Asset Shortage during Power Shortage

TUROGE 2010- 9th Turkish International Oil & Gas Conference
16 March 2010, at 15:30 hours, Sheraton, Ankara, Turkey

Dear Energy Professionals, Dear Colleagues,

In his December 2006 article on the Macroeconomics of Asset Shortages, Economist Ricardo J. Caballero says, “The world has a shortage of financial assets. Asset supply is having a hard time keeping up with the global demand for store of value and collateral by households, corporations, governments, insurance companies, and financial intermediaries more broadly.”

It is so sad to visualize that on one hand world assets cannot find proper investments, while on the other hand our local power plant investments can not find money to get started.

There is a great investment credibility problem in our local energy markets. We need to have a clear evaluation of this major problem starting from the annual investment requirements of our local market, clear figures of electricity supply/ demand in the local market, the capacity we will need in the future, and what we shall face if we do not initiate such investments.

In order to review the balance of electricity supply demand in Turkey, we look at the internet pages of a local Public Transmission company, and we come up with a Turkish Installed Capacity at 44,472.5 MWe as of November 2009.

We can also visualize that, on a month-by-month basis, installed capacity is lower in 2009 than in 2008. In 2008, installed capacity was 41817 MWe, and Peak load was 30842 MWe.

We understand that we had no such a big shortage problem in year 2008.

In 2009, our Installed Capacity was 2600 MW higher, but our demand peak was 4% lower than it was in 2008.

The hardest years for the Turkish system are the drought years since we have a high sensitivity due to the relatively high hydro capacity.

So we multiply the installed capacity by 4650 hours for higher scenarios and by 4500 for lower scenario; this is a rough approximation for capacity utilization.

Please do note that the system has the ability to achieve more than 5000 hours on average annually. If the resulting number is less than the expected demand, then it means the electricity generation system is under stress.

44472.5 MW x 4500 hours (average per year overall availability) = 200 TW-hours
44472.5 MW x 4650 hours = 206.8 TW-hours

Expected demand for 2009 is 194 TW-hours.
Expected demand for 2010 is 206.6 TW-hours.

So without any adding any additional capacity, the existing installed capacity should be enough until the end of 2010.

In summary, Turkey has almost 45,000 MWe installed capacity, though we did not exceed 36,000 MWe at peak hours in 2009.

The remaining portion is NOT available since they are not reliable – sources such as wind, solar, hydro, all renewable – or they are almost out of service, as in case of many old local thermal power plants, such as Hopa, Afsin- Elbistan-A.

Apart from periods of economic crisis, Turkey needs approximately a 6-8 percent increase per year in electricity output in order to keep the desired growth rate.

New investments require a project execution period of 2-4 years for natural gas-fired combined-cycle power plants, 1-2 years for wind, 5-7 years for hydro (ILISU?), and 7-20 years for nuclear.

In this period, money is allocated, but revenues are not generated before completion.

Every kw of power created costs approximately $1000 US Dollars on average. Combined-cycle plants cost a bit less, $500-$600 USD per kw, while thermal power plants cost around $2000 USD per kw. There is no average price per kw available for nuclear power plants.

Now let us do some simple arithmetic with a low end of 6% annual electricity generation increase for an available power capacity of 36K MWe:

36,000 Mw = 36,000,000 Kw
Minimum 6 percent increase for each year x 1000 US Dollar investment per Kwe
0.06 x 36m x 1000 = 2.16 billion US Dollars per year investment needed minimum

So we feel that the figure of $1 billion USD per year upfront becomes too prudent for a higher expectation of the growth rate. So who will finance such a big investment package??

Leading local financiers may say that it is easy for Turkish financial capability, but one should not be so sure about that.

Furthermore, nuclear power plants are NOT a solution to power shortages, since we do not know the exact time required for project execution period, and the final completion date.

It could take approximately between 7 to 20 years to complete a nuclear power plant at this time for many reasons, including legal battles, technology restraints, fabrication difficulties, financing limitations, and regional and international politics.

Blackouts in small regions are currently happening already in Turkey. Although people living in big cities like Istanbul, Ankara, etc. do not face these shortages, it is a reality of life in many towns.

Many of them are classified as power disorders, but those power disorders wander from one area to another in Anatolia. A power failure in one area is repaired (!) and soon after that repair another new power interruption occurs in a neighboring region.

There may be unexpected blackouts (like the one in Paris another in New York, sometime in 2005) due to unforeseen technical problems.

But according to optimistic public employees of our local Public Transmission Company, the local system has enough reserve capacity till the end of 2012 in their worst-case scenario.

The best-case scenario is that we end the prevailing electricity comfort in 2014 or 2015. But capacity projections always have worst-case flexibility to predict a serious problem in 3-5 years in time.

Hence, this projection likely reflects the delay between EMRA licensing and full electricity-producing operation.

EMRA licenses, which are issued after March 2009 and are not included in the worst-case scenario, could be generating electricity in 5 years time and could delay the situation to 2015-2016.

In our opinion, the ground for an electricity supply crisis has been forming gradually since the beginning of 2006.

We may unexpectedly encounter a power shortage crisis, and we turn a blind eye to the facts, in fact the culprits, while searching for other reasons as the cause.

Project financing is too difficult in Turkey, especially at this time of global financial turmoil. Public institutions have limited or almost no capability.

Local investments are generally realized by “corporate finance” methods. Local investors risk their own property in order to get proper "corporate financing" at reasonable interest rates, and payment terms.

In the past, we have realized energy power plant investments exceeding 4000 MW installed capacity. Those natural gas-firing cogeneration plants quickly pay for themselves and create more money for further investments in new plants.

However, we do not have the investment environment for “non-recourse” project finance to secure “off taker” contracts.

Therefore, it is too difficult to find the necessary project financing for mega projects such as nuclear plants and the plants in Afsin Elbistan. We have lost time in the past and continue to lose more and unable to recover fast in due time.

Turkey will need more local private financing and local contracting, local engineering, if applied. If an investment project does not create jobs for local engineering firms, if it does not create jobs for the local qualified workers, if it does not give contracting opportunities to local companies, then we do NOT need that project.

Your writer/speaker sincerely feels that our local private investors deserve all our support to complete new power plant investments, provided that they create jobs for the local engineers and jobs for the local qualified manpower.

Please do note that above forecast is your writer's humble estimation, and does not reflect opinions of any public or private institution. Your comments are always welcome.

--
Haluk Direskeneli, Ankara-based Energy Analyst