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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
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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.
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Electricity Shortfall Looms
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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."
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Frustration from the Regulator
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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.
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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.
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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
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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