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Evolution of European Wholesale Electricity Market: Insights for the Turkish Market

Learn about the European Union’s power market evolution, products traded, market participants, and trading platforms. Discover the importance of the wholesale market for electricity and natural gas, market liberalization characteristics, and the criteria for market design and size of price zones.

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Evolution of European Wholesale Electricity Market: Insights for the Turkish Market

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  1. European Union evolution • Products traded • Market participants • Marketplaces and trading platforms • Conclusions for the Turkish Market Power Marketand Trading

  2. European electricity production portfolios Nuclear Coal Gas Oil Mix Hydraulic Wind

  3. Why is the wholesale market important? • For electricity: • Supply = Demand at all times • Limited storage (ex. pump storage in CH and N) • Trading optimizes supply according to the location and time of demand and creates a wholesale tier • Cross-border wholesale transactions help efficient price finding over regional area, power prices are regional • Seasonal and diurnal variations in availability of some production sources reflected in efficient peak pricing • For natural gas: • Storage is game changer for planning cost/supply • Trading enables optimatisation of LT Agreements

  4. Why is the wholesale market important? • Thus trading can optimize the market by creating: • Efficiencies across regions and countries • Efficiencies between fuels used in generation • (gas, coal, hydro, nuclear, wind, etc.) • Efficiencies by virtue of play of inter-related products(e.g. weather derivatives; emission allowances; transmission rights) • Efficiencies through financial markets and derivatives • Efficiencies stimulated by price signals of new products

  5. Liberalisation: Formation of markets fully integrated energy company „old world“ „new world“ Generation Trading Sales Distribution Transport Market regulated Grid Market Power Exchange OTC (Broker/bilateral) • Consumer has free choice of supplier • Supplier can supply consumers outside their supply area • Development of Markets to organize and match these relations

  6. Characteristics of a mature wholesale market • Standard-Products and Standard Contracts:Base: Mo-Su: 0:00 – 24:00h Peak: Mo-Fr : 8:00 – 20:00h • Physical:Master Contract EFET • Financial: Master Contract ISDA Standardisation Example: EEX-Futures Market • multiple x consumption in DE • 5 Market Maker: continuously simultaneous bids & offers Liquidity Trading data: Prices & Volumes  PXs & Broker Fundamental data: Generation data (incl. RES)  e.g. EEX; Nordpool; RTE Grid data: transmission data  ENTSO-Vista Transparency

  7. European wholesale electricity:market design principles • Decentralised dispatch: market players optimise their own portfolios until gate closure and are free to choose where, how and when they make bids and offers (forward, day ahead, intraday, balancing markets, reserve markets) • Single Buyer option was removed in EU Internal Electricity Market Directive 2003  not be reintroduced via market rules • TSOs balance network in real time after gate closure. TSO should have minimal activity in traded market timeframe and this activity should be transparent • TSOs should be unbundled from generation and supply and should not be “trading”, DE: TSOs have been active “traders” in RES in intraday markets as they are responsible for RES-integration

  8. European wholesale electricity:market design principles • Power-exchange should not be a monopoly - competition and contestability of trading and clearing platforms (MTF) is needed • Anti-trust enforcement can prevent foreclosure of this market as an extension of e.g. the TSO monopoly functions. • Generation investment to be market-driven rather than forecast-driven. Requirement to encourage liquid wholesale markets • Dealt with in the Electricity Security of Supply Directive 2005/87, Turkey: 2009 May Strategic Planning Letter. • Retail prices should not be regulated so that the link to wholesale prices gives appropriate economic signals to retail prices • Turkey: 2015-2016 Time Frame Consumers should be eligible to choose freely

  9. Market design: criteria for size of price zones? Encourage efficient dispatch Support liquidity in traded markets and help dilute market dominance Improve the functioning of retail markets and promote competition Provide incentives for TSOs to invest and manage congestion more effectively Although criterion (a) might be best served by smaller zones/ nodes… …criteria (b) - (d) imply larger price areas than today Stylised map of EU price zones Flow based allocation should only be used to the extent that it leads to increased capacity/ larger price zones

