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Turkish electricity futures stumble

Published on 01/29/2012
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On September 26, 2011 the Izmir based Turkish Derivatives Exchange (Turkdex) launched a Base Load Electricity Futures Contract.

The deregulation of Turkey’s electricity market

This development is part of the ongoing deregulation process of Turkey’s electricity market. The electricity futures contract - cash settled against the so-called PMUM price - was launched at a time that there was no Day Ahead Market established in Turkey. That first happened November 30, 2011 when the PMUM ( Turkish Market Operator) Power Exchange did have its first trading day. Up to that date the PMUM price was set based on a estimated demand.

Little trading activity

Besides there is not much trading activity going on in the OTC market. There are several reasons for that, but one of the main reasons is the stamp duty of 0.825% that needs to be paid on the value of each transaction. Although the Turkish government advocates a fully operational OTC market, it is unclear whether they are willing to skip the stamp duty. Another one is that there is no good and reliable Turkish Power Index yet that could be uses as a pricing benchmark in the contracts.

Although the electricity futures, listed by the Turkdex are exempted from the stamp duty, the trading activity on the Turkdex is with 14 trades really low so far. According to Mr. Mustafa Karahan Chairman of the Turkish Electricity Traders Association ETD all these trades were just on a trial basis. "All of these were just test trades of speculative position taking and certainly no hedging transactions."

Reliability of PMUM prices questioned by market players

Although the Day Ahead Market did actually start in December 2011, the reliability of the PMUM prices is still questioned by the market players. As Mr. Karahan puts it: It is unclear that the prices are the result of supply and demand fundamentals as there is a lack of transparency about the supply and demand in the Turkish electricity market.”

The question is whether the Turkdex did launch its electricity futures contracts too early, ahead of the developments that are still to come in the Turkish electricity markets. From experience I know that timing of the launch of futures contracts is crucial. If you are too early the interest of the potential users might fade away and it will be really tough to do it all over again at a later better time. As a trader at one of the leading power companies in Turkey told us: "Turkdex should have waited for a liquid OTC market based on a reliable Power Index in Turkey”. Looking at the results so far he seems to be right.

 

Please contact Kasper Walet if you are interested to learn more about how an electricity futures market operates and could be used by you and your company.


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Comments

Day Ahead Market Start Date (02/02/2012, 1:49 PM)
Although it is incidated that Day-Ahead Market has started in Dec 2011, the market has been operational under the name of Day-Ahead Planning. The main difference between the two is the latter one enables demand side participation and market splitting (not active yet).

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