Turkish Energy Market Outlook Achievements, Overview and Opportunities October, 2016 Turkish Energy Market Outlook | Achievements, Overview and Opportunities

This report is prepared with contributions from Deloitte.

2 Turkish Energy Market Outlook | Achievements, Overview and Opportunities

Table of Contents

Presentation of the Chair Executive Summary 1/ Macroeconomic Overview of Turkey 2/ Turkey’s Energy Outlook 3/ Electricity Market Overview 4/ Natural Gas Market Overview 5/ Coal Market Overview 6/ Petroleum Market Overview 7/ Energy Efficiency and Climate Change 8/ Energy Sector Incentives Scheme Turkish Energy Market Outlook | Achievements, Overview and Opportunities

Presentation of the Chair

The World has been going through a priorities is utilizing our local and challenging era, marked by slowdown in renewable sources and providing security economic growth in many parts of the of supply in a competitive and transparent World, strong social changes, turmoil way. In this highly interactive world, we especially in the countries in Turkey's believe that this strategy can only be close vicinity, dramatic fall in oil prices and achieved at its best with collaboration both climate change. Turkey, being at the center at intergovernmental and investor level. of the oldest civilizations, and ongoing regional challenges, have mastered the art Turkey has implemented a radical of sustaining its growth and attractiveness liberalization process for its energy in difficult times, through its strong markets. The market is performing Hasan Murat Mercan determinism, social capital and robust under the supervision of an independent Chair natural resources. and autonomous body, Energy Market Organising Committee, Regulatory Authority. Turkey's energy World Energy Congress 2016 Figures in the last 15 years reveal that market legislation is mostly in alignment Turkey is one of the few countries with with the European Union. The regulated sustained economic growth supported segments of the business including by increasing population, industrialization electricity and gas transmission and and urbanization. Turkey’s energy demand distribution networks have been operating will double during the next decade, which under state of the art and transparent tariff calls for an investment requirement of mechanisms. All the critical infrastructure minimum 100 billion USD. This economic is open to third party access meaning growth and increase in energy demand will that connecting to the system as a user be supported with secure and sustainable or actor is strictly secured under arms- sources. length conditions. Public consultation and good stakeholder management is Turkey's energy strategy can be at Turkey's heart of our energy policy. summarized as meeting the growing Securing Turkey’s attractiveness as a energy demand of Turkey in the most safe investment haven is one of the top sustainable way: sustainable in both priorities, thus, we will observe continuous economic terms and in environmental improvement of investment climate of the terms. The Ministry's one of the top country.

02 Turkish Energy Market Outlook | Achievements, Overview and Opportunities

The opportunities to invest in energy developed mobile infrastructure and this whole region’s welfare. We invite all the sector in Turkey are endless. Strategic infrastructure can easily be leveraged to distinguished players in energy and related and mega investment projects are the top unlock the potential of the retail markets. sectors globally to collaborate with us to agenda items. Among such opportunities, It is worthwhile to underline once more supply our increasing demand and be nuclear power plant investments, high that making best use of renewable energy our partner in operating assets, investing capacity lignite power plants, international resources, with a focus on solar and in the infrastructure and developing our gas and oil pipeline projects, high installed wind, is crucial. The model that has been domestic technology together. capacity renewable energy projects, introduced recently on development natural gas underground storage, LNG and of large scale renewable energy areas, FSRU projects take the lead. Projects that namely YEKA, should be very closely will also create synergies in development of pursued by the investors. It is an obvious domestic technology will certainly prevail. fact that the cheapest energy is the Turkey's electricity distribution business unused energy, therefore implementation require vast amount of investment. The of energy efficiency investments in this Regulator has approved investment budget era of improving and even disruptive of USD 6.3 billion and an OPEX budget of technological improvements is vital. In this USD 12 billion for the period covering 2016- context, several energy efficiency projects 2020. More investment is required beyond are implemented, ranging from projects 2020. Gas distribution is also an area with on improving energy efficiency in industry, substantial private sector involvement to the market transformation of energy and potential for growth. On the other efficient appliances. hand, privatization of gas distribution in İstanbul is a major investment opportunity. Turkey lies in a unique fertile land, which It would be wise for infrastructure has been home to endless opportunities operating firms to take part in electricity in the last ten millennia. Today is no and gas distribution with predictable and exception. Turkey's energy sector, as sustainable incomes. Retail markets in well as other locomotives of the national Turkey in electricity, gas and petroleum economy, presents countless opportunities are very attractive due to the increasing for investors, from energy generation and young population and further steps to energy efficiency, from distribution to be taken in opening all these markets investments to natural gas storage, not to full competition. Turkey also has a very only for Turkey’s demand but also for the

03 Turkish Energy Market Outlook | Achievements, Overview and Opportunities

Executive Summary

1/ Macroeconomic View Merchant investments by private sector growing countries among OECD members Turkey is one of the fastest growing together with privatizations substantially in terms of electricity consumption. economies among EU and OECD decreased the public dominance of However, on average, per capita electricity member countries, thanks to successfully the market. Market opening ratio also consumption is still much less compared implemented macroeconomic policies increased and reached to a level of to OECD average. This situation together and structural reforms. After a decrease 86%. As of 2016, Turkey has a mature with the population growth expectations during the 2009 global economic crisis, electricity market with required market shows a great potential in further electricity Turkish economy bounced back with strong places in place, a regulatory framework in demand growth. growth rates and than settled into a more alignment with EU legislation, private sector sustainable pace of 4.1% in 2013, 2.9% in involvement and a very high level of market Installed Capacity (Natural Gas, Lignite, 2014 and 4.0% in 2015 in real TL terms. opening. Hard Coal, Hydroelectric, Renewable Energy, Nuclear Energy): Developing Owing to the prominent economic Electricity Market - Value Chain: In an era economy and increasing demand fueled performance, Turkey attracted around USD of slowed down economic growth globally, the electricity generation investments. 160 billion of foreign direct investment Turkey still provides several opportunities Intensive liberalization efforts and market between 2003 and 2015 and Turkish in its electricity value chain with an based price signals attracted considerable economy is expected to attract USD 70 increasing demand and further growth merchant investment and consequently billion of FDI within the next 4 years. As of potential. installed capacity significantly increased 2016, more than 50,000 foreign companies since 2008. As of July 2016, installed have operations in Turkey. Turkey has a well developed generation capacity of Turkey has reached to 77 GW. fleet that needs to be enhanced with The highest capacity addition was in 2013, 2/Turkey’s Energy Overview increasing demand in a wide range of with ca. 7.0 GW Turkey with its increasing economy technologies and fuels. The state owned experiences sustained growth in energy transmission system in Turkey provides a The installed capacity is dominated by demand. Majority of the primary energy reliable highway for the whole electricity hydro and natural gas fired power plants need is met by natural gas, followed by value chain with a total length of 56,744 km followed by coal and other renewable coal and petroleum. More than half of as the end of 2015. The wholesale market sources. Increasing share of local and these primary sources are used for electric is already developed and mature with renewable sources is at the heart of the power sector. several functional and liquid market places. development strategy of installed capacity. Electricity distribution is fully privatized With an average per capita energy with further potential for mergers The investment requirement of the market consumption level lower than that of OECD and acquisitions and an investment due to rapid increasing demand has been countries, Turkey’s energy demand is need of USD 6.29 billion for 2016-2020 mostly met by merchant natural gas fired expected to continue its increasing trend. period. Due to its dynamic and growing power plants. Natural gas plants comprise population with great enthusiasm in mobile ca. 34.0% of current capacity and 37.9% of 3/ Electricity Market Overview technologies and increasing environmental the electricity generation in 2015. CCGTs Electricity market in Turkey has gone consciousness, retail business in Turkey are expected to preserve their dominant through a major restructuring process provides great potential for the suppliers. position in the following years, considering which was initiated in early 1990s and later their importance for system security. gained pace and stability with issuing of Electricity Demand - Development: the Electricity Market Law in 2001. This Electricity demand has been growing Lignite fired power plants have always restructuring process developed on 2 impressively in line with economic been indispensable element in Turkey’s main pillars of liberalization of the market developments, driven by industrialization generation mix as a local energy source. and privatization of the public assets and and urbanization. During the last 15 years Local coal draws attention with attracted extensive investments to meet Turkey’s electricity demand grew at a privatizations and greenfield investments increasing electricity demand of Turkey. CAGR of 5%. Turkey is one of the fastest in conjunction with the Government

04 Turkish Energy Market Outlook | Achievements, Overview and Opportunities

supports. In total, 4,302 MW of lignite renewable energy investors. Renewable is owned and operated by the state fired power plants with a value of USD 8.2 energy support mechanism secures a monopoly TEİAŞ, under supervision of billion have been transferred to private reliable and consistent income for the EMRA. Turkey’s transmission system sector without providing any sovereign investors and consequently eases the has interconnections with neighboring guarantee. The Ministry has also been financing with better conditions. countries of Turkey and also with ENTSO-E. conducting intense negotiations for As of 2016, TEİAŞ became an observer Afşin-Elbistan, Konya Karapınar, Çayırhan Local equipment manufacturing and member of ENTSO-E. The connection and Afyon Dinar sites with national and localization strategy of the Government is expected to further increase the import international investors. These sites will be constitutes strategic importance in and export volumes. assigned to investors through competitions conjunction with its direct positive effects with purchase guarantee at least for 10 on job creation, enterprise development Electricity - Distribution: Electricity years and will enjoy regional investment and consequently GDP and current distribution in Turkey is conducted by incentives scheme. On 06/04/2016, 6446 deficit. Within the scope of YEKDEM, local 21 regional monopolies. Successfully Electricity Market Law has been amended equipment usage is enabled to benefit completion of distribution sector and TETAŞ has been enabled to make from additional incentives. liberalization process handed over 21 power procurements from operational distribution regions to private sector with lignite fired power plants. New Investment Model for Renewables, USD 13 billion privatization revenue in total. YEKA (Renewable Energy Resource By the end of 2015, installed capacity Area) Mechanism, has been introduced Turkey has a big network serving 39.7 including imported coal fired plant together in order to further support renewable million customers. Due to growing with local hard coal is 7.1 GW capacity energy investments and incentivize local electricity demand and delayed and their generation constitutes 16.0% manufacturing of renewable generation investments, the network require vast of total generation. Hard coal fired power assets. amount of expansion and renewal plants with favorable dark spreads provide investment. In total, USD 6.29 billion profitable and feasible operation to its Nuclear power plants will contribute to the electricity distribution investment budget investors. diversification of energy resources and has been approved by EMRA for the period security of supply. At this point, Turkish of 2016-2020. Effective utilization of Turkey’s rich hydro Government has been taking concrete resources as clean and local energy source steps regarding the addition of nuclear Electricity distribution business in Turkey constitutes great importance inline with power plants to its fuel mix with two provide incomes through performed strategic targets presented in Supply intergovernmental agreements. investments, operational efficiencies and Security Strategy Paper. Current installed decreasing technical and non-technical capacity is ca. 26 GW and strategic target Generation privatizations constitute great losses. is to reach 34 GW by 2023 whereas the importance to reduce market share of economical hydro potential of Turkey is ca. the state owned generation company. Transformation of distribution sector 36 GW. 6.7 GW of capacity has been privatized and introduction of smart systems are hitherto and total privatization income has bringing new opportunities for product In order to avoid the risks linked to both been USD 10.48 billion. The privatizations and technology providing companies. energy dependence and developing a process is still continuing, 7-9 GW capacity Turkey is working on its 2020 Smart Grid sustainable energy model, the Government is expected to be privatized. Roadmap and it is estimated that ca. USD is committed to promoting alternative 11.2 billion will be invested to smart grid solutions based mainly in local and Electricity - Transmission: Turkey implementation by 2035. renewable sources. Feed-in tariff as a has a well established transmission power purchase guarantee known as infrastructure which is enlarged and Electricity Wholesale - Market: The Renewable Energy Resources Support improved by renewal and development trading environment in Turkish electricity Mechanism (YEKDEM) is presented to projects. The Transmission system market has gone through a consistent

