Turkey: Trading powers up
Turkey's entrepreneurial spirit lends itself well to trading and participants are keen to develop liquid markets. In the third of a series of four on the Turkish power market, ICIS Heren examines the structures in place and reports on developments.
ICIS Heren's first assessment of the Turkish power market is published on Thursday, 3 March.
Turkey is poised to launch a traded over-the-counter (OTC) market - a move that could crack open a thriving power sector and booming economy to energy companies and banks across Europe, as well as help increase liquidity in southeastern Europe (SEE).
The country is banking on its burgeoning liberalised power market and ongoing sizeable projects to attract European utilities and local holdings to start OTC spot and curve trading later this year.
Existing trading structure
For now, the market still retains a hybrid form, combining bilateral agreements, which are expected to cover the bulk of electricity demand with day-ahead and real-time balancing mechanisms, as well as settlement systems for imbalances.
Given the set-up, there are two types of prices produced - an hourly marginal price and a system imbalance price.
After 2006, when the transitional balancing and settlement regulation came into force, suppliers terminated their long-term bilateral contracts, and began selling power to the balancing market.
Prices and demand volumes in the balancing market have been attractive to generators, thanks to high growth in demand that led to supply shortages.
This meant that system operator TEIAS turned to the balancing market to buy electricity.
Later on, the balancing market was divided into two parts: the day-ahead planning, for use in the day-ahead trade; and the balancing power market, which serves the real-time balancing of supply and demand.
PMUM, the power exchange, is expecting to switch from day-ahead planning to a day-ahead market, a spot market where participants can carry out activities towards balancing their portfolios. PMUM has indicated that the launch of the Turkish day-ahead market will take place on 1 May.
The sector aims to be fully liberalised by 2013, when a power futures market is expected to be added to the existing platform.
However, Turkish and international traders want to see a forward traded market faster than PMUM is expecting to deliver. A total of 16 domestic and European power companies are part of the Turkish Association of Energy Traders (ETD), which aims to train and licence counterparties, provide market information, data, statistics and a real-time online trading platform.
The association expects to see its membership increase to up to 60 companies this year, and another eight firms have already applied to join.
"Just by its mere size, Turkey could offer incredible opportunities. And an established OTC market would help increase liquidity in southeastern Europe, which is currently struggling," Jan Haizmann, legal committee chairman at the European Federation of Energy Traders (EFET), told ICIS Heren.
He said the association was pushing Turkey to extend its power connections with Greece and Italy, as well as grant third-party access through its borders to companies interested in flowing power in and out of the country.
"ETD aims to reunite market participants and to launch a series of fruitful activities which will eventually lead to the launch of the Turkish OTC power market," said Burak Guler, ETD's head of the advanced OTC market.
Turkey has already synchronised its grid with the European system, hoping to start commercial flows with Bulgaria and Greece later this year.
Haizmann said most European energy companies were interested in trading the market and investing in the power sector.
Turkish counterparties are also in the process of signing EFET-type master agreements that will allow them to trade with each other.
Major European power brokers such as TFS, GFI and ICAP are also circling, invited by major European utilities keen to move the project forward. Each is testing the market and looking to start its own platform later this year.
In fact, TFS - a broker that enjoys a reputation for being first into developing markets - has already launched its Turkish screen, set for trading as soon as counterparties are ready.
"The potential for the Turkish market is clear," Jason Curtis, manager of central and eastern European (CEE), SEE and Italian power at TFS told ICIS Heren. "The annual growth in power consumption outstrips Europe, and the country itself is a significant crossroads for the whole energy complex. With initiatives towards an OTC market and changes in regulation, we see Turkey as an important part of our strategy in the region."
However, without counterparties in place, no trading can be brokered right now. Sources have told ICIS Heren that at least three counterparties have begun to negotiate Turkish versions of the EFET master agreement commonly in use across Europe, but none has been finalised at the time of writing. Deals are currently negotiated on a bilateral basis.
ETD itself is looking to launch a trading platform, OBP, which will pave the way for the start of the OTC market.
Supplier regulatory risks
But there are concerns over regulation, particularly in the wake of a new rule passed by Turkey's gas and electricity regulator Electricity Market Regulatory Authority (EMRA). The regulation will require eligible customers to pay a theft and loss component to distribution companies (see EDEM 7 January 2011).
EMRA ruled at the end of last year that customers should pay Turkish lira (TL) 29.33 (€13.08)/MWh to cover thefts and losses of energy.
This means that wholesale companies might lose important margins, as they have to pay the passthrough levy to distribution companies that act as service providers.
Previously, the risk from energy losses had been factored into the tariff charged to the end-consumer. However, suppliers could offer end-user discounts, meaning that eligible industrial and commercial customers could buy at prices up to 30% lower than the tariff that includes the margin of theft and loss components.
Suppliers now say that with the introduction of a new fixed theft component, wholesale companies have to charge the passthrough component, which lowers the discounts to end-consumers by nearly 14%, so these will be minimal or wiped out entirely.
Consequently, some wholesale companies that might lose their industrial customers as a result of the regulation could consider selling capacity to a local pool to forestall the risk of paying additional taxes.
However, in January this year, EMRA passed a regulation that somewhat offsets the effects of the theft and loss tax (see EDEM 27 January 2011).
Under the regulation, wholesale companies will be able to sell power to commercial end-users that consume more than 30,000MWh annually, making these larger end-users free to choose their own suppliers.
Previously that limit was set at an annual 100,000MWh, meaning power suppliers could target only 10% of the country's commercial consumers, such as businesses, offices and institutions.
But that new regulation took a further twist when EMRA subsequently ruled that eligible consumers cannot switch their suppliers when they choose, but only at the beginning of each quarter.
Trading regulatory risks
Another important development expected later this year relates to a new rule that will require traders to pay a guarantee to Takasbank, a clearing unit operating under the umbrella of the Istanbul Stock Exchange.
Until now, participants have not been asked to provide proof of solvency to ensure that counterparties were not exposed to default risks.
However, when the regulation kicks in - reportedly in May - traders will have to pay a fixed sum when registering as participants, as well as a variable component that will be proportional with the amount of transactions concluded over a given period of time.
It is not yet known how much cash traders will have to stump up, but analysts say that the levy will be sufficiently high to "eliminate smaller players" and ensure that only the commercially viable are selected to become active on the market. AS
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