Hot Grid Summer: Europe's power system under stress

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Eklavya Gupte:

Hello, and welcome to Energy Evolution, a podcast focused on all things energy transition brought to you by S&P Global Commodity Insights.

Today we're examining a story that's unfolding in realtime across Europe. We will be looking at how heat waves are stress-testing the continent's power infrastructure and fundamentally changing energy demand patterns. From nuclear plants reducing output due to warm river water to a surge in air conditioning demand, Europe's energy markets are truly facing the heat. I'm joined by our Correspondent Camilla Naschert to bring you this week's episode.

Hello, Camilla.

Camilla Naschert:

Hi, Eklavya.

Eklavya Gupte:

Obviously, extreme weather events like heat waves can have an emergent impact on energy demand and renewable energy output and we've seen that in various parts of the world. In fact, in 2023 where we had a really hot heat wave in Europe, climate-driven electricity demand was above average, especially in Southern Europe, due to cooling required during exceptional summer temperatures. And in Scandinavia, where cooler than average temperatures in several months actually led to increased demand for heating. This warming that we're experiencing is particularly rapid in Europe.

Now, according to the Copernicus Climate Change Service, which is the European Union's climate monitor, Europe's warming has outpaced the global average by a factor of two since the 1980s. Can you give us some numbers on this, Camilla?

Camilla Naschert:

Well, listeners in Europe probably won't be overly surprised to hear that Europe is indeed warming very quickly. Western Europe just experienced its warmest June ever with an average temperature of 20.49-degrees-Celsius. Even England reported its highest temperature for June since records began, that was in 1884.

Part of the explanation for why Europe is warming faster is actually a reduced air pollution. In the past, pollution aerosols would block some of the solar radiation from reaching the ground. With that having decreased, temperatures are now rising. Geography also plays into it. Some parts of Europe extend into the Arctic, which is currently the fastest-warming region on Earth and that exacerbates this trend.

Eklavya Gupte:

Yes, and they're already seeing the impact of these temperature anomalies on Europe's energy systems. We are lucky today to be joined by our first guest, Glenn Rickson, who leads the short term European power analysis team at S&P Global Commodity Insights.

Welcome to the podcast, Glenn. Great to have you here. To start off, maybe you can give us a little bit of color on how a heat wave or high temperatures, how do they effect power demand and renewable energy output particularly?

Glenn Rickson:

Yeah, sure. Happy to help. Yeah, just to talk through the basics around temperature sensitivity and weather sensitivity generally in Europe in particular. Always, there's been some sensitivity to weather conditions in the energy sector in Europe, but that is evolving over time. In winter, typically we're still looking at, primarily as far as temperature is concerned, a demand side effect where gas and power demand is higher in times of cold weather obviously. There are some correlations with temperature around wind generations, so in times of very low temperatures, you do sometimes get a drop in wind speed as well.

But when we look at the summer, then there is a balance between demand effects and some supply effects as well. Obviously, in the case of demand, when we do get periods of high temperatures, then there is an uplift in cooling demand. And that can vary by region, partly because temperatures vary by region, but also levels of air conditioning can vary as well. And also, in proportionate terms, then some markets have a greater level of non-weather responsive demand if there's lots of heavy industry, for example. Compared to, in the case of Southern Europe, you get lots of tourism demand in high summer as well, which can be quite sensitive to temperatures and air conditioning effects.

But then, you also have the supply side of the story as well. It's partly a temperature story, but also a precipitation story or around water levels as well. For example in France, if we take 2022, which was the height of the energy crisis as a case study, we came into 2022 obviously with high gas prices, but also with some quite constrained French nuclear availability. That situation was worsened as we got into the summer because of higher temperatures and low precipitation levels, that led to low river levels which limited French nuclear's ability to generate. Those level situations obviously also impact hydro generation, but they can also impact coal deliveries down the line, raising costs of coal generation as well. All of these things are coming together to compound the impacts of heat waves on the European power system as a whole.

Eklavya Gupte:

Thank you. What would you say are some of the big stress points really for energy markets? You touched upon supply. But even from a grid perspective, are there any particular issues that we see more often when we have either higher temperatures or even extreme weather?

