Wednesday, June 30, 2010

Turkish Thermal Power Plants for Sale

Dear Energy Professional, Dear Colleagues

Energy Markets Regulatory Board (EMRA or EPDK) Chairman announced that 1120 MWe Hamidabad CCPP, 2x160 MWe Can CFB, 4x150 MWe SeyitĂ–mer TPP, 1034 MWe Soma TPP will be privatized later this year.

Overall capacity in privatization is 16,000 MegaWatts and public authorities expect to get 10 billion US Dollars equivalent of privatization income for the Treasury after electricity generation plant sales.

Our new job is to figure out proper procedures and the face value of the plants in privatization, plus terms and conditions of the scheme. Let us choose a sample Thermal power plant and estimate its face price for sale. So the question is how much to pay in order to buy Soma Thermal Power Plant in Privatization.

In our country, we have a rule-of-thumb expectation that an investment should repay itself within next three years. That may be extended to four years at most.

If you have a thermal power plant with 1034 MWe electricity output capacity, at annual 7000 hours of average working availability after privatization, at average 10 US cents per kwh prevailing electricity market prices, you come up with a figure to earn approximately 350 million US Dollars per year after deducting your coal and operation costs. In years of repayment period, that is accumulated to be not less than 1 billion US Dollars. This is the gross price of the plant in privatization.

Now we have to deduct necessary rehabilitation expenses from 1 billion US Dollar. Rehabilitation expenses should cover expenses to pay 6 (six) new FGD (Flue Gas Desulphurisation) installations. That is approximately 25 million US dollars per FGD unit. That figure is derived from past tenders of Kemerkoy, Yatagan and Orhaneli thermal power plant FGD installations.

The next is new Electrostatic Precipitation (E/P or ESP or dust collector) installations for the remaining 4 units. We know that plant has already paid 9 million Euros for the ESPs of 1st and 2nd units of Soma-B plant. You need to renew also boiler pressure tubes, safety valves, soot blowers, coal mills.

In the end we come up a rough figure of 300 million US Dollars for rehabilitation. That is to be deducted from the gross price of 1 billion US Dollars.

One should keep in mind that in privatization period, new owners normally prefer to keep the existing qualified experienced engineering staff to be active in operation. The technical staff gets better monthly salaries provided that they continue to generate value added contribution to the organization. However senior labor force is requested to get retired. That is the natural outcome of privatization process.

The most important risk in operation is in the quality of the incoming coal to feed the thermal power plant. In the past low and fluctuating quality of incoming coal was the most apparent critical risk as foreseen by the interested foreign parties in early 2000s.

The new investors would like to purchase the nearby coal reserves in order to keep themselves free from risk of incoming coal quality fluctuations. Constant coal quality is to be secured with selective mining. Unburnable materials are to be screened and removed.

So we need to estimate the prevailing price of the available coal reserves. That is again three years payback of the current annual income of the reserves. Local Coal is sold to plant at about average 2.50 US Dollars per million BTU heating capacity. That is a reasonable global price for lignite reserves. For 1034 MWe electricity generation, you have to pay 60 million US Dollars per year for coal. That is accumulated approximately 180 million US dollars in three years.

After privatization of the existing coal reserves, investor should enforce selective mining operation for better coal quality. That needs more mechanization in open pit mining, and reduced labor force in underground mining. That is the nasty reality of the privatization. These realities should be foreseen and evaluated in the long term prior to full enforcement of privatization decision.

All interested parties should get prepared for the outcome. Treasury is certainly in hesitation of spending public funds in power plant rehabilitations. They feel that the public spending is not in proper control. Public tenders take long evaluation periods and they are completed in long terms. In the end most of them are not operated effectively, and properly. Treasury is also in hesitation and reluctance in spending due to possible corruption in public spending.

The prevailing political administration may prefer to privatize the entire plants rather than spending in rehabilitation. After privatization, the public authority could enforce the buyers to agree on the necessary rehabilitation spending from their private sources. It is proven that private spending in rehabilitation is faster, cheaper and more effective in the end.

Human cost impact of the privatization is that labor force is reduced in time. Hiring and firing will be easier. Those senior staff will get retired. Better educated and qualified new staff will be recruited. The existing technical staff will be kept unchanged for a while since they are the most important human capital of the establishment as long as they keep their contribution to the operation. They normally get paid more that they get earlier. Their material satisfaction is fulfilled by the new private owners. On the other hand the technical staff will get more freedom in their spending for rehabilitation and programmed maintenance.

More plant availability and higher capacity output are expected in the long run. Electricity generation will be sold in the local national Market at prevailing rates and more income generation will be created. That is more taxable income for the public funds.

There is also a new investment potential to construct 2x300 MWe capacity new coal fired thermal power plant in Soma in future. That new investment will also be integrated with the privatization package to encourage and attract more attention to the project.

In the end we may find that a proper private ownership may also bring better operation, better rehabilitation, and better environment under strict public scrutiny, and generate more income to the workers.

Moreover they should make more funds available to scientific research in the nearby universities for better coal firing, better utilization of coal reserves. New scientific research institutes are to be established. More academic research funds need to be allocated to the local nearby university engineering and technical departments.

They can sponsor upgrading of the living standards of the nearby settlement. They can sponsor cultural and historical sites/ activities in nearby ancient sites, which are Bergama/ Pergamon and Truva/ Troy.

We have lignite coal as our biggest fuel source and we all agree that we should use that coal

with maximum efficiency and availability,
with maximum contribution to the society,
with minimum harm to the mother nature,
with minimum impact on global warming,
with maximized employment for the qualified local labor,
with maximized employment for the local engineering
with maximized employment for the local contracting.

Please do note that Turkey has picked McKinsey & Company as advisor to help shape up sale strategy for the privatization of the state-owned thermal power plants of the public electricity producer EUAS.

We hope that this report although needs a continuous updating, will provide the interested reader a frank view of the Soma Thermal Power Plant for future operation.

This article is an independent work which is prepared with the available information as received at the Soma Thermal Power Plant, trying to advise a candid picture of the existing situation. It is free from any public interpretation.

Your comments are always welcome. With Deepest Regards,, Ankara based Energy Analyst


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