05 Turkish Energy Market Outlook | Achievements, Overview and Opportunities

development. Today, Turkish electricity natural gas usage in electricity generation provide Turkey the potential to develop a market includes all necessary market prevails with 40%. Turkey is the 5th largest natural gas trading center to help improve places and services that provide reliable country in Europe in terms of natural gas natural gas supply security of both Turkey investment signal in a timely and consumption with 48 bcm and still has and Europe. transparent manner and provide necessary potential for growth. tools for the participants in the market. Day The greenfield natural gas distribution Ahead Market which provide the reference Turkey is an import dependent country tenders have been a great success market price, has reached to 99.3 TWh in terms of gas supply however Turkey is and supported rapid increase in usage trade volume and increased by CAGR of surrounded by countries with major natural of environment friendly natural gas 24% in the period between 2012-2015. gas reserves. Natural gas is imported throughout the country. The projections from Russia, Azerbaijan and Iran through reveal that, with increasing penetration Electricity Retail - Market: Thanks pipelines and Algeria and Nigeria in LNG rates, natural gas demand of households to its young, dynamic and growing form, all through long term contracts. 10 and industry will be the prevailing areas population with great enthusiasm in bcm of natural gas, which was originally of natural gas demand increase in the mobile technologies and increasing imported by BOTAŞ have been taken over coming years. Turkey offers outstanding environmental consciousness, electricity by private sector companies. Possible opportunities with its developing gas retail business in Turkey is an attractive renewal of current BOTAŞ contracts by retail sector to domestic and international environment. In line with gradual market private sector companies provides an investors, as the country experiences a opening and developments in electricity extensive playground for private sector steady infrastructure development and trading environment, Turkey offers great players and new comers. constructs a countrywide gas network. opportunities for retail companies to have significant market share in the untapped With the ongoing and planned investments, 5/ Coal Market Overview retail market. Turkey has a well developed and resilient Coal is an important source for meeting natural gas transmission grid. Turkish primary energy demand of Turkey. 4/ Natural Gas Market Overview natural gas transmission system with a According to Turkish coal balance 2014, Natural gas market in Turkey is going total pipeline length of ca. 13,000 km is coal consumption reached 95.9 million tons through a development process one of the biggest transmission systems and 68% of it was met by local sources and characterized by security of supply, in Europe. The natural gas transmission the remaining demand was supplied by full third party access to infrastructure system is owned and operated by BOTAŞ. coal imports. and more private sector involvement. Issuing of the Natural Gas Market Law in In Turkey there is one underground storage Turkey has 1.3 billion tons of hard coal 2001 was a major step in establishing a facility and 2 LNG terminals. The ongoing reserves. In the recent years, reserve liberal competitive market with private and planned investments for underground volume of major hard coal fields remained participation. As a result of several efforts, storage, FSRU and LNG re-gasification at the same level while lignite reserves private sector involvement has increased facilities will enhance supply security, increased from 9.3 billion tons to 15.5 at import & wholesale and distribution & flexibility of system operations and support billion tons. retail segments. Market opening ratio also Turkey’s vision to establish a natural gas increased to cover all consumers other trading center. The growth potential of the Hard coal is mainly used in conversion than households. As of 2016, Turkey has a market puts forward further investment sector. Turkish hard coal supply has shown natural gas market mostly in line with EU requirements in this area. steady growth in recent years and reached legislation with some more implementation to 35.4 million ton in 2015. In order to steps to be taken in its development By its geographical position, Turkey is meet increasing hard coal demand, Turkish journey. located between the natural gas producer hard coal supply leaned to imports and as countries with total ca. 113 tcm reserves a result import ratio in hard coal supply Natural gas is mainly used in heating, and large consumption nodes such as EU reached to 96%. industry and electricity generation. In 2015, countries with total 435 bcm demand. This

06 Turkish Energy Market Outlook | Achievements, Overview and Opportunities

Turkish lignite reserves are used in Turkey is differentiated from Mediterranean financing agreements. conversion sector as the fuel of lignite countries with sophisticated refineries power plants operated by state owned and and continuous refinery investments As an emerging market, Turkey, whose private electricity companies. As the end of in conjunction with increasing demand greenhouse gas emissions contributes 2015, private sector holds 54% of the total on complex petroleum products both to global cumulative at a level less than lignite production. in national and international markets. 1%, is ready to join the global fight with Although more than half of the petroleum climate change. In order to reduce its CO2 In parallel with development in hard coal imports is crude oil, with the help of emissions and fight against the climate power plant investments and lignite power sophisticated refineries in Turkey, all of change, Turkey acceded to the UNFCCC and plant privatizations, coal consumption the petroleum product exports are in the then became Party to the Kyoto Protocol. of conversion & energy sector increased form of value added refined petroleum In 2015, Turkey submitted its Intended to 78 million tons and compensated the products. Nationally Determined Contributions total coal consumption loss in the industry (INDC). According to the INDC, Turkey is and household & services. As a result Turkey experiences growth in several expected to reduce its 2020 emission of political support to use more local sectors like transportation, automotive level from 1,185 million tons of CO2 to resources for electricity generation, lignite and aviation which consequently increases 940 million tons of CO2 in line with the consumption in electricity generation is domestic petroleum products demand. Paris pledge. As an emerging market, in expected to further increase. Globally known petroleum distribution order to achieve CO2 emission targets companies as well as local companies stated in the INDC, Turkey aims to increase 6/ Petroleum Market Overview are active in distribution market. These the energy savings, energy efficiency, Petroleum consumption in Turkey with distribution companies offer merger and share of renewable energy and carbon 32.5 Mtoe takes the third place in primary acquisition opportunities to the investors certifications. energy consumption after natural gas and and TP Petroleum Distribution Company coal. Oil production in Turkey met ca. 9% of is currently going through a privatization 8/ Energy Sector Incentives Scheme crude oil consumption and ca. 7% of total process. Investors in the energy industry are petroleum consumption of 2015. encouraged with various types of tax With its growing demand and geographical incentives with the aim to support and Turkey is located in a region that includes location, Turkey outshines as a prominent orient investments in conformity with 70% of the explored oil and gas reserves market for petroleum sector investments the objectives of Turkish Government, all over the globe. Therefore, Turkey especially in areas of exploration, refinery to reduce the regional disparities has a geographical advantage for both and trade. within Turkey, create new employment transportation and exploration of oil. opportunities, and to realize the Turkey is leading in terms of number of 7/ Energy Efficiency and Climate international competitiveness and exploration activities within EU countries Change environmental protection. however compared to the rest of the world, As an emerging market, Turkey’s increasing number of active oil rigs in Turkey low, energy consumption raises the importance The investment incentive scheme in Turkey showing a potential in oil exploration. of energy efficiency due to costly imports is structured around 4 main pillars of in energy supply. To promote energy "General", "Regional", "Large Scale" and Turkey supplies crude oil to international efficiency investments, Turkey is "Strategic" investments. These incentive refineries through BTC and IT pipelines introducing complementary legislation and schemes provide benefits in several areas by transporting extracted oil from Middle action plans to create opportunities for covered in the last section of this report. East and Caspian Regions. Ceyhan Marine investors to participate in energy efficiency Terminal with ca. 200 million tons of annual activities. Turkey‘s aim to boost energy capacity has a potential to be an oil trading efficiency in various sectors provides vast center by integrating Russian, Caspian and investment opportunities for local and Iraqi oil with international markets. foreign investors and benefits from various

07 Macroeconomic 1. Overview of Turkey

Turkish Energy Market Outlook | Achievements, Overview and Opportunities

Gross Domestic Production of Turkey

GDP Growth Turkey is the 18th largest economy in the Turkey is one of the fastest growing economies world with a GDP of USD 799 billion in among EU and OECD member countries, thanks to 2014 and USD 718 billion in 2015, which represents a growth of 4.0% in real Turkish successfully implemented macroeconomic policies Lira (TL) terms. and structural reforms.

After suffering from the effects of the global economic turmoil in 2009, Turkish GDP Growth of Turkey economy bounced back with strong growth

rates of 9.2% and 8.8% in 2010 and 2011, 900 823 12% 799 789 respectively. The growth then settled into 775 731 730

800 718 10% a more sustainable pace of 2.2% in 2012, 647

4.1% in 2013 and 2.9% in 2014 in real TL 700 614 8%

terms. 600 530 6% 482 500 4% Between 2006 and 2015, European Union 391 400 2% countries and OECD member countries 302 USD billion have grown with the CAGR of 0.7% and 300 231 0% 1.1%, respectively. In comparison, GDP 200 -2% in Turkey has grown with a CAGR of 3.5% 100 -4% during this last decade, which makes Turkey 0 -6% one of the fastest growing economies

among the EU and OECD member 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 countries. Nominal GDP (in USD) (Left Axis) Real GDP Growth (in TL) (Right Axis) In terms of purchasing power parity, a Source: TurkStat, EIU continuous increase with higher pace was experienced with a CAGR of 6.3% through the last decade.

10 Turkish Energy Market Outlook | Achievements, Overview and Opportunities

Foreign Direct Investments

With respect to 2003 volumes, annual European countries have the biggest share There is a steady increase in the number of Inward Direct Investment values have comprising 68% of FDI inflows. Investors investors, as well. By the end of June 2016, increased about 10 times with recent from North America, Middle East and Gulf more than 50,000 companies with foreign reforms and regulations. countries follow constituting 22% of FDI equity operate in Turkey. inflows. Owing to the prominent economic performance, Turkey attracted around USD FDI Development of Turkey 160 billion of foreign direct investment 25 50 between 2003 and 2015 and Turkish 46 economy is expected to attract USD 70 41 billion of FDI within the next 4 years. 22.0 20 37 21.0 40 20.2 19.9 34 29 18.5 Energy, Manufacturing, Financial & 16.9 15 16.0 30 Insurance Activities and Retailer Trade 26 24 16.2 sectors are the leading ones which 21 13.3 13.0 19 12.3 12.5 constitute 80% of the total FDI inflow of 10 20

10.0 15 x1000 Turkey. USD billion 9.1 12 8.6 5 10

0 0 In the last decade, 2016F 2017F 2018F 2019F Turkey has enhanced its 2005A 2006A 2007A 2008A 2009A 2010A 2011A 2012A 2013A 2014A 2015A Foreign Direct Investment (Left Axis) regulations for foreign Cumulative Number of Companies with InternationalForeign Equity Capital (Right (Right Axis) Axis) investors and become Source: The Ministry of Economy, IMF, UNCTAD, CBRT, ISPAT an attractive investment market. In 2016, more than 50,000 companies Europe 65.8% Asia 10.0% with foreign equity have Near and operations in Turkey. Americas In 2015, Turkey attracts Middle 13.2% East 7.2% USD 16.9 billion foreign direct investments. Gulf Countries 3.8%

Source: The Ministry of Economy * Real estate investments are excluded on FDI shares.