Glenn Rickson:

Yeah. Partly it's a function not only of how high temperatures get, but also the duration of the periods of heat wave as well. Beyond the things that we've spoken about already, there can be issues with infrastructure, so cables can be subject to failure in very high temperatures. We also see effects on plant efficiency. If you see a period of sustained high temperatures, then that can effect the efficiency of many types of generation. Thermal generation, such as gas and coal can be impacted. We can see impacts on solar BPV panels as well. And as mentioned, there are structural effects on hydro generation as well if river levels are affected.

But sometimes, there are also corollary effects as well. One observation I would say for this summer so far, we're talking in mid-July, is that in June, we had record temperatures, for some parts of Europe at least, which came a bit earlier than we would normally expect to see in summer. Typically, it's July and August that are the periods of very highest temperatures.

But although we did see high temperatures, we also actually saw quite high wind generation as well. Which is not unprecedented, but it's quite unusual for a summer month, particularly as we had between really the start of last winter and through to April, almost every month was a low wind month relative to history. Coming into May and June, we have seen that pick up. But quite often, when we see periods of very high temperatures, we do also see a drop in wind speeds, which can obviously compound the effects on the power system as well.

Eklavya Gupte:

Thank you. I know your team recently published a heat wave scenario analysis that looks at the potential impact on power demand and gas-fired generation. What was some of the big risk factors or what was some of the interesting bits that you identified from the scenario?

Glenn Rickson:

Yeah. Well, one thing I wanted to note actually is every summer is different. When we spoke a moment ago about summer '22, that was almost an extreme example of type conditions where, beyond the heat wave effects, we saw very elevated gas prices. Because of that tightness in the overall market, significant price uplift. August 2022 saw the highest-ever power prices and I think gas prices on record. Which is, for an August, quite unusual. You'd expect that to be a winter story.

First of all, it's three years even to this summer and we started this summer in very different conditions where we saw the highest level of negative prices and just generally a much better supplied market. While we have seen, in June, those record temperatures that I mentioned, and we may see again coming into summer, we started in a very different position than that extreme of three years ago. Generation has obviously been a factor there. We've seen an uplift in capacity which is well-correlated with high temperatures. While we might see efficiency effects, we do also see higher overall solar output at times of heat wave and high sunlight.

We've run a sensitivity to replicate at least some of the conditions of summer '22 and summer '23 onto the rest of this summer. That includes things like lift in consumption, the constrained nuclear availability for the July, August periods. To not quite replicate the conditions of '22 because that was quite extreme, but to at least get us closer to that level. We uplifted coal transport costs. We limited flows from Southeast Europe to Western Europe to reflect hydro pressures, for example.

I would say, to be perfectly honest, the biggest message that we have is that there is the price uplift, but it's within reasonable constraints of what we've seen already happening. The upside that we see in terms of price is weighted towards the French market, relative to say the German market or the UK market. The reason for that primarily is that, firstly, France is one of the discount markets in our basic case view because it's relatively well supplied. At least at this time of year, compared to say Spain, which has high temperatures, and Germany which typically would have say lower wind yield than it might do in the winter. It's generally in a better place supply-wise. That weighting is to France. But even then, we see relative to our base case, say a 12-year megawatt upside for August, which is 15 or 20 percent or so relative to our base case view. And the price impacts in other markets are less pronounced.

I think while I would never rule out the potential for periods of extreme price upside, there's always that potential, because we are in a relatively well-supplied place for this summer, we don't see anything like the same upside that we saw, in say summer '22, as a potential.

Eklavya Gupte:

Thanks. Very interesting. Obviously, one of the things we're seeing from a demand perspective is climate-driven electricity demand due to cooling is really picking up, the need for air conditioning, more and more air conditionings across Europe and this part of the world. How do you see that playing out?

Glenn Rickson:

Yeah, we do see the uplift from cooling demand. I think very broadly, and it does vary across market and time of year, but once we get to say country averages of 20, 22-degrees, then we start to see an uplift on cooling demand. Obviously, that has a certain daily shape to it, which can mean that you see significant moves in today shape. In Spain, for example, where you have very high solar in the daytime, but that tails off once it gets dark in the evening, then we do see potentially quite a steep uplift in net consumption because of the still high air conditioning demand, but the drop-off in solar.

