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How to establish the Turkish Power Index - a 'best practice' approach
|Published on 05/05/2011|
Indices are very helpful instruments for the tracking and prediction of markets, to measure performance or sentiment and to form a solid basis on which futures and options at an exchange can be listed. The index can be used as an underlying value for the hedging of (energy) risk through the use of derivatives. The index can additionally provide an underlying instrument for structured products.
"The" price of electricity does not exist; it differs per country, area and/or region. Neither does the Turkish electricity price exist, because we have to distinguish the spot price and the forward prices. The price of this hour, is not the same as that for the power of the next hour. And when we talk about forward prices, we have to make clear what the maturity of the contracts is.
Next, in Turkey there is no "official" price of power today. In other words: there is no transparent power price. However, the need for such a price is very relevant. You only have to look at the developments in the UK market, that has the same trading potential as the German and Scandinavian markets. However in reality the trading volumes are only a fraction of these in the 2 most liquid power markets in continental Europe. One of the main reasons for this is that there is not one single price index that is used as the benchmark to most of the trades. Due to the lack of a single benchmark wholesale traders are using a variety of indices and cash-market terms to trade forward, effectively fragmenting liquidity in the market. A liquid market provide investment signals to market participants and reduce the capacity that parties might manipulate prices as a lack of liquidity may reduce the efficiency of wholesale electricity markets and reduce competition between industry parties.
Historically the Turkish power markets are Turkish Lira -based; but maybe it is wise to simultaneously list a Euro-denominated index, to allow it to be compared to most European electricity indices.
So in order to take the development of the Turkish electricity and gas markets to the next stage there is a strong need for standardized market price information for several electricity products facilitated by an independent and secure platform.
Our 'best practice' approach is based on many years of experience in developing price indices not only for electricity, but also for other commodities like oil. The initial goal of the approach is to increase transparency and promote liquidity for long-term electricity contracts in the Turkish market by means of the establishment of a so –called Pricing Panel. The compilation of the Reference Prices will be structured in such a way that the outcome reflects as accurately and closely as possible the prices and trends of Products traded on the electricity market in Turkey. By publishing the reference prices the players in the market will get a good view on what is happening in the market. These price signals are important indicators in the portfolio management of market parties and will be significant support in making investment decisions.
It would be our pleasure to explain in much more detail about our proposed approach; why the index that we propose is a reliable local Turkish price reference, and why it is superior to and more useful than the existing indices and/or benchmarks.
Please contact Kasper Walet.