The hot summer has been dominating European market fundamentals, but, despite some fairly supportive developments, gas demand across the four-country region fell in July, buffeted by headwinds from higher solar output, French nuclear availability and Alpine hydro generation. The summer heat is expected to ease by mid-August, but there are signs it has already reduced Alpine hydro balances, while Nordic balances have stabilised but remain substantially lower y/y. For the rest of Q3 18, y/y gas demand reductions are likely to be just 0.13 bcm y/y, smaller than seen in July, although with the storage deficit in NW Europe still high, the markets will not want to price in much additional gas demand.
Aggregate gas demand across the region fell by 0.24 bcm (3%) y/y last month, as soaring temperatures cut res-com demand, offsetting increases in power sector gas demand in Belgium and the Netherlands. While cooling demand boosted total power demand in the four-country region, the increase was met by higher coal, nuclear and solar generation in Germany, while hydro and nuclear generation squeezed gas out of the generation mix in France. On the flipside, Belgian gas into power and Dutch industrial gas demand—which includes the power sector—hit a seven-year high for July as both countries logged lower power imports from the Nordics.
The hot weather has been playing havoc with hydro levels Europe-wide, resulting in shifts in power flows. Nordic hydro levels have been low for months and were down by 17 TWh y/y on 23 July. Forward looking Nordic hydro balances as of 7 August were actually closer to being 22 TWh lower y/y, but that y/y gap is slimmer compared to previous forecasts that had put the deficit near 30 TWh. Alpine hydro levels, a key source of power this summer, have started to fall. Week 30 reservoir levels were largely flat y/y—still healthy in France (+11%) and Italy (+16%) but sharply lower in Switzerland (-10%) and Austria (-9%)—but with the last two weeks seeing some of the summer’s hottest weather so far, aggregated hydro balances for the Alpine quartet are likely to be in y/y deficit now.
The deterioration in hydro levels is likely to have a knock-on effect for demand in the coming winter. Even when the heat relents and allows the resolution of cooling water availability issues—which have knocked 5 GW of French nuclear capacity off the grid for a few days at the end of July and start of August—the erosion of the y/y surplus in Alpine hydro stocks makes low Nordic levels all the more significant.
We forecast that this could add 0.1 bcm y/y of total power sector demand in Belgium, France, the Netherlands and Germany. With the continental gas markets still having a high injection need over the next two months, the market is unlikely to be eager to price more gas into power, even with September gas imports set to be higher y/y as Nord Stream works are complete.
|Fig 1: German solar gen. & gas in power, TWh, bcm||Fig 2: Net power flows – Germany-Sweden, TWh|
|Source: Fraunhofer, NCG, GASPOOL, Energy Aspects||Source: Fraunhofer, Energy Aspects|