The presence of effective spot and derivatives markets is very important for new power-generation investments as well as the optimisation of existing generation capacity. These markets provide investors with the price signals and financial products they need for feasibility studies and risk management. In the past few years, large utility companies like RWE have been stating that energy market liberalisation and the establishment of an Energy Exchange would be key for them to make new investments in Turkey. At PwC we prepared a study that quantifies the effect of energy market liberalisation on the Turkish economy and concluded that liberalisation will contribute considerably to growth and employment.
Efforts for the establishment of an Energy Exchange have finally produced concrete results. The new Electricity Market Law No. 6446, published in the Official Gazette on 30.03.2013, has brought a new regulatory framework, under which the organised wholesale power markets will be operated.
Currently the day-ahead market, the balancing power market and the ancillary services market are operated by the Market Financial Settlement Centre under the Turkish Electricity Transmission Company (TEİAŞ). Efforts are underway to establish an intraday market. Future power contracts are being traded in the Turkish Derivatives Exchange, but they do not attract much interest. Investors hold the view that the prices in the day-ahead market do not reflect the real supply-demand balance due to the large share of state-owned utilities in power generation and the fact that natural gas market prices are regulated.
According to the new law, a new Energy Markets Operation Company (EPİAŞ) will be established to operate the day-ahead and intraday markets. The operation of the balancing power market and the ancillary services market will remain with TEİAŞ. EPİAŞ will be responsible for the financial settlement in the markets operated by EPİAŞ and TEİAŞ. Standardized power purchase contracts and derivatives contracts based on power and/or power generation capacity will be traded in markets on the Istanbul Stock Exchange (Borsa İstanbul A.Ş.). The law requires the Energy Market Regulatory Authority (EPDK) to publish a regulation to lay out the working principles of EPİAŞ, taking into consideration the opinion of the Capital Markets Board (SPK). As for the working principles of the markets under Borsa İstanbul, they will be determined in regulations to be published jointly by the EPDK and the SPK. The law also allows EPİAŞ to engage in market activities other than those specified above, including emissions trading.
The law limits the direct and indirect share of state-owned enterprises in EPİAŞ to 15%, but this ratio may be doubled with a Cabinet decision. From this provision, we may conclude that TEİAŞ will get a 15% share in the first instance, followed by the Petroleum Pipeline Co (BOTAŞ) once a natural gas market is established. Borsa İstanbul, private energy and finance companies and foreign exchanges are also likely to become shareholders to EPİAŞ. All shareholders, including state-owned enterprises and BOTAŞ shall have representation in the company board. The aim here is a shareholder structure and management resembling the Energy Exchanges in the European Union. Such a management structure for the spot markets is expected to improve the risk management of these markets as well as the operational processes.
Regardless of whether the contracts traded in Borsa İstanbul are settled physically or just financially, their pricing will be affected by the price indices of the spot markets under EPİAŞ. Both the EPDK and the SPK will have to monitor price formation in the spot markets. In this context the transparency of the data, which may affect price formation in EPİAS, is very important.
The law has exempted the papers, which are related to the operations of the organised wholesale electricity markets, from stamp tax. Because organised wholesale power markets defined in the law cover the markets operated by EPİAŞ, TEİAŞ and Borsa İstanbul, over-the-counter (OTC) markets cannot benefit from the stamp tax exemption. The exclusion of the OTC markets from the scope of the Electricity Market Law has disappointed some investors, as the OTC markets provide more flexible financial products to investors than the Exchange.
While efforts towards the establishment of the Energy Exchange are positive, the Energy Exchange is only one of the steps that need to be taken for liberalisation, and it may only succeed if the other steps are taken. In this regard it is important to reduce the state's share in power generation and liberalisation in the natural gas market. The establishment of a natural gas spot market under EPİAŞ and the trade of gas derivatives products would not only benefit players in the natural gas market, but also gas-fired power plants.
As the secondary legislation is being prepared by the EPDK and the SPK in the upcoming days, energy companies will need to make the operational changes necessary to operate in the spot and derivatives markets. Regulatory institutions and energy companies may find foreign examples instructive in their efforts.
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