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Outlook 2019: Mixed hydroelectric picture to lead EU into choppy waters

Highlights

Cold temperature fears in Q1 linger

Start of snowfall in the Nordics lackluster

Comfortable hydro supply in Italy, Spain

London — Hydro reservoir stocks in many parts of Europe are heading into 2019 slightly below multi-year averages, amid nuclear supply and cold temperature fears in Q1 that have kept alive generation adequacy concerns during peak periods.

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The rising dependence on hydroelectric output to balance networks was underscored during the October and November cold spells at a time of reduced nuclear availability in France and Belgium.

A 2% increase in French hydroelectric generation during the period enabled the country to export nearly 1 TWh to Belgium in November alone, the highest export volume for this month since 2014.

French hydro reserves were a touch below the 10-year average of 64%, at 62% full by the end of Week-50.

More generally, and following a hot and dry summer and a ramp-up in hydro utilization for power production, Europe's hydro stocks are sub-optimal heading into peak winter.

'BAD START' IN NORDICS

A blazing summer and lackluster rainfall in 2018 left the hydro-dependent Nordic region in dire straits, with the impact trickling into winter and next summer.

Depending on winter snow levels, hydro reservoirs are expected to reach a minimum level in the spring "that corresponds with the deficit that we see today, compared to normal," Norwegian Water Resources and Energy Directorate's Senior Advisor Martin Andreas Vik told S&P Global Platts.

"We are currently off to a bad start, with 7 TWh of energy potential less than normal, but this can correct itself in time for the thawing season," he said.

Reservoirs in Norway, Finland and Sweden declined to 69.3% of capacity by the end of Week-49, below the average of 75.6% registered over the period between 1990-2012, according to data from Nord Pool.

Nearer term, energy stored in Norwegian reservoirs currently "is more than sufficient to supply the energy needs in Norway this winter and thus we expect imports to be quite low," NVE said.

However, concerns were highlighted in the Nordic-German Q1 spread. German Q1 base contract was at a near Eur4 premium over its Nordic peer by late December, more than half from the start of this winter period.

Furthermore, a delay in Finland's plans to start the Olkiluoto-3 nuclear reactor to 2020 from 2019 could mean an increase in demand for exports from the neighboring countries.

SOUTH EUROPE COMFORTABLE

Meanwhile strong hydro levels in Italy, Spain and Switzerland offer system operators more comfort.

"Italy keeps on being relaxed [on] healthy hydro. On the other side French Q1 prices [have] quite some risk premium," a European trader said. Incidentally, strong gas storage levels in Italy have also served to cap power price inflation.

With the situation tight in Belgium and France primed to export, Italy could also turn exporter to Northwest Europe in January and February.

This has been reflected in Q1 19 power prices, with the Italian-French spread narrowing close to parity and at times even flipping Italy to a discount to France as seen early December.

After falling to a discount of 25 euro cent on December 17, the Italian Q1 price closed at Eur1.36/MWh above the French Q1 contract on December 20.

Since the summer Italy has experienced several weeks of torrential rain in late October and early November. More recently Italian hydro stocks have remained steady at over 3.6 TWh, with expectations of healthy supply set to continue into the New Year.

In the Iberian peninsula, Spain is likely to witness competition between hydro and gas with the recent suspension of generation and green cent taxes boosting CCGT economics.

With Spanish hydro stocks close to the 10-year average, net exports are expected to continue throughout the winter, Platts Analytics said.

"A gradual convergence of hydro output towards the five-year average in the following months makes Spain well priced in 2019, but some upside risk is still present for 2020," it said.

--Anuradha Ramanathan, anuradha.ramanathan@spglobal.com

--Edited by Jonathan Loades-Carter, newsdesk@spglobal.com