Turkey: Reforming The Electricity Market: A Balancing Act

The first effects of private sector involvement in the electrical power sector were observed in 1986 with the enactment of Law No. 3996 regulating the build-operate-transfer model and welcoming the private sector – including foreign capital – into the electricity market. Prior to that time, the electricity market was run by the state, following passage of the nationalization acts from 1938-44. Whereas the first attempts at liberalizing the electricity market had been observed long before, actual liberalization of the electricity market took place only with the enactment of Law No. 4628 on the Electricity Market in 2001.

New Mechanisms for Balancing Supply and Demand

Developments in the industry, high demand for good quality, and the need for liberal electricity pricing increased demand for a market with a high level of private sector participation, especially in the generation industry. Consequently, a need arose to restructure the electricity trading market to balance demand and supply, to prevent both consumers and generators suffering from volatile price fluctuations, and ultimately to create stable market pricing. Enactment of the Electricity Market Balancing and Settlement Regulation in 2004 – which entered into force on August 2006 by implementation of a cash settlement – created the initial structure of the so-called "spot market," "day-ahead market" and "electricity exchange market."

The Balancing and Settlement Regulation

As a consequence of the increase in the demand for electricity – as well as the rise in the level of private sector participation in the sector with the licensing mechanism under Law No. 4628 on the Electricity Market and the regime on operation of build-operate-transfer model facilities – a new Regulation on Electricity Market Balancing and Settlement was enacted and announced in the Official Gazette dated 14 April 2009 and numbered 27200 ("BSR"). This regulation establishes the rules and procedures for the "final balancing and settlement mechanism," abolishing the previous regulation for re-structuring purposes. It also sets forth the principles and procedures with respect to balancing systems and the settlement of payables and receivables arising from any inconsistencies between the supply and demand of electricity. Finally, it reforms several fundamental components of the electricity market, such as available electricity balancing and trading markets, balancing units, bilateral trading and collaterals. Until the market is operating effectively upon establishment of the necessary infrastructure, related transactions will be carried out through day-ahead planning, and relevant regulatory and technical work will be done. The date on which the day-ahead market is operative will be announced through an EMRA (Electricity Market Regulatory Authority) Resolution one month beforehand.

The Day-Ahead Market

A fundamental amendment introduced through the BSR is the establishment of a new market – a "day-ahead market" ("gün öncesi piyasası") – controlled by the Market Financial Settlement Center (Piyasa Mali Uzlaştırma Merkezi (PMUM)) as the Market Operator ("Market Operator"), balancing electricity supply and demand for the following day. Market participants are to be provided with the opportunity to sell and purchase electricity for the following day through acceptance of offers valid for a specific date, unit and time period. Market participants are the holders of generation, auto production, and wholesale and retail sale licenses. Those that join the balancing mechanism must be registered as balancing units, as essential market players obligated to comply with scheduling requirements. Balancing units are: (i) licensed generation facilities or their units; (ii) consuming units which can adjust or cut off their consumption according to the System Operator's instructions; and (iii) combined cycle plants, which can load and de-load independently and be metered independently on the basis of each settlement period. Due to their intermittent nature, canal or river-type hydroelectric, wind power, solar, wave, tidal power, co-generation and geothermal generation facilities do not have to be part of the balancing system. However, at the request of the respective generation company and the approval of the National Load Dispatch Center (Milli Yük Tevzi Merkezi (MYTM), the System Operator of these facilities can also be qualified as a balancing unit and participate in the balancing system. The day-ahead market raises expectations of achieving a stable current market where demand and supply are equalized through prior planning of the needs and availability of the generation facilities, with better cost settlement.

MYTM, as the System Operator ("System Operator"), operates the "real-time market" ("dengeleme güç piyasası") by accepting offers which are valid for a specific unit, region, date and time interval. The real-time demand and supply of electricity is balanced by the reserve capacity acquired in real time, through adjusting the volume of electricity generated within a 15-minute period.

Market Players as Balancing Units

Under the BSR, consumers are no longer passive acceptors of market prices. Consumers are included as market participants who can influence prices through lowering demand at high-demand intervals to strategically affect the demand factor of the equilibrium. As a result of their active role in the market, consumers must also pay a certain portion of the Residual Balance Adjustment Fee (Sıfır Bakiye Düzeltme Tutarı). This rule is expected to reduce the financial burden on generation companies, which increasingly complain about the higher costs resulting from the Residual Balance Adjustment Fee.

Another subject of BSR regulation is the guarantee to be obtained from the market players to secure cash flow, which is essential for a well-functioning electricity trading market. Market participants are obliged to provide a guarantee for the fulfillment of their obligations on settlement of payments under the BSR. The amount of such guarantee will be enough to cover any risks likely to arise from any and all market activities conducted by the relevant market player.

Furthermore, the BSR allows balancing units to form balancing groups, leading to the establishment of a portfolio and lessening deficiencies in either demand or supply, depending on the type of group formed. Creating balance within each group itself will have a significant positive effect on balancing the whole market. In connection with this, a new concept of parties and groups – liable to the System Operator for rectifying imbalances in the system created by certain market participants – is being introduced. Accordingly, one of the parties to the selling/purchasing arrangement will have to bear all financial costs arising from market imbalances resulting from their transactions.

An Untested System

It is beyond question that creation of a balancing and settlement mechanism is itself a huge step forward for liberalization of the energy market, and will provide a more liberal, stable environment for the market players. That said, the balancing and settlement system in Turkey is not conventional in set-up, and is unique in that it acts as a balancing market as well as a form of day-ahead market. It is therefore difficult to predict which of the recent amendments will have a beneficial effect on full liberalization, motivate market players to maintain their bilateral undertakings, and utilize the balancing and settlement market as a secondary option, maintaining an electricity market that achieves normal trading with stable and foreseeable prices. However, the essential question is whether harnessing the new market system will be possible under the current electricity market conditions, and how the governmental authorities in co-operation with the private sector will work efficiently to provide the related infrastructure to implement the rather complex new mechanism.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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