Effects of strong El Nino on global energy markets

The US National Oceanic and Atmospheric Administration notes that the probability of a 'very strong' El Niño by the end of this year and the beginning of 2027 is over 90 percent.

Changes caused by El Nino in temperature, precipitation and wind patterns can affect demand, production and trade balances in energy markets in different ways. As temperatures rise, increased use of air conditioning and other cooling systems increases electricity consumption, standing out as one of the direct effects of El Nino on energy systems.

According to the International Energy Agency (IEA), global electricity demand will grow by 3.6 percent this year compared to last year and 3.8 percent in 2027. The IEA points out that a stronger-than-expected El Niño may increase the need for cooling in some regions, pushing electricity consumption above current estimates.

According to the IEA, the amount of electricity used for cooling buildings in the world has increased by 50 percent since 2015, reaching approximately 2,900 terawatt hours. This magnitude draws attention to the additional load that high temperatures can create on electrical systems through cooling demand.

El Nino could increase solar production

Wind and solar energy production is affected differently by El Niño's effects on atmospheric pressure, cloudiness and wind patterns, varying by region.

According to the projection of energy and commodity markets data and analysis company ICIS, it is predicted that the temperature increase caused by El Nino may increase solar energy production in some regions. Solar energy production in Europe is expected to increase by 1.1 percent to 2.1 percent in the third quarter of this year compared to normal weather conditions.

In other regions, it is predicted that El Niño may reduce productivity by reducing solar radiation. It is predicted that strong El Nino conditions may change atmospheric circulation and reduce wind speeds and, accordingly, wind energy production in some regions. ICIS calculates that there may be a 9.8 percent decrease in wind production in Europe in the first quarter of 2027 compared to normal periods.

Changes in the amount of precipitation, river flows and reservoir levels due to drought negatively affect hydroelectric production. It is stated that hydroelectric production may decline if hot and dry conditions become stronger. The International Energy Agency points out that strong El Niño conditions may suppress hydroelectric production in some parts of Latin America and Southeast Asia in the coming period.

The effects of El Nino on electricity demand and production may also be reflected in the natural gas and LNG markets. It is considered that if hydroelectric production declines, more natural gas and coal power plants may need to be commissioned to meet electricity demand, which may increase the demand for fossil fuels.

According to ICIS, it is estimated that El Niño-induced hot summer conditions could increase Asia's liquefied natural gas (LNG) demand by approximately 1.6 million tonnes in the third quarter. This amount corresponds to an additional demand of approximately 2.5 percent in Asian LNG demand in the same period.

El Nino's effects extend to energy trade

Another dimension of El Nino's effects on energy markets is seen in global energy transportation.

Ship passages in the Panama Canal are closely linked to the amount of rainfall and water reserves in the canal basin. Since the canal's lock system uses fresh water during the passage of ships, the decrease in reservoir levels may lead to a limitation in daily transit capacity.

The Panama Canal Administration continues to take measures to save water as rainfall in the basin remains below expectations. In this context, as of September 3, the daily pass quota for Neopanamax locks has been reduced to 9 and to 25 for Panamax locks. The Panamax transit quota is planned to be reduced to 23 per day as of September 15.

It is evaluated that transit restrictions in the canal may also affect energy cargo.

Strong El Niño could increase LNG competition

ICIS Head of Energy Analytics Andreas Schroeder told AA correspondent that they expect the effects of El Nino to strengthen later in the year.

Schroeder stated that the increased use of air conditioning due to hot weather increased the use of gas-fired power plants, creating additional LNG import demand.

Stating that hot and dry weather conditions may increase electricity production from fossil fuels in South and East Asian countries that import LNG and some markets in South America, Schroeder said, "This means increased competition for scarcer LNG supply, especially in the summer months." he said.

Schroeder said, "Weak monsoon in South Asia led to drought in some countries. This suppressed hydroelectric production and increased electricity prices in the summer period." he said.

Pointing out that renewable energy capacity is important in the resilience of energy systems against weather-related shocks, Schroeder said, "Higher renewable energy capacity helps absorb the impact of El Niño-induced weather shocks in the energy sector. Dry conditions weaken hydroelectric production, but the effect of this can be partially compensated by higher solar energy production." he said.