With scorching temperatures likely to persist in southern Europe, the region’s gas and electricity markets are about to be put to the test, with a strong upward trend in demand.
Red alerts and record temperatures: Europe faces rising gas demand
Temperatures are expected to exceed 40 degrees Celsius in parts of Italy, Spain, Greece and France over the next few days. Red alerts were issued in several cities, including Rome. This has already led to an increase in demand for gas, with gas for combustion rising sharply, particularly in Italy. Heat waves in the region are also associated with higher cooling demand and 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 heat wave persists. But they noted that the level of cooling demand was slightly lower than the same period last year due to price sensitivity and cooling limits in public buildings in some cities.
“This could mitigate the rise in prices and the call on gas generation compared to last year, especially as French hydro stocks and nuclear availability are in better health year on year,” said Glenn Ricksonresponsible for European energy analysis at S&P Global.
” [But] more record-breaking temperatures in Europe this summer would cement the perception that such conditions will become increasingly frequent in the context of climate change, increasing calls for mitigation efforts and potentially leading to increased price volatility.
Impact of heat wave on energy demand: Forecasts for Spain and Italy
Spanish national forecaster Aemet said last week that it expects warm, wet weather from July to September, which should ensure robust renewable energy production. It declared an official heatwave for the period from July 17 to 19, with temperatures reaching 44°C. Daily peak demand is around 5% higher than at the start of the month at 35.1 GW on July 17, while photovoltaic production is forecast for the month.
Similarly, Italian meteorologist Meteo Italia has warned of an “extremely hot” week, with potential peaks of 45°C between July 17 and 19. Italian electricity demand is expected to peak at 56.3 GW on July 17, some 16% higher than at the beginning of the month. In the week commencing July 9, Spanish gas-to-electricity demand rose by 34% on the previous week, to 3.
TWh, Enagas data shows, over the same period, Italian demand for gas for electricity rose by 24% to 4.5 TWh, Snam data shows. Daily gas prices in Italy and Spain are currently well above those in northwest Europe. Platts, part of S&P Global, valued the Italian PSV price at 28.35 euros/MWh on July 14, and the Spanish PVB price at 25.83 euros/MWh. These valuations compare with a UK daily price of 23.91 euros/MWh and a Dutch TTF price of 24.60 euros/MWh.
Electricity exports from France: drought and summer heat constraints
EDF has already warned of cooling water restrictions on the Rhone with the shutdown of the 900 MW Bugey-3 nuclear reactor for the weekend of July 15 to 16. However, negative hourly prices across the whole of Europe from Northwest strong wind and low demand forced EDF to reduce its nuclear output by 10 GW on July 16, as reactor availability is currently higher than forecast, by around 5 GW over 12 months.
In a report on the energy future 2050, French grid operator RTE has warned that the number of nuclear reactor shutdowns due to heat waves or drought is set to increase as a result of climate change. For the time being, France continues to export almost maximum capacity to Italy and Spain. Flows across the Pyrenees have reversed this summer compared to last summer’s northward flows, due to falling gas prices and improved nuclear generation in France.
Electricity demand forecasts: A temporary increase before the seasonal drop in August
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 electricity demand in April, before the failure of the new 1.2 GW Savoie-Piémont cable and an improvement in hydroelectricity in Italy. French and Swiss exports to Italy on July 14th peaked at over 6 GW, while those to Spain were close to 3 GW.
Water levels on Italy’s River Po fell to a record low in April, before flooding in May helped restore hydroelectric reservoir levels across Italy. Weekly electricity demand in Italy reached a peak of 2023 in the week ending July 16, with an average of 38 GW compared to a 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 peak of 31 GW last summer.
Demand is set to rise again this week due to warm weather, but structural demand is set to fall in August due to the vacations. EEX data show that Italian August baseload electricity traded at the beginning of July 17 at 98.30 euros/MWh, down more than 20% since the start of the month. On July 17, French electricity traded as low as 71.77 EUR/MWh on EEX, a level not seen for more than two years for the first month’s contract.
