The Lex Newsletter: Hydropower: It Never Rains, But It Pours

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Dear reader,

Greetings from Italy. Rain is a key issue here right now after the floods that have hit Emilia-Romagna. The central Italian region received about half its annual rainfall in 36 hours, triggering hundreds of landslides and mudslides. Fifteen people have died and more than 1,000 have been forced to flee 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 in the last 500. Temperatures soared and crops failed.

Extreme weather conditions are considered to be a consequence of climate change and will have dramatic repercussions on the way Europeans live, eat and work.

This climate will also have an impact on the continent’s energy matrix. Europe depends on hydropower for about 15 percent of its energy. Hydropower, generated by harnessing the flow of rivers or water released from reservoirs, used to be considered a reliable source of renewable energy. 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 power at low cost for decades. But construction costs are high, and finding suitable sites for dams can take many years, if at all. The International Energy Agency expects annual growth of just 3 percent in hydroelectric generation between 2022 and 2030.

Last year was a very bad year for the hydroelectric plant. This year is looking better: Water levels in European reservoirs are generally higher than last year, really an outlier in terms of rainfall. But the recovery so far is not as strong as expected.

Consider the levels of the reservoirs. Extremely depleted at the start of the year, they have surged ever since, with a particular improvement in recent weeks, according to commodity consultancy ICIS. In southern Europe, we are on average 20 percent above last year’s levels, and just slightly below historical norms.

But in some countries, the low watermark is still visible. Spain and Portugal are still parched. And the Nordic countries are also experiencing a long dry spell, with reservoirs in Sweden, Finland and Norway combined 20 percent below historical trends.

Also, these numbers are helped by the fact that we are not using as much hydropower as usual. As a recent report by renewable energy experts BNEF points out, dam recharge rates remain very low.

Let’s take Italy as an example. Electricity generated from hydroelectric plants so far this year was 10.2 GWh, according to Terna, the local grid. That’s a bit above last year’s lows, but still 40 percent below 2021 levels.

In part, the low hydroelectric production reflects a lower demand for electricity in general. Winter was warm and people have been trying to save energy. The fear is that a hot summer, coupled with lower energy prices, could reverse this trend, leaving hydropower potentially undersupplied. Mindful of this, the grid has called on the government to postpone the planned decline in some coal generation until the end of September.

In the past, the shortcomings of hydropower have been covered by gas-fired power generation. But, even if summer is sizzling and rain is sparse, it’s unlikely we’ll see a return of rising gas prices in 2022.

On the one hand, Europe has a growing capacity for solar and wind power to pick up the slack. Just think about what happened last year. Lost hydroelectric production and nuclear cutoffs in France left Europe with a deficit of 185 TWh. Demand dropped conveniently, reducing the hole to 100 TWh. New solar and wind plants supplied three-quarters of that.

Second, there’s a great cushion of gas to fall back on. The storage was more than half full, even after the winter season. That is well above the historical average. Consequently, gas prices have fallen 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 power availability is likely not. Europe as a whole faces next year much better than feared. And cheaper natural gas should boost the local economy a bit in the coming months.

the best of the rest

Lately I have become increasingly interested in water resources. As stories like this suggest, we will have to change the way we manage them. Martin Wolf’s column on the UK water system raise the issue.

While doing research for this newsletter, I came across this very good review of the world electricity market in 2022. It highlights how we may be approaching the peak of emissions from the electricity sector.

Enjoy the rest of your week,

camila palladino
lex writer