Turkey’s growing power market has attracted investors and project developers for over a decade, yet their plans have been dashed by unexpected political or financial crises or, worse, obstructed by a lengthy bureaucratic approval process. Now, with a more transparent retail electricity market, government regulators and investors are bullish on Turkey. Is Turkey ready to turn the power on?
Power projects invariably encounter financial, political, technical, and environmental challenges. In the past, those problems have been magnified in Turkey. But recently, Turkey, once known for strict government planning and control of all aspects of its economy, has made substantial moves to open its markets and reduce government control of foreign trade and outside investment in power markets. Additionally, many segments of publicly owned industries have been privatized since 2001. The results have been tremendous: Turkey’s gross domestic product has grown an average of 6.9% over the past six years, although growth in 2009 is projected to be only 1% or 2%, according to Isbank. The consensus is that Turkey must have immediate and substantial investment in its electricity generating infrastructure if the country is to maintain its recent impressive record of economic growth (Figure 1).
1. Installed capacity. Conventional thermal and hydro generation sources have traditionally dominated Turkish power generation. Today, wind, geothermal, landfill gas, and solar power combined account for approximately 1% of Turkey’s installed capacity. Source: U.S. Energy Information Administration, International Energy Annual
Economic growth usually translates into increased electricity consumption. Turkey has experienced an average annual rise in energy consumption of 8.5% from 2001 to 2008. The 2008 consumption levels of 198 billion kWh are perilously close to the amount of power that domestic installed capacity is able to provide. Indeed, before the financial crisis began to affect 2008 consumption figures, many analysts feared blackouts in 2009.
This report, a POWER exclusive, was compiled with on-the-ground research and extensive interviews of key industrial and political figures who make up Turkey’s power sector. It closely examines Turkey’s plans to create a power infrastructure capable of providing the reliable electricity supplies necessary for sustained economic growth.
Building Demand
Though the effects of a global economic slowdown in Turkey have decreased the country’s growing demand for electricity by about 10%, the slowdown will only be temporary. Turkey’s electricity consumption per capita is a mere 3,000 kWh — less than a quarter of the consumption of some of its neighbors in the European Union (EU). Rapid urbanization coupled with a young and growing population will put strong upward pressure on electricity assets. Indeed, Turkey will have to double its installed capacity of 40,000 MW by 2020 in order to cope with expected demand growth, according to Turkey’s Ministry of Energy and Natural Resources (MENR).
Recent disputes involving natural gas supplies from Russia have strengthened the Turkish Government’s resolve to achieve a greater level of energy independence. Government officials hope that by using a mix of renewable, nuclear, and more-efficient thermal power plants, Turkey can reduce the costs and risks involved with importing gas from Russia, Syria, and Iran. Turkey has no nuclear power plants, although it is known to be discussing the purchase of CANDU reactors from Canada. (Read more about these reactors on p. 28.) Turkey has adequate internal reserves of uranium, and the CANDU reactor does not require uranium to be enriched. But many inside and outside of Turkey oppose constructing a nuclear plant in Turkey because of potential earthquakes.
In addition to constructing new plants, a range of environmental projects is planned for existing plants, including retrofitting older coal-fired plants with flue gas desulfurization systems. New renewable power facilities are being considered, building on Turkey’s strong tradition of building hydroelectric plants. There are also designs to tap into the country’s enormous wind, solar, and geothermal potential (Figure 2).
2. Total Turkish energy consumption, 2006. Source: EIA International Energy Annual 2006
An Evolving Regulatory Environment
The privatization of Turkey’s electricity assets was first attempted three decades ago, but a combination of ongoing political, legal, and economic factors have left the process far from complete. We begin with a brief history of how the regulatory framework has evolved to explain the current market and how it is likely to develop.
Privatization of Turkey’s power infrastructure was first considered in the 1980s as part of the mandate of the Motherland Party’s Prime Minister Turgut Ozal. Ozal saw privatization as a way to reduce Turkey’s debt and increase its global competitiveness. Yet the privatization of the State Economic Enterprises, which controlled the key industries, contradicted the precepts of the Turkish Republic’s founder, Mustafa Kemal Ataturk, whose "statism" principle placed a strong emphasis on the role of government in industry. Subsequently, there was significant opposition to privatization from many trade unions, politicians, and bureaucrats.
In 1984 the Turkish parliament, or Grand National Assembly, passed the Energy Privatization Law 3096. This far-reaching law allowed the private sector to build and operate electricity generation, transmission, and distribution assets. It was also known as the BOT law, as it was planning to use the world’s first build-operate-transfer model and, crucially, it would force investors to eventually hand assets back to the state at the end of an agreed-upon contract term. The system planned to reassure investors by offering sovereign bank guarantees to cover any potential losses.
The BOT model initially failed to make much headway. "The main stopping point was that investors wanted to know that if there was a legal dispute, then they could resolve the matter through international arbitration; the original legal framework of Law 3096 did not allow for this," explained Ahmet Danisman, general manager of Turkey’s first private energy company, AkEnerji.
In 1994 legislators looked to resolve this issue by amending Law 3096 so that it would include international arbitration, but this was overruled in 1996 by the Constitutional Court. The problem with BOT was that as the asset was eventually returned to the state, it was regarded as state property and therefore subject to administrative law as opposed to commercial or international law.
Legislators, however, did finally manage to make the BOT model more attractive by keeping the sovereign guarantees at 100% of the investment; the original approach reduced the guarantees incrementally over the contract term. Shortly after this change, 1,389 MW of gas-fired plants and 803 MW of hydroelectric plants were constructed under the updated BOT model before the conditions attached to the International Monetary Fund (IMF) rescue package for Turkey in 2001 restricted the further granting of sovereign guarantees.
Not content with the levels of private investment attracted by BOT, MENR created an alternative system under the BO Law, passed in 1997. It created a build-operate model that was designed to avoid the constitutional problems associated with the ownership of generation. The first construction under the BO model, which only applied to thermal plants, began in 2000.
While the myriad changing laws and regulations are complicated to follow, it’s clear that the uncertainty froze investment in the electricity sector. Perhaps the most telling legal anecdote concerns what occurred in 1997 and 1998, when MENR exercised a clause in Law 3096 that allowed for the transfer of operating rights of existing power plants and distribution assets. MENR conducted a series of tenders for the assets and signed transfer contracts with companies. But another legal challenge, this time from a trade union, derailed the process.
Another effect of this stop-start privatization process was that by 2000 the majority of private sector investment in the power sector was from auto-producers — large conglomerates that produced electricity and heat primarily for their own industrial use. Today, most of the important Turkish power companies have experience as auto-producers, including Enerjisa, AkEnerji, and Ayen Enerji. "Our background in auto-producing means that we gained skills and know-how in the energy industry before some of our peers," claims Selhattin Hakman of Enerjisa.
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