11 Turkey’s Energy 2. Outlook

Turkish Energy Market Outlook | Achievements, Overview and Opportunities

Primary Energy Sources

Source: Natural gas surpasses other The third largest energy source is Sector: Electric power sector primary energy sources with its 33.4% petroleum with 24.7% share in primary is the leading sector in primary energy share. Natural gas is a major source for energy sources. Petroleum is mainly consumption with 43.8% share. Main electric power sector. The share of natural utilized in transportation sector with a 79% primary energy sources of electric power gas in primary energy sources stagnated consumption rate. On-road vehicles are sector are natural gas and coal with 41% in 2015 in conjunction with the decreasing the supreme actors in petroleum usage in each. usage in electric power sector. Residential transportation, with cars, buses, trucks etc. and commercial usage constitutes 26%. Transportation is the second largest 18% of consumed natural gas is utilized for Renewables and hydro sources sector with 20.2% share. Petroleum is a industry where iron and steel industries constitute the smallest part with 9.8% crucial source for transportation sector take the lead in consumption. share. Renewables and hydro are mainly where 98% consumption of transportation utilized for electric power and residential supplied by petroleum. Coal constitutes 32.1% share in primary & commercial sectors with 54% and 43%, energy sources and takes the second place. respectively. Residential and commercial sector Coal is mainly used for electric sector with is the third largest sector with 18.6% 58% share. Industrial sector consumes 29% share. Biggest source of residential and of coal. Cement, iron and steel are the main commercial sector is natural gas with areas for industrial consumption of coal. 46%. Renewables and hydro, and coal comes after natural gas with 23% and 22%, Turkey’s Primary Energy Supply by Source and by Sector, 2014 respectively. Total Primary Energy Supply was ca. 124 Mtoe in 2014. Industry sector has the least energy usage Source Sector with 16.2% share among other sectors. 98% Coal is the main source with 57% and 79% Transportation natural gas is the second largest source Petroleum 2% 29.7 (24.7%) 24.3 (20.2%) 4% 0% for industry with 37%. Cement, iron and 11% steel are the main sub-sectors for energy 6% 5% Industrial consumption in industry. 37% 19.5 (16.2%) 57% 1% Natural Gas 1% 18% 40.2 (33.4%) 55% 6% 26% 41% Electric Power 41% 54.2 (43.8%)

29% 12% 58% Coal 38.7 (32.1%) 13% 9% 1% 46% 2% Residential and 22% 54% Commercial Renewables and Hydro 23% 22.4 (18.6%) 11.8 (9.8%) 43% Note1: Non-energy usage petroleum consumption (3.13Mtoe/1.2%) is not included in the analysis. Note2: 0.3% of transportation sector consumption is supplied by renewables sources. Source: MENR

14 Source: MENR Turkish Energy Market Outlook | Achievements, Overview and Opportunities

Import of Primary Energy Sources

Fossil fuel reserves of Import Share of Turkish Primary Energy Consumption 140 Turkey are highly limited 120 120 124 114 compared to its demand 120 108 106 106 109 100 therefore majority 100 88 91 75% 84 73% 73% 74% 73% 72% of energy demand is 80 71% 70% 18% 73% 19% 16%

toe 15% 16% 72% 73% 14% 15% 15% M 72% 15% supplied by imports. 60 14% 14% 15% 31% 31% 31% 32% 28% 31% 30% 31% 32% 40 23% 23% 26%

Energy supply of Turkey is dependent on 20 35% 35% 33% 30% 29% 28% 27% 24% 24% 24% 26% 24% imports. During the last decade, three 0 quarters of Turkey’s primary energy

consumption was met by imported 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 resources. Petroleum Natural Gas Coal Total Primary Energy Consumption In the recent years, use of natural gas has Source: MENR increased due to increasing residential penetration rates and number of natural gas fired power plants. On the other hand, Energy Consumption per Capita in 2015 share of petroleum in primary sources decreased to 25% from 35%. Coal imports United States of America 7.0 constitute ca. 15% of Turkish primary Belgium 4.7 energy consumption throughout the last Netherlands 4.5 decade. OECD Average 4.2 France 3.8 In 2014, one fourth of primary energy consumption was met from domestic Germany 3.7 production. Local coal, mostly low calorific EU Average 3.1 value, and renewable sources constitute Spain 2.5 most of the domestic production. Italy 2.5 Some of the OECD Countries Greece 2.0 OECD Average Turkey 1.6 2.6 Underconsumption of Turkey

0 1 2 3 4 5 6 7 8 Although energy consumption of Turkey increases consistently, average per Energy Consumption (toe per capita) capita energy consumption level of OECD Source: EIU countries is higher than that of Turkey.

While average OECD primary energy With increasing urbanization and According to the 10th Development Plan, consumption per capita was 4.2 toe in industrialization, Turkey has great potential Turkey is expected to increase its primary 2015, a Turkish citizen consumes 1.6 toe for energy consumption increase. energy consumption to 1.92 (toe per capita) energy in average. by 2018.

15 Electricity 3. Market Overview 17 Turkish Energy Market Outlook | Achievements, Overview and Opportunities

Liberalization Timeline of Turkish Electricity Market

Establishment of Organized Establishment of Energy Supply Security Strategy Electricity Market - Stage II (Day Exchange (EXIST) Renewable Energy Law Paper Ahead Market, Collateral New Investment Model for (Law No.5346) Mechanism) Establishment of Completion of Distribution Renewables - YEKA Electricity Market in Turkey has gone Privatization Strategy Beginning of ENTSO-E Regulatory Body (EMRA) Connection Privatizations (Renewable Energy through a major restructuring process Document Resource Area) which was initiated in early 1990s and later gained pace and stability with issuing of the Electricity Market Law at the start of the new millennium. This restructuring process developed on two 2001 2004 2005 2006 2009 2010 2011 2013 2015 2016 main pillars; liberalization of the market and privatization of the public assets.

Since the Electricity Market Law was put into force in 2001, several steps have Electricity Market Law Establishment of Organized Electricity Amendment of Renewable New Electricity Establishment of been taken in achieving the targets (Law No.4628) Organized Electricity Market - Stage I Energy Law (FIT Market Law Intra Day Market of the law. Some of the major steps (Day Ahead Planning, differentiated on resource Market type and local equipment taken in this journey are covered in the Balancing Power Market, New Incentive Model bonus) Unbundling of timeline given below. Hourly Settlement) Distribution and Retail for Local Coal Fired PPs Source: Deloitte Analysis Initiation of Generation Sales Activities Privatizations

Market Opening Ratio: 28% 30% 32% 49% 63% 75% 84% 86% 86%

Installed Capacity: 28.3 GW 36.8 GW 38.8 GW 40.6 GW 44.8 GW 49.5 GW 52.9 GW 64.0 GW 73.1 GW 77.0 GW

EÜAŞ (Public) 26% 28% 26% 41% 42% 42% 46% 46% 37% 59% 58% 58% 54% 51% 49% 54% Private 74% 63% 72% 74%

2001: The Electricity Market Law is 2004: The laws and regulations issued 2006: On 08/01/2006, the first the main legislation setting the ground for were supported with High Planning Organized Electricity Market started to development of a financially sound and Council Decisions, so called “Strategy operate with Balancing Mechanism only. transparent electricity market operating Papers”. The theme of the 1st Strategy Even in its early form, this mechanism in a competitive environment under Paper was “Electricity Sector Reform and started to generate market based prices provisions of civil law. The main aim of Privatizations”. This strategy paper put for electricity and this was a very successful the law is delivery of sufficient, good forward a detailed plan for privatization step for attracting merchant power quality, low cost and environment friendly of electricity distribution and generation producers to invest in this growing and electricity to consumers and to ensure the assets. promising market. autonomous regulation and supervision of the market. With this Law, an independent 2005: In 2005, Renewable Energy Law 2009: On 12/31/2009, 1st Stage of Energy Market Regulatory Authority was was issued. Consequently, one year later, in Organized Electricity Market including Day established. A licensing scheme was 2006, renewable energy investments based Ahead Planning, Balancing Power Market introduced which enabled private players to on this legislation started. and Hourly Settlement was initiated. participate in the market. In 2009, 2nd Strategy Paper with "Supply Security and Supply Diversification" theme was published.

18 Turkish Energy Market Outlook | Achievements, Overview and Opportunities

Establishment of Organized Establishment of Energy Supply Security Strategy Electricity Market - Stage II (Day Exchange (EXIST) Renewable Energy Law Paper Ahead Market, Collateral New Investment Model for (Law No.5346) Mechanism) Establishment of Completion of Distribution Renewables - YEKA Privatization Strategy Beginning of ENTSO-E Regulatory Body (EMRA) Connection Privatizations (Renewable Energy Document Resource Area)

2001 2004 2005 2006 2009 2010 2011 2013 2015 2016

Electricity Market Law Establishment of Organized Electricity Amendment of Renewable New Electricity Establishment of (Law No.4628) Organized Electricity Market - Stage I Energy Law (FIT Market Law Intra Day Market (Day Ahead Planning, differentiated on resource Market type and local equipment Balancing Power Market, New Incentive Model bonus) Unbundling of Hourly Settlement) Distribution and Retail for Local Coal Fired PPs Source: Deloitte Analysis Initiation of Generation Sales Activities Privatizations

Market Opening Ratio: 28% 30% 32% 49% 63% 75% 84% 86% 86%

Installed Capacity: 28.3 GW 36.8 GW 38.8 GW 40.6 GW 44.8 GW 49.5 GW 52.9 GW 64.0 GW 73.1 GW 77.0 GW

EÜAŞ (Public) 26% 28% 26% 41% 42% 42% 46% 46% 37% 59% 58% 58% 54% 51% 49% 54% Private 74% 63% 72% 74%

2010: In 2010, privatization process of investments have become more attractive In 2015, Intra Day Market started to operate. State Owned Generation Company (EÜAŞ) with the introduced amendments. This market place further increased market assets was initiated with the aim to fully sophistication and provided additional privatize the assets, except the ones with 2013: New Electricity Market Law was means for balancing especially for strategic importance (large hydro power issued in 2013 with the aim to increase renewables. plants). As the first step to integrate Turkish reliability and transparency of the market. electricity grid with Europe, ENTSO-E test In 2013, privatization process of distribution 2016: In 2016, New Investment Model connection was initiated, in 2010. companies were successfully completed and for Renewables, YEKA (Renewable Energy the distribution and retail activities were Resource Area) Mechanism, has been 2011: On 12/31/2011, 2nd Stage of unbundled. This was a major step achieved introduced in order to support renewable Organized Electricity Market was started, for full market opening. energy investments and incentivize local Day Ahead Market and Collaterals manufacturing of renewable generation Mechanism came into force. In 2011, 2015: The market operations were assets. As one of the strategic investment Renewable Law was amended and feed-in carved out from TEİAŞ and independent areas, TETAŞ has been enabled to make tariff was differentiated for different type energy exchange (EXIST) was established, power procurements from operational of sources and local equipment bonus in 2015. lignite fired power plants, starting from was introduced. Non-hydro renewable 2016.