Over time then, things like data centers are going to become increasingly relevant for data centers. Already, we see when data centers are looking where to locate, there is a drive towards investing in the Nordic markets, for example. The relative coolness of the Nordic markets is a key part of decision making process. We might see that emerge further as heat waves potentially continue. Then, if they are installed in a particular market, then it does uplift the potential for cooling demand, and also sensitivity to water levels as well if we see greater uptakes of water during times of high temperatures from data centers.

Eklavya Gupte:

Can you tell us a little bit about how infrastructure is affected or can be affected by higher temperatures?

Glenn Rickson:

Yeah, I'll certainly try at a basic level. We have already, this summer, seen a number of infrastructure issues. Spain, in April, being the most obvious one where we saw a nationwide blackout. I should say that wasn't directly as result of high temperatures. But certainly, there is increased frequency, and anecdotally at least increased frequency around power outages. They're certainly getting more attention. We've seen outages I think in Prague recently, and Southeast Europe as well over the summer to date. None of these are necessarily tied exclusively to heat wave effects, but I would say there is broadly a greater potential for issues when we see more and more decentralized generation coming on stream which can make it hard for network operators to manage demand upside because it's quite hard to determine what's real demand versus what's behind the meter behaviors.

There is an effect potentially on cabling infrastructure. I'm no engineer, but certainly the higher the temperatures that we get to, once we get past a certain threshold, then we do see greater risk of equipment failure, whether it's cables or other types of transmission infrastructure.

What I would say is it's all about the correlation of these things as well. We've spoken individually about all these different elements, but across technologies and across geographies, then if all these things compound together, then overall we see greater risk around more wide scale issues. If not around power outages, then at least very elevated prices. We do see still very elevated prices at times of high temperatures for sure.

Eklavya Gupte:

Okay, thank you very much. Before we close off, is there anything else I've missed out on or any other bits that you think are quite useful from a power and energy perspective?

Glenn Rickson:

Well, taking all of these things together, in terms of investment for the future I suppose it's worth keeping in mind that certainly there has been an increased frequency of heat waves in the last few years. June saw record temperatures for the time of year in a number of markets. It's probably wise to assume that these conditions continue and potentially accelerate as well. Certainly, any investors are going to be looking at how they mitigate against that.

We came into this summer with solar developers looking at a collapse in the value of their assets when we saw a high rate of negative prices. But the flip side to that is at times of heat wave, there is at least potential to earn greater revenue and to serve the power sector because of that correlation between temperature and sunlight basically. There is a mixed story there.

Certainly, as a general point, I would say is that the ability to flex demand is already valuable and will be increasingly of value. That includes the ability to mitigate against the need for cooling demand as well. If you can shift grid off takes through batteries at times of high temperatures, that's good for certainly the power system, and probably quite wise in terms of mitigating price risk as well.

Eklavya Gupte:

Very interesting. Thanks a lot, Glenn. Great to have you here on the podcast.

Glenn Rickson:

My pleasure. Thank you.

Camilla Naschert:

Now, one of the tangible demand side implications of the heat is the growing use of air conditioning. I wanted to find out more about what that might mean for Europe in the future. Brian Motherway, head of the Office of Energy Efficiency and Inclusive Transitions at the International Energy Agency explained it.

Brian, welcome to Energy Evolution. Very glad to have you here.

Brian Motherway:

Thank you very much. Pleasure to be here.

Camilla Naschert:

We're recording on the 15th of July, much of Europe is currently experiencing heat waves. It does some like summers are getting hotter and more difficult to deal with, at least in some parts of the continent. I myself, I grew up in Central Europe, lived in England for a long time. At least anecdotally, I don't have much experience with ACs. In most places, maybe you'll find a fan at most. I just closed the window here to be able to record without background noise and it's already getting pretty warm.

Beyond the anecdotes, maybe you can provide some data on this. How widespread is the use of air conditioning in Europe compared to other markets, other regions? And has this started to change?

Brian Motherway:

I have a similar experience, Camilla, because I moved to France 10 years ago and Paris had an extremely hot summer and everyone told me, "This is such a rare occurrence here in Paris." But now, in the last 10 years, it's become almost every single year has a hot summer. People are noticing, as you say. We do see more people buying fans of course, but air conditioning. France, Western Europe is not a region traditional associated with air conditioners. Maybe one-in-five households in the European Union owns an air conditioner. But of course, that varies from one-in-two in Greece and Spain, to less than one-in-10 in some of the northern countries. Here in France, it's about one-in-five, maybe one-in-four. It is becoming more common. It's still not normal and the heat is still not as intense as in other regions in the world, but certainly people are reacting. They want to stay cool, the world is getting hotter, and people take appropriate steps.

