With scorching temperatures likely to persist across southern Europe, the region's gas and power markets are set to come under strain, with demand on a steep upward trend.
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Temperatures are set to exceed 40 degrees Celsius in parts of Italy, Spain, Greece and France in the next few days, with red alert warnings across several cities, including Rome.
This has already resulted in a rise in gas demand, with gas for power burn increasing sharply, especially in Italy. Heatwaves in the region are also associated with higher cooling demand as well as impacts on supply, with river temperatures affecting nuclear operations and plant efficiency.
Analysts at S&P Global Commodity Insights expect some price volatility if the heatwave persists. But they noted that the level of cooling demand was slightly lower than at the same time last year due to ongoing price sensitivity and because of cooling limits in public buildings in some cities.
"This may mitigate upside to prices and the call on gas generation vs last year, particularly as hydro stocks and French nuclear availability are healthier year on year," said Glenn Rickson, head of European Power Analysis at S&P Global. "[But] more new temperature records in Europe this summer would cement the perception that such conditions will be increasingly common under climate change -- increasing calls for mitigation efforts and potentially leading to increased price volatility."
Spain's national forecaster Aemet said last week that it expects a hot and wet climate for July through September, which should ensure robust renewable generation. It declared an official heatwave for July 17 to July 19, with temperatures rising to as high as 44 C.
Daily peak power demand is seen around 5% higher than the start of the month at 35.1 GW July 17, while photovoltaic output is seen rangebound for the month.
Similarly, Italian weather forecaster Meteo Italia has warned of an "extremely hot" week with potential peaks of 45 C between July 17-19.
Italian power demand is forecast to peak at a maximum of 56.3 GW July 17, some 16% higher than at the start of the month.
In the week starting July 9, Spanish gas to power demand increased 34% compared with the previous week to 3. TWh, Enagas data shows.
Over the same period, Italian gas-to-power demand increased 24% to 4.5 TWh, Snam data shows.
Day-ahead gas prices in Italy and Spain are currently well above those in cooler northwest Europe.
Platts, part of S&P Global, assessed the Italian PSV day-ahead price on July 14 at Eur28.35/MWh and the Spanish PVB price at Eur25.83/MWh. Those assessments compare with a UK day-ahead price of Eur23.91/MWh and a Dutch TTF price of Eur24.60/MWh.
Peak power demand
France's EDF has already warned of cooling water restrictions on the Rhone river, with the 900-MW Bugey-3 nuclear reactor halted for the July 15-16 weekend.
However, widespread negative hourly prices across northwest Europe amid strong wind and low demand forced EDF to ramp down nuclear output by 10 GW on July 16, with reactor availability currently above forecast and some 5 GW up year on year.
In an Energy Futures 2050 report, French system operator RTE warned that the number of nuclear reactor shutdowns due to heatwaves or drought was set to increase due to climate change.
For now, France continues to export near maximum capacity to Italy and Spain.
Flows across the Pyrenees have reversed this summer compared with northbound flows last summer, due to falling gas prices and improved nuclear output in France.
Italy is already Europe's biggest importer of electricity, with net imports accounting for over 20% of annual demand.
Net imports covered a record 24% of Italian power demand in April before an outage on the new 1.2 GW Savoy-Piedmont cable and improved hydro in Italy reduced inflows.
French and Swiss power exports to Italy on July 14 were seen peaking above 6 GW, while those to Spain are close to 3 GW.
Water levels on Italy's river Po fell to an all-time low in April, before flooding in May helped to restore hydro reservoir levels across Italy.
Weekly power demand in Italy reached a 2023 high in the week to July 16, averaging 38 GW compared with a summer peak weekly average of 40 GW in 2022.
Similarly in Spain, weekly demand averaged almost 30 GW in the week to July 16, compared with a 31 GW peak last summer.
Demand is likely to rise further this week due to the hot temperatures, but structural demand is set to ease in August due to the holidays.
Italian August baseload power traded early July 17 at Eur98.30/MWh, down over 20% so far this month, EEX data showed.
French month-ahead power traded July 17 as low as Eur71.77/MWh on EEX, a level not seen in over two years for the front-month contract.