VZCZCXRO5449
RR RUEHAG RUEHAST RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA
RUEHLN RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHAK #0676/01 0851328
ZNR UUUUU ZZH
R 261328Z MAR 07
FM AMEMBASSY ANKARA
TO RUEHC/SECSTATE WASHDC 1450
INFO RUCPDOC/USDOC WASHDC
RHEBAAA/DEPARTMENT OF ENERGY WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUCNCIS/CIS COLLECTIVE
RUEHGB/AMEMBASSY BAGHDAD 0917
RUEHAH/AMEMBASSY ASHGABAT 1932
RUEHTA/AMEMBASSY ASTANA 0005

UNCLAS SECTION 01 OF 03 ANKARA 000676 
 
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 BEXP TU
SUBJECT:  TURKEY'S ELECTRICITY SECTOR: ANGST AND 
OPPORTUNITY 
 
REF: A) ANKARA 41 
 
B) 06 ANKARA 6380 
C) 06 ANKARA 5455 
D) 06 ANKARA 4379 
 
Sensitive But Unclassified.  Please handle accordingly. 
 
¶1.  (SBU) SUMMARY: Turkey's long anticipated 
electricity shortage is at hand.  The government's slow 
progress on liberalization, market pricing, rule- 
making, and privatization have led to failure to 
deliver new investment, so the government is already 
confronted with managing electricity supply gaps.  The 
private sector is disappointed by the delay in the 
electricity distribution privatization (reftels), but 
interested in the potential nuclear program.  One 
Turkish company, Park Holding -- rather 
unrealistically, without specification on government 
purchase guarantees -- has already bid for a nuclear 
license.  End Summary. 
 
--------------------------- 
Electricity Shortfall Looms 
--------------------------- 
 
¶2.  (SBU) At A March 8-9 energy conference in Istanbul, 
company executives were excited about opportunities in 
Turkey's energy sector, tempered by angst and 
frustration about slow progress on liberalization and 
attracting investment. In his opening speech, Energy 
Market Regulatory Agency President Yusuf Gunay, called 
for more progress on attracting investment and 
privatization of electricity infrastructure.  Noting 
the risk of a California-style crisis and heightened 
risk of black-outs, he called for liberalization of 
prices and establishment of a real energy market. 
Gunay admitted that establishment of the "Balance and 
Reconciliation" system for marginal prices was a good 
start.  He cautioned that the public should not expect 
price decreases to the consumer. 
 
¶3.  (SBU) In his comments, Energy Minister Hilmi Guler 
stressed the indispensability of Turkey's unique 
geography in serving as an energy corridor and 
terminal.  He and others spoke out in support of the 
new petroleum law (partially vetoed by President Sezer 
and under study at the parliament) to attract upstream 
foreign investment and supported diversifying Turkey's 
energy mix by increasing use of coal, hydroelectric, 
and other renewable energy, as well as launching the 
new nuclear program.  (Note: the President recently 
partially vetoed the new Energy Efficiency law.) 
Pointing to the lack of progress, Dogan Holding 
Director Yahya Uzdiyen said, "I have attended this 
conference for six years, but in recent years, there is 
no progress; we are talking about the same things." 
 
------------------------------ 
Frustration from the Regulator 
------------------------------ 
 
¶4.  (SBU) In a separate meeting, Energy Market 
Regulatory Agency (EMRA) President Yusuf Gunay defended 
his record at the five-year old regulator, but lamented 
lack of political will elsewhere in the government to 
fulfill the goals of a liberal market articulated in 
the energy market law and electricity strategy paper. 
He lauded progress on areas under EMRA's control: 
licensing hydroelectric and wind licenses, as well as 
awarding delivery of natural gas distribution in over 
forty municipalities.  Gunay regretted that 
privatization of electricity distribution (postponed) 
and generation (delayed) as well as realization of all 
aspects of a liberal electricity market were not under 
EMRA's control.  He criticized the government for still 
being too present with a heavy hand in the sector, not 
letting go its historical function as contractor, 
buyer, and seller in the market.  Gunay also criticized 
 