19 Turkish Energy Market Outlook | Achievements, Overview and Opportunities

Electricity Market Value Chain

In an era of slowed down economic growth globally, Turkey still provides several opportunities in its electricity value chain with an increasing demand and further growth potential.

Turkey's resources and geography, Installed capacity of Turkey has reached to 77.0 GW as the end suitable to develop supply portfolio of July 2016. with wide range of technologies, Gross Generation: 261.8 TWh provide opportunities to investors 2 74.4% Private Sector Aprx. Internal Consumption: 5% experienced or interested in different Aprx. Net Gen. 248.7 TWh 1 25.6% Public Sector

areas of power generation. Generation

The state owned transmission system in Turkey provides a reliable Length of transmission lines

highway for the whole electricity ( ≥36kV)

value chain. 37,534km

Total longitude of transmission Transmission Losses: 2% 19,071km 140km lines is 56,744 km as the end of Aprx Losses: 5.2 TWh 380 kV 154 kV 66 kV 1 2 3

2015. As of 2016, TEİAŞ became the Transmission first observer member of ENTSO-E. Market Volumes Establishment of Energy Exchange Istanbul (EXIST), has been a great Import: 7.1 TWh 281281 step in achieving further progress TWhTWh Export: 3.2 TWh 99 in the already developed and TWh 99 21 TWh TWh 21 TWh mature wholesale electricity Bilateral Day BPM, IM and Wholesale Net: 3.9 TWh 1 2 3 AgreementsBilateral Ahead Day Imbalance BPM, IDM and market in Turkey. 1 Market 2 3 Agreements Ahead MarketImbalances Market Electricity distribution is fully privatized with further potential Length of distribution 157,786 lines (<36kV) km for mergers and acquisitions. This Distribution Technical & Non-Technical Losses: 14% segment of the value chain provides 912,551 1,070,337 Aprx. Losses: 34.5 TWh km great potential with a regulator km # of Distribution Companies: 21 approved investment need of USD # of Subscribers: ca. 39.7 million

6.29 billion and OPEX budget of USD Distribution Overhead Underground Total 12.0 billion for 2016-2020 period. 1 2 3 Market Opening Ratio Thanks to its young, dynamic and growing population with great enthusiasm in mobile technologies 86% and increasing environmental Gross Consumption: 265.7 TWh consciousness, retail business in Aprx. Net Cons: 214.2 TWh

Retail 14% Turkey provides great potential for the Electricity Electricity Consumption1 Consumption 2 Open for of non-eligible suppliers. In the last decade, annual Competition Consumers

electricity consumption increased Competitive with the CAGR of 5%. Regulated Note: All data represents 2015 values.

20 Turkish Energy Market Outlook | Achievements, Overview and Opportunities

Electricity Demand Development

Electricity demand has been growing Turkey’s ever increasing electricity demand trend will impressively in line with economic developments, driven by industrialization be preserved with growing GDP, industrialization and and urbanization. Economic growth urbanization supported by structural reforms. together with population growth expectations show a great potential in further electricity demand growth. Gross Electricity Demand in Turkey, 2000-2030 In 2015, ca. 266 TWh of electricity 700

is supplied to the domestic market, 600 corresponding to 3.3% annual growth 500 from 2014 figure of 257 TWh. The CAGR of gross electricity demand for the period 400

2000-2015 is 5.0%, for the last five years TWh 300 (2010-2015) this ratio is 4.8%. Realized Demand 200 Past Consumption HighMENR, Scenario High Scenario Demand Projection BaseMENR, Scenario Base Scenario Demand Projection Peak electricity demand has a similar 100 LowMENR, Scenario Low Scenario Demand Projection trend with slightly higher growth rate. Peak 0 demand has more than doubled since

2000 and CAGR is ca. 5.5%. 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 GDP Growth 6.8 -5.7 6.2 5.3 9.4 8.4 6.9 4.7 0.7 -4.8 9.2 8.8 2.2 4.0 2.9 3.9 Demand per Capita (MWh) 1.9 1.9 2.0 2.1 2.2 2.3 2.5 2.7 2.8 2.7 2.9 3.1 3.2 3.2 3.3 3.4 As of MENR base scenario demand Source: TEİAŞ, MENR, TurkStat projection, electricity consumption will be more than doubled in 15 years by reaching 581 TWh from current level of 266 TWh.

Turkey is one of the fastest growing Net Electricity Consumption per Capita in 2015 countries among OECD members in terms United States of America 12,807 of electricity consumption. However, on Belgium 7,936 average, per capita electricity consumption OECD Average 7,822 is still much less compared to OECD France 7,590 average. Germany 7,171 Netherlands 6,880 In 2015, average per capita consumption EU Average 6,172 for OECD member countries is ca. 7.8 Spain 5,597 Italy 5,213 Average MWh, while it is around 3.0 MWh in Greece 5,029 Turkey. This is another viewpoint showing OECD Turkey 2,971 4.851 Underconsumption of Turkey growth potential of Turkey’s electricity 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 consumption. Electricity Consumption (kWh per capita)

Source: World Development Indicators

21 Turkish Energy Market Outlook | Achievements, Overview and Opportunities

Installed Capacity

Developing economy and increasing Developing economy and increasing demand fueled demand fueled the electricity generation investments. Installed the electricity generation investments. capacity in Turkey has increased by more than seven times since 1984. As of July 2016, installed capacity of Turkey Historical Installed Capacity by Primary Energy Resources, 2000-2016* has reached to 77 GW. 80,000 6,817 MW (8.8%) Renewable** Fuel Oil*** Hydro and lignite fired power plants were 70,000 Coal**** Natural Gas 798 MW (1.0%) the initial investment priorities and Turkey’s 60,000 Hydro 16,884 MW (21.9%) generation mix was hydro dominated. With 50,000 the increasing investments to especially 40,000 26,275 MW (34.1%) natural gas fired power plants, share of the MW 30,000 thermal capacity increased gradually in the 20,000 last decade. 26,263 MW (34.1%) 10,000

Existence of long term natural gas import 0

contracts, cheaper per MW investment 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016* costs compared to other technologies, flexibility in site selection, and technological *As the end of July 2016 fit for cycling operation have paved the way ** Includes Wind, Solar, Geothermal and Waste and other renewable power plants for natural gas installed capacity to expand *** Includes Diesel, Asphaltit and Naphta firing power plants **** Includes all kinds of local and imported coal firing power plants faster than other technologies during the Source: TEİAŞ, Deloitte Analysis last decade.

Renewables are starting to gain visible share in the generation mix. This trend is expected to continue with the addition of new wind, geothermal, solar and biomass power plants.

Existing lignite plants are facing efficiency and availability problems due to aging equipment. Recently strategy paper on Energy Efficiency has set goals to increase efficiencies. Moreover, lack of investments in new lignite plants have resulted in a declining share of lignite based generation. The Government aims to change this through the new investment incentive mechanism specific to local coal fired PPs and PPA awards to operational lignite fired plants.

22 Turkish Energy Market Outlook | Achievements, Overview and Opportunities

Installed Capacity

Historical Additional Installed Capacity Development, 2000-2015

Source: MENR, Deloitte Analysis

Between 2000 and 2015, on average ca. 3.1 Renewable investments (excluding hydros) As a result of intensive GW of new capacity has been added to the are quite new in Turkey's generation generation mix of Turkey each year. mix, a majority of the investments have liberalization efforts and been carried out within the last decade. the price signals in the The highest capacity addition was in 2013, Considering the policy level support with ca. 7.0 GW and natural gas fired for renewables and local resources, market, the investments power plants constitute 3.6 GW of the these investments are expected to be significantly increased commissioned capacity. In 2015, 4.3 GW of accelerated. new capacity was commissioned. since 2008.

As a result of intensive liberalization efforts Historical Installed Capacity Development by Ownership, 1995-2015 and the price signals in the market, the GW 21 27 39 50 53 57 64 70 73 investments significantly increased since 100% 2008. 80% 44 GW As a reference, since 2014, in the last 2.5 years, the newly commissioned 60% capacity corresponds to 20% of the 40% installed capacity. 8 GW

20% Private Generators BO/BOT EÜAŞ 20 As the end of 2015, the share of private GW generators, in installed capacity, has reached 0% to ca. 72% and it is expected to increase with 1995 2000 2005 2010 2011 2012 2013 2014 2015 ongoing privatizations and upcoming private Source: TEİAŞ, Deloitte Analysis sector investments. EÜAŞ will only keep strategic power plants ca. 8 GW.

23 Turkish Energy Market Outlook | Achievements, Overview and Opportunities

Natural Gas Fired Power Plants

With the liberalization of the sector and Natural gas plants comprises ca. 34.0% CCGTs are expected to establishment of the organized market of current capacity and 37.9% of the combined with the increasing demand electricity generation in 2015. Although, preserve their dominant and resulting need for generation assets, their utilization may decrease with position in the following Turkish electricity market has become favorable hydrology, CCGTs constitute great an attractive haven for the national and importance for the system security and years, considering their international investors. Accordingly, relieving congestions due to their flexibility. importance for system considerable amount of merchant Consequently, CCGTs are expected to investment, mostly natural gas fired power preserve their existence and importance security. plants emerged in order to meet the in the future. Concordantly, a capacity investment need of the market. mechanism will be introduced to the market and natural gas fired power plants Since 2010, ca. 8 GW of additional natural will be the main resource to assure supply gas capacity was commissioned. There and system security with this mechanism. are still major projects expected to be The Ministry and Authority is working on commissioned before 2018. the mechanism details.

Installed Capacity Development – Natural Gas (1990 – 2016*)

30,000 25,550 26,275 24,621 24,906 25,000 20,440 19,477 20,000 18,175

15,000 13,774 MW

10,000 7,068

5,000 2,210 2,925

0 1990 1995 2000 2005 2010 2011 2012 2013 2014 2015 2016*

NG Share in 14% 14% 26% 35% 37% 36% 37% 38% 37% 34% 34% Installed Cap.

