European Power

Trading Report

Full year 2014 report

ICIS European Power Trading Report The ICIS European Power Trading Report provides quarterly analysis of market developments, as well as an outlook for trading prospects over the next year. The in-depth report not only covers the established power markets of Europe, but also the emerging markets of Romania, Serbia, Bulgaria and Greece. The report is vital for those looking for trading opportunities and tracking developments in European power markets. Report features The ICIS European Power Trading Report covers 14 European power markets and gives readers access to:

The ICIS Power Tradability Index

Full coverage of activity in established and emerging markets

Analysis of the state of OTC markets, counterparties, price drivers, supply and

demand, trading forums and data transparency

An outlook for trading prospects over the next year

Quarterly updates so you are aware of the latest market developments

How can it help? The ICIS European Power Trading Report provides an independent and expert view of European power markets. It enables you to:

Gain a better understanding of the key European power markets

Understand market developments that could affect trading prospects

Read crucial market insights

Make decisions about trading positions and prospects

Create strategic plans using ICIS’ independent view

Identify who the major trading partners are

Determine what growth prospects are like in each of the markets

To find out more about the report please contact energysales@icis.com

3European Gas Hub Report: Qx 2015 Update

Liquidity developing fast despite obstacles

Turkey

Turkey’s fast-developing market has drawn interest as well as doubts

from traders and investors scouring for profit.

Turkey’s surging economic growth has boosted energy demand.

Combined with the liberalisation of the electricity sector, these two

factors have supported the launch of a traded electricity market which

has developed fast since ICIS launched the first assessments of over-the-

counter electricity prices in 2011.

Electricity consumption has been growing at an annual 5-6% rate for

the last ten years, while gas use has increased tenfold between 1992-

2014. As we speak, Turkey’s total installed capacity is 70GW, while its gas

consumption in 2015 is expected to reach 50.8bn cubic metres (bcm).

This has attracted new entrants, with the number of new participants

accelerating last year.

However, obstacles to trading remain.

Firstly, the electricity sector has been trapped in a cumbersome cross-

subsidies system established in the late 1990s and which is expected to

die out naturally by the end of this decade. Under current arrangements

around 50% of the total production is still sold to the regulated market

at set tariffs, and the end of this system in the next five years is expected

to encourage a further surge in liquidity.

Secondly, despite attempts to liberalise the gas market, progress has

been slow. This is largely because natural gas is seen as a political tool

in negotiations with neighbouring states, a characteristic that is strong

across the region, with Turkey close to three-quarters of the world’s con-

ventional oil and gas resources.

Turkey’s energy markets were vulnerable to the Russia-Ukraine con-

flict in 2014, as critical volumes feeding the populous western Marmara

region transit the war-torn eastern part of Ukraine. Gas curtailments,

particularly in the western part of Turkey, tend to lead to extensive shut-

down instructions in the electricity sector as the gas transmission system

operator BOTAS has no other means to balance the system. These af-

fected liquidity in the market.

In October, Russian volumes via the western Malkoclar entry point were

halved until the end of November, inducing panic among Turkey’s private

and public companies. Russia never explained the reasons behind the curtail-

ment, but observers noted that volumes increased to the daily contractual

average of 42m cubic metres (mcm) after Ankara conceded to partner up in

a gas pipeline project that would replace the Moscow-backed South Stream.

Worse yet, 2014 proved one of the driest years in the last decade,

undermining hydroelectricity supply. The prospect of supply shortages

ICIS Tradability Index

Contract Spread Points

Day-ahead €0.50/MWh 0

Week-ahead €0.50/MWh 0

Month-ahead €0.50/MWh 0

Two months ahead €0.50/MWh 0

Three months ahead €0.50/MWh 0

One quarter ahead €0.50/MWh 0

Two quarters ahead €0.50/MWh 0

One year ahead €0.50/MWh 0

Two years ahead €0.50/MWh 0

Three years ahead €0.50/MWh 0

Day-ahead €0.30/MWh 0

Week-ahead €0.30/MWh 0

Month-ahead €0.30/MWh 0

Two months ahead €0.30/MWh 0

Three months ahead €0.30/MWh 0

One quarter ahead €0.30/MWh 0

Two quarters ahead €0.30/MWh 0

One year ahead €0.30/MWh 0

Two years ahead €0.30/MWh 0

Three years ahead €0.30/MWh 0

Total 0

Liquidity TWh

Total trade volume

Q1 2014 1.1

Q2 2014 0.8

Q3 2014 2.1

Q4 2014 1.9

October '14 0.5

November '14 0.8

December '14 0.6

A full history of trades data is available. Please contact sales@icis.com

SAMPLE DATA

SAMPLE DATA

4 European Power Trading Report: Full year 2014

led to greater volatility in the short-term market, which changed the

trading pattern on the OTC market.

