BUY OR SELL-Spanish power prices may dive into hydro abyss

Trade the News

Sunday September 05, 2010 12:48:12 AM GMT

* Medgaz gas pipeline could pile pressure on prices

* Spot prices above futures prices in early September

* Nuclear outages may compensate for hydro deluge

By Daniel Fineren and Martin Roberts

LONDON/MADRID, Sept 3 (reuters) - Soaring Spanish spot power prices risk crashing down to earth on bulging hydroelectricity reserves.

Iberian spot power prices have hit several 19-month highs in late August and this month, but could drop sharply due to high hydroelectricity reserves, price-setting wind power and the prospect of a surge in Algerian gas supplies.

SELL

Spanish spot power prices, which have a strong influence on forward contracts, have risen more than 80 percent since mid-April and are up about 1,950 percent from all-time lows on April 3, when gale force winds and a surge in hydropower output hauled the "pool" down to 2.47 euros per megawatt hour.

Several spikes in hydropower output from January-April, when brimming reservoirs had to be opened up after unusually heavy rains, helped drive down Spanish spot prices from 30-35 euros/MWh to less than 10 euros several times in early 2010.

After a wet start to 2010, Spain's hydropower reserves are up more that 270 percent from levels at this time last year and up 250 percent from early September 2008, which may force hydropower plants to work harder before this winter.

"Reservoirs are at their highest levels since 1998," an Iberian power market trader said. "That isn't a problem right now, but if it rains in October, they'll have flush water like mad to prevent them from overflowing."

Even after one of Spain's drier summers in 2009, when reserves were drained more than normal, heavy rainfall in winter filled up Spain's reservoirs so quickly that by year-end some were nearly full again.

Strong winds over the New Year holiday saw Spain's thousands of wind turbines supply more than half of the country's demand, which forced gas and coal-fired power plants to shut down to avoid system overload as hydropower firms drained reservoirs.

The deluge of green power drove spot prices down to what were record lows at the time, but which have been broken several times since when strong winds and wet weather drove spot power prices dowm to zero for some hours on low demand days.

With much more water in stock now and more wind turbines sprouting over the last year -- and with no increase in export capacity to France -- a repeat of last year's price plunges seems likely. And this year they may come earlier.

Another possible bearish sign is that Spanish spot prices have been trading at a premium to futures in the first few days of September, a market structure called a backwardation, which is unusual and often points to prices easing.

Spain could also see a surge in Algerian gas supply over the next few weeks, if the much-delayed Medgaz pipeline opens as expected before the end of September.

Gas demand from power plants has waned over the last few months, in part because of high hydropower output but also because of increased coal burning, but a surge in gas from Medgaz could see generators running their plants hard over winter to use it up, piling pressure on prices.

BUY

Spanish power demand has risen for the last nine months in a gradual recovery from lows seen in 2009, and prices have been on an upward trend through July and August, a time of year when demand from many big industrial power consumers dips as workers take holidays.

Despite occasional wind and hydropower supply spikes, gas and nuclear power plants are still the biggest sources of electricity.

The unexpected shutdown of any reactors, which are relied upon to supply about 20 percent of Spain's electricity around the clock, would likely push up spot prices and futures if the shutdown looks likely to last.

The opening of the 8-billion cubic metre per year Medgaz pipeline has been put back so many times that doubts remain over whether it will begin commercial operations before winter.

Power prices could get some support if it is delayed again or dive if it is finally opened.

"With extra gas maybe some interesting prices are to be had," another trader said.

"But it is hard to tell because we don't really know exactly when this pipeline will come online or under what terms they will sell." (Editing by James Jukwey)

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