Reforming Turkey’s energy market

Author: | Published: 12 Apr 2016
Email a friend

Please enter a maximum of 5 recipients. Use ; to separate more than one email address.

Turkey's energy market is changing. With the establishment of the EPİAŞ exchange boosting the country's electricity market, and reforms to its gas sector imminent, corporates and investors can look forward to a quite different environment in the years to come. There are still challenges though, including anti-corruption challenges and expensive licensing systems. Here, Dr Jan Haizmann, a senior business consultant and board member of the European Federation of Energy Traders, assesses the sector. 

What are the most  noteworthy developments within Turkey's energy sector that investors, corporates or their advisers should be aware of?

The most important development has been the setting up of EPİAŞ, an exchange authorised to manage and control electricity trading throughout the country. Established in September 2015, EPİAŞ is getting increasing interest from market players in Europe seeking access to the Turkish electricity market. It's also gaining traction among over-the-counter (OTC) market participants from Turkey – mostly generators – which is channelling more trades through the exchange.

What are the benefits of EPİAŞ?

It's a more transparent tool for price discovery in the Turkish wholesale power market, and functions as a market exchange along with the broker platforms that traditionally operate the OTC market. The EPİAŞ also plans to build products for the futures and forward market and to add natural gas products to the platform in 2018. Eventually there will be a Turkish energy exchange, comprising electricity and gas product offerings together.

The electricity market has, until recently, suffered from a lack of transparency, so EPİAŞ is certainly an improvement. Turkey's electricity market is finally reaching a degree of transparency. As far as price discovery for natural gas is concerned, we are expecting further improvements in the near future.

The Turkish government should actively pursue the market opening for natural gas, otherwise there is a risk that the recent reform of the electricity market will have a very limited effect. Unbundling trade and supply from the transmission department of BOTAŞ, the state-owned crude oil and natural gas pipelines and trading company in Turkey, remains an obstacle.

What should companies or investors dealing with Turkey’'s Energy Market Regulatory Authority  (Emra) for the first time be aware of?

The current licensing system undertaken by Emra is fairly complex. Applications can take up to six months and it's an expensive process too, costing approximately €100,000 ($113,950) for each licensed activity, such as supply.

The option to become an electricity trader, for example, is only open to Turkish companies. This need to create a separate legal trading entity can create transfer pricing problems for international organisations, because they cannot run the trading operations out of the non-Turkish central trading desk.


"Turkey really needs to get on with liberalising the gas market now"


As the system is now, any EU entity will have to employ Turkish staff, and all commercial dealings will have to be through that Turkish entity.

This requirement constitutes a market barrier to entry for non-Turkish trading entities. Better integration of the Turkish energy market with the neighbouring south east Europe markets could be realised if Turkey gained access to the Energy Community. The Energy Community Secretariat recently published a study which concluded that Turkey could be integrated relatively easily. This integration would not only benefit the energy markets in Greece and Bulgaria in particular, but it would also improve the competitiveness of the Turkish energy market.

As well as that, the Turkish government has not yet settled the issues surrounding stamp duty. At the moment, every single deal is subject to stamp duty, which obviously dampens large-scale deals potentially featuring multiple transactions, as they would be taxed multiple times. To develop a wholesale market, the Turkish government must find a warehouse solution for trades, exempting these trades from any taxation.

Are there are other anti-corruption points to be wary of in the country?

Anti-corruption is an issue in Turkey, as it is in other emerging countries. I am not aware of any new anti-corruption initiatives under the existing regime.

Managing the creditworthiness of counterparties is likely to become an issue where efficient clearing solutions do not exist and many companies suffer from poor capitalisation.

Most of the companies in Turkey that are active in the country's electricity market are not rated. As a consequence, no rating is available to evaluate the creditworthiness of counterparties. Because of this, there is a higher counterparty risk in Turkey. The netting arrangements in the OTC documentation relating to closed out netting in insolvency scenarios also do not work in Turkey, so there is a certain legal risk, as well as credit risk, when dealing with Turkish counterparties. Corruption is certainly an issue to be aware of in the country.

You are a board member of the European Federation of Energy Traders (EFET). What are the EFET’'s priorities for the next 12 months?

Our main focus at EFET is advocating for liquid wholesale markets in the EU, and there is still a lot of work to do in the central and eastern European markets. In Turkey we don't have a frontline stake. It is more difficult for us to become active because Turkey is not regulated by the EU. From a trader's position, admittance to the Energy Community would change this. From EFET's perspective, we think that Turkey should increase transparency into the balancing market, notably for gas. As far as gas is concerned, we need a trading and balancing gas platform where wholesale market participants can obtain reliable price signals, which is missing from the Turkish gas market at the moment.

Turkey needs to make more progress on liberalising the gas market now following its work in the electricity market. A lot of time has already been lost.

Why have authorities not pushed gas market reform yet?

Because gas is linked to security of supply, and not every decision-maker in Turkey understands that energy markets are far more resilient at tackling supply crises compared to centralised opaque gas markets. Some have advised the government that a tight control of all market activity is the best hedge against supply disruptions, but the same people argue that Turkey should retain price control and a complex system of cross-subsidies to strengthen the economy.

In Europe we have learned that diversity of supply is the best hedge against supply disruption. Diversity of gas supply should be combined with sound cross-border infrastructure integration. If Turkey does not follow these lessons, it will remain subject to the arbitrary decisions of its major gas supplier. Russia has no reason to favour market reform in Turkey, but it has an interest in maintaining its market share. Protection of market share operates at best through retaining the quasi-monopoly off-take of BOTAŞ. For a dominant supplier, it is much easier to influence one sole off-taker compared to a multitude of off-takers that could source their supply from elsewhere. The import price for Russian gas will decrease only if Turkish companies have real alternatives to Russian gas supplies.

We are optimistic that the Turkish government will be able to embark on the path of reforming vertically integrated structures in favour of free market concepts.

There are several projects preparing for the unbundling of the gas market. There is one currently being run and co-financed by the EU that is looking at platform developments and gas balancing markets.

For Turkish companies, the market opening would certainly be beneficial. They are currently operating without any price signals, and there are few opportunities to hedge their operational risks. Because Turkey is fairly industrialised, I think domestic companies will push for further opening.

About the contributor
Haizmann  

Dr Jan Haizmann
European Federation on Energy Traders

E: j.haizmann@efet.org
T: +32 472 365725

Dr Jan Haizmann is a senior business consultant and board member of the European Federation of Energy Traders. He holds law degrees from Germany, UK and Belgium.

In 1999, Haizmann moved to London to work as a regulatory affairs manager for a large wholesale energy trader, focusing on industry regulation in the power and gas sector. From 2002 until 2005 he gained commercial experience as gas origination manager at Glencore in London.

Since 2005, Haizmann has been an independent consultant to the energy trading industry. He is managing director of Correggio Consulting, an advisory company with activities in energy dispute settlements and regulatory and compliance advice for the energy industry.

Haizmann has actedas a key expert in the context of EU technical assistance to build energy markets, notably in Turkey. He has held various executive functions at the European Federation of Energy Traders, and serves a member of the EFET board of directors. HE also heads up EFET's EU liaison office in Brussels.