HOPES AND FEARS IN TURKEY' ELECTRICITY SECTOR

UNCLAS SECTION 01 OF 03 ANKARA 002877

SIPDIS

USDOE FOR CHARLES WASHINGTON
USDOC FOR 4212/ITA/MAC/CPD/CRUSNAK
EXIM FOR PAMELA ROSS AND MARGARET KOSTIC
OPIC FR R CORR AND C CHIS

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ENRG EINV BEXP EXIMOPIC TU
SUBJECT: HOPES AND FEARS IN TURKEY' ELECTRICITY SECTOR

REFS: A) ANKARA 2143
B) 05 ANKARA 4786
C) 05 ANKARA 3223
D) 05 ANKARA 886

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Sensitive But Unclassified. Please handle accordingly.


1. (SBU) SUMMARY: With growing fears of an electricity
supply deficit in Turkey by the end of the decade, the
Turkish government has announced plans to add nuclear power
to its energy mix and the private sector is calling for
greater clarity on the investment framework. While the U.S.
firm AES remains interested in the electricity distribution
privatization, the government and judiciary continue to
grapple with existing, politically-charged BOT and BO models
that provide a significant portion of electricity, but are
perceived as locked into high prices. Despite the
controversy, the government is expected to continue to honor
its contracts for purchase of electricity from BOT and other
power plants. End Summary.

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Electricity Shortfall Looms
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2. (SBU) There is a growing recognition of an electricity
shortfall in 2008-10, but the Turkish government has not
come up with a serious action plan to grapple with this.
Energy Ministry base case projections show a gap of 10,000
megawatts in 2009. While Turkey has announced its decision
to add nuclear power to its energy mix, this will be over a
longer time frame and difficult to achieve. Both the public
and private sectors are frustrated that the 2001 Electricity
Market Law and associated Electricity Strategy Paper have
not resulted in more investment from the private sector in
the electricity sector as time runs short to put in place
new investment in production capacity to meet the imminent
shortfall.


3. (SBU) At a recent energy conference in Istanbul,
officials lamented that Turkey had not yet achieved an
active energy market and officials were still grappling with
assuring security of supply (like their counterparts in the
EU). Public sector participants expressed frustration with
meager investment results in the energy sector, pointing out
that the Electricity Market Law requires investment to come
from the private sector.
Private sector participants expressed frustration with slow
progress on needed legislative and regulatory steps that
would facilitate investment in the energy sector.
Especially with respect to nuclear power, there was clamor
for a greater role and commitment from the public sector.


4. (SBU) Electricity distribution (now carried out by state
company TEDAS) was identified in the Electricity Strategy
Paper as the first privatization step. Although this is now
delayed by over one year, the U.S. firm AES has been
persistent in its interest, but to date has been unable to
review associated contracts and is concerned that key
international arbitration clauses may not be present in the
privatization documents (Ref C). Underlying legislation to
facilitate privatization was long delayed, partly because
some politicians sought to attach measures related to
electricity exports to Iraq and controversial BOT power
plants. A number of relevant amendments were adopted on May
10 intended to facilitate privatization of distribution, and
generally not including the other issues. Once the
legislation is in place, Privatization Administration
officials express optimism for sequential tendering of
twenty regional distribution entities.


5. (SBU) The intent of the 2001 Electricity Strategy Paper
was to establish market transactions with the distribution
company and then to embark on privatization of six mixed
portfolios of production facilities (EUAS),but this too has
been delayed. The Energy Market Regulatory Authority (EMRA)
has been stymied in its efforts, partly because the state is
still the main actor in the rudimentary electricity market.
The GOT will remain the main owner-developer of large
hydroelectric facilities, but the status of bilateral
protocols for medium-sized hydro facilities, including one

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with the U.S., remains unclear. EMRA has been moving slowly
on licensing small hydro facilities that take advantage of
incentives under the Renewable Energy Law. Despite the
GOT's intent to promote domestic resources for generation, a
recent Council of State (Danistay) ruling stalled progress.
The Danistay ruling found that EMRA was not empowered by law
to hold tenders for granting generation licenses, preventing
EMRA from selecting one of several companies when all were
interested in one specific project. The ruling also had a
negative effect on investors who already received a license
and started construction, because the legal ground for their
license has been put in question. The first significant
wind based facility recently opened in Bandirma - with GE
wind turbines.

