Privatizing Plants
Perhaps the most defining moment of the protracted privatization process came in 2001 with passsage of the Electricity Market Law 4628. The law kept the license model, whereby companies effectively rent the right to operate an asset that they have bought or built. This ambitious legislation also redefined the state organizations that control generation, transmission, and distribution assets to facilitate their privatization, construct an electricity trading mechanism, and create an independent body to regulate the overall electricity market. Eight years later, Law 4628 has made significant, if somewhat slow, progress.
One fundamental action of Law 4628 was to separate the former Turkish Electricity Transmission and Generation Corp. (TEAS) into separate bodies for generation (EUAS), distribution and trading (TETAS), and transmission (TEIAS). The idea behind unbundling these assets was to ease their eventual privatization. Indeed, this move was another step in the process that was started in 1994 when TEK (Turkish Electricity Corp.) was split into TEAS and TEDAS (responsible for generation/transmission and distribution respectively).
Privatization made another step forward when TEDAS was split into 20 regional distribution companies controlling 98% market share in electricity distribution across Turkey. Four of these distribution companies were offered for sale in 2008 and, despite the turmoil in the world’s capital markets, all were eventually sold.
Law 4628 also makes provisions for the privatization of generation assets. In accordance with the law, EUAS has prepared six portfolios of power plants to be privatized. Each portfolio ranges from 2,000 MW to 3,000 MW of installed capacity totaling 45 power plants. EUAS is not planning to withdraw from the market completely, however, and analysts expect it to retain a generating capacity of approximately 7,000 MW.
Unfortunately, the generation privatization timetable was delayed when the Privatization Administration, which is charged with overseeing the plan, was forced to issue another tender for a consultant after its original choice, Lehman Brothers, collapsed.
Designing a New Market
Many feel that the most important element of the 2001 law was the creation of a market mechanism. Under the law, the majority of electricity is traded through bilateral contracts, but approximately 15% of the electricity is bought and sold through the balancing and settlement mechanism. The system operates under an eligible consumer concept whereby any market participant that requires more electricity supplied to it by the grid is free to choose its supplier on a market with hourly rates.
The physical balancing of the system is handled by the National Load and Dispatch Centre (NLDC), while the Market Financial Settlement Centre (MFSC) accounts for the monetary transactions. Both centers work under the auspices of TEIAS. The NLDC is also responsible for producing hourly consumption estimates that are used as a guide for scheduling activities for the next day. Currently, a day-ahead scheduling method is used, which means that consumers use consumption estimates to request how much electricity they will need 24 hours in advance.
In essence, the system allows generators to make money by selling electricity for higher prices according to supply and demand. However, some doubts have been cast on the system. At the end of 2008, Energy Market Regulatory Authority (EMRA) officials admitted that, "Recently very serious questions are raised concerning price manipulations within this mechanism," according to the Secretariat General for EU Affairs.
Yet market participants have dismissed the importance of these claims for two reasons. First, they say the system has succeeded in attracting investment to the sector. They point to the difficulties faced by gas-fired plant owners before the balancing and settlement mechanism was established when rising gas prices were not reflected in the electricity price set by the government. Many generators had to close their plants or run at a loss. They also highlight the fact that the current system is transitional and is intended to make way for a more sophisticated spot market by 2010.
Private sector players have also welcomed the tough stance that EMRA has taken on allegations of price manipulations. Although the Turkish electricity market remains a complex mix of public and private bodies and transitional systems, an independent, active regulator is essential to the development of a competitive energy market.
The director general of EMRA, Hasan Koktas, told POWER, "We are fully aware that in order to attract direct foreign investment, it is crucial that we have a transparent uncomplicated bureaucracy. Turkey is in the process of liberalizing its energy sector in alignment with the principles of the EU."
The most recent major piece of energy legislation was the Renewable Energy Resources Law 5346. This law is generally perceived to have been successful in attracting investment to the renewable market and, at the time this article was written, a new law with differentiated tariffs for the various types of renewable technologies was being prepared.
Tough Economic Times
The privatization of Turkey’s power industry has been a long and complex process that has encountered several economic and political hurdles. Indeed, Turkey was one of the first countries in Europe to liberalize its electricity market but has seen many of its neighbors complete the process more quickly. Even after the Electricity Market Law passed in 2001, progress has been slow, as power investors were initially wary after having their fingers burned in previous years.
Then in 2008, just as international utilities were returning to the country and local players were ramping up their operations, the credit crunch hit developers’ ability to finance projects and complete planned mergers and acquisitions. However, there is growing confidence in the regulatory environment, as evinced by the number of foreign energy companies making large investments in Turkey. Furthermore, despite encountering problems as it worked to define market regulations, EMRA is generally perceived to be improving bureaucratic procedures while adapting to changes in the market.
Those dissatisfied with the pace of reform should remember that the first privatization law was passed only one year after a military coup, and that between 1991 and 2003 Turkey was governed by 10 different prime ministers representing six different political parties. This constant changing of administrations, most of which were coalitions, made it difficult to forge a consistent approach toward privatization. Energy investors will hope that the recent success of the moderately Islamic, pro-business Ak Party in securing a third successive term will create the stability required for investment and liberalization.
Fossil-Fueled Plants Under Fire
Both coal- and gas-fired power plants have come under increasing criticism in Turkey for damaging the environment and increasing the country’s dependence on energy imports. Yet Turkey needs approximately 40,000 MW of new installed capacity by 2020. With nuclear appearing a distant option and renewables expected to have a limited impact in the near future, it becomes clear that much of the growth will come from coal-fired and gas-fired thermal power plants, according to MENR estimates. Furthermore, even if a significant portion of Turkey’s considerable renewable potential is developed, much of the extra electricity generated will still need to be supported by baseload power resources because key renewable technologies use weather-dependent, variable sources of energy.
Turkey has traditionally relied on fossil fuels for generating electricity, although its dependence on various fuels has changed over time. For much of the early part of the republic (from 1923 to 1963), hard coal was the favored fuel. Eventually, it was supplanted by oil, which, following the price instability of the 1960s and 1970s, gave way to domestically produced lignite by the early 1980s. However, gas-fired plants were built steadily throughout the 1980s and 1990s, and gas officially overtook lignite in 1999.
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