NG Share in Generation 18% 19% 37% 45% 46% 45% 44% 44% 48% 38% N/A

*As the end of July 2016 Source: TEİAŞ

24 Turkish Energy Market Outlook | Achievements, Overview and Opportunities

Lignite Fired Power Plants

Lignite fired power plants have always On 06/04/2016, 6446 Electricity Market Law With governmental been indispensable element in Turkey’s has been amended and TETAŞ has been generation mix as a local energy source. enabled to make power procurements from supports, electricity According to 2015 figures, installed capacity operational lignite fired power plants. The generation with local accounts for ca. 8.7 GW and generation procurement price is set to 63 USD/MWh constitutes for 12.0% of the total generated (185 TL/MWh) for 2016 which is ca. 1.5 fold coal draws attention as electricity in Turkey. of current market price levels. a prominent investment Amount of Apart from 620 MW TOR Çayırhan Plant, area. ca. lignite reserve almost all capacity was operated by EÜAŞ 15.6 to contribute to billion tons until 2013. In 2013 and 2014, privatizations / economy of Seyitömer, Kangal, Yatağan, Yeniköy, Kemerköy, Soma B, Orhaneli, and Tunçbilek Non-operational Lignite Sites and Reserves were realized. In total, 4,302 MW of lignite fired power plants with a value of USD 8.2 billion have been transferred to private sector without providing any sovereign guarantee. Çayırhan 421.5 million ton The Ministry has been conducting intense reserve negotiations for Afşin-Elbistan, Konya Karapınar, Çayırhan and Afyon Dinar Afşin Elbistan 4,825 million ton coal sites with national and international Afyon Dinar Konya Karapınar reserve investors. These sites will be assigned 941 million ton 1,833 million ton to investors through competitions with reserve reserve underbidding method. TETAŞ will provide power purchase guarantee for at least Installed Capacity Development – Lignite (1990 – 2016*) 10 years to the applicant that offers the 10,000 9,102 lowest electricity purchase price. The 8,678 Environmental Impact Assessment, 8,199 8,1998,1438,1808,238 expropriation and other permit and license 8,000 7,131 6,509 related procedures will be completed before 6,048 the tenders by the public entities. 6,000 4,874 MW Lignite fired power plant investments, 4,000 as a local energy resource, are defined as “priority” by the government policies and included in Region V of the Regional 2,000 Investment Incentives Scheme to enjoy different tax and social security premium 0 advantages, land acquisition rights and 1990 1995 2000 2005 2010 2011 2012 2013 2014 2015 2016* other financial supports. The details of the Lignite Share in 30% 29% 24% 18% 17% 16% 14% 13% 12% 12% 12% Support Scheme is further discussed in the Installed Cap. final section of this report. Lignite Share in Generation 34% 30% 28% 18% 17% 17% 14% 13% 15% 12% N/A *As the end of July 2016 Source: TEİAŞ 25 Turkish Energy Market Outlook | Achievements, Overview and Opportunities

Hard Coal Fired Power Plants

Hard Coal Fired Power Plants – Imported Coal

As of September 2016, 10 imported coal fired plants which amount up to 6.9 GW Turkey is not rich in terms of hard coal; andcapacity, areInstalledoperational Capacity. Ongoing Developmentprojects, including – Hardpre-license, Coal**under (1990evaluation – 2016***)and hence, most of the capacity is dependingunder construction projects, sums up to 20 GW capacity. 9,000 on imported hard (steam) coal. By the 7,782 end of 2015, installed capacity including 8,000 7,0657,066 imported coal fired plant, local hard coal 7,000 Installed Capacity by License Type - Imported Coal fueled plants and dual fuel firing plants 6,000 # of (solid and liquid) is 7.1 GW. Imported 4,9234,930Projects 5,000 4,351 coal fired plants together with hard coal, 3,751 MW generated 16.0% of the total electricity in 4,000 Licensed - 6,9 10 2015. 3,000 Operational 2,002 2,000 Licensed - Since 2009 ca. 4.7 GW of new imported 1,000 332Under 326 480 7,4 9 Construction coal plants have been commissioned and 0 the capacity is also expected to increase. 1990 1995 2000 2005 2010 2011 2012 2013 2014 2015 2016* As imported coal fired PPs create an Pre-Licensed 4,2 4 Hard Coal Share advantage in terms of fuel cost and low in Installed Cap. 2% 2% 2% 5% 8% 8% 9% 8% 10% 10% 10% coal supply risk, investors tend to develop Pre-License Hard Coal Share 8,3 9 base load imported coal fired projects. in GenerationUnder Evaluation1% 3% 3% 8% 9% 12% 14% 14% 15% 16% N/A

** Includes local and imported0 hard coal2 fired capacities4 ***6 As the end8 of July 201610 Source: TEİAŞ The dark spread is realized as 31.7 USD/ GW MWh* in 2015. In August 2016, additional Source: EMRA, Deloitte Analysis import tax is imposed on imports of Map ofMap Someof Some OperationalOperational and andProspective ProspectiveImported CoalImportedFired PPs Coal Fired PPs thermal coal for generation from major exporters. The tax on thermal coal imports Cenal causes a 5.4 USD/MWh downward shift Sarıkaya on dark spread. However, the dark spread Biga is still favorable and encourages the Çebi Eren Çolakoğlu investments. Icdas Kirazlıdere Zorlu Aksa DD Enerjisa The imported coal plants in Turkey usually Pitanes import coal from either South Africa, Russia Izdemir or Colombia. Due to logistics reasons new Göknur Kahramanmaraş license applications condense around Kağıt coastal areas; namely, İzmir, Çanakkale and Kipaş Selena Gölovası Adana. US coal recently started gaining Tosyalı Sanko Licensed / Operational İçtaş Emba Atlas Atakaş market share in Turkey as the hard coal Suez Licensed / Under Construction İsken prices in US declined due to the effects of Atagür Ayas Pre-Licensed Hakan shale gas in US. Diler Pre-License – Under Evaluation Hard coal fired power Note:Note: Projects are located according to the disclosed cities. However, exact locations of projects may change. Projects are located according to the disclosed cities. However, exact locations of projects may change. Source: EMRA, Deloitte Analysis plants with favorable Source: EMRA, Deloitte Analysis dark spreads provide profitable and feasible operation to its investors. *It is assumed that efficiency of coal fired power plant is 40% and lower heating value of coal is 6000 kcal/kg. 26 Turkish Energy Market Outlook | Achievements, Overview and Opportunities

Hydroelectric Power Plants

Turkey is rich in terms of hydro resources. Since hydro sources have considerable As a clean and local energy resource, share in energy mix, hydrology has a 2023 hydroelectric power have been an crucial impact on the generation scheme 34 Target GW investment priority and supported and system security. Hydroelectric dams / throughout the development of electricity can benefit from higher market prices market in Turkey. This is reflected in and consequently get higher revenues 8 New Hydro Capacity investments and the capacity has grown operating as peaker plants. to be Commissioned GW with CAGR of 10.3% in last 5 years. / Economical hydro potential of Turkey is Installed capacity of hydro plants has calculated as ca. 36 GW of capacity and ca. reached 25.9 GW (35.4% of total installed 130 TWh/year of generation. Reaching up capacity) at the end of 2015 and hydro to 34 GW of hydro capacity is within Turkish plants have met ca. 67.1 TWh (25.6% of Government’s 2023 targets. total electricity generation) electricity demand of Turkey in 2015. Small hydro electric power plants can benefit from Renewable Energy Resources According to EMRA in January 2016, 282 Support Mechanism (YEKDEM) purchase hydro projects are under construction with guarantee for 10 years and local equipment a total capacity of ca. 7.8 GW. 2023 targets tariff for 5 years. The details are available in of the Government aims to reach 34 GW the Renewable Energy Section. capacity in hydros.

Installed Capacity Development – Hydro (1990 – 2016*) Effective utilization 30,000 Run of River 26,263 of Turkey’s rich hydro 25,868 25,000 Hydro with Reservoir 23,643 resources as clean and 22,289 26% 26% local energy source 19,609 20,000 30% 17,137 28% constitutes great 15,831 25% ​ 15,000 12,906 21% importance inline MW 11,175 9,863 with strategic targets 10,000 74% 74% 6,764 ​ 72% 70% presented in Supply 79% 75% Security Strategy Paper. 5,000 0 1990 1995 2000 2005 2010 2011 2012 2013 2014 2015 2016*

Hydro Share in Installed Cap. 41% 47% 42% 34% 32% 33% 34% 35% 34% 35% 34%

Hydro Share in 40% 41% 25% 24% 25% 23% 24% 25% 16% 26% N/A Generation

Note: Installed capacity difference between Hydro with Reservoir and Run of River type plants is not illustrated until 2011. *As the end of July 2016 Source: TEİAŞ

27 Turkish Energy Market Outlook | Achievements, Overview and Opportunities

Renewable Energy

According to the government policies, new Total installed capacity of renewables has Solar Energy stands out as a promising capacity investments, supply diversity (the reached 5.8 GW (7.9% of total installed investment area owing to Turkey’s need for local and renewable sources) and capacity) at the end of 2015 and renewable advantageous position in solar radiation and maximizing energy efficiency are critical plants met ca. 17.0 TWh (6.5% of total sunshine duration in the global context and points for Turkey in conjunction with the electricity generation) electricity demand of among European Countries. Considering increasing primary energy demand. In Turkey in 2015. the available land area with solar radiation order to avoid the risks linked to both and sunshine duration, Turkey is regarded energy dependence and developing a In parallel with Turkey’s long term strategy, to have the highest solar energy potential sustainable energy model, the Government Government has established very ambitious in Europe along with Spain. The Southeast is committed to promoting alternative objectives for 2023 regarding electricity and the Mediterranean regions are the solutions based mainly on local and generation based on high availability of most favorable regions with 2,993 and 2,956 renewable sources. Therefore, Turkey has renewable energy resources: hydro, wind, hours of average sunshine duration and initiated a forward looking and innovative solar, geothermal, etc. This shall increase 1,460 kWh/m2 and 1,390 kWh/m2 of average energy policy in which renewable energy the share of non-hydro renewable energy solar radiation, respectively. plays a significant role. in electricity generation capacity to at least 27GW in 2023. 2023 27 Target Installed Capacity Development – Renewables (1990 – 2016*) GW 8,000 / 6,817 New Renewables 5,777 Capacity to be 6,000 20 4,363 GW / Commissioned 4,000 3,294 ca. USD MW 2,581 Investment 1,969 Requirement 2,000 1,522 29 / 18 31 60 70 billion 0 1990 1995 2000 2005 2010 2011 2012 2013 2014 2015 2016 Renewables Share in Installed Cap. 0% 0% 0% 0% 3% 4% 5% 5% 6% 8% 9% In order to avoid the

Renewables risks linked to both Share in Generation 0% 0% 0% 0% 2% 3% 3% 4% 5% 7% N/A energy dependence Source: TEİAŞ *As the end of July 2016 and developing a sustainable energy model, the Government is committed to promoting alternative solutions based mainly in local and renewable sources.

