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Monday, August 13, 2012
Balkans face new supply crisis

Martin Burdett (Platts Energy in Eastern Europe)

Southeastern Europe is facing another electricity supply crisis as a result of record low hydropower production brought on by two years of drought. While import capacity from Hungary and Slovenia, and to a lesser extent Bulgaria, is currently helping to cover high summer demand, concerns are growing that this year’s drought, which is exacerbating already low water levels in rivers and reservoirs across the region after low rainfall last year, could create supply problems this autumn and winter if the drought conditions persist. This could in the view of a number of traders lead to dramatic rises in already high electricity import prices, placing increased pressure on the region’s heavily-indebted, cash strapped utilities. 

The scale of the problem was illustrated this week with the declaration of force majeure by Romania’s state hydropower producer Hidroelectrica on all its supply contracts as a result of record low production Balkans face new supply crisis owing to low water levels on the Danube and the country’s other main rivers and “unfavourable hydrological forecasts for the coming months” (see separate story – page 4). Meanwhile, in Albania, CEZ confirmed August 6 that it had almost quadrupled electricity imports to the national distributor, which is owned and operated by the Czech utility, to 350 GWh per month with effect from August 1 from 100 GWh imported in July. “The decision comes as part of steps by CEZ and the Albanian authorities to stabilize the energy situation in Albania,” CEZ Shperndarje said in a statement. “The parent company in Prague has decided to allocate more funds to the Albanian distribution company to be used to secure the energy needed to guarantee uninterrupted supplying with energy”. CEZ said that the decision was taken not as a result of exceptional increases in demand but as a result of low hydro production and reservoir levels to maintain hydro reserves for later this year. 

In mid-July, Bosnia’s major power utility EPBiH reported that its hydro production in the first half of 2012 was down 42% below forecast at 3,280 GWh. “In the first half of this year hydro accounted for only 18% of the company’s total output,” Mirsad Sabanovic, EPBiH’s supply and trade manager, told reporters July 18. Elvedin Grabovica, EPBiH’s general manager, said that total output for 2012 is expected to be 20% lower than in 2011, partly because of the continuing overhaul of a 215-MW unit at the Tuzla coal-fired plant, which should be complete by the end of the year, but mainly because of the prolonged drought, which had lowered hydro output. Bosnia, which is normally the only net power exporter in the Western Balkans, produces about 40% of its electricity from hydropower, while the remainder is generated by aging coal-fired plants. 

One senior trader at a European utility told Platts August 7 that the “writing was on the wall already at the end of 2011”. Despite the snowfall earlier this year it does not matter how much rain falls in 2012 we had such low rainfall from 2011 that we need extraordinary wet weather for the reservoir levels to return to normal,” he said. “This summer is maybe worse than the previous one in terms of rainfall and because of empty reservoirs from this winter,” Mladen Apostolovic, head of trading floor and portfolio management at the EFT Group, the Anglo- Swiss trader, said in an interview August 6. “There was not enough rainfall in the beginning of the year to refill the reservoirs,” he said, with reserves further depleted in the second quarter as hydropower plants had to operate to substitute for large thermal power plants taken offline for maintenance. “Hydropower production in the Balkans in the sixmonth period between Q4 2011 and Q1 2012 was the lowest half year in hydro production in the last 15 years. This was some 11 TWh or 56% below average production,” Apostolovic said, noting that this was a problem for the region, which depends on hydropower for some 25% of its total supply. 

The production problems have persisted this year, he added, with production in the first half of this year down 16% on the same period in the previous year and in the case of Bosnia-Herzegovina as a whole as much as 50% below the long-term average for the first six months. As another indicator of the problems, Apostolovic pointed to the fact that water levels in the Danube were at a ten-year low at the end of July, though he said Hungary, Slovenia, Bulgaria and Romania were claiming that for now there were not any problems with water levels for the cooling of their respective nuclear power plants. “This is one of the few bright spots in the overall picture,” he commented. Apostolovic said that if there is no heavy rainfall in early autumn, the region could face supply issues in Q4 and the start of the heating season. This, he said, would be dependent on the operation of a number of the main thermal power plants. Serbia’s state power producer EPS, for example, said in its July in-house newsletter kWh that some 1,200 MW of coal-fired capacity (Nikola Tesla A5, Nikola Tesla B1 and Kostolac B2), currently offline for rehabilitation, is only expected to return to service at the end of October. Supply shortages would in turn drive up prices for the region, he said. “There is no significant price difference between Hungary and the Balkans for the present but this could change,” he noted. Significant price rises would, however, make it economic for a number of the region’s gas-fired plants, currently idle, to start producing, which would help cover for lower hydro production. “Current prices for Q4 cannot support production from gas-fired plants and this is also exacerbating supply shortages but if on the other hand we see increased prices incentivizing gas-fired producers to operate then this can help to stabilize the supply situation,” he explained. Traders said that the hydro situation in the Balkans was driving up power prices in Hungary and the region and leading to widening spreads with Germany. “Hungarian prices are very high and the Hungary to Germany spread is going to €10 on year ahead and on week-ahead you have a €20 spread. The single reason for this spread and the high prices in Hungary is the hydro situation in the south. Hungary is acting as the Tesco supermarket of the region,” said one trader. “For Q3 we now have spreads of €15 to Germany and for Q4 spreads of €9-9.5. The upside for prices in this region is a bit larger than the downside. This Q4 spread of €9 does not incorporate risk of very bad hydrology. Traders and utilities still believe that hydrology will return to normal and are not willing to pay a couple of euros more of risk premium for Q4 but as we approach Q4 if the situation does not improve I expect this risk premium to rise. In absolute terms the prices in the Balkans will for sure increase,” commented Apostolovic. “However, I believe that the region’s utilities will be better prepared and will buy security and emergency power in advance to make reserves to be able to respond to a possible critical supply situation which wasn’t the case this time last year,” he added.

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