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After a dry 1st half of the year, precipitation ups hydropower output in the SEE/Balkan region

Eylert Ellefsen
Archived blog post. This blog post has been transferred from our previous blogging platform. Links and images may not work as intended.

In this blogpost we will look at the likely price impacts from the recent increase in hydropower production, which was 7 TWh below normal levels in the first half of the year – and a key fundamental price driver.

Will the price difference between the CWE and SEE markets be reduced in July? Using EQ’s hydrology and price forecasting models, we take a closer look at the most significant markets in the region.

Hydropower production is rising in the SEE region as a whole (weekly chart, EQ data)

Romania is by far the largest hydropower producer in the SEE region, covering about 33% of the overall hydropower output. In the following charts collected from EQ's hydro-section, we show the precipitation and inflow for Romania on a daily resolution since mid-May:

Heavy precipitation since June 8th + latest forecasts and increase in inflow levels.

Continued heavy precipitation in Romania towards the middle of next week will increase inflows even more. The precipitation outlook for weeks 2 and 3 ahead shows rather normalized levels, which means that the hydropower situation across the SEE region will most likely be close to normal by the start of July/Q3.

Price impacts

What does the change in hydropower levels imply for spot prices in the SEE region? We consider Hungary (HU) as the main SEE spot hub and the price difference between Austria (AT) and Hungary as representing the price difference between the CWE-SEE power markets: 

  • Romanian (RO) prices are strongly correlated to HU                                                                      
  • A significant increase in SEE hydropower production will normally lower HU/RO prices, which in turn also means a lower price difference between AT-HU (CWE-SEE)
  • Pay attention to this market difference, and the correlation to the hydropower situation.
Weekly spot prices for AT, RO and HU so far this year (EUR/MWh)

The AT/HU price difference was around 13 €/MWh for January, declining to about 6-7 €/MWh during Q2.                                                                        

This week (25) we estimate the price difference at about 5 €/MWh, the lowest so far this year, as most likely driven by the stronger hydropower situation. So what is the market outlooks for theJuly-contract in this new hydropower situation ?                          

The difference between HU/AT in July 2018 was about 1.5 €/MWh in a very wet scenario (+35%), and for 2019 about 15 € in adrier than normal case (-20%). These levels indicate that price formation is very hydropower dependent.                        

July contracts as traded since 1 May (EUR/MWh).

We see that the HU-AT price difference has declined since start of June, mainly because of increasing AT prices (ref higher fuel prices).                                                                                

The SEE market has been relatively stable lately, although we see a bearish tendency over the last few days. This is most likely due to increasing hydropower.                                                                                        

As we have lately observed spot price-differences close to 5 €/MWh, we think that the gap to July prices of about 10 €/MWh is a bit wide relative to the fundamental situation.                                                                                    

In the coming days, the spot-price in the SEE-area might easily be forced even lower due to higher hydropower output, and then the difference in the July-contracts will be even lower.                            

Final takeaway

EQ will follow the market and hydropower situation closely in the coming weeks. With a normalising of the weather, we believe that the SEE-contracts are over-priced right now.

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