Turkey wants to raise the private sector’s share in the electricity market to 75% to raise government revenue, boost investment to keep up with demand and reduce the role of the state in the economy. Under legislation that existed until the start of 2013, this would have been difficult. However, the Electricity Market Law 6446, enacted in March 2013, sought to open up the sector to private investors who can now independently generate, distribute, export and import electricity on a wholesale and retail basis, alongside existing state companies. The law aims to improve market transparency, establish a regulator, create an energy-trading exchange and, crucially, increase private sector investment in ageing infrastructure.
Among the main sales in 2014 were those of the transmission lines of the national gas company, BOTAŞ, and a 49% stake of the public Turkish Electricity Distribution Company (TEDAŞ). In 2014 six thermoelectric plants and 10 hydroelectric plants were privatised, sold primarily to local investors, and as of the end of that year the share of energy produced by the private sector had reached 72%, up from 57% in 2003.
Economic instability and high public debt plagued Turkey for decades, making investment in the electricity sector a low priority. However, rapid economic growth over the past decade has sparked greater energy consumption, exposing the electricity networks’ shortcomings. Overloads and blackouts were common, and still are, and there are leakages across much of the network. An average of 16% of transmitted electricity is lost, reaching as high as 70% in impoverished south-eastern areas.
To keep up with demand that has risen only second to China, analysts argue that Turkey must invest $ 5bn10bn a year over the next decade. A revamp of the legal underpinnings of the electricity sector was required to attract private monies to distribution and generation. For the former, the tender of the grids Anadolu Yakası Elektrik Dağıtım, Dicle Elektrik Dağıtım, Toroslar Elektrik Dağıtım and Vangölü Elektrik Dağıtım in March 2013 earned the government $3.5bn, with nearly $3bn of that figure coming from Enerjisa, Sabancı Group and Germany’s E.ON’s joint-owned energy group, which won the two largest grids. Already, Turkey has increased the private sector’s role in the power market to 61% from 38% a decade ago.
Old Law & New
The foundation for the privatisation of Turkey’s energy market began in 2001, with the enactment of Law 4628, which enabled participation by foreign and domestic private investors while reducing the state’s role. The law established the independent Energy Markets Regulatory Authority (EPDK) to smooth the transition to a fully liberalised market. But the transition was not especially smooth, and many assets were still in state hands at the beginning of this decade. Uncertainties lingered over the stipulations of the law until the new legislation was enacted in 2013. This situation is typified by the failed attempt to sell off generation assets belonging to the state-owned electricity company Elektrik Üretim AŞ (EÜAŞ) and the failed bid by the MMEKA consortium to buy Istanbul’s two transmission companies in 2011.
Under the old legislation, distribution companies could carry out distribution, generation and retail under the umbrella of the same legal entity. An amendment in 2008 meant these activities had to be unbundled by January 1, 2013. The now-repealed Law 4628 also stipulated that foreign players could not wholly, jointly or indirectly have control of electricity generation, transmission or retail sectors. Market control had rested with three state entities: EÜAŞ, the monopoly Turkish Electricity Transmission Corporation (TEİAŞ), which is unlikely to be privatised, and the Turkish Electricity Trading and Contracting Company (TETAŞ), which still has a 40% share of the market.
The new legislation makes substantial changes to the licensing and approval system, including to the types of licences available. It has brought in a pre-licensing process and extended the cut-off dates for some incentives, such as stamp-duty exemption for generation companies, the price-equalisation mechanism for tariffs (until the end of 2015) and an extension for tax exemptions for unbundling.
The new framework also allows for the establishment of an energy exchange, the Energy Markets Operating Corporation, or EPIAS. Previously, companies were able to trade derivative contracts at a fixed price. Now reference prices will be the target, providing more transparency and competition, and helping to lower power prices. The exchange also reduces the role of TETAŞ to regulation, developing the national grid and improving interconnection with neighbouring countries’ grids. The law reduces the government’s stake in EPIAS to 30%, and European energy exchanges ICE Endex and EEX have expressed interest in Turkey’s energy trading market, Reuters reported in 2013.
Types of Firms
There are five types of operators in the market. EÜAŞ and its subsidiaries comprise more than two-fifths of the market. This is followed by build-operate-transfer and build-operate-own companies with rights to build and operate thermal plants that were developed before the previous electricity market law. Then there are companies operating under transfer of operational rights agreements, independent power producers and companies licensed to produce only for their own needs.
Turkey completed its sale of all 18 state-run power distributors in 21 regions by late 2013, adding $12.7bn to state coffers. With full privatisation, TEDAŞ no longer distributes power. However, it continues to own assets and permit privateers to use them under a transfer of operation rights model. Distribution companies must make connection agreements with TEİAŞ for transmission services, connection and system-utilisation agreements, approved by the EPDK.
Supply was provided by state and private wholesalers, and retailers were regulated by the repealed Electricity Market Law as two activities. The new law combines them under one supply licence without subjecting firms to any regional restrictions for eligible consumers.
Public utilities still dominate the electricity generation and wholesale sectors. Trading agreements are generally between a generation company or a wholesale company and a distribution company or an end user. Their form and terms are subject to negotiation between parties. As yet, the EPDK has no supervisory power over the terms of agreements signed by private sector wholesalers. Bilateral energy-sale agreements with TETAŞ are subject to EPDK approval but agreements signed by private wholesalers are not.
The EPDK has issued some 1500 generation licences, of which 87 are held by EÜAŞ and 1377 by independent power producers. The build-operate-transfer and build-operate companies operate based on contracts with the Ministry of Energy and Natural Resources, which acts as a second regulator, without a generation licence issued by the EPDK.
Any direct or indirect transfer of 10% or more of a licence holder’s shares is subject to approval by the EPDK. This rate is 5% for publicly held companies. The market share of a private sector generation company cannot exceed 20% of the total installed electricity generation capacity in Turkey in the previous year.
One aspect of the legislation encourages uptake of renewable energy. In line with the government’s target of 30% of electricity generated by renewable sources by 2023, each supply licence holder must buy power from the country’s two nuclear plants after they become operational in 10 years. This amount is equal to a determined percentage that the supply licence holder sold in the previous year. TETAŞ is obligated to buy electricity generated by nuclear and coal-fired plants exceeding 1 GW of installed capacity.
The government is eyeing another $13bn it says it can raise by privatising assets generating 16,000 MW of installed capacity now held by EÜAŞ. In April 2014 operating rights to lignite-fired plants at Yeniköy, with capacity of 420 MW, and the 630-MW Kemerköy plant were sold to builder IC İçtas for $2.67bn. Also in April, Demir Madencilik, a Zonguldak, Turkey-based mining concern, placed the highest bid of $351m for the 300-MW Catalgazi lignite power plant.
The Privatisation Administration will also privatise Yatağan, a lignite-fired giant with capacity of 630 MW. Yatağan, located in the southern Mugla Province, for decades made headlines for creating excess waste, and locals have said it spews pollutants near tourism resorts, leading to health problems. Raising environmental standards is also required under the new electricity law, although investors are given a grace period until 2018 in which their licences cannot be cancelled and no sanctions can be applied while they seek to make their newly acquired plants compliant with environmental protection statutes.
Non-state companies have already added an extra 22,000 MW to their installed capacities through privatisation and new investments in the last decade. A total of approximately 32,000 MW are held in private hands, leaving roughly 25,000 MW with EÜAŞ, which includes 28 hydro-electric and 16 thermal power plants, or a total of 16,200 MW, that are slated for sale.
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