Traders had focused more on short-term contracts in previous years,

but in 2014, particularly in the second half of the year, they turned their

attention to the back end of the curve. The winter months were simply

deemed too risky to take a position on.

On the positive side, previous barriers to trade have either been over-

come, or seen as less important.

There is some use of the Turkish version of the EFET contract in use

across Europe, helping to increase trading with more standardisation.

However, many other contract arrangements have proliferated, with Turk-

ish counterparties producing their own versions of master agreements.

Other issues such as Turkey’s 0.948% stamp tax, applied on any con-

tracts which carry a financial element, remain in place – but the OTC mar-

ket has continued to develop, in spite of this additional transaction cost.

Aside from typical market-related uncertainties, liquidity is also tak-

ing time to develop as a cultural shift, as the concept of energy trading

becomes more entrenched.

For example, traders are not dedicated to trading, but are also asked

to deal with administrative work as well as planning and following up

existing contracts.

Finally, trading does not happen as seamlessly as in other markets –

traders often have to check with their managers before taking advantage

of opportunities in the market.

THE STATE OF OTCOTC activity nearly doubled on 2013, with 793 trades reported to ICIS.

These were concluded across four Turkish and EU-based broker screens.

The overwhelming majority were Baseload trades, with only nine

peak, domestic peak or off-peak deals. Comparatively, there were 438

deals on broker screens in 2013.

Just like in previous years, interest focused on the near curve, although

there was an increase in front-year trading in the second half of 2014.

Nevertheless, the trading pattern of 2014 was rather erratic, and a

direct reflection of the intrinsic risk. March and April were the most active

months of the year, but by December, liquidity ebbed away.

The early surge in liquidity was linked to a regulatory change at the

beginning of 2014 which led to the merging of the wholesale and retail

licences into a single supplier licence.

This allowed wholesale licence holders to tap the retail customer base.

At the same time, the market saw a surge in the number of successful

supplier licences issued by the regulator EPDK, with 40 additional licences

issued in 2014, compared with only 12 wholesale trading licence (as was

previously known before) a year earlier.

Nevertheless, market participants’ enthusiasm was tempered by vola-

tility during the year.

It became clear in the first quarter that the country was facing one of

its worst droughts in a decade, which meant that the supply of cheaper

energy generation used to control potential delivery price spikes was

simply not an alternative.

By April, typically the wettest month of the year, dam levels were

less than 30% of the expected average for the period, which meant

that April Baseload out-turned at an average TL160.61/MWh on the

exchange PMUM, the highest level since the establishment of the day-

ahead market for that month.

Fearing similar bullish out-turns in May, traders’ interest turned to

the OTC market, with strong interest in the front month in particular,

accounting for 30 of the 103 deals.

Most trading has concentrated on the near curve, where the level of

risk was deemed reduced.

But interest in front month trading, as a means to lock in volume

and price, waned later in the year, when fears over a gas supply crisis

triggered by a severe curtailment in Russian flows turned to downright

panic. The number of trades reported on screen dropped to around 50 in

October, November and even lower in December.

Interest switched to long-term trading as prompt products were

deemed too risky. A total of 28 Calendar Year 2015 Baseload trades were

reported to ICIS between August and December 2014, compared to only

13 Cal’14 Baseload deals concluded on broker screens throughout 2013.

COUNTERPARTIESThe number of new entrants in the market has more than tripled, from

12 in 2013 to 40 in 2014, bringing their total to 203. The increase can be

explained on two accounts: the rise in liquidity and a regulatory change

at the beginning of the year that led to the merger of the wholesale and

retail licences into a single supplier licence.

Those actively trading on the Turkish OTC market include genera-

tors and wholesale companies, which are mostly interested in securing

volumes and hedging.

The incumbent EUAS has the most installed capacity, and sells the

biggest part of its generation to the state wholesaler TETAS. It also sells a

smaller portion of generation to the day-ahead market PMUM, operated

by grid operator TEIAS.

