Greetings from Italy. Rain is a key topic here at the moment following the floods that have ravaged Emilia-Romagna. The central Italian region received about half its annual rainfall in 36 hours, causing hundreds of mudslides and landslides. Fifteen people have died and more than 1,000 have been forced to leave their homes.
Such devastation is all the more striking because it follows a long drought. In Italy and much of Europe, 2022 was the driest year for the past 500. Temperatures soared and crops failed.
Extreme weather conditions are widely held to be a consequence of climate change and will have dramatic repercussions on the way Europeans live, eat and work.
This weather will also have an impact on the continent’s energy mix. Europe relies on hydroelectric power for about 15 per cent of its energy. Hydro — generated by harnessing the flow of rivers or water released from reservoirs — used to be thought of as a reliable renewable energy source. As weather patterns become less predictable, that may change.
Hydro offers a great source of clean energy. Given normal hydrological conditions, these power plants deliver low-cost power for decades. But construction costs are high and finding appropriate sites for dams can take many years, if at all. The International Energy Agency expects a mere 3 per cent annual growth in hydro generation between 2022 and 2030.
Last year was a very poor year for hydro. This year looks better: water levels in European reservoirs are generally higher than last year, truly an outlier in terms of rainfall. But the recovery so far is not as strong as hoped.
Consider reservoir levels. Extremely depleted at the start of the year, these have risen since, with a particular improvement in the past few weeks, according to commodity consultancy ICIS. In southern Europe, we are on average 20 per cent above last year’s levels, and only a touch below historical norms.
But in some countries, the low watermark is still visible. Spain and Portugal remain parched. And the Nordics are also experiencing a long dry patch, with reservoirs in Sweden, Finland and Norway, in aggregate, 20 per cent below historical trends.
Moreover, these numbers are flattered by the fact we are not using as much hydropower as usual. As a recent report from renewable energy experts BNEF notes, dam refill rates remain very low.
Take Italy as an example. Electricity generated from hydro plants so far this year was 10.2 GWh, according to Terna, the local grid. That’s a touch above the lows of last year, but still 40 per cent below 2021 levels.
In part, low hydro production reflects lower electricity demand overall. Winter was warm and people have been trying to save energy. The fear is that a sizzling summer, coupled with lower power prices, could reverse this trend, leaving hydro potentially undersupplied. Cognisant of this, the grid has asked the government to postpone the planned decrease of some coal generation until the end of September.
In the past, shortfalls in hydro have been covered by gas-fired power generation. But, even if the summer sizzles and rain is thin on the ground, we are unlikely to see a return of the 2022 gas price surge.
For one thing, Europe has a steadily growing capacity of solar and wind power to take up the slack. Just think about what happened last year. Lost hydro production and nuclear outages in France left Europe with a 185 TWh shortfall. Demand conveniently fell, reducing the hole to 100 TWh. New solar and wind plants supplied three-quarters of that.
Second, there’s a big gas cushion to fall back on. Storage was more than half full, even after the winter season. That’s well ahead of the historical average. Gas prices have consequently fallen to below €30/MWh, the lowest level since before Russia’s full-scale invasion of Ukraine in February last year.
In Italy, rainfall will continue to be a concern, but chances are that energy availability will not. Europe as a whole faces the coming year in much better shape than feared. And cheaper natural gas should provide a bit of a tailwind to the local economy over the next few months.
Best of the rest
I have become increasingly interested in water resources lately. As stories like this suggest, we will need to change the way we manage them. Martin Wolf’s column on the UK water system lays out the issue.
As I was researching this newsletter, I came across this very good review of the global electricity market in 2022. It highlights how we may be nearing peak emissions from the power sector.
Enjoy the rest of your week,