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Promising Market for Hedging the Risk in Energy: Turkish Electricity Derivatives Market

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The most significant characteristic behavior of an emerging market is displaying volatility in electricity market. As a consequence of market price risks on electricity markets, market players keen on hedging risk by applying financial derivatives. Derivatives in energy act an essential part by the reason of managing the risk with more transparency and liquidity across the globe. The vital issue is how global markets players and energy traders can turn into opportunities?

In 2012, total volume of global energy futures reached to 827.8 million contracts, is dominated by US by a half market share of energy futures. ICE and CME are the largest energy exchanges which are based in US. Apart from US, Multi Commodity Exchange of India constitutes of 10% transaction volume of futures.

For the time being, Turkey's energy policy is not limited with physical attitude, also target to constitute a deepen energy market by applying financial derivatives as electricity futures. Under the guidance of electricity futures, investors, consumers, producers and distributors will be capable of determining their position in terms of their market expectations. Since September 2011, Electricity Futures started to operate after Capital Market Board ("CMB") approval.

Base Load Future Contract which is the fundamental contract type in Turkish Derivatives Exchange ("TURKDEX") based on 1 Megawatt of energy per hour calculation method. The delivery of receipt of underlying asset is based in relevant hours of days.

The pricing of the electricity futures will be determined by Turkish Electricity Transmission Company ("TEİAŞ") in the light of day ahead hourly prices' average started. All calendar months are included with regard to analyze day ahead pricing of electricity market.

Contract Size

The size of contract is calculated by days number of hours in the contract month multiplied with 0.1 MWh. In this type of future contract, the tick size of the contract will be 0,10 which means 10% percentage price range shall be applied. Initial margin for the electricity future is 1200 TRY whereas maintenance margin level is 75% of initial margin.

The day hours of electricity calculation are changeable in terms of summer time and winter time. Transition from winter time to summer time the calculated hours shall be accepted as 23 whereas it should be implemented as 25 hours in the transition of summer to winter time.

Daily Settlement Price Mechanism

There are some requirements which shall be taken into account by calculation of daily settlement price:

  • The average price of last ten minutes trading activities are considered.
  • In condition of less than trades execution in last ten minutes, last ten trades will be taken into account as settlement price determinant.
  • Unless ten trading transactions are generated, the weighted average price of all the trades will be valid.
  • If no trade activity executed during whole session, previous day will assign settlement price.

Assessment of Turkish Electricity Derivatives

  • Due to the lack of electricity spot markets in Turkey, Derivatives are not being priced with regard to spot market. Day-ahead electricity pricing mechanism may not reflect real market prices in some cases. Underlying derivatives prices should be driven by spot markets.
  • Turkey's derivatives market shall be much more profound with another types of financial instruments such as electricity forward contracts, swaps and vanilla options.
  • Competitive transactions costs and fees should be revealed with the purpose of creating attractiveness to the electricity derivatives.
  • In accordance with Law No: 6446 Turkish Authorized Wholesale Markets are being exempt from stamp duty 0.825 % that will provide low cost opportunity for investors.
  • Beside of future contracts in energy sector, forward contracts should exist after establishment of new stock exchange ( "EPİAŞ") in Turkey. Mostly, swaps are applied as forward contracts that will trigger to boom of Bilateral Over the Counter ("OTC") trades through contract counter parties.
  • An integrated information system shall be structured to manage contracts with relevant forecasting and optimization practices.
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