  10. European market evolution • Products traded • Market participants • Marketplaces and trading platforms • Conclusions Power Marketand Trading

  11. Standardisation = pooling liquidity Hourly products MW 4 3 2 1 1 5 0 2 3 4 24 ... Bloc products Peak Load 8 20 h Mo-Fr Base Load Mo-So 0 24 h • Long term: two products = Base & Peak • Short term: hourly products and combinations (e.g. weekend) • few products = high liquidity • but strong need remains for non-standard products… • Non-standard products remain in the OTC market, bilateral level

  12. Peak = 8 – 20 Peak = 8 – 20 Peak = 8 – 20 Peak = 8 – 20 Peak = 8 – 20 Base = 0.00 – 24.00 (one week)‏ … as customer needs are still there Load profile hour

  13. European market evolution • Products traded • Market participants • Marketplaces and trading platforms • Price formation • Motivation for Trading Power Marketand Trading

  14. Market Participants: heterogeneous origin Utilities Banks Integrated Player Municipalities Gas majors Oil majors

  15. European market evolution • Products traded • Market participants • Marketplaces and trading platforms • Conclusions Power Marketand Trading

  16. Market Places- Characteristics: Exchange and OTC Exchange OTC Auction Continuous Trading direct contact Voice-Broker Broker-Platform Spot Market Futures Market Spot Market Forward Market physical settlement financial settlement physical settlement financial settlement Spot Market Futures Market  interdependency between Spot and Term Markets: e.g. EEX & NP Futures contracts are settled on the basis of the spot market prices

  17. Trading on an exchange ADVANTAGES • Fewer contractual relationships • No Credit risk through Clearing • No performance risk • Guarantee and margin needed only by one central counterparty • Simplified invoicing and administration • High degree of automisation, and standardisation

  18. If freedom to engage in OTC transactions is restricted … DISADVANTAGES • Trading Fees • Inflexibility of gate closures • Lack of broker competition • Risk of complexity in rules • Only Standard Products • Complex-Regulation applies

  19. Competition between trading platforms ENERGY TRADERS TRADING PLATFORMS TRANSACTIONS

  20. Enhancing liquidity National market with limited wholesale volumes POWER EXCHANGE A POWER EXCHANGE B POWER EXCHANGE POWER EXCHANGE C

  21. European market evolution • Products traded • Market participants • Marketplaces and trading platforms • Conclusions Power Marketand Trading

  22. Conclusions: 1. What are the remaining challenges for the Turkish Electricity Market? • Continue work towards liberalized market (TPA, TSO unbundling, free trade) • Safeguard Choice of Trading Venues (exchange, EPİAŞ) • Transparency - access to information on transmission capacity, generation, and demand for all market participants is clearly insufficient • Contract Standardization is Insufficient : EFET - Power - translated into Turkish language: Problems to take-up Master Agreements - Why? • Eliminate obstacles (e.g. administrative obstacles to trading, stamp duty) • Insufficient number of participants, ensuring multiple market entry • EPİAŞ: Will it ensure liquidity and transparency?

  23. 2. What are the remaining challenges for the Turkish Gas Market? • Accelerate the draft Gas Market Liberalisation Act: • Complete the transparency initiative into the TR gas market. Without liberalising the gas market, the recent electricity initiatives have little use • Achieve a Gas Market Design for better Price Formation at all levels starting from the MENR all the way to the EPİAŞ structure in a prioritized way: • Build to operate balancing market, this is usually the first point to start OTC and Liquid market. • Finalize to operate the EBT Software • Utilize EFET-Gas-TR standard contract; Stndardise products • Develop a national balancing point (UDN) for price formation • Continue Contract or Volume Releases off the BOTAŞ portfolio • Finalize BOTAŞ Unbundling Process. • Learn from Experience – do not repeat Mistakes made elsewhere!!

  24. Aim:Trading without borders

  25. Thank you for your attention! European Federation of Energy TradersAmstelveenseweg 9981081 JS AmsterdamTel: +31 (0)20 5207970Email: secretariat@efet.org www.efet.org

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