May 3 (Bloomberg) -- Electricity prices may reach record highs in Europe, as forecasters predict a second straight summer of soaring temperatures.

``The chances are we will see significant increases in prices,'' Kim Keats, head of power and fuels at ICF International Inc. in London, said in an interview. ``Forward prices will take this into account.''

Baseload power for next quarter in Germany, Europe's biggest market, has risen 28 percent from its Feb. 23 low for this year and traded today at 46.60 euros ($63) a megawatt-hour, according to GFI Group Inc. at 6:43 p.m. in Berlin. Increased demand for electricity to power air conditioners and refrigerators may send baseload, or around-the-clock, contracts as high as 60 euros, said Olaf Ter Bille, senior energy trader at the MMT Energy Fund.

Temperatures in Northwest Europe may jump to records in the second half of July, said Jim Dale, a senior risk meteorologist at British Weather Services, two days ago. There's a 70 percent chance mean summer temperatures will be above the 1971-2000 average for much of western Europe, the U.K.'s Met Office said May 1. The risk of a hot summer, like last year's, is about one in eight, it said.

Traders have started buying power for the summer to avoid shortages that would force them to buy in the spot market. MMT, based in Amsterdam, forecasts German electricity contracts for next quarter could rise as much as 29 percent, based on today's price.

Hot Weather

Hot weather affects supplies as well as demand. Rising temperatures reduce water levels on Europe's rivers, restricting shipping and supplies of coal to power stations, Keats of ICF said.

The driest April in 106 years didn't affect shipping on the Rhine, Europe's busiest waterway, said Markus Lehmacher, a spokesman for Cologne's Water and Shipping Agency, on April 27. Water levels yesterday fell to their lowest this year, 1.99 meters (78 inches), around Cologne. When levels are below two meters, restrictions may be imposed and barges have to transport less coal, Lehmacher said.

April was the warmest month on record in Northwest Europe, including Germany and the U.K., according to forecasters. Hotter temperatures typically mean lower amounts of rainfall.

``If precipitation levels carry on as this, there will be problems,'' said Dale, whose company sells forecasts to businesses including energy companies.

U.K. power for delivery next quarter today soared to their highest in more than three months. The contract rose 3.3 percent to 27.90 pounds ($55.48) a megawatt hour, according to price information on Bloomberg from the energy broker Spectron Group Plc. That's the highest since Jan. 18.

Power Cuts

In Italy, Europe's fourth biggest power market, a drop in rainfall to 50 percent of the long-term average has depleted lakes, rivers and reservoirs for hydropower production. This has lead companies to enter the forward market to secure supplies.

``There's a fear of a shortage,'' Andrea Selvaggi, Barclays Plc's Italian commodities originator, said in an interview. Terna SpA, the country's grid operator, is warning that blackouts could occur because the lack of water cuts hydropower output. Barclays investment banking unit, Barclays Capital, trades electricity in most of Europe's markets.

Australia, gripped by its worst drought in a century, has seen power prices rise by as much as four times more than usual for this time of year, Merrill Lynch & Co. said yesterday in a report. The drought is restricting supply of water at hydroelectric stations.

Prices for baseload continuous power in the national Australian electricity market are about A$60 ($49) to A$80 a megawatt hour, compared with a typical price of A$20-A$40 for this period, Merrill said.

`Severely Hot'

Warmer waters also restrict how much cooling water power plants can discharge for environmental reasons. Such limits force power plants to generate less electricity.

A ``severely hot'' summer in Europe could lead to output cuts at French nuclear power plants, Mark Daubney, a strategic specialist in the European Energy Services department of John Hall Associates Ltd., said two days ago in a phone interview.

``It could lead to very high prompt prices in July and August,'' he said. ``There could be a knock-on effect to the Benelux countries, Germany, and other countries nearby.'' Prompt prices are due for delivery in the next few days.

The record on Germany's European Energy Exchange AG for baseload day-ahead power was set on July 26 at 301.54 euros a megawatt hour. Delivery for tomorrow was settled at 33.89 euros in an auction today.

Carbon Prices

Falling carbon-emissions contracts will restrain prices, Keats said. The price of 2007 permits, needed to emit carbon dioxide from about 12,000 power plants and factories in the region, dropped more than 95 percent since a year ago as national governments handed out more credits than utilities needed.

Credits for this year fell 5 percent to 53 euro cents, on the European Climate Exchange in Amsterdam.

Forecasters don't always get it right. Last year's Atlantic hurricane season was quieter than expected after Hurricane Katrina in 2005 caused $81 billion in damage. Tropical Storm Risk, a U.K.- based group of scientists and insurers, last month predicted 17 storms and four major hurricanes this year.

Prices of next-quarter power contracts may fall if meteorologists change their forecasts or temperatures fall in France and Germany, traders say. ``It could go down to 30 euros if we have a cold summer,'' MMT's Ter Bille said.

To contact the reporters on this story: Lars Paulsson in London at lpaulsson@bloomberg.net; Paul Dobson in London at pdobson2@bloomberg.net

Last Updated: May 3, 2007 12:59 EDT