Camilla Naschert:

Are there certain countries in Europe where you're seeing demand for AC grow more than others? I guess it depends both on the temperature, and also on the kinds of houses that people live in?

Brian Motherway:

Certainly, again, if you take here in France, it's increasing by a few percent a year. But if you look at the stats now, 20, 25 percent of homes have air conditioning, but it's much more common in houses. And obviously, therefore in less urban areas than it is in apartments because it can often be more expensive to do it in an apartment block. It's not part of the traditional way buildings are built. Other than that, it follows the weather. Again, more than half the households in Greece and Spain have an air conditioner. That's much higher than other countries, but they have been warmer for longer, if you like.

Of course, there's an affordability question here in terms of, quite put simply, richer people are more likely to have air conditioners than less well off people. You see that pattern all over the world. You see it even more so in developing regions. In India, only about one-in-10 families have an air conditioner and it's very much associated with whether people can afford it or not. There's a real social and fairness issue here in terms of who can afford to stay cool in Europe and in the world.

Camilla Naschert:

Have you at the IEA done some research on how the demand for AC units in Europe could change and what that would do to the overall power demand?

Brian Motherway:

So far, the electricity demand associated with air conditioning in Europe is not particularly a high. It's a couple of percent of overall electricity usage, but it is growing year-on-year by several percent. We could imagine that over the next decade, certainly we expect the number of air conditioners to rise by 50% or more in Europe. I can imagine that the energy demand associated with those air conditioners will rise at the same pace.

It's still not the biggest driver of electricity demand, but it's certainly one of the fastest-growing drivers of demand. And also, it's a key issue for peak demand because in certain regions, more and more on a particularly hot day, you're going to see demand spiking when it gets hot, when people turn on their air conditioners and fans, and that's becoming more of an issue for many countries as well.

Camilla Naschert:

Are ACs the only option to keep cool, or are there other technologies that we should be looking out for and other maybe means in which, yeah, you could use nature or tree cover, et cetera? Are there other solutions that cities and regions should be taking better advantage of? I'm also thinking in terms of the AC units themselves, you tell me if this is true or not. That using AC actually pushes hot air out into the street and then increases the temperature around the building further.

Brian Motherway:

This is all true, Camilla. First of all, there are ways of doing how we build cities better in terms of trees, and shade, and planting. There are certainly ways of doing buildings better than others. Of course, you know that certain hotter countries, Southern European countries, have much better traditions of building buildings that stay naturally cooler because of the way their built, the thickness of the walls, the quality of the insulation, the way they're shaded. This can make several degrees difference as a starting point. A building can be several degrees cooler if it's well-built. The first thing any country, any family, any society needs to do is think about we need to prepare for a hotter future, and we need to be building our cities, and our neighborhoods, and our buildings better and ready for this hotter future.

Then of course, there are huge differences in what equipment you buy. Air conditioners vary hugely in terms of their energy efficiency. You go into a shop today and you look at two air conditioners that cost more or less the same to buy, but one of them will literally use twice as much electricity as the next one, and that therefore will cost you twice as much to run. There are huge difference. And it's really important that somebody buying an air conditioner buy the most efficient one because it's going to save them money over years and decades in terms of how much it costs to power that.

Camilla Naschert:

Maybe for listeners who don't have an idea of what this could look like, do you have any example that comes to mind of a best practice approach to this, maybe in a certain city or certain region?

Brian Motherway:

First of all, a well-built building is a well-built building. There's a lot of buildings in Europe that have been well-built in terms of their insulation, good quality windows and doors, et cetera. Of course, that was traditionally done to keep heat in because that's often driven by staying warm in the winter. Now, the same insulation, the same kind of buildings will keep you cool in the summer. All around us, there are good examples of well-built buildings that are good in both cases. When it's cold, they help you stay warm, and when they're warm, they help it stay cold.

If you look at Spain or North Africa, if you go to Morocco or Tunisia, you see buildings built with thicker stone, with courtyards, with different layouts, some ways that help them keep cool. You can feel those buildings, if you ever go into any of these buildings, you can feel how cool these buildings can be even in very hot weather.

