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Droughts rattle Europe's hydropower market, intensifying energy crisis


Hydro dips below solar in July

French output down 30% on year

Iberian stocks at record lows

  • Author
  • Andreas Franke
  • Editor
  • Daniel Lalor
  • Commodity
  • Coal Electric Power Energy Transition Natural Gas
  • Topic
  • Europe Energy Price Crisis

Brutally dry conditions in parts of Southern Europe have led to a significant downturn in hydropower generation so far in 2022, exacerbating an already perilous situation in the energy market as the EU grapples with the realities of ditching Russian gas.

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Some of Europe's largest hydropower operators, especially those with plants in France, Italy and Iberia, saw production decline steeply in the first six half due to sustained high temperatures and low rainfall.

The dry spells meant monthly hydro production in the EU dropped below solar power for the first time in July, according to grid operator data aggregated by research firm Fraunhofer ISE.

Amid the droughts, many hydro operators are suffering financially from having to buy power at record-high prices on the spot market to replace missing hydro volumes.

The hydro generation of French utility EDF, was down nearly 30% year on year in the first six months of 2022, resulting in an earnings impact of Eur1.4 billion ($1.4 billion) and compounding outages in the state-controlled utility's sprawling nuclear fleet.

The poor hydro performance was "in the context of historically low water levels as a logical consequence of the drought in France," EDF chairman and CEO Jean-Bernard Levy told analysts July 28.

Enel's first-half hydro generation in Italy and Iberia was more than a third lower than in 2021. "The situation is extremely dry in Europe," CFO Alberto De Paoli said on the company's July 28 earnings call, adding that hydro availability in Italy and Spain was roughly 40% below the historical trend.

Iberia is among the worst-affected regions: Portugal's hydro stocks are at their lowest levels in recent times -- with reservoirs at 29% of capacity on July 31, compared with the average of 63% over the last decade -- due to what grid operator REN said was the "worst drought in 100 years".

In neighboring Spain, three large hydro complexes were running at restricted output in mid-July due to scarce rainfall and above-average temperatures.

EDP saw its Iberian hydro generation more than halve in the first half compared with a year ago, translating into a Eur19 million loss of earnings after the unit recorded positive EBITDA of Eur281 million last year. Iberdrola's hydro output in Spain was also down 51% in the period.

Extreme conditions more frequent

Fluctuations in hydro generation are nothing new, but the frequency of extreme conditions seem to be increasing as a result of climate change.

"It seems like these extreme fluctuations happen more often," said Anton Schleiss, a retired civil engineer who now coordinates Hydropower Europe, an EU-funded project to develop a road map for the industry. "We have more often wet years and more often dry years."

Operators typically guard against such variations by using their reservoirs. In Southern Europe, that means storing winter rainfall for use during the dry summer months, while Alpine reservoirs store meltwater from glaciers in the summer to use over the winter.

"If the reservoirs were not there, we would already be in a blackout everywhere," Schleiss said in an interview.

Record-low hydro stocks aggravate an already tight power generation landscape in Europe. EDF's nuclear output in France is well below normal levels due to plant outages, while coal units are having to return in many markets because of gas shortages.

French nuclear output stood at 26.9 GW on Aug. 3, according to system data -- well below the approximately 40 GW seen in early August last year.

Beyond technical issues in EDF's fleet, the utility has also been forced to restrict production at certain plants because of high river temperatures, which mean it cannot use water for cooling purposes.

Those factors combined could lead to a gas supply risk in the coming winter, according to Glenn Rickson, head of European power analysis at S&P Global Commodity Insights.

The EU is already calling on member states to reduce their gas consumption to help the bloc navigate potential further disruptions of Russian imports.

"Every unit of non-gas generation that is below expectation now implies that gas has to turn up," Rickson said.

Preparing for winter

Many hydro operators in Europe cashed in on surging power prices last year, but that dynamic has been turned on its head.

In an interview with S&P Global in July, EDP CEO Miguel Stilwell d'Andrade said the company has been forced to buy back replacement electricity volumes on the spot market to make up for its lower hydro production.

EDP sold forward its hydro generation at Eur60/MWh, then purchased power on the market for Eur230/MWh, the CEO said.

Assuming normal rain levels in the second half of the year, the company will look to hold back some production to help replenish its reservoirs, Stilwell d'Andrade told analysts July 29. With stocks running low and winter approaching, operators face a decision to generate now or store water for production later.

"If you are producing now and having to buy back [power] in the winter, you are looking at having to pay at least double," Rickson said. "Inevitably, the shortfall that we're seeing now will feed into the winter."

In the Alps, reservoirs have seen lower inflows this summer due to less snowfall last winter, according to Schleiss.

The longer-term trend in the region is toward a more challenging hydro picture, given its glaciers are disappearing. Glaciers feed water through to reservoirs slowly but snow melts quickly, which will push storage capacity to the limit.

For now, though, attention is on the coming winter.

"We can hope that the winter is not too cold in Europe and that we have a lot of precipitation that brings additional water to the reservoirs," Schleiss said.

However, if the winter is particularly cold, "then we will really have problems".