Turkey's energy sector under stress

Turkey’s energy sector under stress

On January 19 this year, Turkey was to auction three of the country’s largest electricity distribution companies. Bids were expected to exceed $3 billion, with the sale a symbol of the country’s commitment to liberalization and to reducing the role of the state. 14 days before the auction, the Prime Minister, Recep Tayyip Erdogan, expressed concern that transferring these companies to private hands could lead to higher electricity bills for the consumer. 2007 is, of course, election year, and a few days later the sale was postponed.

For the 80+ bidders, this was a bitter blow. But, after 10 years of similar blows, those still in the ring have learnt to roll with the punch. These years have seen tender after tender cancelled by legal challenge and contracts abrogated by government whim. To date, the Turkish government has had to pay over $100 million in compensation to aggrieved investors and for the past five years it has been at daggers drawn with the companies which invested some $3 billion in the 2,450 MW of plants built under the Build-Operate-Transfer system.

This is not a time of investor confidence, and yet, more than ever, such confidence is necessary. For Turkey urgently needs new power plants to keep up with ever-soaring demand. The state cannot afford to build them, but the private sector is dragging its heels. Indeed, as in the case of some plants built under the auto-producer model, owners prefer to mothball their facilities rather than keep producing at prices which do not cover their costs.

The numbers are clear. The reserve margin in Turkey is falling to critical levels. This margin shows what percentage of the capacity of the country is unused during periods of peak winter demand. In most countries, a reserve margin of 15-25% is adequate. In the case of Turkey, experience shows that when the margin falls below 40% the system comes under strain and black outs are likely. One reason for this is that not all plants in Turkey can produce to their 'boiler-plate' capacity.

Another – and this was one reason for the 8-hour black out in many provinces last July – is that many are under repair. One reason for the difficulties is the trebling of oil and gas prices which has followed the invasion of Iraq. The Erdogan government has sought to protect the Turkish consumer from higher prices, and has largely succeeded. In US$ terms, electricity prices at end 2006 were around the level of three years earlier. They are now about 20% below the average paid by households and industry in the OECD, the grouping of western industrial countries. All this has been achieved at a price.

Preventing generators from passing on their cost increases has caused existing investors to close some plants and potential investors to delay decisions. Equally, BOTAS, the state natural gas company, has been hit by the insistence of the Minister of Energy, M. Hilmi Guler, that it hold down prices: in recent months, it appears to have been trading at a loss. Six years after the enactment of the Electricity Market Law, the situation is confused.

An independent regulatory body has been established and progress made in introducing a balancing and settlement market on EU lines. But the introduction of cost-based pricing is only partial and development in this area hindered by the introduction of a 'transition period' lasting until end-2010. Regulatory uncertainty continues in areas such as the regime for investments in renewable energy. And no model has yet emerged to replace the now-unavailable take-or-pay contracts which underpinned the last wave of private investment. Europe is no angel in this area.

The EU Commission is becoming increasingly shrill about the failure of member states to enact many of the reforms on which Turkey has embarked. However, Turkey’s problems are particularly acute. Its current levels of consumption and generation are, on a per caput basis, about one-third those in Western Europe. Consumption is growing fast, averaging over 8% per year in the past 25 years. But, after a spurt in the early 2000s when 5,800 MW of Build-Operate capacity came on line, private investment has lagged. Indeed, now the interest is not in building new plants but in purchasing the 11,769 MW of thermal plants and 3,677 MW of hydro plants which the state is due to auction. After, that is, it makes significant progress in selling off its distribution assets. The main exception to investor hesitancy is the tender being planned of rights to operate the large C and D lignite fields at Afsin-Elbistan in Turkey’s south east.

Bidders are required to build new power plants totaling around 2,400 MW. The deadline for bids was announced as January 23, 2007, but, following complaints by potential bidders about the bidding conditions and financing difficulties involved, this tender was postponed to March 27. After the postponement of the privatization of electricity distribution, this tender too may be affected. Past improprietries in the sector mean that the opposition and much of the press views the sector with considerable suspicion. Why, correctly asks Metin Munir in Milliyet, was the contract for construction of the 1,200 MW Ilisu dam awarded without competitive tender?

Then, there is the debate on ‘national’ resources - e.g. lignite and hydro - rather than imported ones - e.g. natural gas. Less discussed is how will Turkey contribute to the Kyoto process and seek to minimize the growth in its emissions of greenhouse gases. But in the months to come this will be on the agenda. In May 2005, Turkey became a party to the United Nations Framework Convention on Climate Change. It has not acceded to the Kyoto Protocol to this Convention, though may come under increasing pressure to do so as the harmonization of its policies with those of the EU continues, irrespective of whether this leads to full membership. It has now prepared its greenhouse gases inventory in line with the requirements of the Convention.

The next step is for it to publish its National Communication which will include plans and strategies towards emission reduction and will be a base for the bargaining regarding the targets that will be set for Turkey. Whatever happens here, a more rational approach is required to the planning of hydro power.

The poor rainfall of the past year is a reminder of the three years of poor rainfall at the beginning of the decade, meaning low levels of capacity usage and that each kilowatt hour of hydro power will require more investment than this capital-starved country can afford. Hydro-power also raises serious environmental concerns - whether over the devastation of Roman mosaics at Zeugma, of the white waters of the Çoruh river above the Black Sea, or of the town Hasankeyf on the Tigris.

Then there remains the need for concrete measures to protect would-be investors who have worked hard on government-backed projects, only to have the government fail to fulfill its side of the bargain. The postponement of the electricity distribution tenders was an uncomfortable reminder of this legacy.