However, information about the volumes sold to TETAS and PMUM

in 2014 is not available until summer 2015 when the company releases

information about the previous year’s activity.

The more active counterparties are the wholesale companies

which are either Turkish or Turkey-based, including EFT, Esko Enerji,

2MEnerji, GEN-I, Ezpada, Alpiq, TT Group and Limak. Producers such as

Enerjisa, RWE, Fina, OMV, Akenerji are also active, although typi-

cally they sell generation through bilateral contracts rather than on the

OTC market.

Most of the OTC trading is focused on supply, although there are

some incipient forms of speculative trading. There is also a growing vol-

ume of financial trading.

Larger companies are more likely to engage in some speculative trad-

ing, while smaller companies trade to secure volumes for their customers.

Trading is also boosted by cross-border exchanges with Bulgaria and

Greece. A number of companies have entered the market with a focus

on cross-border trading opportunities.

There are on average 12 companies trading on the Bulgarian-Turkish

border taking part in monthly tenders organized by the grid operator

TEIAS. The number increased almost tenfold since limited commercial

flows started in June 2011.

The most active companies are wholesalers such as GEN-I, TT Group,

Celler Elektrik, Alpiq, Limak and Unit Elektrik.

PRICE DRIVERSThe key driver for electricity prices remains natural gas prices. The 9%

increase in the regulated natural gas tariff from 1 October attracted a

similar hike in regulated electricity tariffs, and therefore OTC prices in

the non-regulated market. In contrast to the reaction from the gas mar-

ket, electricity companies said the rise was hefty and even warned at

the time that the December Baseload price would increase to a record

TL200.00/MWh.

However, disruptions in gas supply have also unsettled participants

during 2014.

The first issues occurred in February when a concomitant drop in

imports from Iran, Azerbaijan and Algerian LNG pushed the day-ahead

price to TL217.49/MWh, the highest last year.

5European Power Trading Report: Full year 2014

Other shocks over the year included the curtailment of Russian gas

flows at the beginning of October, without obvious reason, and dropped

to panic-inducing levels of 20mcm/day at the end of November.

This meant that electricity liquidity, which had been relatively robust

earlier in the year, slowed down visibly.

Hydroelectricity is the other form of flexible supply, and participants

pay close attention to hydro levels as the other main flexible form of

generation.

For example, reduced hydro production had also forced generators to

run thermal plants at full throttle, including during the summer period

when daily demand spiked to an all-time high of 41GW on 14 August.

SUPPLYIn 2014, Turkey’s generation increased to nearly 70GW, which placed the

share of the private sector markedly higher than that of the state-owned

company, EUAS.

Turkey’s thermal capacity including natural gas and coal-fired genera-

tion stands at 41.2GW, split between state generator EUAS and private

operators. Hydro capacity is just under 23.5GW, with EUAS the major

producer. Installed wind capacity was 3.5GW at the end of 2014, and

Turkey offers feed-in tariffs to producers, so this figure is rising.

Part of Turkey’s generation is tied up within a superstructure of

subsidisation, with generators such as EUAS or the so-called Build-Own-

Operate (BO), Build-Own-Transfer (BOT) created under private-public

partnerships, which are required to sell their production to the state

wholesaler TETAS at a regulated price.

TETAS, in turn, sells the electricity to distribution companies, which then

offload the volumes to various types of consumers. The system will naturally

die out within the next five years as BOs and BOTs reach their shelf life.

The supply pattern for 2014 changed compared to 2013, as the bulk

of consumption was covered from costlier thermal rather than cheaper

hydro production because of the ongoing drought.

This, combined with a gas and electricity tariff hike at the beginning

of October, boosted the average 2014 delivery value on the exchange

PMUM by nearly 8.5% compared to the 2013 median out-turn.

Throughout the year, Turkey added 3.1GW of thermal generation

(natural gas and coal/lignite), 1.14GW hydro production, 815MW wind

production and 134.2MW of geothermal production, according to ICIS

calculations.

One of the most important changes to Turkey’s generation profile

was the commissioning of the 882MW gas-fired Egemer power plant in

Erzin, southern Turkey, last summer. The plant is operated by Akenerji.

In response to rising electricity demand, a total of 307 producers re-

ceived a generation licence in 2014, of which 198 were for gas-fired pro-

duction totaling 7.97GW. The second most popular fuel was imported

and domestic coal, where 23 applications were received by the regulator

EPDK totalling 3.04GW.

