- Electricity and Natural Gas Correlation in Turkey: Fragility in Trading and Pricing Mechanism
- December 17, 2013
- Law Firm: HERDEM Attorneys At Law - Istanbul Office
- Turkey has a very high foreign-source dependency in energy sector by 75% whereas natural gas dependency mounts to 98%. Apart from being a major natural gas importer, Turkey locates in a very strategic region between the demand centres in Europe and manufacturing areas such as Russia and Middle East that results with being a natural gas trading hub. In this regard, there are many internal and external key components conduce to determine the prices in Turkey. In the scope of endogenous determinants, electricity prices is observed as a fundamental driver of natural gas prices.
Outrageous Increasing in Natural Gas Demand Caused Electricity Power Cuts
To illustrate, latest power cuts existed as a result of harsh weather conditions throughout the Turkey. As a consequence of this fact, demand for natural gas extremely boosted. When Turkish electricity market is analyzed, it could be seen that 50% of electricity need is met by natural gas terminals. In consideration of this interrelation, unit electricity prices climbed from 0.15 TRY to 1 TRY in the recent days. Furthermore, some technical issues in natural gas terminals also caused not to meet the demand. Iron and steel industry, which requires highly consumption of natural gas damaged in reaction to deficiency in natural gas supply.
Trading Fact: Natural Gas Terminals Are Endangered with Recent Regulation
Recently, the Commission has taken a resolution regarding the electricity trade done by energy plants on 21.11.2013. According to this Resolution, an electricity manufacturing license owner may purchase 40 % of its annual electricity production amount from the market. This Resolution is based on the Article 30 ç) of the of the Electricity Market License Regulation ("Regulation"), according to which a manufacturing license owner is entitled to purchase the electricity energy or electricity capacity in order to provide the electricity energy or capacity which he/she shall supply. However, this energy amount shall not exceed its annual produced energy amount which is determined by the Energy Market Regulatory Commission ("Commission").
Typically, bilateral agreements are implemented by natural gas terminals for sales of their production capacity in the market. On the other hand, these manufacturers make another proposals with counter parties for pursuance of their engagement. After this regulation, these natural gas producers will have difficulties to set a balance between their production capacity and their 40% capability of electricity purchasing. Contract management is projected to require a strong forecasting against to operational risk. Another substantial point is long term contracts are applied for their gas procurement by natural gas producers. Uncertainty in their capacity management with 40% purchasing limitation may increase marginal costs regarding unexpected instant needs of their natural gas. In this regard, they may encounter with troubles to meet their demands and also higher natural gas prices may be faced. This resolution is expect to rise electricity prices in Turkey as a result of high correlation between natural gas and electricity markets.