Turkey-Greece spot link raises questions about future prices

Turkish and Greek electricity prices have been showing small signs of correlation, so Balkan companies have reiterated questions about Turkey’s impact on the region’s markets and its future influence once cross-border capacities increase later this year.

Cut off from the rest of Europe, Turkey had been described as an energy island, impervious to external drivers and unable to affect other markets.

However, since its interconnection to Bulgaria and Greece and the start of limited commercial flows among the three countries in June 2011 ( see EDEM 10 May 2011 ), traders have sought to gauge the extent to which Turkey, the largest regional market, could leave a footprint in its hinterland.

Some sources even suggested before the interconnection that Turkey could change the dynamics of the Balkan power markets once the country was connected to the EU grid and push regional prices up by some €5.00/MWh as it would suck in more regional volumes ( see 1 September 2010 ).

Turkey was seen as a power-hungry market, with a minimum annual consumption growth of 6.5% through to the end of the decade and higher delivery prices.

Rising prices boost interest

Turkish power prices have indeed increased by an estimated 16% between 2011 and 2013. PMUM settlements in the first four months of this year have seen an average 30% mark-up on the same period in 2011, according to data from the exchange. Even so, average prices this year hover around TL160.00/MWh (€54.48/MWh), which is short of the TL180.00/MWh expectations that some companies had a few years ago.

Thanks to higher prices, Turkey has been attracting interest particularly on the Bulgarian border, where the number of active companies has increased to more than ten each month, compared to only a handful when the auctions first started in June 2011.

Interconnection capacity for Greek and Bulgarian imports into Turkey stands at 550MW, while the export capacity is 412MW. Bulgaria accounts for two-thirds of imports and exports, and Greece for the other third. There are daily flows between Turkey and Greece, and monthly imports/exports with both Greece and Bulgaria.

As Turkey prepares to increase its cross-border capacity to an estimated 1.2GW later this year, subject to the successful completion of the third and final stage of trial interconnection tests with the EU grid ( see EDEM 20 March 2014 ), questions about its full impact on the region have therefore returned to the table.

Market correlations…

The logistics of the individual markets pose problems for assessing Turkey’s impact. Firstly, there are no daily auctions between Bulgaria and Turkey, as there are between Turkey and Greece. Secondly, Bulgaria does not have a day-ahead market and therefore lacks spot prices. The two countries hold monthly auctions, and the Bulgarian-Turkish border attracts the greatest interest. However, these prices are insufficient to measure the level of correlation between the two.

Therefore the only way to analyse the effect of Turkey’s interconnection on the region, is to compare the movements of the Turkish day-ahead price published by the exchange PMUM with those of the Greek system marginal price (SMP).

Interestingly, a four-month data snapshot covering the period 1 January 2014 – 15 April 2014 shows that PMUM and SMP settlements have been moving in tandem on 60 out of the 105 surveyed days (Greek data for 29 and 30 January was missing because market operator LAGIE could not calculate them following industrial action).

“When price differentials between the two countries appear, we see a quick reaction on the cross-border flows which could explain some price correlation in principle,” a source active on the Greek market said.

The source said the impact of the Turkish interconnection to Greece was limited because imports and exports were still rather small, at only 100MW.

“Greek prices could be affected by [the Turkish PMUM] by no more than €1.00-2.00/MWh and I guess PMUM would be affected even less [by SMP],” he added.

However, he conceded that once the overall cross-border capacity increases to the predicted 1.2GW, Turkey could make a visible impact on neighbouring countries.

“If there was more capacity on the lines then, yes, we would see an impact on Greek prices, mostly because Greece would be exporting more.”

…or fundamental similarities?

Other sources interviewed by ICIS were more sceptical over potential price correlation between the two markets.

One participant said that while the surveyed data may show similarities in price movements, this was largely related to fundamentals shared by both countries.

“It might look like there was a correlation in prices because there are similar weather patterns. Greece and Turkey are very close; if we have high hydro [production], they have high hydro [production]; if we have cold winters, then Istanbul faces cold winters as well. This is not because they impact each other, we are just sitting in the same region,” he noted.

A source active in Turkey accepted there were signs of price correlations, but he said this may also be due to the exchange rate.

“[The euro to Turkish lira exchange rate] went from TL2.91 on 1 January to TL3.195 on 24 January and then back to TL 2.90 on 7 April. This is a pretty wide gap.” PMUM prices are quoted in Turkish liras and have been converted into euros.

Gas price boost

Finally, for now the average Greek SMP price has been delivering at an average €6.00/MWh premium to the average PMUM out-turn since the beginning of the year. This is largely because of a change in Greek regulations that affects gas producers and has been boosting the pool price ( see EDEM 8 January 2014 ).

But if Turkey were to announce an increase in the wholesale gas price that typically attracts an increase in regulated and non-regulated electricity values, then PMUM and SMP prices could find themselves at parity. A survey conducted by ICIS earlier this winter found that Turkish companies were expecting an average 13% gas and an estimated 7% electricity price hike this year ( see EDEM 25 February 2014 ). Aura Sabadus and Sophie Udubasceanu