Renewable generation attracted less interest with 22 applications

for hydro production worth 801MW, and three applications for wind

amounting to 76.2MW.

DEMANDDemand has been on an upward trend for the last ten years, continued

its ascent in 2014, rising by an average 5-6%. The increase came largely

from the industrial sector – particularly construction, steel and cement

production, although the economy has been slowing down, largely

under the impact of slumping EU markets, traditionally Turkey’s largest

trading partners.

Non-eligible consumers with an annual consumption of 5,000KWh or

less, such as households, are supplied by EUAS. If the regulator scraps the

threshold this year as expected, they will be able to choose their suppli-

ers. However, the regulator has not moved to do this to date.

CROSS-BORDER TRADINGTurkey already has active borders with Bulgaria and Greece , and cross-

border capacity typically provides another source of electricity from

imports. Border capacity is usually oversubscribed, with 12 companies

typically active each month.

Under current arrangements Turkey imports 550MW from Bul-

garia and Greece and has an export capacity in the reverse direction of

400MW. Two-thirds of this covers the Bulgarian interconnection, while a

third is earmarked for the Turkey-Greece link.

Cross-border exchanges remain a favourite with Turkey’s wholesale

companies, who have actively taken positions in the monthly auctions

organised by the grid operator TEIAS for the Greek and Bulgarian bor-

ders. However, as the TEIAS exchanges continue to be conducted in a

trial environment overseen by the European Network of Transmission

System Operators (ENTSO-E), the body overseeing the interconnections,

the cross-border capacities remain limited.

This means that companies did not have enough flexibility in import-

ing and exporting energy to and from Bulgaria and Greece to respond to

demand-supply fluctuations.

On Turkey’s eastern border with Georgia, GSE allocates export capacity

to Turkey for each month a year ahead, with TEIAS nominating any Turkish

exports, and these capacities are agreed in November the year before.

If there is more interest in exporting electricity from Georgia than

allocated capacity on the border into Turkey, such as during the summer

months, then GSE as the exporting grid holds a tender. Bidders attend

the tender in person, which is held in Georgia.

Georgia started delayed exports of energy in July and was expected

to crank up capacities on the Borcka-Akhaltsikhe line to 700MW

throughout the summer. However, the allocated capacities were rather

modest and Turkish traders said Georgia was facing limitations on its

energy generation caused by the regional drought. GSE declined to com-

ment at the time.

However, Georgia can also transit energy to Turkey from Russia,

Azerbaijan or Armenia.

The first of these tenders occurred at the end of November, when

the Georgian transmission system operator held a tender for 300MW

of transit capacity during December, awarding it to Global International

Energy Corporation, an off-shore registered company, for electricity

sourced in Russia and flowing to Turkey.

The Russian seller was state company Inter RAO, while the buyer in

Turkey was Karcal Enerji, an Ankara-based subsidiary of the Georgian

transmission system operator.

The auction was decided via closed-envelope bidding, with the ten-

der announced on Friday evening, the bidding closing on the following

Monday, and the decision announced on Wednesday of the same week.

It was unclear what the selling price was, nor where in Russia the

energy was sourced. ICIS later revealed that less than a third of the pro-

posed capacity was eventually allocated by Georgian grid operator GSE,

as the PMUM price in December was lower than expected.

GSE organised a similar auction on 26 December for the transit of

energy on the same 400kV Borcka-Akhaltsikhe line, but failed to attract

any interest.

TRADING FORUMS The OTC market is gradually expanding its share as more players are

increasingly attracted by the flexibility granted by this arrangement.

Companies continue to trade on broker screens, the most active be-

6 European Power Trading Report: Full year 2014

ing Turkey-based Balkaner, VOLT and Zen, as well as London-based desks

in Tradition and GFI.

Bids and offers are generally posted on screens by brokers. Traders,

however, like to give bids and offers via phone, e-mail or Yahoo Mes-

senger rather than posting to screen.

A large share of trading activity was carried out on the day-ahead ex-

change, PMUM, thanks to more robust delivery prices, although companies

say that the bulk of trading continues to happen on the bilateral market.

Plans to launch EPIAS, the new day-ahead market, were delayed be-

cause of a bureaucratic process involving the platform’s shareholding and

governance structure as well as the calculation of financial contributions

for each participating shareholder.

