dynamic follows a drop in volumes heading south across the 3.1 GW transalpine link during the year, particularly after the imposition of states of alerts in the countries.

Demand in the three markets fell to 18% below its 2019 levels at the height of lockdown in April but has since recovered to near a 5% decline in July, according to data from the three grid operators.

Prior to the COVID-19 lockdowns which hit all three countries from mid-March, cross-border volume from France to Italy was up around 16% year on year in Q1 to around 1.9 TWh/month. However, that reversed to a 55% year-on-year volume decrease for an average of 0.7 TWh/month for April-July, before August's steeper decline, grid data showed.

The dynamic has played out similarly on France's border with Spain. Volume going south across the 2.8 GW trans-Pyrenees link fell 21% year on year for the first quarter, which then steepened to a 48% year on year decline in July, before falling off almost entirely in August to date.

Data from REE shows just 12.9 GWh of net flows for August to date from France to Spain, down from 630 GWh in the same stretch of August last year.

As with the France-Italy dynamic, the net flow across the border has fallen as Spain has been exporting far more power to its northern neighbor during August as weaker domestic demand has caused a surplus of generating capacity, made up of increased installed solar capacity, higher hydro resources and positive clean spark spreads backed up by long gas storage.

COVID-19 resistant

Clean spark spreads in both Italy and Spain have shown resilience to the impact that COVID-19 has had on commodity prices.

According to S&P Global Platts data, the Italy clean spark spread for the month ahead has averaged Eur6.67/MWh ($7.9/MWh) between Mar. 1 and Aug. 18, 2020.

That compared with Eur6.91/MWh for 2020 to date, meaning weaker regional gas and LNG prices have largely mitigated the impact of weak power prices.

The clean spark spread is also closely aligned to the Eur6.81/MWh average for the same period last year and higher than an average level of Eur1.37/MWh for Mar. 1 through Aug. 18, 2018.

In Spain, the spark spreads have also held up post-lockdown, averaging Eur4.69/MWh compared to an average Eur4.60/MWh for 2020 to date.

That was higher than the January through August 2019 average of Eur4.03/MWh and a reversal from negative spreads seen through 2018.

Both Italy and Spain usually price their wholesale prices using gas or hydro as the marginal technology, so positive spark spreads can incentivize the use of gas in the generating mix, particularly when the gas storage position is longer.

As demand fell across the region and generating prices became cheaper due to demand destruction caused by lockdowns, one outcome has been a flattening of the spread to French wholesale prices.

Increased renewable supply in the mix has also become a growing bearish factor for both volumes and prices in the hotter summer months especially when internal demand is suppressed by weaker-than-normal downstream demand.

Notably, during the lockdown period of the second quarter, Spain's largest generators reacted to the weak prompt prices by cutting as much nuclear and wind generation as possible and, at the same time, taking cheap gas onboard and putting it into storage.

In Italy, which has a greater number of interconnections with neighboring markets, the price decline was mitigated by a boosting of exports and reduction of imports on its international connections as price spreads tumbled.

Spreads near zero

The month-ahead spread between France and Italy briefly turned negative at the start of June 2020 and has remained in low single digits since, down from double-digit spreads in the March to August period of the previous two years.

There was a similar occurrence around the same time on the equivalent France-Spain spread, which has been close zero since June and moved into negative territory on five consecutive trading sessions in August.

The narrowing of spreads has also played out on the monthly auctions of cross-border capacity between the markets, as reported by European Joint Allocation Platform JAO.

For Q1, prior to the lockdowns, average auction prices were up 22% year on year for France-Italy and down 4% for France-Spain at Eur5.92/MWh and Eur3.33/MWh, respectively.

But the deltas have narrowed considerably in the months since, with April to September auction outcomes an average 60% lower for Italy-France (Eur4.82/MWh versus average Eur11.90/MWh for April-September 2019) and 64% lower for France-Spain (Eur3.89/MWh versus Eur10.81/MWh).

Interconnections between France and both its principal southern neighbors is due to be boosted in the short to medium term.

On the Italian border, the proposed new 1.2 GW power interconnector at Piedmont-Savoy expected online this year will boost cross-border capacity between the two neighbors from a maximum 3.15 GW to 4.35 GW, while a proposed undersea link in the Bay of Biscay, planned for 2025 commissioning, aims to boost France-Spain capacity to 5 GW from its present 2.8 GW.