Falling energy prices could squeeze Turkey-SEE cross-border trading

Falling energy prices in Turkey could pare cross-border trading profits to wafer-thin levels and change market dynamics in the region in the medium term, traders in southeast Europe said.

Since the launch of commercial electricity exchanges between Turkey and the European interconnection zone, the most sought-after border has been that between Bulgaria and Turkey thanks to the latter’s net premium over neighbouring markets.

This meant that the monthly costs to flow electricity into Turkey were proportionally high, often exceeding €20.00/MWh, as companies jostled to clinch capacity in monthly tenders.

However, over a five-month time span, capacity prices on that border dropped from €18.09/MWh in January to €1.93/MWh in the May auctions held by the Bulgarian transmission system operator ESO this month.

The fall in capacity prices is linked to bearish energy prices since the beginning of the year, which have been falling throughout the region on the combined effect of subdued consumption and ample renewable generation.

The sharpest falls have been seen in Turkey, where, for example, the average April spot price has been delivering at €34.70/MWh on the exchange PMUM, €15.30/MWh below the last ICIS assessed price.

Bearishness persists

Neighbouring markets such as Bulgaria, Romania, Serbia and Hungary have seen similar price movements, although not as pronounced. The biggest bearish driver has been abundant hydropower supply, particularly in the western Balkans.

For example, Serbia’s state-owned utility EPS has been on the selling side throughout March and April, according to market data. Furthermore, demand for daily cross-border capacity in the direction of Serbia-Hungary soared. Albania is also reportedly exporting electricity. Previously feared spikes on Hungarian exchange HUPX in April due to nuclear outages in the region and cuts to cross-border capacity from Austria and Slovakia did not materialise as a result.

At the same time high wind energy output combined with moderate demand and reduced exports to Serbia led to plummeting Romanian day-ahead prices at the beginning of this month. For example, the Day-ahead Baseload on the exchange OPCOM dropped as low as €5.93/MWh on 3 April.

The overall bearishness put Bulgarian domestic producers in a disadvantageous position. The online selling platform operated by 1.6GW Maritsa East 2 coal-fired power plant was predominantly empty so far in April with traders pointing out that the producer simply could not match prices in the region.

On Wednesday, only a week before the expiry of the front-month contract, the Bulgarian utility NEK announced a tender to sell 200MW May Baseload starting from €35.23/MWh, excluding the export tariff. This is slightly below NEK’s offer for April at €35.78/MWh.

The effect of falling energy prices has been mirrored in tighter energy price spreads between Turkey and surrounding markets, raising questions over the region’s trading dynamics in the short to medium term.

Closer and closer

Since its interconnection to Bulgaria and Greece, Turkey has typically imported directly from the two countries or via transits from Romania and Hungary if prices in the latter markets were more attractive. This meant that the direction of exports has been west to east.

However, as Turkish spot prices have nosedived since the beginning of the year, prices in Turkey, Bulgaria, Romania and Hungary are showing signs of correlation.

Furthermore, there are indications that Turkey’s premium to Bulgaria could peter out, bringing it on a par or even a discount to neighbouring markets.

For example, the Turkish May Baseload price was last assessed by ICIS on Tuesday at €42.23/MWh, €3.08/MWh higher than the Bulgarian equivalent, assessed last Thursday. To compare Turkey’s premium over the Bulgarian equivalent stood at €29.115/MWh in December.

Four traders agreed the likelihood of reversing flows from east to west in the mid-term was high at least in some months when Hungarian prices are bullish, particularly if speculation that Bulgaria would increase a raft of fees that collectively act as an export tariff came true.

Currently, the tariff amounts to €4.08/MWh, but recent comments by the Bulgarian prime minister indicated that the tariff may more than triple, pushing energy prices above their Turkish equivalents.

However, reverse flows could become a common trend only after the launch of the Bulgarian Day-ahead power exchange, currently expected by the end of the year, one trader active on the Bulgarian market said.

“If you don’t have liquidity you can’t close positions and transiting would be risky. The exchange would make traders braver and they could reverse the flows more often, knowing they can get out of a position easily,” he said.

Less cross-border trading

A Turkish trader said that further falls in energy prices would discourage companies from taking positions on the border.

“There will still be companies which have long-term contractual obligations and will have to fulfil them,” he said. “However, companies which have been there purely for a quick profit will be discouraged to trade, at least in the short term.”

A Bulgarian trader said interest in cross-border trading was declining already, while a second one noted that profit margins have been generally quite thin because of historically high cross-border prices.

A fourth trader suggested that any changes in cross-border trading that may occur in the upcoming months if energy prices continue to fall will be short-lived.

“If higher energy prices return to the Turkish market, it’s going to be a profitable business again,” he explained.

However, other Turkish traders pointed to the fact that Cal ’16 Baseload prices have also been on a sharp downward trend, being first assessed at Turkish lira 179.00/MWh (€68.00/MWh) in January, but dropping to TL157.75/MWh (€58.20/MWh) on Wednesday, the latest day of assessment.

The trader active on the Bulgarian market added that in his opinion power demand in Turkey may not grow as much as initially expected in the coming years. This, they say, may hint at the fact that cheaper energy in Turkey may be here to stay. Turkey’s GDP growth has been slowing down over the last five years, falling from an overheated 9.2% in 2010 to 2.4% in 2014, according to trade data released last March. Aura Sabadus/Irina Peltegova