28 Turkish Energy Market Outlook | Achievements, Overview and Opportunities

Renewable Energy - RER Support Mechanism

The development of renewable energy Who can benefit from YEKDEM? Legal entities or real persons having sources and the promotion of energy renewable energy generation facilities efficiency measures are two of the priorities Generation Companies with License: without holding a license can benefit from of Turkish energy policy. Renewable energy generation facilities the mechanism for 10 years via incumbent that started operation after 05/18/2005 RetailCo in their region. Generation without Feed-in tariff as a power purchase or before 12/31/2020 can benefit from a license is currently limited to capacities guarantee is presented to renewable YEKDEM purchase guarantee for 10 years <1.0 MW. energy investors in conjunction with the and local equipment tariff for 5 years. Government’s support policy for renewable energy resources. This mechanism is known Unlicensed Generation: In order to Renewable energy as Renewable Energy Resources Support promote distributed generation, unlicensed Mechanism (YEKDEM). generation has been introduced and support mechanism incentivized in the scope of Renewable secures a reliable and Energy Resources Support Mechanism. consistent income

Feed-in Tariff (USDcent/kWh) for the investors and consequently eases Solar (CSP) 13.3 9.2 22.5 financing with better conditions. Solar (Photovoltaic) 13.3 6.7 20.0

Biomass 13.3 5.6 18.9

Geothermal 10.5 2.7 13.2

Wind 7.3 3.7 11.0 Base Incentive Local Equipment Incentive Hydro 7.3 2.3 9.6 Max Price

0 5 10 15 20 25 USDcent/kWh Source: Law No. 5346

29 Turkish Energy Market Outlook | Achievements, Overview and Opportunities

Renewable Energy - Local Equipment Incentives

The incentive scheme has been established 24 Local 24 Intensified Solar Energy Equipment Local to promote the use of local equipment and 22 Incentive* 22 Biomass Energy Equipment Panel integration and solar Incentive* development of a national industry. 20 0.6 20 panel structural mechanics Cogeneration system 0.4 18 18 Stirling engine 1.3 Generator and power Investments of local equipment 16 16 0.5 Mechanical accessories of electronics 2.4 14 steam production system 14 Internal combustion engine manufacturing for renewable energy cent/kWh cent/kWh 0.9 D Mechanical accessories of the D or stirling engine 12 1.3 12 generation assets are defined as “priority” US heat energy storage system US 10 10 Steam or gas turbine 2.0 by the government policies. These Sun tracking system 0.6 Gasification and gas cleaning 8 8 0.6 investments are included in Region V of the group

6 13.3 Reflective surface plate 0.6 6 13.3 Regional Investment Incentives Scheme Liquid or gas fuel steam tank 0.4 4 Radiation collection tube 2.4 4 and consequently enjoy different tax 2 2 Fluid bed steam tank 0.8 and social security premium advantages, 0 0 land acquisition rights and other financial supports. The details of the Regional 24 24 Investment Incentives Scheme is further Local Local 22 Photovoltaic Solar Energy Equipment 22 Wind Energy Equipment discussed in the final section of this report. Incentive* 20 20 Incentive* Material focusing the solar Mechanical equipment in 0.5 1.3 18 rays onto the PV module 18 rotor and nacelle groups Inline with the consistent policies and 16 Invertor 0.6 16 Turbine tower 0.6 support mechanisms, renewable energy 14 14 cent/kWh Generator and power Cells forming the PV module 3.5 cent/kWh D 1.0 12 D 12 electronics

equipment manufacturing market is US PV modules 1.3 US expected to flourish and eventually start 10 10 Blade 0.8 exporting to African, East Europe and 8 PV panel integration 0.8 8

6 13.3 Middle East markets in conjunction with 6 4 4 Turkey’s strong potential, reputation for 7.3 2 2 reliable manufacturing and geographical 0 0 location.

24 24 Local Local 22 Geothermal Energy Equipment 22 Hydroelectric Energy Equipment Local equipment Incentive* Incentive* 20 20 Steam injector or vacuum Generator and power 0.7 1.0 manufacturing and 18 compressor 18 electronics Generator and power 16 0.7 16 Turbine 1.3 electronics localization strategy 14 14 cent/kWh Steam or gas turbine 1.3 cent/kWh D 12 D 12 US of the Government US 10 10 constitutes strategic 8 8 6 6 importance in 4 10.5 4 7.3 conjunction with its 2 2 0 0 direct positive effects on job creation, enterprise * Local equipment incentive prices are the incentives for domestically produced equipment and valid for 5 years. As per the recent draft amendment version of the regulation local component YEKDEM support development and (corresponds to local equipment incentives) for unlicensed generation facilities was removed. Source: Law No. 5346 consequently GDP and current deficit.

30 Turkish Energy Market Outlook | Achievements, Overview and Opportunities

Renewable Energy – Investment Support Scheme

Inline with the local and Incentives For Renewable Incentives For Energy Resources: Energy Resources: The following incentives shall renewable generation be provided for the legal entities with •• Renewable energy investments shall be generation license to be commissioned until support policy of the exempt from customs tariff and value 12/31/2020: Government, other added tax for their investment costs (imported solar panels are not within the •• 50% discount shall be applied over the renewable energy incentive scope) system transmission system usage fee for five years starting with the incentives and supports •• Lower license fees commissioning of the plant. are provided besides ––Only 10% of licensing fees ––Annual license fee exemption for the •• During the investment period of the guaranteed feed-in tariff. first eight years of the operations generation plants, transactions and documents related to the generation •• Network connection priorities plant investment shall be exempt from Renewable Energy Resource •• Simplified project preparation and land stamp tax and charges. Areas (YEKA) acquisition procedures New Investment Model for Renewables, YEKA (Renewable Energy Resource Area) •• For the first ten years of the investment Mechanism, has been introduced in order to and operation periods, 85% discount is support renewable energy investments and applied to the cost of right of easement, incentivize local manufacturing of renewable usage right and rent generation assets.

Public and government owned lands that are categorized as highly suitable for the renewable energy generation are defined as YEKA. YEKA is expected to create new opportunities for renewable energy sector and investors. According to YEKA Regulation;

Advantages Necessities Assignment Process

•• The General Directorate of Renewable •• Having a local manufacturing facility •• Projects within YEKA are assigned Energy is responsible for completing; and using local equipment will be to private entities with tenders. ––necessary measurements, mandatory for YEKA tenders as per (According to the draft YEKA ––technical studies, draft YEKA regulation. regulation, underbidding method is ––pre-feasibility studies, used for the tenders. The connection •• Collateral is required for applying YEKA ––transportation infrastructure of capacity usage right is given to the tenders. The exact amount will be YEKAs. applicant that offers the lowest defined for each tender. electricity purchase price.) •• TEİAŞ is responsible for completing; ––energy transmission facilities •• License will be granted to the ––electrical infrastructure plans successful bidder.

•• Simplified procedures are provided to obtain land permission. 31 Turkish Energy Market Outlook | Achievements, Overview and Opportunities

Nuclear Energy

Nuclear power plants will contribute to the 2nd NPP Type: BOO diversification of energy resources and PPA: 20 years (4,400 MW) Terms: Fixed price, security of supply. At this point, Turkish Sinop Fuel cost+10.80 USDcent/kWh, 100% of gen. Government has been taking concrete steps regarding the addition of nuclear power Istanbul plants to its fuel mix. Ankara

An agreement with Russian Atomstroyexport has been made to build the first nuclear power plant in Mersin. Akkuyu NPP is expected to start operations in 2023.

Second NPP will be established in Sinop by a Japanese – French consortium with 51% 1st NPP Type: BOO share and EÜAŞ with 49% share. An intense PPA: 15 years (4,800 MW) Terms: Fixed price, 12.35 USDcent/kWh, (70% and 30% of process is ongoing to establish the project Mersin - Akkuyu generation for Unit 1&2 and Unit 3&4, respectively) company.

There are ongoing negotiations for the third nuclear power plant.

Inline with the Government’s localization policies local industry is expected to attract USD 8 billion investment related to nuclear technology.

32 Turkish Energy Market Outlook | Achievements, Overview and Opportunities

Generation Privatization Timeline

Turkish electricity market has gone through In July 2015, it was announced that 5 Kangal (Lignite) 457 MW a major restructuring and liberalization portfolio group consisting of 9 HEPPs will be 02/08/2013 Hamitabat (NG) USD 985 million process. Enabling market liberalization, privatized and 3 more groups that includes 03/06/2013 1,156 MW privatizations constitute great importance 4 HEPPs were added to this list as the end of USD 105 million 2013 to reduce market share of the state owned 2015. As of May, 2016, all 8 portfolio group Seyitömer (Lignite) 06/17/2013 generation company. Therefore, the Ministry of HEPPs were tendered with total installed 600 MW has showed great effort to accelerate the capacity of 718.4 MW. USD 1.336 billion USD 2,248 million Çatalağzı (Hard Coal) process. corresponding to 1.86 million USD/MW is 04/29/2014 300 MW collected. USD 351 million In order to put forward a detailed plan for Yeniköy,Kemerköy (Lignite) Yatağan (Lignite) privatization of electricity distribution and Privatization Authority continues to privatize 420 & 630 MW 08/27/2014 08/16/2014 630 MW 2014 generation assets, Privatization Strategy power plants that are owned by EÜAŞ. 3 USD 2,671 million USD 1,091 million Paper was prepared by High Planning portfolio group consisting of 5 HEPPs will be Council, in 2004. The liberalization and tendered in late 2016 and it is known that Orhaneli,Tunçbilek (Lignite) Soma B (Lignite) 12/08/2014 210 & 365 MW reform process of the sector can only be these privatizations will be continued. 990 MW USD 521 million accelerated and enabled by limiting the USD 685.5 million 01/13/2015 controlling power of state entities over the It is aimed that EÜAŞ’s generation assets market. 2015-2019 MENR Strategic Plan also (besides the strategic assets, the large points this issue and states that electricity hydro plants) will be transferred to the Manavgat (Hydro) 48 MW Fethiye (Hydro) generation of EÜAŞ will be limited to 20% of private sector through privatizations. 16.5 MW USD 131.2 million Turkey’s electricity generation by 2019. Moreover, BOT type generation assets, after 10/23/2015 10/19/2015 USD 44.8 million completion of their implementation contract Kadıncık I-II Karacaören I-II Between 2008 and 2012 HEPP portfolio durations will be added to the privatization 2015 (Cascade Hydros) 11/16/2015 11/09/2015 (Cascade Hydros) 126 MW which includes 52 small hydro power plants scope, as well. 78 MW were tendered. From these plants, USD 457 USD 298.8 million USD 177.7 million million of total revenue were collected for Average price per MW for other sources Hopa (Fuel-Oil) Doğankent – Kürtün – Torul ca. 170 MW. It corresponds to ca. 2.7 million is realized as; 1.17 million USD/MW for (Cascade Hydros) 50 MW 11/30/2015 USD/MW. hard coal and 0.53 million USD/MW for 12/18/2015 262.7 MW USD 26.6 million fuel oil fired power plants while average USD 435.2 million After the privatization of small HEPPs, privatization price is 1.56 million USD/MW. Privatization Authority started tendering USD Tortum* (Hydro) ca. 6 GW of EÜAŞ’s thermal power plants. 26.2 MW Şanlıurfa* (Hydro) Total 51 MW Privatizations and transfers have been Privatization USD 46 million 26.04.2016 27.04.2016 completed between 2013 and 2015. 10.48 USD 87.3 million billion Income 2016 Adıgüzel - Kemer* / (Cascade Hydros) 28.04.2016 4.3 GW of lignite fired power plants have 110 MW Installed been transferred to private sector and USD 115 million USD 8.2 billion in total which equaled to 1.9 6.7 Capacity of GW Privatized Assets million USD/MW are collected. / Installed Capacity Installed Privatization Price Capacity of * Financial closings are expected to be done. 7-9 To be Privatized Source: Directorate of Privatization Administration GW Assets in Mid- / long Term

33 Turkish Energy Market Outlook | Achievements, Overview and Opportunities

Electricity Transmission

TEİAŞ owns and operates high voltage Along with the transmission line and The state owned transmission network in Turkey, as a substation developments, TEİAŞ state owned natural monopoly. TEİAŞ also enhanced the interconnection transmission system is responsible for grid investments and line capacities. Currently Turkey has provides reliable operations, load dispatch & frequency interconnections capacity of 1,800 MW control, interconnections and generation import and 900 MW export in total. Using infrastructure for both capacity projection. the interconnection capacity, Turkey consumers, generators imported 7 TWh and exported 3 TWh of Transmission infrastructure is designed electricity in 2015. In the Ministry's Strategic and all sector actors in in Turkey mainly to transfer generated Plan 2015-2019, TEİAŞ is targeting to achieve line with the investments electricity from supply rich East to demand 5,500 MW import and 3,800 MW export concentrated West. capacity by the end of 2019. performed.

