The Turkish power sector has been going through an extensive reform programme for several years, with the 2001 Electricity Market Law aiming to improve the investment climate. Electricity demand continues to grow rapidly and there is an urgent need for new generating capacity. The next few years will be vital in terms of new generation investments.

Sekip Güray, MSc,* General Directorate of Energy Affairs, Turkey

Turkey’s efforts to involve the private sector in its electricity sector started in the early 1980s and gained momentum in the 1990s. As part of these efforts, around 9 GW of capacity was constructed with long term power sales agreements and state guarantees. Plants based on build-own-operate (BOO) and build-operate-transfer (BOT) models accounted for 22 per cent of total installed capacity by the end of 2005. However, the effectiveness of these efforts is still an issue for discussion within the sector.

Since 2001, significant progress has been achieved in the legal and administrative framework to create a competitive electricity market. Implementation of the new struture, representing a worthwhile transition from competition for the market to competition in the market, first started in October 2002.

The Electricity Market Law, enacted in 2001, aims to create a competitive, transparent and commercially viable electricity market providing sufficient, reliable and affordable electricity to consumers. The Market Law is largely compatible with the EU Electricity Directive.

Indicative supply demand scenarios for the period 2006-2010. The generation figures reflect only existing power plants and those in the pipeline (i.e., plants under construction and projects already licensed)
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The Energy Market Regulatory Authority (EMRA) was also established in 2001 for independent supervision and regulation of the market. EMRA is responsible for issuing licenses for market activities, preparing and enforcing regulations and performance standards, preparing tariff calculation methodologies including those for sales to non-eligible consumers, supervising and monitoring the market participants and their performance.

Nondiscriminatory third party access to the transmission and distribution networks is one of the key principles of the new market structure. The Turkish Electricity Transmission Corp. (TEIAS) will remain responsible for reliable operation of the transmission grid. It will also act as market operator. The market structure being implemented is based on bilateral contracting among the market players, complemented by a balancing and settlement regime.

The Market Law abolishes the past practice of long term power purchase agreements (PPAs) with state guarantees for new generation investments. Market entry in the generation segment is governed by the principles of authorization by EMRA. Within the framework of electricity market implementation, efficient operation of electricity generation and distribution assets under competitive market conditions is envisaged to enhance quality and security of supply. The electricity market, functioning on the principles of competition, has been designed to attract new investments in generation capacity to ensure sustainability. As a last resort, the Ministry of Energy and Natural Resources is able to implement new generation plants through the state owned generation company (EUAS) in order to secure supplies.

A phased approach

The Electricity Strategy Paper, issued by the High Planning Council in March 2004, is one of the recent developments in electricity sector reform. The Strategy Paper serves as a roadmap that clearly defines the set of activities over the transitonal period of market reform.

The Strategy Paper addresses an extensive array of actions, including the privatization of the distribution infrastructure and a significant portion of state owned generation assets. These actions are deemed to be tools for a smooth transition to full market opening. The threshold for eligibility is currently 7.7 GWh, corresponding to nearly 30 per cent of the total market. The Strategy Paper sets a target of full market opening by 2011 using a phased approach. This approach recognizes that full market opening does not guarantee success; what is important is making sure that there is diversity in the market, allowing consumers to exercise choice. As the evidence in many EU countries points out, almost ten years after the first Electricity Directive, an open market does not necessarily equate to a functional market.

Breakdown of installed capacity by generators (at the end of 2005)
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Since part of the generation sector, based on state guarantees, is out of the competitive domain, the privatization of state owned generation is considered to be important. Privatization will start in the distribution sector to ensure that a strong, functioning market exists to attract investors to the generation sector. Distribution privatizations are expected to be launched in 2006.

Challenge and opportunity

Except for a part of hydropower, all the generation plants currently owned and operated by EUAS are to be privatized. The Strategy Paper envisages that these plants will be grouped into portfolios in a way that will prevent the dominance of any one player in the market. A level playing field will be established, where each portfolio will have a mixture of thermal and hydropower plants. Studies analysing the privatization of around 17 GW of state owned capacity are underway.

Turkey has been experiencing significant demand growth rates in electricity for decades. Total electricity consumption was just over 160 TWh in 2005, nearly a three-fold increase over consumption in 1990. Recent forecasts up to 2020 indicate a 6-7 per cent annual growth rate in demand, illustrating the need for new capacity additions.

In 2005, total installed capacity reached 38.8 GW compared to a peak demand of 25.2 GW. Despite a sufficient reserve margin, Turkey will need new capacity in the short to medium term to cope with electricity demand growth.

At the end of 2005, 54 licenses amounting to 1.3 GW had been granted by EMRA to newcomers. A significant portion of these projects are in the pipeline. In addition, the recently launched rehabilitation programme for lignite fired power plants aims to increase generation from existing plants.

Nevertheless, most of the supply-demand scenarios indicate a need for new capacity by 2010, in addition to the existing plants and those in the pipeline. In this context, any delay in completion of the already licensed projects will worsen the situation.

Gas is currently one of the predominant fuels in the generation mix, whereas the domestic resources used for electricity generation are mainly hydro and lignite. By the end of 2005, gas – including dual fired plants – hydro, and coal consituted 35 per cent, 33 per cent and 24 per cent of total installed capacity respectively. Around 35 per cent of the country’s hydro potential has been used, generating 35-45 TWh/year depending on hydrological conditions. The remaining generation potential of domestic lignite is estimated to be 70 TWh/year.

Analyses of supply scenarios indicate that the total installed capacity requirement is 80 GW (low demand scenario) and 96 GW (high demand scenario) by 2020. With regard to the long term sustainability of the power sector, in particular the security of supply, fuel and technology choices are of importance. However, no mechanism exists to influence fuel and technology choices, except for recent legislation supporting renewables. The interaction between electricity and gas markets deserves particular attention in this regard.

The Law enacted in May 2005 for encouraging renewables is one of the supplementary efforts to harmonize the market with the EU. The Renewables Law introduces a feed-in tariff scheme, together with a purchase obligation for the distribution companies from certified generators. The feed-in tariff is set around the wholesale price level, which is currently rather high due to the stranded cost arising from past PPAs.

Early signals

Turkey has already achieved significant progress in electricity market reform, as private sector interest in various segments of the sector has shown. A detailed assessment on the impact of market reform on the overall economic efficiency of the sector should only be made after the transitional period.

It could be argued that there are good prospects for reducing end user prices – especially those for industry – over the medium to long term provided that a sufficient level of diversity through increased numbers of suppliers is achieved. The privatization programme is designed to contribute to the efficiency of the sector.

The growth in demand presents opportunities for direct private investments in a wide range of new generation projects. Turkey’s need for new capacity in a timely manner makes it an interesting case study for those analysing to what extent liberalised markets can attract investment.

The substantial demand growth being experienced in this transitional period is providing a unique challenge for Turkey. The current level of wholesale prices may provide an incentive signal for potential newcomers in this period. Although early signals suggest that the market is able to attract new capacity additions, the next few years will be crucial in the Turkish electricity sector.

*The views expressed in this article are those of the author and do not represent the views of the administration to which the author is affiliated.