Analysis: Economy, renewables disturb Turkey, SEE trading patterns

Price dynamics in Turkey and south-east Europe have been reversed over 2015, raising questions about regional trading patterns next year.

Until last year Turkey retained its premium over regional markets, driven by an annual 6-7% electricity demand increase, a booming economy and a near 50% share of costly gas-fired production within the electricity generation mix.

However, slowing economic and energy demand combined with high hydro production have this year depressed Turkish prices to such an extent that they are now closer to those of Bulgaria, traditionally the cheapest market in the region. This means that trading interest at the Bulgarian-Turkish border has also declined. In January a total of 13 companies placed bids on the border in monthly auctions organised by the Turkish grid operator TEIAS. By September that number had dropped to six.

A trader active in Turkey said the country’s electricity market may recoup some losses over the winter months when soaring demand and the risk of gas crises could boost spot prices.

A reported change in the pricing strategy of the Turkish incumbent EUAS may also contribute to a mildly bullish trend.

EUAS is thought to have increased its prices in the spot market by an estimated TL15.00/MWh in off-peak hours and around TL20.00/MWh in peak hours since the end of August. The information could not be confirmed with the company.

Nevertheless, the economic doldrums and the political uncertainty that have beset the country this year have left a bearish imprint on the electricity market that may continue well into the next year.

Bulgarian-Turkish spreads shrinking

The trend of shrinking price spreads between the Bulgarian and Turkish markets is expected to continue, according to trading sources, although Bulgarian exports to Turkey would still be profitable at least in the medium term.

Expected developments on the Bulgarian market which are likely to change the trading dynamics could also affect the spreads.

At the moment Bulgaria’s free power market is not driven by fundamentals, as around half of the market remains regulated. The selling side is dominated by three big state-owned producers and in the absence of active over-the-counter (OTC) or exchange trading, there are no firm price signals.

The levels at which the big producers sell power depend on prices in more liquid markets such as Hungary.

However, the long overdue Bulgarian exchange IBEX is scheduled to launch on 8 December, while the government is aiming for full market opening from the beginning of next year. This means that the Bulgarian market should start building up liquidity and fundamentals will play a bigger role for prices in the future.

“If utility NEK [which owns most hydro power plants] becomes a market maker on the exchange and starts optimising its production then we may see a more dynamic market,” one trader said. However, the change in trading dynamics is expected to be rather slow as traders will have to adapt.

The fate of the Bulgarian electricity export tariff would also affect the spreads.

As Turkey will be expanding its hydro, wind and solar capacity, prices in the long run are likely to drop closer to Bulgarian prices. “Turkey is no longer as bullish as we expected it to be three years ago,” the trader said.

Another source said Bulgarian and Turkish prices could become flat to each other only if more cross-border capacity is made available between the two countries and if the two markets are coupled. But this is not expected in the foreseeable future.

Greek prices fall

Greek electricity prices have dropped year on year because of bearish gas prices, which reduced the cost of gas-fired generation in the country. However, the bearishness was less pronounced than in Turkey, making the market the most expensive in the region.

The financial risk that has loomed over the Greek market this year has increased the risk of doing business in the country, but its bullish effect was not sufficient to help stem losses, traders said.

In fact it was a lack of several key developments, such as regulatory changes and new installations pressuring prices in other markets, that capped falls, traders said. Low cross-border capacity with Turkey also prevented higher imports. aura.sabadus@icis.com, irina.peltegova@icis.com and sophie.udubasceanu@icis.com