VZCZCXRO6565
RR RUEHAST
DE RUEHAK #4379/01 2130733
ZNR UUUUU ZZH
R 010733Z AUG 06
FM AMEMBASSY ANKARA
TO RUEHC/SECSTATE WASHDC 7556
INFO RUCPDOC/USDOC WASHDC
RHEBAAA/DEPARTMENT OF ENERGY WASHDC
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHGB/AMEMBASSY BAGHDAD 0694
RUEHAH/AMEMBASSY ASHGABAT 1905
RUEHTA/AMEMBASSY ALMATY 2221

UNCLAS SECTION 01 OF 03 ANKARA 004379 
 
SIPDIS 
 
USDOE FOR CHARLES WASHINGTON 
USDOC FOR 4212/ITA/MAC/CPD/CRUSNAK 
EXIM FOR PAMELA ROSS AND MARGARET KOSTIC 
OPIC FOR R CORR AND C CHIS 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ENRG EINV EPET BEXP EXIM OPIC TU
SUBJECT:  TURKEY'S LOOMING ELECTRICITY DEFICIT 
 
REF: A: ANKARA 3716 
B: ANKARA 2877 
 
ANKARA 00004379  001.2 OF 003 
 
 
Sensitive But Unclassified.  Please handle accordingly. 
 
¶1.  (SBU) SUMMARY: With growing fears of an electricity supply 
deficit in Turkey before the end of the decade (Ref B), the Turkish 
government has announced plans to move forward more quickly on 
privatization and establishment of an electricity market for pricing 
and settlement.  Meanwhile, long fixed consumer prices have squeezed 
the one significant part of the electricity industry intended to 
react to market signals: those which produce for their own needs and 
sell the excess to the grid ("autoproducers").  The July 1 black out 
has spurred the government to take measures to increase supply, to 
facilitate privatization, and to reform the price system.  End 
Summary. 
 
----------------------------------------- 
Electricity Cut Results from Fixed Prices 
----------------------------------------- 
 
¶2.  (SBU) The power cut that affected 13 provinces in Turkey on July 
1 precipitated serious debate on Turkey's electricity needs and the 
viability of the current pricing system.  Recent developments pushed 
the GOT to revise its supply-demand projections for the 2006-2015 
period and to take measures to keep private generation companies in 
the system.  After keeping prices at the same level for three years, 
the GOT is finally considering price increases in electricity and 
some tax relief measures to support private producers. 
 
¶3.  (SBU) According to Turkish Electricity Transmission Inc.(TEIAS) 
data, Turkey will produce 173.1 billion kWh electricity and consume 
171.4 billion kWh in 2006.  The same data indicates that the Turkish 
state Electricity Generation Inc. (EUAS) plants will produce 38.1%, 
private Build-Operate-Transfer (BOTs) 9.5%, private Build-Operate 
(BOs) 23.8%, and "autoproducers" 11.1% of this total.  Autoproducers 
refer to plants that produce for their own needs - usually for an 
associated factory - and have the right to sell to the grid, but at 
controlled prices.  BO's, BOT's, and autoproducers are mostly 
gas-fired.  (The clean coal-importing Iskenderun BO is the 
exception.)  The Energy Ministry is concerned about increasing 
reliance on imported natural gas (and about two-thirds of this 
coming from Russia). 
 
¶4.  (SBU) The GOT's reluctance to increase electricity prices in the 
last three years, despite the 60% increase in natural gas prices 
during the same period, has brought increasing pressure on 
autoproducers.  The gas-fired BOs and BOTs remained unaffected by 
the natural gas price increases, since they have a pass-through 
arrangement for their cost inputs.  The autoproducers, however, were 
directly affected by the gas price increase, and their profit 
margins shrank to such levels that they were recording losses from 
selling electricity at night time -- when the sales prices are 
lower.  For this reason, the autoproducers had recently been 
shutting down their generation sales activities at night and had 
formally expressed their concerns to the GOT. 
 
¶5.  (SBU) This problem finally hit Turkey badly on Jul 1, when the 
GOT could not get the autoproducers to feed electricity to the grid 
after one of the transformers in Bursa in north-western Turkey 
broke.  The state distribution company TEDAS was unable to provide 
electricity to a total of 13 cities around Bursa for 11 hours that 
night.  The government criticized the companies that refused to 
provide electricity that night, claiming these investments were made 
for public service.  Following these remarks, the Competition 
Authority initiated an investigation into Ak Enerji, Zorlu, Koc, 
Sabanci Energy and the Electricity Producers' Association (EUD), to 
determine whether the companies acted jointly the night of Jul 1. 
Alarko and Ak Enerji announced on Jul 13 that they would stop 
generation in their autoproducer facilities as of the end of July, 
since their cost of production exceeded the sales price.  Newspapers 
reported 7-8 other companies were planning to do the same. 
Reportedly, the companies are looking for ways to import their own 
gas to limit their costs (possible in principle, but difficult in 
practice). 
 
