Energy Market Dynamics

Dear Readers,

The Soma mine disaster which took place on the 13^th of May, 2014 resulted in the highest loss of human life caused by a man-made structure in the last 40-years globally. It is for sure that the accident occurred due to poor safety measures and priority being given to coal production rather than the safety norms which are to be upgraded to the level of world standards. The Soma disaster stemmed from imprudence.

Your writer believes that local coal is the solution to the ever increasing energy demand within the local market. The high quality coal produced from underground mining is not burned in our local thermal power plants. This rich coal is used in industry, mainly in iron and steel mills. Our local thermal power plants use the nearby open-pit poor quality lignite, sometimes called brown coal, which cannot be utilized elsewhere.

Coal is accused of being the "death trap" of energy sources and we receive many evaluations that we should move away from coal to other sources. This is incorrect. Local coal is a blessing for this country that can be utilized to free ourselves from imported fuel coal-gas, to reduce current account deficiencies (CAD), and to increase supply security. Hydro, wind, and solar energies are not alternatives but supplemental sources of energy generation.

Today, we will cover the latest developments in the local electricity market.

In the year 2002, with an amendment to the energy law, political authorities chose to reduce the role of public enterprises in energy generation. Preference was given to the private sector in investing and building new power plants. Nowadays, we cannot say that we have created a free market in the energy sector, but we can observe that a certain level of transition has been reached.

In the market liberalization process regarding the use of natural gas in the electricity market, our national pipeline company signed its first purchase agreement for the sale and purchase of gas with Russia’s energy giant, Gasprom, in 1984.

Later, a LNG purchase agreement was signed with Algeria. In the following years, public and private companies made several gas purchase agreements that contributed to the expanded volume of gas use in the local market for household heating as well as electricity generation.

In 1984, the first step taken towards market liberalization of the electricity market was the division of the public energy enterprise into firms responsible for generation (TEAS) and distribution (TEDAS).

In 1994, we had power plant investments in accordance with the Build- Operate- Transfer (BOT) model. Similarly, we initiated the installation of new power plants based on the Build-Own- Operate (BOO) model.

EMRA (the Energy Markets Regulatory Agency) was established in 2001 and TEAS was divided into three companies, namely, EÜAŞ (generation), TEİAŞ (transmission), and TETAŞ (trade). We have created a "free consumer" concept, emphasizing the right of the consumer to choose an electricity supplier that suits his or her requirements.

The financial settlement method finished in 2003 and after the 2006 crisis we employed the electricity balancing and settlement regulation method. Later, in 2010, hourly day-ahead market planning was implemented to enable the smooth transition to free market pricing.

We had previously experienced a shortage of outsourced natural gas in the cold winter months and faced price hikes, trapped without the capability to negotiate.

Problems with the "intraday market" will be overcome through the pushing forward of the transition to this market. Preliminary work has been completed on the intraday market through the new entity EPİAŞ, and progress will be furthered by the end of 2014 as planned.

Our total installed energy generation capacity output has reached about 65,000 MW within the last 10 years, increasing three-fold from earlier times. The private sector now holds a larger share of electricity generation than the public sector.

The total installed capacity of natural gas-fired combined cycle power plants (CCPPs) and imported coal-fired conventional power plants has also begun to hold an important share. The purchase agreements of natural gas-fired CCPPs which were built according to BOO and BOT contracts will come to an end, and then we expect to see new movement in the markets.

With the increasing number of wind power plant installations, Turkey now ranks 10^th in Europe in terms of installed wind power. By 2023, we have a target to reach an installed wind electricity capacity of 20,000 MW which is unlikely to be attained. We hope that by accelerating the regulation process of licensing and issuance of new wind energy permits, we can increase wind power generation. Moreover, wind and solar power companies will be able to generate additional income through carbon markets.

Turkey's energy consumption has increased by 7% annually over the last 10 years, hence the doubling of its output capacity. Investors have gained market experience with regards to the growth forecasts which are very important in initiating new investments. BOO and BOT power plants continue to have long-term power purchase agreements for the sale of electricity to the public trading company (TETAŞ). EÜAŞ (the public generation company) and other free power generation companies have bilateral agreements through which energy can be sold to consumers on the spot market. The public trade company (TETAŞ) sells electricity, based on national tariffs, to distribution and retail companies which in turn sell to end consumers.

