Privatization of the Turkish Electricity Distribution Companies

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Industries Energy, Utilities & Mining Sector

Privatization of the Turkish Electricity Distribution Companies

Table of Contents 01

02 Executive Summary 03 General Outlook to Privatization 05 The Turkish Electricity Market 14 TEDAfi 17 Privatization of the Electricity Distribution Companies 27 Appendix 1: Electricity sector strategy paper 28 Appendix 2: Cost-Based Pricing Mechanism 29 Appendix 3: Amendment Proposal to the Law no. 4628 30 Abbrevations 31 List of Tables and Exhibits 32 References 33 Contacts

02 Executive Summary

Growing need for energy mainly driven by increasing level of urbanization and industrialization, coupled with the fiscal imperatives of the state urged the governments to take concrete actions to involve the private sector in energy infrastructure projects by the early 1980s. However, the lack of legal and regulatory framework underlying a consistent reform strategy stalled the private sector involvement in the power industry projects. Indeed the subsequent legal disputes resulted in an overall negative impression of the investment climate in Turkey. Based on the lessons learned over the last 25 years, a more structured transformation process is in the making. Indeed the enactment of the Electricity Market Law no. 4628 in 2001 and the establishment of the Energy Market Regulatory Authority (EMRA) stand as vital steps in the right direction, with the basic goal to devise a competitive framework in the market by establishing pricing mechanisms that reflected the actual cost of the service in such a way as to minimize the market-related role of the state-owned entities. In line with the 2004 Strategy Paper depicting the roadmap for the liberalization process in the Turkish Electricity Market, the first round of privatization comprising three distribution companies, namely BASKENT, SEDAS and AYEDAS, was set to have been finalized by March 2007. However, the aforementioned tenders were rendered defunct and delayed for an indefinite schedule just before the tender date. Apart from constituting a vital criterion for the EU membership process, the grim truth of looming power shortages from 2009 urged the Turkish government to take serious actions by the beginning of this year. For the first time since 2003, the regulated electricity tariff substantially increased in January 2008, albeit still falling short of covering the spiraling natural gas costs. Then, a small portion of 141 MW in the EUAS portfolio was privatized in February 2008, the highest bid of US$510mn for which was submitted by the Zorlu Enerji. The third step in row has been the launch of the “competition” for the construction and operation of the country's first nuclear power plant, scheduled to take place on September, 24 2008. Underlying all the sectoral developments are the amendments to the Electricity Market Law no.4628, which are still being negotiated by the sub-committees of the Turkish Parliament. And now, the latest link to action chain is the resumption of the defunct tender processes for the electricity distribution companies, in two consecutive phases:

1. Resumption of the tenders for BASKENT and SEDAS with the already pre-qualified bidders 2. Initiation of new tenders for MERAM and ARAS To support this privatization current by dissipating the concerns regarding the pricing structure for the rest of the Transition Period until 31.12.2010, a recent decision by the High Planning Council entails a Cost-Based Pricing Mechanism (CBPM) to be implemented by the state economic enterprises (SEEs) operating in the energy sector as of 1 July 2008. The current sequencing of privatization in the industry - which gives equal priority to distribution assets, is considered productive, depending on the fact that most efficiency gains from privatization are expected to be achieved by the privatization of potentially competitive segments of the industry, rather than by the privatization of natural monopoly segments. The...
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