TURKEY HOPES FOR INCREASED EXPORT OF ELECTRICITY

UNCLAS SECTION 01 OF 02 ANKARA 003263 SIPDIS SENSITIVE E.O. 12958: N/A TAGS: ENRG EPET ETRD IZ TU SUBJECT: TURKEY HOPES FOR INCREASED EXPORT OF ELECTRICITY TO IRAQ, BUT OBSTACLES REMAIN REF: A. BAGHDAD 2298 ¶B. ANKARA 2803 ¶C. ANKARA 1003 ¶D. ANKARA 246 ¶1. (SBU) SUMMARY: Working to build on agreements between the Iraqi and Turkish Governments to increase electricity exports from Turkey to Iraq from current 150 MW to as much as 1200 MW (reftels),Turkish Company Kartet/Karadeniz is eager to fulfill this opportunity, but many obstacles remain: Turkish regulatory approval, building transmission capacity on both sides of the border, securing financing mechanisms in Iraq, and provisioning fuel oil in Iraq. The Turkish energy regulatory body is likely to give permission to double the license to use existing transmission capacity for 300 MW, but will likely insist on opening up additional capacity for competitive tenders. End Summary. ¶2. (SBU) In a June 3 conversation with Energy Officer, Turkish company Kartet representative Orhan Karadeniz expressed optimism for being able to increase electricity exports to Iraq from Turkey, but criticized the Turkish energy regulatory body (EMRA) as an obstacle. He said that the Iraqi (ITG) and Turkish governments (PM, MFA and Energy Ministry) were very supportive, stemming from recent bilateral meetings (reftels). Karadeniz said that EMRA was likely to renew Kartet's current license allowing a doubling of exports to 300 MW to fully utilize existing transmission capacity for export from Silopi to Northern Iraq and to help Iraq meet its August peak demand this year. (Indeed, MFA told us on June 6 that exports could reach 300 MW this week.) However, Karadeniz listed a number of obstacles to increasing capacity to 1200 MW by August 2006 as targeted in the bilateral meetings: -EMRA appeared unwilling to grant a license for increased capacity to 1200 MW. Karadeniz claimed that EMRA had no technical, legal, or administative grounds for this position, given Karadeniz's exclusive deal with the Government of Iraq (dating from September 2003 with the CPA and IGC). Karadeniz said that the Turkish production company EUAS had excess capacity of over 3000 MW. He also said that Kartet had paid past claims to the Turkish electricity trading company TETAS, but was now making the case that these claims were excessive charges for previous purchases of electricity off the grid. -The original deal was based on provisioning of fuel oil from the Bayji refinery in Iraq as partial payment for the electricity, but this has never been available for security, administrative, and/or financial reasons. This was also an obstacle to the smaller increase. -While Karadeniz has offered to make the investment for increased transmission capacity on the Turkish side, the ITG has agreed to finance the investment on the Iraqi side. However, the Iraqi government has requested that Karadeniz carry out the construction on both sides and accept payment from Iraq, introducing payment risk to Karadeniz. -Karadeniz has required the ITG to provide a bank guarantee for the first year of the five year take or pay contract for the 1200 MW transaction. He said that this bank guarantee could only be provided with cash collateral in the current financial system in Iraq, which was a prohibitive cost. ¶3. (SBU) Ministry of Energy Under Secretary Sami Demirbilek told us that it was likely that EMRA would renew the Karadeniz license for 300 MW capacity as supported by the GOT. He expressed frustration with the rigid stance of EMRA, which he felt went beyond its regulatory purview. He noted the full support of the government and the extra capacity available at EUAS, so he said everyone would be better off allowing Karadeniz to implement the deal. ¶4. (SBU) However, EMRA representative Murat Erenel told Energy Officer that there was interest from about 15 Turkish companies, including major domestic companies such as Sabanci, Koc, Ak Enerji, and Zorlu, to provide the additional electricity wholesale exporting capacity. Therefore, he said that EMRA had to support nondiscrimination and third party access to the grid, and thus had to support a competitive auction to increase export capacity from 300 MW to 1200 MW. Erenel has expressed concern in the past about what he termed the "special" deal between Kartet and the Ministry of Energy (Ankara reftels). ¶5. (SBU) Comment: The embattled EMRA has been engaged in a bitter inter-agency dogfight with the Ministry of Energy and the rest of the government over its independence and the Kartet electricity export to Iraq deal has fallen into this fight. Embassy has reminded Karadeniz repeatedly that it must work with the regulatory authority to purchase and export electricity off the grid. ¶6. (U) Iraq REOs Minimize Considered MOORE