The Battery of Europe

 

Norway generates over 90% its electricity from hydro-electric power stations and as a result is known as the ‘battery of Europe.’

While the UK heatwave has recently made headlines, most of Europe has also experienced record temperatures and more disturbingly drought conditions. Water levels in Norway’s hydro-electric power station reservoirs are a third below what is typical for this time of year and could take months to be replenished by rain and melting snow. Some reservoirs in south-western Norway are below half capacity.

Norway’s Minister of Petroleum and Energy Terje Aasland, has said the government intends to introduce new regulations that would limit electricity exports, when reservoir levels run too low.  The priority is re-filling reservoirs to protect Norwegian energy security.

In a story that is mirrored across the West, energy production and the cost of energy has risen to the top of the political agenda in Oslo. For a country that has historically been the pinnacle of green energy generation and the envy of the World, in an almost unthinkable move, the government has gone so far as warning that it cannot rule out electricity rationing this winter.

These new proposed restrictions could threaten the UK’s and Europe’s plan to draw power from Norway this winter. National Grid has already said that the UK is set to become more dependent on Europe for power at peak times. Power interconnectors are expected to provide up to 5.7 gigawatts of electricity at peak times, with about 25% of this set to come from Norway. The UK’s power network could be stretched to the limit this winter!

The Norwegian news comes at a time when parts of Europe are already struggling to fill the void as a result of Russia cutting gas supplies. More countries are having to bend the rules to keep the air-conditioning on. In France, President Macron has eased safety rules to allow five nuclear power stations, run by EDF to discharge hot water into rivers to keep reactors running during the heatwave.

While we all sizzle this summer, we have to hope we do not experience another ‘Beast from the East’ – as Europe’s energy security looks like being severely tested this winter. While the UK, does have greater flexibility with its LNG import facilities, we are exposed to higher spot prices for gas and the Norwegian hydro-electric news demonstrates that we are still vulnerable.

What have we been watching?

 During the quieter August holiday period, markets appear to have taken the latest inflation data in their stride although it will put even more pressure on the Bank of England. Global investors continue to focus on the US Federal Reserve which has been more aggressive than either the Bank of England or European Central Bank and has ‘front-loaded’ interest rate hikes. Put simply, in the US we may be closer to peak inflation and interest rates but in the UK and Europe, both are still climbing with pain for households and businesses. Global investor attention this week is likely to focus on the Federal Reserve conference at Jackson Hole. Treasury yields started to climb back towards 3% on mounting concerns about global recession risks.

While miliary exercises in the Strait of Taiwan have calmed down for the time being, the war of attrition in Ukraine continues. Russian military facilities in Crimea appear to be coming under increasing attack, heralding yet another shift in the war. European gas prices hit an all-time high (ten times the ten-year average) as state-owned Gazprom announced unplanned maintenance of the Nordstream1 gas pipeline turbine. Gas supplies via the pipeline will be shut for at least three days starting the end of August.

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In the UK, annualised inflation surged past 10% in July -the highest level for 40 years. The Bank of England (BoE) must surely be forced into another 0.5% interest rate hike in September? Futures are now pricing in a further 1.5% of interest rate hikes by May 2023. This is increasing the risk of a sharp consumer slowdown. The BoE is forecasting inflation to hit 13% and as a sign of the continued upward pressure, grocery price inflation reached 11.6% in the four weeks to early August with dairy products seeing the biggest jump. This, in turn flowed through into the weakest UK consumer confidence reading in the forty-year history of the survey. Market concerns that inflation is becoming more persistent in non-discretionary areas together with the weak consumer confidence reading saw Sterling slip to $1.18.

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In the US, retail sales in July were flat month-on month although gasoline prices were lower, hitting the takings of service stations. The Federal Reserve (Fed) released the minutes of its most recent meeting which appeared to support the current market view that a further interest rate hike of 0.5% is likely in September.

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Parts of China are also suffering from a heatwave. Electricity supply to factories in Sichuan province has been temporarily rationed. The region is reliant upon hydro-electricity which has been affected by falling water levels in reservoirs. China also appears to be implementing draconian ‘flash’ localised lockdowns under its zero-tolerance Covid-19 policy. The People’s Bank of China cut benchmark loan rates for the second time in a few days to prop up the struggling property sector.

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Brent oil slipped back to $95, the lowest level since Russia’s invasion of Ukraine, following weaker Chinese economic data.

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Finally, talking of European drought and record low river water levels. ‘Hunger stones’ have been seen in parts of Czech Republic and Germany. In past times, these have marked unusually low river bed levels only seen in extreme drought conditions. One stone, dating from 1616 in the River Elbe says ‘if you see me cry.’

 

Read Last Week’s Alpha Bites – Meltdown

 

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Alpha Portfolio Management is a trading name of R C Brown Investment Management PLC which is authorised and regulated by the Financial Conduct Authority.