Sunday, October 07, 2007

Subsidizing Electricity Price; How far?

"Dear Members of Press, I have no such statement - Price increase in electricity- in my agenda-. If there would be such a decision, then, the Government Speaker would definitely make a public announcement. All other statements are clearly nothing, but baseless gossip and rumor. We are very sensitive on these issues. Because our Government is in a great effort to upgrade the living standards of our citizens, we are not in the same mood of our past peers as “price increase in evening, and then again price increase in the next morning”. We accomplished to make to forget the wording “Price increase” from our daily life. I presume that all of you and our citizens wish to remember- those days- again. Do not let them again".

These were the words of the highest Political Authority of the Turkish Administration concerning the current discussions on the wholesale electricity prices last week.

On the other hand, in the last five years, the labor and equipment/material prices have exhibited 50 and 100% increases based on the current local economic indexes, respectively. Moreover, the price of natural gas received from GasProm of Russia has unbelievably increased by 73%; currently being 315 US Dollars per 1000 m3. The contribution of gas term to the overall wholesale electricity price is about 8.13 Cents/kWh, while, as of 18 Jan 2007, the Turkish average electricity wholesale price for TETAS (the Turkish Government owned Wholesale Company) is set at 7.6 Cents/kWh level.

Despite of all these frustrating consequences in gas prices, a member of foreign embassy in Ankara, who obviously seems to have the authority of representing GasProm, could openly stated towards the audience of an intellectual platform in a liberal university that;

"Gazprom, will certainly continue to increase the natural gas prices until otherwise their clients would find alternative fuel resources for themselves.",

thus creating a very cold environment in the audience.

Furthermore, in parallel with increase in political tension between USA and Iran, the oil prices and then as a consequence, the natural gas prices are expected to increase in 2008. The progressively increasing prices in NG during the last four years had a reflection on the Turkish Private Electricity Generation Sector, particularly on the autoproducers (Turkish independent Power Producers) and the Licensed Electricity Generation Companies which depend on natural gas in deep disappointment and frustration.

As a result of these frustrations, most of these companies have eventually found themselves with no alternative, but applying to Turkish Market Balancing and Settlement Center (MBSC / DUY, a spot market operated by the Turkish Transmission System Operator TSO, where electricity is sold with respect to hourly marginal costs) and selling their generation with respect to these marginal prices, and thus abandoning their existing bilateral contracts made with their customers.

Today, TETAS is functioning as a purchasing mechanism for wholesale electricity taken from these companies at a price of 12.5 Cents / kWh and selling at 7.6 Cent/kWh to the Turkish public wholesale market. So, how is the difference being financed and by whom? That difference is obviously financed by the other public establishment on the other side of the same Avenue, the Turkish Treasury.

More unfavorable side is that, the Political Authority now seems to have no alternative, but favoring the natural gas fired plants, due to the obvious fact that time allowed to close the gap between supply demand curves is too short for establishing other types of plants than gas,

the unfortunate fate of the members of the Present Political Authority is that although they had all of their political accusations against the members of the Previous Government in that respect that a high volume of redundant natural gas fired generation capacity has been established without any reasonable justification during the past five years,

and now they seem to be heading exactly to the same situation that they are to be surrendered by gas fired plants even by higher percentages.

Present situation reveals that almost 44% of the total electricity generation belongs to natural gas, and this share is expected to be increased to higher levels within the next five years, due to the obvious gap in the supply demand curves expected within the next two years, thus leading to significant increases in the wholesale and retail electricity prices.

Electricity prices have always been a very serious subject of political concern for Turkish Political Authorities, since it is vitally important for being politically popular and being successful in the next election(s). The present Political Authority obviously and clearly foresees the possible risks of getting politically unpopular due to high prices, and does not even pronounce any increase in electricity prices. Therefore, it seems that the report prepared Three Turkish Ministers advising “increase in Electricity Prices” has immediately been disappeared without being published.

With the fixed idea (obsession) of supplying cheap electricity to the local industry, current subsidy implemented on the Turkish wholesale market has obviously introduced severe symptoms on the private generation sector in the form of discouraging the foreign investments,

hence eventually leading to the obvious supply-demand unbalance expected to appear more clearly within the nest two years,

and create adverse effects in approximately 8 billion US Dollar equivalent, as a high burden on the Turkish Treasury.

The investors who could be interested in making further investments have obviously changed their intensions due to unfavorable climate created by the low electricity prices.

Within the directives of the Political Authority, the 8 billion US Dollar financial deficiency has already been compensated by the Turkish Treasury through the taxes paid by the ordinary citizens with no relation of consuming wholesale electricity whatsoever.

The obvious shortage between supply-demand balance however, would be felt soon in the Turkish wholesale and retail markets as sharp price increases within the next two years.

Unless a miraculous solution has been found, the developments seem to yield a picture exhibiting more and more dependency on the natural gas for electricity generation

and the unconditional surrender by the prices dictated by the unreliable neighbors on the North and East borders.

Your comments are welcome

Courtesy of Prof. Dr. Osman SEVAIOGLU
Department of Electrical & Electronics Engineering
Middle East Technical University, Ankara, Turkey

If you would be interested in receiving the complete pdf document of above article, please do send a short request email to the blog writer.
Click to join EnergyNewsletterTurkey

Click to join EnergyNewsletterTurkey

Free Blog Counter