Monday, June 11, 2012

Reviewing Turkish Privatization of SeyitÖmer Thermal Power Plant

Dear Colleagues, Dear Energy Professional,

Turkey's Privatisation Administration (OIB) recently announced that 1120 MWe Hamitabat  CCPP,  4x150 MWe SeyitÖmer TPP, 1034 MWe Soma TPP, and 3x150MWe Kangal TPP will be privatized later this year.  
Çan 2x160 MWe  CFB may also be considered in near future. 

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. This scheme is basically “Transfer-of- Operational- Rights” for some predetermined period (49 years), not “Property Sale”.

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  SeyitÖmer Thermal Power Plant in Privatization. 

SeyitÖmer Coal mine fields owned by Turkish Coal Board, a public Authority, whereby thermal power plant is operated by Turkish Electricity Generation Public Company.  It is expected that both premises will be sold together by the Privatization Authority.

The existing power plant are based on pulverized coal firing technology which need relatively higher calorific value plus less moisture. Direct Pulverized coal firing technique can be successful only if you lower the moisture content and hence with higher the calorific value. 

Available coal has a challenging content with very poor Low calorific value at about average 1996 kcal per kg, and approximately with 34% moisture, 43% ash, 1.34-1.50% in sulphur content. Pulverised coal firing boiler design is based on 1500 kcal/kg LHV for units 1-2, 1400 kcal/kg LHV for units 3-4.

We have a rule-of-thumb expectation that an investment should repay itself within next three (or four maximum) years. That may be extended to four years at most in our investment environment.

If you have a thermal power plant with 600 MWe electricity output capacity, at annual 7000 hours of  best average working availability after privatization, at average floating 10 US cents per kwh prevailing electricity market prices, you come up with a figure to earn approximately 350- 400  million US Dollars per year after deducting your coal and operation costs. In 3-4 years of repayment period, that is accumulated to be not less than 900 million US Dollars. This is the gross price of the plant in privatization.

SeyitÖmer plant is built by reputable Western power plant designers (German/ French/ Italian) but they are quite old. First and second units are built by Stein Industrie of France and steam turbines by Franco Tosi of Italy, both completed in 1973. Third unit is built by VKW of Germany, steam turbine by Mitsubishi of Japan, and completed in year 1977. Fourth unit boiler island designed and built by VKW of Germany, steam turbine by BBC and completed in year 1990.

Now we have to deduct necessary rehabilitation expenses from 900 million US Dollar. Necessary rehabilitation expenses should cover expenses to pay 4 (four) 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 available 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 also need to renew boiler pressure tubes, safety valves, soot blowers, coal mills. Units 1-2 are too old, so they need more allowance for rehab cost.

In the end we come up a rough ball-park figure of 200-300 million US Dollars for major rehabilitation after sales. That is to be deducted from the gross price of  900 million 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 retirement. 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. From the past operational records, 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 by owner Turkish Coal Authority to the plant at about average 3.30 US Dollars per million BTU heating capacity. That is a bit expensive price for local lignite reserves. For total 600 MWe electricity generation, you have to pay approximately 140-150 million US Dollars per year for coal supply. 

After privatization of the existing coal reserves, investor should enforce selective mining operation for better coal quality. Investor also evaluate coal drying at natural open air, or in forced drying in the process, to reduce moisture from 34% to 23%, so that LHV of coal can be increased to approximately 3000 kcal per kgLHV, for easier, better and efficient firing in 6 each per boiler pulverized coal burners.

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. There is no ESA agreement. Ownership of Open-pit Coal fields are expected to be transferred to public utility company for easy  fuel purchase procedures. 

There is no treasury guarantee for electricity sales. 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.

There are approximately +1000 employees in the existing plant, which could be reduced to half by employing volunteering retirement plan. Human cost impact of the privatization is that labor force is to be reduced in time. Hiring and firing will be easier. Those senior staff will get retirement. 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 2x150 MWe capacity new coal fired thermal power plant next to existing SeyitÖmer thermal power plant in future. That new investment will also be integrated with the privatization package to encourage and attract more attention to the project. New power plants are to be considered as bonus.

In the end we may find that a proper private ownership may also bring better operation, better rehabilitation, and better environment under strict NGO/ 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 enrichment, better coal firing, and better utilization of available nearby 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. 

Investors can sponsor upgrading of the living standards of the nearby settlement for better public relations. They can also sponsor cultural and historical sites/ activities in nearby ancient sites.

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

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.  US based Bain & Company is also working for tendering new power plants construction in Afsin Elbistan.

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

This article is an independent work which is prepared with the available information as received  during our work at the SeyitÖmer 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,

Haluk Direskeneli, Ankara
based Energy Analyst


Post a Comment

<< Home

Click to join EnergyNewsletterTurkey

Click to join EnergyNewsletterTurkey

Free Blog Counter