Turkey has a well established transmission Synchronous connection to the ENTSO-E infrastructure which is enlarged and network has been an important target Interconnection Capacity improved by renewal and development for TEİAŞ. In line with the infrastructure Projection projects. In order to support Turkish developments, trial run period of ENTSO-E Capacities Import (MW) Export (MW) electricity market development, connection started on 09/18/2010. In 2014, 2017 2019 2017 2019 transmission investment spending is it was decreed that Turkish transmission ENTSO-E 650 1,800 500 500 increased at a remarkable rate and reached system will be connected to European Georgia 1,050 1,400 1,050 1,400 to USD 803 million in 2015 which is twelve Continent grid permanently. Long Term Iran 600 1,200 600 600 fold of 2002 budget. Agreement (LTA) for 10 years and related Iraq - 500 400 700 agreements were inked on 04/15/2015. As Syria - 600 500 600 In line with the development in Turkish of January 2016, TEİAŞ became an observer Total 2,300 5,500 3,050 3,800 electricity market during 2002-2015 period, member of ENTSO-E. This agreement is Source: MENR Strategy Plan 2015-2019 these investments enabled substation expected to further increase the import and numbers to be increased by 107%. In 2015, export volumes. TEİAŞ operated 56,744 km transmission lines and 138,951 MVA substation capacity with voltage levels of 380 kV, 220 kV, 154 kV Infrastructure Development and 66 kV. 140 900 Substation Capacity 120 800 TEİAŞ also continues transmission line Transmission Investment Spending 700 investments, a recent major investment 100 600 being 380 kV underwater transmission 80 500 line to transmit electricity that creates a loop around Marmara Sea to relieve the 60 400 300 USD million congestion in Thrace Region. x1000 MVA 40 200 20 100 0 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: TEİAŞ

34 Turkish Energy Market Outlook | Achievements, Overview and Opportunities

Electricity Distribution

Electricity distribution sector has been When the privatizations were finalized in Başkent EDAŞ Sakarya EDAŞ shaped with the successfully conducted 2013, 18 distribution regions were serving 11.85 TWh 07/01/2008 07/01/2008 7.79 TWh 3.079 million 1.308 million and concluded privatizations that aimed for 33.7 million subscribers representing USD 1,225 million USD 600 million to both achieve operational efficiency 164.3 TWh electricity distributed in total. Meram EDAŞ Aras EDAŞ and meet the long delayed investment Privatization tenders were completed with 6.08 TWh 09/25/2008 09/25/2008 2.28 TWh 0.725 million requirements. USD 13 billion in total. As a result, investors 1.531 million USD 440 million USD 129 million paid USD 79 million per TWh electricity Privatization Strategy Paper issued in 2004 distributed and USD 383 million per million Çoruh EDAŞ 2.59 TWh sets the ground rules for the privatization subscribers. Osmangazi EDAŞ 1.018 million USD 227 million process of distribution sector. In 2005, 20 5.16 TWh 11/06/2009 out of 21 distribution companies (DisCo), For further market liberalization, as of 1.311 million Yeşilırmak EDAŞ USD 485 million 4.53 TWh as regional monopolies, were established 01/01/2013, electricity distribution activities 1.521 million as subsidiaries of TEDAŞ, the incumbent and retail sales activities were unbundled. USD 442 million electricity distribution and retail sales As of this date, retail sales activities have Fırat EDAŞ company. Each DisCo is a sole company been conducted under a separate legal 2.49 TWh 0.699 million Uludağ EDAŞ that has operating rights of its own region entity. Thus, market participants’ access USD 230 million 9.91 TWh 02/18/2010 through electricity distribution license to grid infrastructure on equal terms 2.438 million Çamlıbel EDAŞ for a period of 30 years. The assets of is secured and an efficient competitive USD 940 million 2.32 TWh 0.740 million distribution company belongs to TEDAŞ. environment is provided in supply market. USD 259 million

Trakya EDAŞ As an indispensable part of liberalization 5.33 TWh 08/09/2010 process and prerequisite of privatizations, 0.822 million Successfully completion USD 575 million a state of the art tariff mechanism was introduced and the tariffs of the companies of distribution sector Akdeniz EDAŞ 11/12/2012 7.72 TWh were approved in 2006 covering 2006-2010 liberalization process 1.733 million period. USD 546 million handed over 21 Boğaziçi EDAŞ In 2008, Privatization Administration 23.95 TWh 12/14/2012 distribution regions to 4.326 million started the privatization tenders of the private sector with USD USD 1,960 million 18 electricity distribution companies. The Gediz EDAŞ privatization process was successfully 13 billion privatization 12/19/2012 13.54 TWh completed and the transfer of 21 regions to 2.533 million USD 1,231 million the private sectors was completed by 2013. revenue in total. Toroslar EDAŞ Dicle EDAŞ

13.83 TWh 19.48 TWh 3.084 million 1.433 million USD 387 million USD USD 1,725 million 03/15/2013 Total Privatization Van Gölü EDAŞ AYEDAŞ Income 3.78 TWh 10.76 TWh 13 0.515 million 2.299 million billion / USD 118 million USD 1,227 million all Distributed Energy # of Distribution Number of Subscribers 21 Companies Operated Privatization Price by Private Sector regions / Distributed Energy Number of Subscribers Privatization Price

35 Turkish Energy Market Outlook | Achievements, Overview and Opportunities

Electricity Distribution

Electricity distribution and retail sales sector offer great opportunities to the investors to create value through investments and efficient operational activities.

Electricity Distribution Revenue •• Additional profit opportunity due Technical and Non-Technical Regulations to the difference between EMRA’s Loss Performance: Electricity distribution is a regulated determined reference unit cost prices •• Additional profit opportunity arising segment under supervision of EMRA. The and the actual cost prices of the grid from the difference between regional revenues of the electricity distribution investments. (CAPEX efficiency) technical and non-technical loss companies are regulated by the revenue targets and actual ratios (Technical and cap model, very commonly implemented Operating expenditures non-technical loss efficiency). in European countries. The revenue (OPEX): regulation practices in Turkey allow the •• Distribution tariffs subject to regulation •• Additional profit opportunity arising distribution investors to make profits in have been covered a period of 5 years from the difference between approved the following areas: until now. First practice period started OPEX by EMRA and the actual in 2006. As of 01/01/2016, this is the 3rd OPEX (OPEX efficiency). In total USD Investments (CAPEX) / WACC: Tariff Implementation Period. 12.0 billion OPEX budget has been •• Earnings from unamortized capital approved by EMRA in 2015 for the expenditures at a reasonable rate of period 2016-2020. return (WACC rate). The WACC rate •• Other income items that are not valid for 2016-2020 period is set at included in the distribution revenue 11.91% in real TL terms. In total USD adjustments and provided to the 6.29 billion electricity distribution distribution companies as an additional investment budget has been approved income. by EMRA for the implementation period of 2016-2020 in 2015.

Electricity Retail Revenue Gross Profit Margins: Operating expenditures Regulations (OPEX): •• Gross profit margin for the regulated According to the revenue regulation customers has already been approved •• Additional profit opportunity arises practices that EMRA has implemented as 2.38% for the 3rd Implementation from the difference between approved for Electricity Retail Companies, retail Period (2016-2020). OPEX by EMRA and the actual OPEX revenues are regulated with price (OPEX efficiency). cap model. These revenue regulation •• For eligible customers there is a free practices allow the retail companies to market. Increasing the difference •• Late payment penalty income is not make profits in the following areas: between end user price and cost included in the gross profit margin or of energy allows a gross profit for retail service revenue requirement the companies. Increasing the sales calculations and left to the retail volume and market share are the main companies as an additional income. motivations for retail companies.

36 Turkish Energy Market Outlook | Achievements, Overview and Opportunities

Electricity Distribution – Smart Grid

Developments in technology change the Transformation of distribution sector and introduction way the grid operators and the grid users interact with the grid and make use of it. of smart systems are bringing new opportunities Smart grid technologies are developing to for product and technology providing companies. enable this transformation. Estimated investment to smart grid implementations As the first step in smart grid development, is ca. USD 11.2 billion by the year 2035. automated meter reading systems (AMR) emerged which enable more frequent and off-site metering. Turkey also adopted Smart Grid Smart Metering its regulations to introduce AMR in the In Energy Efficiency Strategy Paper In conjunction with smart grid, electricity distribution grid. Widespread use (2012-2023), implementation of smart smart metering systems also play important of AMR systems is essential for full market grid investments is considered as a target role in development of distribution opening and to support efficient grid in order to support electricity intensity infrastructure and support full market management. Implementation of smart grid reduction by 20% before 2023. opening. Similar to smart grid, smart and metering systems enable two way data metering system investments are analyzed communications and enable enhancements With an attempt to increase R&D activities by cost benefit studies. Initially, smart in areas such as demand side management, of electricity distribution companies, EMRA meters are expected to be implemented energy efficiency and balancing peak introduced a support scheme for R&D for high electricity consuming clients demand. These huge investments should projects including smart grid investments within the AMR limitations determined be preceded with carefully studied cost- as a focus area. by the regulator authority. For the later benefit analysis. investment period, smart metering One of the main projects performed systems will be expanded in line with cost in this area is "Turkish 2020 Smart Grid reduction benefits and introduction of new Vision and Strategy Project" the output technologies. of which is Turkey’s 2020 Smart Grid Roadmap. This project provides feasible Smart Market technology selection based on cost- Smart Market is defined as market benefit analysis, systems architecture related benefits of smart solutions. In design, recommendations about required addition to producers, consumers and legislation and human capital targets. prosumers, many other service providers It is expected that implementation of are taking part in these markets (e.g. energy the steps in the smart grid roadmap will efficiency service providers, aggregators, enable consumers to take an active part etc.). Distribution companies need to in the electricity market, increase share of collaborate to manage market related renewables in electricity generation and enabler investments such as integration of improve electricity supply quality. solar-PV installations and electric charging stations. Smart market applications may Estimated investment to smart grid lead to grid implications that must be dealt implementations is ca. USD 11.2 billion by by distribution companies. the year of 2035.

