Can The EU Be An Example To Turkish Electricity Market Liberalisation?

Can The EU Be An Example To Turkish Electricity Market Liberalisation? Istanbul Energy Day 8 September 2015 Dr. Jan Haizmann Managing Director CORREGGIO CONSULTING

Introduction Dr. Jan Haizmann Academia Study University Freiburg (Ass.iur 1989), Brüssel (Dr. Jur. - 1998) und London (LL.M. 1991) Fully qualified German Lawyer Career Rechtsanwalt/Admission to German Bar, OLG München 1994-1999 Associate Lawyer Graf Westphalen, Head Brussels Office 1999-2001 Director Regulatory Affairs, ENRON, London, Frankfurt 2001-2003 Legal Director, TXU Energy Trading SA, Geneva 2004-2005 Front Desk Gas/ GLENCORE Energy, London As of 2006 Chairman EFET Legal Committee As of 2009 Various Functions for EFET & EFET Deutschland e.v. As of 2006 Managing Director, CORREGGIO CONSULTING, Brussels Multiple project deliveries in the energy filed, focus on industry regulation/ strategy Monthly Correggio Regulatory Report widely subscribed -> sales@montel.no

Outline Overview of European Electricity Market liberalisation Key benefits & pre-requisites of a liquid wholesale market Price developments, OTC vs. exchange-based trading, major issues Lessons learnt from other EU markets Recommendations for Turkey

The European Wholesale Electricity Market 1999-2014 A liquid wholesale electricity market delivers benefits Rare price spikes occur without affecting market confidence The OTC market remains a driver for competition An open market has not led to blackouts or any insecurity Wholesale prices are not responsible for rising customer bills

Snapshot of European Electricity and Gas Market Liberalization (Unbundling) Source: EFET 2014

Key Benefits and Value of a Liberalized Power Market Consumers (commercial & households) have free choice of supplier Suppliers can supply end-users outside of their market area Market development and organization geared to match these principles Source: EFET 2014

Electricity Regional Initiative (ERI) A Stepping Stone To A EU Power Market? Division of Europe into 7 regional power markets Speed up integration of Europe s national electricity markets Regions grouped according to similar concerns and market structures Resolve regional issues prior to merger with other regional markets Initiative designed to harmonize market access rules and mechanisms Bring together TSOs, regulators, companies and MS governments Source: ERGEG 2014

Key Benefits Of A Liquid Wholesale Electricity Market Market participants can adjust their volume & price positions near real-time All market participants are able to hedge their forward exposures as needed by trading futures & options New market participants face low barriers to entry The market delivers robust price and investment signals Market participants are not squeezed and security is assured

Promoting Market Transparency Inform market participants: Creates market confidence in prices and price formation; Value and allocates risk; Gives investment signals; Initiates multiple market entry; Drives market efficiency short & long term; Enables competition on an equal footing; Access to information; Ability to explain prices; Forecasting Market Confidence Market Depth Entry of New Players Increase in Volumes

Characteristics Of A Mature Wholesale Market Standardisation 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 Liquidity Example: EEX-Futures Market multiple x consumption in DE 5 Market Maker: continuously simultaneous bids & offers Transparency Trading data: Prices & Volumes PXs & Broker Fundamental data: Generation data (incl. RES) e.g. EEX Transparency Platform; Nordpool; Grid data: transmission data ENTSO-Vista

An Attractive Spot Market Underpins Total Liquidity An attractive spot market depends on: Transparency of bids and offers & price fixings, leading to an efficient price discovery mechanism Non-discrimination between participants The participation of even the largest and vertically integrated generators and suppliers Transparency about the availability and use of underlying infrastructure Objective rules regarding congestion management, re-dispatch, use of inside information and competition

Monthly Volumes On EEX/EPEX Spot 2002-2014 Source: EEX 2014

Monthly Volumes In EEX Futures And Options 2004-2014 Source: EEX 2014

Rare Price Spikes Do Not Affect Market Confidence Volatility in wholesale power prices & occasional price spikes do not jeopardize market liquidity or confidence in pricing mechanism Spikes are mostly caused by outages or exceptional events Occasional price spikes are necessary signals in a functioning market Help identify supply & demand imbalances or problematic grid bottlenecks Market participants may hedge their exposure to varying spot prices (including spikes) using forwards and futures Regulatory intervention such as price capping might lead to market distortions

Power Price Development In The EEX/EPEX Spot Day-Ahead Auction: German Market Area EUR/MWh 350 300 250 200 150 100 50 0-50 2004 2006 2008 2010 2012 2014-100 Source: EEX Phelix Day Base

Frequency Of Price Spikes (> 150 /MWh)- EEX/EPEX Spot 2000-2013 Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Number of hours >150 /MWh Number of hours >1000 /MWh 1 30 20 37 0 90 64 79 87 2 0 0 8 0 1 3 Highest price: 2436.63 /MWh, 7th November 2006, 6.00 to 7.00 pm Source: EEX

OTC Vs. Power Exchange Accessibility/Liquidity OTC Available to limited market participants Exchange Traded Liquid market wider market participation Agreements Bilateral/customised contracts Standardised contracts Risk/Exposure Presence of counter-party credit risk Counter party risk assumed by exchange (Price) Transparency Opaque dealing Transparent price discovery mechanism Position Is an involved participant Platform is neutral Settlement Bilateral dispute settlement mechanism Well-defined dispute settlement mechanism Trading Method Continuous trading Typically (central) auctions Reporting (Transactions) Difficulty in reporting & regulating various trades Exchange is the central regulating & reporting entity

The Brokered OTC Market Remains An Important Driver Of Competition & Liquidity Trading takes place at any time Low cost Concentrates trading liquidity in standard products (double volumes traded from initial quotes on screen) Efficient and continuous price discovery mechanism which can respond to new information Ability to tailor transactions to needs Especially useful for forward transactions

