Estimating the hedging value of an energy exchange in Turkey to a retail power consumer

• We develop a model of spot and forward electricity prices for Turkey.
• We simulate power futures contract prices and develop wholesale buying strategies.
• We calculate procurement cost under all-spot and optimal futures buying strategies.
• Optimal strategy saves distributor over $14 million (3.6%) over a six month period.
• Welfare implications include lower power costs and financial risk for industry.

The new Electricity Market Law of Turkey, enacted in March 2013, built the legal framework needed to establish a long discussed energy exchange in Turkish electricity markets. The aim of this study is to estimate the value of this prospective energy exchange.We do this by first developing a spot price model and a link between spot and forward markets. We then use the resulting price series to compare two different energy procurement scenarios for a hypothetical retail company responsible for supplying five percent of total load. In one scenario, we assume that our hypothetical retailer procures all energy in the spot market. In another, we optimize purchases by minimizing cost subject to a risk tolerance, using information from both spot and forward markets.Results reveal that beyond reducing the retailer's risk exposure by smoothing expected costs, the exchange could have reduced total procurement costs during the first six months of 2013 by as much as 27.3 million Turkish Lira ($14.2 million or 3.6% of the total procurement cost).