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Turkey’s energy miscalculations have hefty cost

More than a third of Turkey’s installed power capacity remains idle after an ill-calculated rush for energy that has had a hefty financial and environmental cost.
A general view of Ambarli gas-fired power station in Istanbul January 8, 2009. Production at three Turkish power stations has been halted as a Russia-Ukraine gas row had led to a shortage of gas supplies to Turkey, an Energy Ministry source told Reuters on Thursday, but this would not create a power supply problem, he said. On Tuesday Russian gas supplies coming via Ukraine to Turkey were completely cut, although some supplies are still coming via a pipeline which passes directly from Russia under the Black

After a drastic expansion in recent years, Turkey’s power-producing sector is in dire straits, hit by a falling energy demand in the ailing economy. Atop the financial woes, the rush for energy — driven by overly optimistic projections on economic growth — has left major environmental scars, with numerous hydropower projects wreaking havoc on river basins, and coal plants operating without filters have come to threaten human health. The toll also includes historical and cultural heritage such as the unique town of Hasankeyf, which is now submerged due to a large dam on the Tigris River.

Turkey, whose gross domestic product is in the region of $750 billion-$800 billion, has an energy consumption of about 145 million TOE (ton of oil equivalent) per year. Three-fourths of the country’s energy needs are met through imports, the bill of which has fluctuated around $43 billion in recent years, depending on the pace of economic growth and global energy prices. Energy products account for more than 20% of Turkey’s imports, with Russia and Iran standing out as the country’s main suppliers of natural gas and oil. 

Nearly a fourth of Turkey’s import-reliant energy consumption goes to power production. Gas-fueled plants have the largest share, contributing about 30% of the total electricity output. 

To reduce its reliance on imports, Turkey aims at energy conservation in all realms, especially in industry, the transport sector and households. Therefore, it wants to boost its power production while gradually reducing the use of imported resources and increasing that of domestic ones, including water, coal and renewable sources such as wind and sunlight, which currently account for about 15% of power production. 

The power generation and distribution industry, dominated by public enterprises until the 1990s, saw an extensive privatization drive after the Justice and Development Party (AKP) came to power in 2002. At present, the public share is 21% in terms of installed power capacity and about 15% in terms of actual production. 

The supremacy of the private sector owes not only to the privatizations but also to the new power plants that have mushroomed across the country. The building spree has been so dizzying that Turkey has ended up with huge investments that dwarf its energy demand, which, as it turns out, leaves more than a third of the installed capacity idle. On top of it, the companies are now saddled with costly foreign debt, owing to the loans they lavishly used to build the plants.

The investment redundancy owes to bold growth projections and corresponding estimations on energy needs. The AKP government had set rather ambitious growth targets in the 2007-2013 period, averaging 7% per year, but the outcome was only about 5% per year. Similarly, the 2014-2018 period saw an average growth rate of 4.9% per year, falling short of the 5.5% target. 

Turkey today has an installed power capacity of 90,000 megawatts, but actual production accounts to only 65% of the capacity. Moreover, the dramatic depreciation of the Turkish lira since last year has meant a big cost increase for the investors, who used mainly foreign currency loans to build the plants. 

Ahmet Eren, the head of Eren Holding, a major investor in the energy sector, offers the following account on what went wrong: “First, when licensing the investments, the government had to follow a microplan and make adjustments according to needs. Second, the banks had to make the same considerations when issuing us the loans. And on our part, we failed to make accurate forecasts. The abundance of loans emboldened us. And now, there is a surplus. How long will it take to deplete the surplus? No doubt, it will take four or five years. Companies are incapable of new investments anyway.” 

Birol Erguven, the CEO of the energy branch of Limak Holding, another heavyweight in the sector, concedes that misguided projections are at the core of the problem, with the electricity demand falling behind the steady increase in supply. As a result, prices remain low, having an adverse impact on the investments, he argued. According to Erguven, a solution should be sought jointly by companies, policymakers and banks. 

Loans to the electricity sector total about 200 billion Turkish liras ($34 billion), according to September figures by the Banks Association of Turkey. The rate of nonperforming loans has reached as much as 7%. 

Along with the construction sector, where bad loans are also rife, the energy sector has received various forms of support, including loan restructuring by banks and certain government incentives. But just as in the case of some construction firms, some energy companies are reportedly expecting an outright lifesaver from the country’s sovereign wealth fund, which is run by President Recep Tayyip Erdogan and Finance Minister Berat Albayrak, the president’s son-in-law. 

Kalyon Energy is said to be the first company in which the fund might buy a stake to keep it afloat. Hit by financial and partnership problems, the company has struggled to make progress on two government-awarded projects involving wind and solar facilities of 1,000 megawatts and 500 megawatts, respectively.