OTC And Exchange-Based Trading Countries Purely exchangebased trading countries Mainly OTC trading countries OTC & exchangebased trading countries

OTC Markets Are A Driver For Competition And Liquidity 5000 2013 power trading volumes for Germany in TWh 4000 3000 2000 1000 0 Power Exchange OTC Source: RWE Supply & Trading

A Well-Functioning Market Underpins Security Of Supply And Appropriate Investments In spite of declining wholesale prices in Europe since 2008, investment in generation capacity and the high voltage grid has remained sufficient to avoid all but the rarest blackouts or brownouts Investments in conventional generation and merchant interconnections only happen when trust is established in the transparency, fairness and liquidity of the market

Electricity Sector Liberalisation In Europe Has Tended To Make Wholesale Electricity Cheaper Liberalisation (1997-2004) resulted in significantly declining wholesale power prices in real terms Restrictions on CO2 emissions & an economic boom drove costs up from 2005-2008 Substantial RES-E generation capacity and reduced demand renewed downward pressure on wholesale prices from 2009 Current markets exhibit a compression of the spread between peak-load and base-load prices If wholesale power prices rise again, impact on consumers will be limited in light of grid tariffs, RES-E related charges and taxes making up the final retail price

Forward Power Prices Have Been Decreasing Source: EEX 2014

Rising Energy Bills Are Not Caused By Wholesale Power Prices Retail Prices Still Remain High Wholesale energy costs in Europe now represent less than half of household consumer bills Source: Eurostat, EC

Taxes And Levies Represent The Main Driver For Power Consumer Prices In Europe Source: Eurostat, EC

RES-E Levies Steadily Increase: Now Represent 26% of Industrial Customer Bills in Germany Source: Eurostat, EC

Lessons Learned At Other Markets License Fee: Constitute a market entry barrier and Turkish fees are very HIGH Discourages trading activity; Requirement for Turkish legal entity of foreign trading entities accompanied by additional cost of accounting, tax & legal cost make Turkey look unattractive Scheduling Fee: Discourages trading activity and thus, liquidity. Export Fee (BG, RO, GR): Similar impact as a prohibitive export duty; Negative investment incentive; Negative impact on social welfare; Poisons the idea of a single European electricity market (common merit order); Blocks the implementation of Market Coupling

Energy Market Principles (1) Competition and Market Access Access to infrastructure, products & services Competition grants price signals for informed-decisions Access to Transmission Networks Unbundling (ownership, legal & account) Transmission capacity rights Transparent Markets Information (infrastructure availability, energy flows, utilization rates) TSOs publish consumption, pre-trade & post-trade data Freedom of Choice of Trading Venue Market participants decide how/where to conduct activities Monitoring, clearing & credit protection mechanisms

Energy Market Principles (2) Cross-border Markets Removal of artificial barriers Bidding across national borders (GR/BG) Intraday Markets and System Balancing Moving gate closure time closer to real-time Harmonized balancing markets Ancillary Services Functions/services facilitating flow of electricity Ensure supply meets demand Sound Market Design and Implementation of Market Rules Network Codes Strengthening ACER & ENTSOs

Energy Market Principles (3) Market Integrity and Financial Regulation Ability of market to adjust to new conditions Standardized transaction Decarbonization Emissions Trading Scheme (ETS) Market Stability Reserve (MTS) Integration of Renewable Energy in Wholesale Markets Balancing & re-dispatch procedures for RES generators Aligning national financial support schemes Flexibility Right mix of flexible capacity (production, demand, storage etc.) Ability to use/exploit capacity with limited constraints Generation and Demand Adequacy

Energy Market Principles (4) Storage No storage for electricity Security of Supply Diversity of supply sources & import routes Ability of market to respond to disruptions Standardization Standard contracts and standard IT protocols (data exchange) Regulated Retail Tariffs Phase-out regulated & fixed power prices Social tariffs i.e. subsidies for vulnerable consumers Freedom from Licensing & Obligation of Secondary Establishment Firms wishing to expand should 8 not September, incur Istanbul new/duplicate costs or obligations

Current Stakeholders: Physical Spot Exchange in Focus

Turkey Must Foster Liquidity in Wholesale Power Market Market Functions for Current status in Turkey 1 Efficiency allocation (short-term) Optimal power plant dispatch resulting in cost-efficient wholesale prices Day-Ahead and Balancing Markets 2 Signalling function (midto longer term) Market-based investment incentives and decisions for power plants (for incumbents and new entrants) and crossborder capacities X Not existent 3 Risk management function Transfer of market price risks from risk averse to risk seeking X Not existent

Recommendations For Turkey (1) Progress gas market reform!! Reform of electricity market triggers the need for gas market reform Abolish price taps & protectionist practices i.e. no cross-subsidisation Price formation should be based on supply & demand dynamics Develop a transparent forward market Enable long-term price signals (daily, monthly etc.) Avoid over-subsidising RES Feed-in tariffs have distorting effects on price

Recommendations For Turkey (2) Do not over-regulate! No need for heavy REMIT regime REMIT Light? More cross-border interconnections with Greece & Bulgaria Foster power exchange and electricity trading Implement a PMUM into EPIAS Abandon current stamp duty on Trading Suggestion: Create Warehouse (no VAT, no Stamp or other duties) Don t split liquidity Access to exchange trading alongside develop OTC platforms/bi-lateral trade

Thank You For Your Attention! Q & A Correggio Consulting Rue le Corrège 93 1000 Brussels, Belgium www. correggio-consulting.eu Phone: + 32 (0) 472 365 725 E-mail: j.haizmann@correggio-consulting.eu 40