Electricity produced from renewable energy sources have guaranteed purchase prices which can be sold to retail companies at a premium price. Available electricity in the local market is sold on the ‘day-ahead market’ according to ‘balancing power market’ procedures. Currently, the balancing market has a lack of transparency/openness, as seen in the observation that the existing structure is amenable to manipulation.

In the years to come, however, market shares of EÜAŞ and TETAŞ will decrease as will those of the BOO and BOT power plants, thus allowing different players in the market to maneuver in a more free and competitive structure.

We expect a more transparent structure will be achieved with the help of the Istanbul Stock Exchange, along with its private partnership with EPİAŞ (public), the intraday market, and integration of financial markets.

In Turkey there is also an Over the Counter (OTC) market, a bilateral contract market that works in a more limited capacity and for shorter periods of time. Here, agreements are subject to stamp duty, there are a smaller number of participants, and intermediaries are unique. In the coming years we hope to increase the number of both exhibitors and intermediaries.

In our country, we have a narrow trade volume in the "energy exchange" market. We hope that the Istanbul Stock Exchange will produce a higher volume of energy transactions and expect it to be an active market in future. There are 21 active electricity distribution companies which are expected to be transferred during the retail sales process. Instead of operating with the current national tariff that varies according to the supply point, we hope to adopt a regional price method which would be aimed at resetting the eligible consumer limit to zero.

In the natural gas market, we have a state monopoly on imports, transmission, and marketing that is completely controlled by BOTAŞ. Similar to the unbundling seen in the electricity market, we expect the same in the natural gas market. Most importation is carried out solely by BOTAŞ, yet its market share should decrease in the coming years.

We have been experiencing difficulties due to the low level of supply security of natural gas reserves. In order to have better supply security, our public authorities have introduced an investment plan for new pipelines from northern Iraq, expressed interest in the new offshore gas reserves of Israel/Cyprus, introduced a new LNG terminal in Izmir, increased the capacity of gas fields in northern Marmara, and invested in the exploration of underground gas reserves at Salt Lake (Tuz Gölü).

Our electricity market operates based on a cost-based bidding procedure that is determined by the price of each participant's hourly basic energy input. Via bilateral agreements or YEKDEM (the renewable energy incentive procedure), the electrical energy generated is transferred to the system.

Private plants do not bid in the balancing market, but they do declare estimated production and energy amounts that they are transmitting to the system. According to the total amount of the bids received and the total production demand, forecasts are made at the point when the marginal price the-day-before is decided upon.

The final price for the end consumer is then finalized by taking into consideration the cost of lost and stolen energy, distribution costs, delivery costs, TRT’s (Turkish Radio Television) share, meter reading costs, value added tax, and additional fees such as energy consumption taxes. The fact that TRT receives a share still faces ongoing criticisms. Right now the priority in electricity trading is production optimization and fuel supply security.

In which market the electricity will be sold, at what price, and at what time interval, are the big questions following supply security. The consumption portfolio should be kept broad, same with the production portfolio, and their availabilities should exhibit sufficient flexibility.

In short-term planning, demand forecasting and plant reliability have been gaining importance. In medium-term planning, lasting profitability analysis of the bilateral agreements ought to be in included in the realization of those demand forecasts. In long-term planning, investment objectives should also incorporate the determined final amount of consumer demand.

The number of supply companies in Turkey is far too high, especially considering how essential the amount of companies active in a competitive market is. Compared with samples of the number of suppliers in Europe, we observe that the smaller the number of operations, the better it is for a healthier market.

We hope that this number will decrease over time and that in the long-term, the purchase contracts of EÜAŞ and TETAŞ will come to an end, tariffs will be lifted, EMRA's market share will be reduced, and that retail players will have more freedom to establish dominant positions in the competitive market of the future. In this way, end users will hopefully receive cheaper and more reliable electricity as well. Ankara, 15 June, 2014

Haluk Direskeneli, is a graduate of METU Mechanical Engineering department (1973). He worked in public and, private enterprises, USA Turkish JV companies (B&W, CSWI, AEP, Entergy), in fabrication, basic and detail design, marketing, sales and project management of thermal power plants. He is currently working as a freelance consultant/ energy analyst with thermal power plants basic/ detail design software expertise for private engineering companies, investors, universities and research institutions. He is a member of METU Alumni and the Chamber of Turkish Mechanical Engineers Energy Working Group.

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