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Nuclear Quest
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6. (SBU) The GOT has announced its intent to use a yet-to-
be-defined public-private partnership model to put in place
5000 MW of nuclear power capacity, starting with a small
pilot facility in Sinop Province on the Black Sea (Ref A).
At the same energy conference, there was a lively debate of
this decision. Many speakers applauded the decision to
diversify Turkey's energy mix as necessary given high
dependence on energy imports, in particular natural gas
(from Russia and Iran),and supported the GOT's intent to
use more indigenous resources (coal and hydroelectric).
Other speakers questioned the timing and ability to finance
these large investments, not to mention the need to
safeguard and store nuclear waste. Environmental activists
recently organized a 10,000-strong protest against the
nuclear power plans in Sinop to mark the twenty-year
anniversary of Chernobyl. (Note: We understand that GE and
Westinghouse/Toshiba are interested in providing new nuclear
technology to Turkey, but many interlocutors view the lack
of progress from the U.S. on ratification of the Cooperation
on Peaceful Uses of Nuclear Power Agreement as an obstacle.
End Note.)

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BOT Blues
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7. (SBU) The portfolio of four BOT (Build-Operate-Transfer)
plants which provide high-priced electricity (about 11% of
Turkey's total generation capacity) has long been a
politically-charged issue for GOT. It continues to appear
that - despite a policy of calls for unilateral price
reduction over the years and inspection and enforcement,
which borders on harassment - the GOT will continue to honor
its contracts (Ref D). Over the last year, the Energy
Ministry has met individually with BOT owner-operators to
apply pressure for price reductions. One local company,
Colakoglu, reportedly agreed to a reduction (but as part of
a diverse energy portfolio in Turkey). A Trakya
(Enron/Prisma with USG EXIM exposure) rep told Econ
Specialist that the company had made an offer in response to
an earlier request from the Ministry for a tariff reduction.
Although the GOT did not give a reaction or answer to date,
the Trakya rep thought the Ministry remained unsatisfied by
the company's offer. Trakya said that it was constrained in
what it could offer - given lenders' needs and the fact that
Trakya had only a single asset in Turkey. Another BOT
facility with EXIM exposure, Doga Enerji, has felt
comparable pressure from the MENR to unilaterally reduce
prices.

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Other Models also under Threat
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8. (SBU) Surprise rulings from the Council of State
(Danistay) over recent months (REF B) have put temporary
"stay's" on a number of Build-Operate (BO) gas-fired plants,
which are major providers of electricity in Turkey (Izmir
and Adapazari). A number of these rulings have affected
ENKA, which bought out U.S. Intergen (although EXIM/OPIC
exposure remains). An ENKA rep told Energy Officer that
ENKA gained a temporary blocking measure from the Council of

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Ministers and noted that it held a Treasury guarantee for
their payments. Many interlocutors scratch their heads at
the contrarian Danistay ruling (finding that the facility
agreements constitute a concession which requires Danistay
approval),and conclude that it adds to uncertainty in
Turkey's energy investment environment.

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Comment
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9. (SBU) Over the years the GOT has cancelled a number of
BOT's and Transfer-of-Operating-Rights (TOR) contracts -
some of which are in arbitration, adding to investment
environment uncertainty. TOR is the practical model of
choice for the electricity distribution privatization, as
opposed to outright asset sale, which could face
constitutional challenges in the courts. Adding to investor
concern is a perception of late payments from the GOT for
electricity and/or -last year- some reductions in off-take
from BO facilities, even though this is guaranteed from the
GOT as a take or pay obligation. Finally, a number of
plants, primarily corporate "self producers" were subject to
reductions during the cut-off of gas from Iran last winter.
Among these corporates is the Turkish conglomerate Zorlu, to
whom Exim has exposure. The Energy Ministry and EMRA are
not viewed as strong institutions with strong leadership by
our interlocutors and the courts add to uncertainty and
antagonism in the energy environment. While the GOT seems
likely to honor existing contracts, Turkey will continue to
struggle with how to deal with a looming electricity
shortfall. A growing perception of electricity supply
crisis could prompt the GOT to step in with new incentives,
adding to the patchwork of old and new models in place in
the sector.

Wilson