¶6.  (SBU) The GOT is now looking for ways to overcome this growing 
crisis. According to press reports, the Ministry of Energy is 
getting ready to announce price increases in electricity as of 
August.  The Ministry is reportedly planning a 5-15% total increase, 
which it will announce in the coming months.  The GOT is also 
 
ANKARA 00004379  002.2 OF 003 
 
 
working on measures to provide tax relief to producers as a way to 
lessen the shock and political cost of consumer price increases, 
although the IMF program restricts their flexibility in this regard. 
 The Government held summits on July 27 and 31 to consult with 
industry, and the Council of Ministers underscored the government's 
intent to institute a combination of tax relief and electricity 
price increases. 
 
--------------- 
Supply Concerns 
--------------- 
 
¶7.  (SBU) The state electricity transmission company (TEIAS) revised 
its electricity supply-demand projections for the 2006-2015 period, 
moving the forecasted gap forward one year.  According to the base 
scenario, which is based on a 7% annual increase in electricity 
consumption, Turkey will have a 3 billion kWh electricity shortfall 
in early 2009.  In response to the anticipated shortfall, The Energy 
Minister Hilmi Guler has announced plans to add nuclear to the 
energy mix (but these would not come on stream until after 2015 in 
any event), to accelerate plans to privatize some power plants and 
distribution regions - including hydroelectric facilities, and to 
establish a balancing and settlement system to facilitate creation 
of an electricity market. 
 
¶8.  (SBU) The long-delayed launching of privatization of regional 
electricity distribution companies remains "imminent", but continues 
to slip.  The long awaited announcement of the tariff structure, 
accompanied by some adjustment in the boundaries of regions, has 
elicited complaints by a number of companies who have claims arising 
from earlier failed privatization attempts.  American company AES 
and a number of European companies persevere in their interest. 
 
------------------- 
Trouble at the BO's 
------------------- 
 
¶9.  (SBU) While the BOT's have faced threats and calls for 
unilateral price reductions in the past from the GOT, because their 
transactions were structured with higher prices and guarantees (and 
higher returns based on a higher risk environment at the time of the 
deals), they have been quietly producing electricity and have 
recently stayed off the front pages of the press.  It appears that 
the GOT will continue to honor its contracts to purchase electricity 
from these four plants (with some EXIM/OPIC exposure).  Both BOT's 
and BO's prices are adjusted for higher natural gas cost inputs, so 
they are cushioned to some extent, but still rely on payment from 
state entities. 
 
¶10.  (SBU) Recent rulings by the Danistay (Council of State) - 
stemming from long-standing law suits - put the EXIM/OPIC financed 
Izmir power plant at risk of closure.  This 1400 MW gas-fired 
Build-Operate (BO) was built by Enka and U.S. Intergen, but the 
latter sold its interests to Enka.  The Danistay annulled the 
underlying Electricity Sales Agreement (between Enka and TETAS - the 
state electricity trading company) claiming that this was a public 
service concession on which it should have opined.  The GOT 
assiduously worked to overturn and delay implementation of this 
decision, finally passing a new law requiring execution of a new 
Electricity Sales Agreement (ESA) that would be ruled under private 
law, outside of Danistay jurisdiction. 
 
¶11.  (SBU) In response to requests from EXIM and Enka, we gained a 
verbal affirmation from Treasury officials that the existing 
Treasury guarantee will still be operative and honored under a new 
ESA with written affirmation to follow.  (The law specifically says 
this, but the lenders wanted additional comfort and assurance.) 
Enka signed the new ESA on July 25, barely in advance of the 
effective deadline created by the Danistay ruling. 
 
¶12.  (SBU) EXIM and OPIC financed a portfolio of BO power plants 
with original exposure of almost $ 1 billion.  Two other plants - 
Adapazari (Thrace near Istanbul) and Baymina (Ankara) are also at 
risk, but the law suit is less advanced, and the GOT appears willing 
to make a comparable fix to avoid losing these significant sources 
of power for the grid.  Despite these woes, Enka announced in the 
press on August 1 its intent to build another gas-fired power plant 
in the northwest, but without providing details on the financing 
structure. 
 
------- 
 
ANKARA 00004379  003.2 OF 003 
 
 
Comment 
------- 
 
¶13.  (SBU) Companies and Government Officials remain frustrated by 
the still under-developed energy market in Turkey (electricity and 
natural gas).  The regulator EMRA is still waiting for a functioning 
market based on price signals to oversee, which exacerbates turf 
fighting between EMRA and the Energy Ministry.  The relatively small 
corporate autoproducer segment - which was the core of a potential 
market-based component - has been squeezed between free cost and 
wholesale prices but fixed retail prices (alarmingly reminiscent of 
the crisis in California earlier in this decade).  The supply 
shortage is now foreseen to be coming sooner than the time required 
for permitting, financing, and building power plants, so it looks 
like Turkey may face more black-outs.  Moreover, Turkey's neighbors 
do not have excess capacity and it is not economic for Turkey to 
transmit electricity from its east to its major markets in the west. 
 Turkey's small but important exports to Iraq (Ref A) may be put at 
risk if domestic supply cannot meet demand.  The perception of near 
crisis and risk of more black-outs may force Turkey to finally take 
measures needed to stimulate needed investment.  On the other hand, 
the under-developed nature of Turkey's electricity market and the 
related political challenges are symbolized by the fact that it is 
the Government cabinet which sets electricity prices. 
 
McEldowney