Using of derivative instruments in Turkish electricity market and an application on the pricing of derivative contracts

Technological development increases the need for electricity day by day. Electricity consumption increases in installed power capacity. Because electricity cannot be stored, instantaneous power supply and power demand curves must be in balance. With the liberalization of the power markets, power prices started to occur in the market environment. In addition, electricity is a product that have high demand and should be consumed as soon as produced. Changes in amount of generation and consumption directly affect the volatility in electricity prices. In order for power prices to be formed in a balanced way, generation and consumption should be planned that balances each other. This volatility in power prices increases the risk in the market. The purpose of this thesis is to analyze the use of derivatives against the price risk. The players in the market have been explained and examples are given from power markets in the world. In the second part the structure of the Turkish electricity market explained. Besides, market component that affecting price formation were mentioned. In the third part, the types of risks in the electricity market and the using of derivatives in power market are explained. In the last part, an application has been made that pricing of option contract. Black & Scholes method is used in option pricing application.