ANKARA 00000676  002 OF 003 
 
 
the World Bank in acquiescing in allowing delays in 
privatization and liberalization.  Gunay pointed out 
that these delays were hurting the investment 
environment and Turkey's anticipated electricity 
shortage had already come to pass.  He referred to a 
significant black-out last summer and anticipated more 
in the coming summer (reftels).  Gunay asserted that at 
times this winter, Turkey has not been able to satisfy 
demand.  Gunay will step down as EMRA President in 
November. 
 
¶5.  (SBU) Meanwhile, there are already signs of Gunay's 
sobering prediction coming to pass.  Major electricity 
supplier ENKA's Ankara rep confirmed to us that the 
Energy Ministry recently had to orchestrate rolling 
cut-offs of some 1,000 MW to some industrial customers 
in order to make supply meet demand.  The Enka rep 
complained that the electricity distribution 
"postponement" will be a big negative for attracting 
investment in the electricity sector, including 
generation and the proposed nuclear plants. 
 
----------------------------------- 
Electricity Prices an Issue for IMF 
----------------------------------- 
 
¶6. (SBU) Another obstacle to sufficient investor 
confidence in the electricity sector is the GOT's long 
unwillingness to allow market pricing.  In the absence 
of price increases -- and private sector confidence 
that price-setting will be divorced from political 
considerations -- the post-election privatization of 
the electricity distribution companies will be far less 
attractive to bidders, nor will the sector attract the 
needed private investment to expand generation 
capacity.  The Government's putting off of needed 
electricity price increases has emerged as the single 
most contentious issue in the IMF stand-by program.  A 
recent IMF mission reached broad agreement in every 
other area but left town March 21 without a deal on the 
finances of state-owned energy companies.  Absent 
electricity price increases, the IMF expects these 
companies to show losses that will make it harder for 
the Government to meet its fiscal target.  In the 
election year context, the Government is digging in its 
heels against price increases, preferring to look for 
spending cuts at the state companies or, if necessary, 
elsewhere in the public sector.  At the same time, the 
IMF is pushing for a longer-term structural fix to the 
politicization of electricity pricing policy. 
 
-------------- 
Nuclear Dreams 
-------------- 
 
¶7.  (SBU) The GOT's decision to seek to add nuclear to 
its energy mix is a longer term ambition, but the GOT 
hopes to attract investors soon.  Turkish Press 
reported that Ciner Group's Park Holding applied for a 
nuclear power generation license with the Energy Market 
Regulatory Authority and the Turkish Atomic Energy 
Authority on March 15.  This is the first official 
application made by a private company, although the 
domestic private sector participated in a number of 
meetings with the GOT on possible models that could be 
used in establishing nuclear power plants.  Park 
Energy's application was remarkable in that it was not 
predicated on any state guarantees in building the 
plant or in purchasing the electricity.  Moreover, the 
GOT has not yet established the underlying legislation 
and regulation for the proposed nuclear sector.  Zorlu 
is another prominent Turkish energy company which has 
expressed serious interest in Turkey's nuclear quest. 
A number of international companies are reported to be 
watching closely. 
 
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Comment 
 
ANKARA 00000676  003 OF 003 
 
 
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¶8. (SBU) While we promote Turkey's contribution to a 
"southern gas corridor", it is important to remember 
that Turkey faces looming domestic problems with 
respect to electricity supply, reliance on expensive 
energy imports, BOTAS' financial woes, and potential 
gaps in natural gas supply.  Turkey's political 
calendar is heating up with Presidential elections this 
spring and parliamentary elections this autumn, so this 
will make it doubly difficult to make hard decisions on 
sensitive issues like energy pricing and foreign 
investment.  Electricity shortage in Turkey may also 
make it more difficult to implement the proposed 
increase in electricity exports from the national grid 
to northern Iraq. 
 
McEldowney