MARKET TRANSPARENCYTEIAS, as the operator of the PMUM exchange, has begun to increase the

volume of data published on its website, bringing more clarity on traded

bilateral volumes as well as code instructions issued to power plants for

operating at any given time.

Real-time demand and supply data, however, are still published with

a day’s delay.

OUTLOOK Gas supply remains an issue in Turkey, causing volatility which could

affect liquidity.

Pipeline volumes via the Western Line remain critical and any inter-

ruptions or reductions could prompt the electricity grid operator TEIAS to

issue load shedding instructions to temper demand.

However, Russian Western Line supplies should be more secure since

transit country Ukraine has pre-paid its own Russian January imports,

easing concerns over supply disruption, despite tensions between Russia

and Ukraine.

There are also rumours that capacity at the BOTAS and the privately

operated Marmara and Aliaga LNG terminals had been fully booked until

the end of February, meaning that the gas system should be well supplied.

Hydro levels were reduced last year amid a severe drought, but ap-

pear much healthier this year, providing the opportunity to compensate

for any potential gas supply reductions, which could also offset volatility

and maintain trading levels.

At the same time, it is important to note that the electricity incumbent

EUAS would aim to use its hydro capacity to cap prices. EUAS typically

sells the bulk of its generation under long-term contracts, but has previ-

ously ramped up sales of hydro generation on the PMUM Day-ahead

market. Low hydro levels in 2014 prevented this, leading to greater

volatility, although reserves have since recovered.

Turkish regulator EPDK is considering scrapping the eligible consumer

threshold, currently pegged at 5,000KWh/year.

This has been gradually reduced over the years, and is likely to be en-

tirely eliminated, creating a theoretical full market opening and encourag-

ing more market participants.

Offsetting this encouragement, many renewable generators have

switched from the free to the regulated market, potentially removing

more need to hedge production on the market. Last December, the

regulator EPDK said a record 5.57GW of wind, solar, hydro, biomass and

geothermal producers had opted to sell under the regulated incentives

scheme, which offered them a fixed tariff at the dollar-equivalent rate on

the day of payment. The flight was prompted by a record depreciation of

the Turkish lira against a euro-US dollar basket.

In examining potential for new suppliers in Turkey, plans by EUAS to

auction off generation will not materialise. EUAS tested the water last

year when it tendered 100MW worth of production, and was expected

to organise subsequent auctions for more volumes. However, this is un-

likely, at least not in the first three quarters of 2015, as EUAS will retain

its generation to ensure security of supply.

Turkey’s privatisation programme also offers opportunities for more

counterparties and greater trading liquidity. The Turkish privatisation

administration OIB has tendered over 5GW of state-owned thermal

capacity in the last two years, and the plan is to privatise 16.5GW of

state-owned generation in total.

The OIB is looking to sell at least 1.5GW of gas-fired generation and

some of the 6GW of state-owned hydro capacity in the new year.

The 1,442MW Bursa combined-cycle gas plant (CCGT) in the north-

western region and the 50MW Hopa gas-fired plant in the east have

been lined up for immediate privatisation, although a firm date is yet to

be announced.

The OIB is also expecting to offload part of the 6GW of hydro genera-

tion held by the incumbent EUAS. The capacity has been divided into 13

portfolios, the smallest one including 238MW and the largest 759MW.

Despite great hopes pinned on the promised increase in cross-

border capacity with Bulgaria and Greece, which has proved attractive

regional traders in search of profit ever since limited commercial flows

started in June 2011, these are unlikely to be fulfilled, at least not in

Q1 2015.

Turkey is finalising its interconnection tests with the European Network

of Transmission System Operators (ENTSO-E), but there is no definite time-

line for stronger links. Plans to more than double the current capacity to

2GW will come once the membership is achieved. Even if Turkey achieves

this goal, grid operator TEIAS is unlikely to crank up the capacity in one go,

as it still needs to upgrade the system to ensure its stability.

At the opposite end of the country, Georgia started its electricity

exports in July 2014, but will not sell any domestically produced energy

until March when it allocated 43.3MW on the line. However, Georgia

may organise further transit tenders from Russia or even Azerbaijan and

Armenia from February.

Finally, the launch of the much-expected day-ahead market, EPIAS,

which will replace the existing PMUM is likely to happen in the first half

of the year, although this vastly depends on finalising its shareholder and

governance structure as well as the technical transfer of logistics from

the old to the new platform. Aura Sabadus