Then of course, the technology we use really matters and behavior really matters. An air conditioner uses maybe 40-times as much electricity as a fan, but of course it keeps you much cooler. But if you consider using them both together, if you maybe set the temperature on the air conditioner a little bit higher and combine it with a fan, these are all ways of making people's lives more comfortable while minimizing their electricity used, therefore lowering their energy bills while also minimizing their impact on the environment.

Camilla Naschert:

Getting back to the equipment of AC units, you already said that there are huge differences between different models. But when you look at the technology itself, do you see gains to be made in terms of improving the efficiency, or are we, in terms of the best models, fairly optimized already?

Brian Motherway:

Well, I think first of all, we see huge differences and we see this in every region in the world. That it doesn't necessarily cost more to buy a more efficient air conditioner, it's just a question of picking the right one, many countries use energy labels where you can figure out which one to buy. Buy an A-rated one instead of a C or a D. It's surprisingly varied how efficient air conditioners that are being sold in the same market and that's true of every part of the world.

At the same time, I do think we can expect breakthroughs. Everybody knows we're moving into a hotter world, everybody knows that there's going to be a massive increase in the use of air conditioning and other technologies, so we see some quite exciting technologies that may emerge in the coming years. But we have to remember that this is quite an urgent problem right now. Somewhere in the world, anywhere in the world, every second, five air conditioners are being bought by somebody, so there's a huge growth in air conditioning as we speak. That's because people are responding extremely reasonably and rationally to the heat they find themselves in and they want to be cooler.

The question is are those five air conditioners being sold every second, are they efficient, are they inefficient? Are they locking in lower bills and less carbon emissions for the coming decades, or are they locking in higher bills and higher carbon emissions? That's where government policies around information for consumers, minimum energy performance standards, design of buildings, all of this really matters now because the growth is happening now.

Camilla Naschert:

All of this conversation around efficiency of course also ties into Europe's climate conversation. By 2040, the EU wants to reduce greenhouse gas emissions by 90% compared to 1990 levels. How does this increased energy demand from air conditioning play into Europe's climate goals?

Brian Motherway:

I think it's a key question and I think we could expect that the energy demand for air conditioners in Europe will more than double between now and 2050, and if not more. Of course, that starts to make an impact. Even though at the moment, air conditioners are not a massive user of electricity, it is absolutely going to grow. As I said earlier, it's not just about how much overall energy they use, a key issue for air conditioners is their effect on peak demand. Because of course, peak electricity tends to be the most expensive and the most polluting, so there's a key issue to make sure that our growth in air conditioners are part of a smarter electric future.

We expect more of our lives to be run by electricity in the future, whether it's our cooling or our heating, our driving electric cars. It's absolutely vital that this all be part of a smart system where we're matching supply and demand so that we're making the maximum use of clean solar and clean wind when it's available. We're having some flexibility at peak loads so that we're not driving up our use of fossil fuels. Air conditioning really needs to be factored into the future of the European electricity system so that we can make sure people benefit from it, but in a way that doesn't affect Europe's ability to meet its energy and climate goals.

Camilla, obviously your focus is on Europe. But I do want to stress that while this is really lively for Europe right now and we see a massive increase in the demand for air conditioning, there are many parts of the world that are much hotter where it's almost a life or death situation for people to have access to cooling in ways that is much less affordable. We really want to see this as a global issue where regions like India, sub-Saharan Africa, Southeast Asia, air conditioning ownership rates are of course much lower there because people can't afford them, but the pressures they feel and the health impacts they feel from heat are far greater than even we're experiencing yet.

Camilla Naschert:

Brian Motherway, thank you so much for joining us on Energy Evolution.

Brian Motherway:

Thank you, Camilla.

Eklavya Gupte:

All right, listeners, that is all for this week. I hope you found it useful. And also, don't forget to subscribe to Energy Evolution on your favorite podcast platform to stay up to date with our future episodes.

Lastly, I'd like to take a moment to recognize the Energy Evolution Podcast team, including my cohost Taylor Kuykendall, Karen Willenbrecht, Dan Testa, and Camilla Naschert, as well as our agency partner, The 199, and the Commodity Insights digital content team. Thank you for tuning in to Energy Evolution.