37 Turkish Energy Market Outlook | Achievements, Overview and Opportunities

Electricity Wholesale Market

The trading environment in Turkish As of 2015, organized markets Market Volumes electricity market has gone through volume is 108 TWh whereas bilateral 500 a consistent development. A phased contracts volume is 281 TWh. Total approach was adopted and market places, supplied electricity volume is 221 TWh 400 products and services evolved with corresponding to the market churn ratio 300 improving systems and infrastructure. The of 1.8. electricity market, attracted substantial TWh 200 merchant investment, even in its very early The development of the bilateral contracts 100 stages, is in its mature stage. In line with is driven by the private sector which was the development of organized markets, tripled in volume in 4 years time span. 0 2012 2013 2014 2015 unorganized markets also progressed and Bilateral Volume DAM Volume started to take important role in the market Imbalance Volume BPM Volume by providing more sophisticated products. Day Ahead Market, Settlement Supply Volume Today, Turkish electricity market includes Source: EXIST all necessary market places and services established in 2012, that provide reliable investment signal has reached to 99.3 in a timely and transparent manner and Organized Markets provide necessary tools for the participants TWh trade volume and EXIST TEİAŞ BIST in the market. increased by CAGR DAM Settlement BPM Derivatives Ancillary IDM Collaterals of 24% in the period Services Unorganized Markets between 2012-2015. OTC Bilateral Contracts

Stage 2 Final Situation Stage 1 Transition Period • Day Ahead Market • Day Ahead Market • Day Ahead Planning • Balancing Power Market • Balancing Financial • Balancing Power Market • Hourly Settlement Settlement Mechanism • Balancing Power Market • • Collateral Mechanism Communique • Monthly Period Hourly Settlement • Intraday Market Settlement • Hourly Settlement • Collateral Mechanism • Physical Delivery/Financial Derivative Contracts

November 1 August 2006 1 December 2009 1 December 2011 2015 2003

38 Turkish Energy Market Outlook | Achievements, Overview and Opportunities

Electricity Retail Market

Turkey aims to fully open its electricity In line with gradual market opening and market to competition. In line with this target, the eligibility limit has been developments in electricity trading environment, consistently decreased from 9,000 MWh in Turkey offers great opportunities for retail companies 2003 and reached to 3.6 MWh in 2016. The eligibility limit is expected to be zero in line to have significant market share in the untapped retail with the infrastructure investments at EXIST market. that have progressed substantially and expected to be completed soon. Market Opening Ratio Development

Consequently, reduction in the eligibility Eligibility Threshold limit lead to an increase in theoretical 10,000 100% Theoretical Market Opening Ratio* market opening ratio to 86% of 2016 from 9,000 90% 23% of 2003. 8,000 80% 7,000 70% In line with the market opening and 6,000 60% developments in the electricity market, 5,000 50% total number of private supply licenses has MWh/year 4,000 40% increased substantially. By the end of 2015, 3,000 30% there are 156 supply licenses owned by private sector and one owned by TETAŞ, 2,000 20% state owned wholesale company. 1,000 10% 0 0% Currently, incumbent retail companies,

unbundle retail company of privatized 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 distribution companies, are holding *Theoretical market opening ratio is calculated by EMRA. majority of the eligible consumers. It is Source: EMRA,TETAŞ, Turkish Competition Authority expected that real market opening ratio, was around 25% in 2014. Therefore, as a Number of Private Supply** Licenses result of increasing population and churn 180 160 156 ratio, there will be great opportunities for 160 141 148 new retail companies to have significant 140 122 market share in the electricity retail market. 120 Also, retail companies can create value by 100 operational excellence practices in addition 75 to regular electricity sales practices. 80 60 40 26 27 Turkey is planning to implement and 40 15 19 23 expand smart grid, smart metering and 20 5 demand side management applications. 0 Consequently, this game changer

technology will enable retail companies 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 create differentiated products and create **Previously wholesale license new trade opportunities for the companies. Source: EXIST

39 Natural Gas 4. Market Overview 41 Turkish Energy Market Outlook | Achievements, Overview and Opportunities

Liberalization Timeline of Turkish Natural Gas Market

Regulation related to Third Natural Gas Market Law First Access to Party Access to LNG Natural Gas Market Law Regulation related to the Amendment (Licensing of Transmission System by Terminals (Law No. 4646) Use of Underground Storage Distribution Regions) Regulatory Framework related Private Sector to Third Party Natural gas usage in Turkey emerged to Access to Transmission Network meet the increasing power demand of Turkey, as a solution to the increasing air pollution and in general as a reliable energy source to support development 2001 2003 2004 2005 2007 2009 2011 2012 2013 2015 2016 of Turkey. Development of the natural gas market was initially carried out by public sources in all areas of the value chain. Issuing of the Natural Gas Market Law in 2001 was a major step # of Gas Supplied Establishment of Energy Start of Greenfield First Contract Release First Private Importer First LNG Cargo by Additional 6 bcm Contract in establishing a liberal competitive Distribution Region: 66 Market Regulatory Distribution Tenders Tender for 4 bcm to (West Line) Private Sector by Private Sector market with private participation. Authority Private Sector Tariff Regulation for Natural # of Gas Supplied First FSRU Investment # of Gas Supplied # of Gas Supplied Re-export Natural Gas Until 2001 several steps were taken in Gas Distribution Companies Distribution Region: 64 by Private Sector (Under Distribution Region: 7 Distribution Region: 27 to Greece achieving the liberalization targets. It Development) # of Gas Supplied # of Gas Supplied can be articulated that Source: Deloitte Analysis Distribution Region: 44 Distribution Region: 59 private sector participation in natural gas distribution Total Contracted Volume: 29.3 bcm 45.3 bcm 45.3 bcm 45.3 bcm 51.9 bcm 51.9 bcm 51.9 bcm 51.9 bcm 51.9 bcm 51.9 bcm segment is the most Total Consumption: prominent success in market 16.0 bcm 20.9 bcm 22.1 bcm 26.9 bcm 35.1 bcm 35.2 bcm 44.1 bcm 45.2 bcm 45.9 bcm 48.0 bcm development. Other major 8% 11% 16% development steps are Total Import: 8% 22% summarized in this page. BOTAŞ 100% 100% 92% 89% 92% 78% 84% Private 100% 100% 100%

2001: The Natural Gas Market Law İstanbul, Bursa, İzmit and Eskişehir). There Principles was put into force in 2004 (NGML) was first issued and published in was a need to extend natural gas usage to that Turkey had a workable regulatory Turkish Official Gazette on 05/02/2001. other cities. EMRA then put forward a green framework to be enforced. This Law is the main legislation setting field privatization scheme based on tenders: the ground to establish a financially The first tender was conducted in 2003. The 2005: The NGML contains very sound, stable and transparent natural gas tender process proved to be very successful ambitious targets to decrease BOTAŞ’s market so as to ensure supply of good and this resulted in increasing number of market share and it defines gas release quality natural gas at competitive prices to cities with natural gas usage year by year. All programs as a means to catch this target. consumers in a regular and environmentally the necessary investments were done by Consequently the first contract release sound manner under competitive private sector and consequently the capital tender to release 4 bcm of BOTAŞ contract conditions. The Law introduces third party requirement was also covered by private from GazProm was conducted in 2005. 4 access to grids, sets liberalization targets sector. companies gained the right to negotiate and defines a licensing scheme enabling with GazProm to import 4 bcm of gas from private players to participate in the market. 2004: The NGML and the Regulation Russia through West Line. In 2001, also an independent Energy Market about Natural Gas Market Transmission Regulatory Authority was established. Network Operations Principles (first issued 2007: In 2007, a natural gas wholesale in 2002) sets the basic rules related to Third company signed a Standard Transportation 2003: Before the NGML, natural gas was Party Access to transmission network. But Contract and gained access to the supplied to limited number of cities (Ankara, it was not until BOTAŞ Network Operating transmission network, as the first “Shipper”

42 Turkish Energy Market Outlook | Achievements, Overview and Opportunities

Regulation related to Third Natural Gas Market Law First Access to Party Access to LNG Natural Gas Market Law Regulation related to the Amendment (Licensing of Transmission System by Terminals (Law No. 4646) Use of Underground Storage Distribution Regions) Regulatory Framework related Private Sector to Third Party Access to Transmission Network

2001 2003 2004 2005 2007 2009 2011 2012 2013 2015 2016

# of Gas Supplied Establishment of Energy Start of Greenfield First Contract Release First Private Importer First LNG Cargo by Additional 6 bcm Contract Distribution Region: 66 Market Regulatory Distribution Tenders Tender for 4 bcm to (West Line) Private Sector by Private Sector Authority Private Sector Tariff Regulation for Natural # of Gas Supplied First FSRU Investment # of Gas Supplied # of Gas Supplied Re-export Natural Gas Gas Distribution Companies Distribution Region: 64 by Private Sector (Under Distribution Region: 7 Distribution Region: 27 to Greece Development) # of Gas Supplied # of Gas Supplied Source: Deloitte Analysis Distribution Region: 44 Distribution Region: 59

Total Contracted Volume: 29.3 bcm 45.3 bcm 45.3 bcm 45.3 bcm 51.9 bcm 51.9 bcm 51.9 bcm 51.9 bcm 51.9 bcm 51.9 bcm

Total Consumption: 16.0 bcm 20.9 bcm 22.1 bcm 26.9 bcm 35.1 bcm 35.2 bcm 44.1 bcm 45.2 bcm 45.9 bcm 48.0 bcm

8% 11% 16% Total Import: 8% 22% BOTAŞ 100% 100% 92% 89% 92% 78% 84% Private 100% 100% 100%

apart from BOTAŞ, to ship the local natural access to the LNG terminals shall be on a companies. This process introduced 3 gas produced. Out of the 4 companies that non-discriminatory basis and shall provide additional players engaged in natural gas were successful at the contract release economical, efficient and safe operations imports. Gas import contracts of private tender, the first Shipper obtained its license of the terminal. First LNG cargo by private sector companies increased to 10 bcm. and started gas imports in 2007. Within sector was brought into the system in 2009. the first quarter of 2009, all 4 successful 2016: NGML was amended in 2016. bidders have taken over their contracts and 2011: Similar to LNG terminals, The law amendment included provisions started importing gas from Russia. As per the regulation related to the use of regarding giving rights to the Regulator to the agreement signed between BOTAŞ and underground storage was issued in 2011. increase natural gas storage obligations Greek DEPA company in 2001, re-export of Tariff Regulation for Natural Gas Distribution (from the current level of 10%) up to 20% of Azeri gas to Greece started in November Companies was issued end of 2011 and annual gas consumption and redefinition 2007. started to be implemented for applicable of boundaries of natural gas distribution natural gas distribution companies. The companies. The first FSRU investment 2009: Regulation related to Third regulation sets a state of the art price by private sector was initiated. This is an Party Access to LNG Terminals was issued ceiling approach for determination of gas important step both for diversification of in 2009. The regulation set forward the distribution tariffs. resources and for securely meeting the main commercial and technical rules that peak demand. Studies have been initiated in should be covered by the principles and 2012: 6 bcm of gas contract of BOTAŞ opening a spot natural gas market at EXIST procures document to be prepared by from West Line ended in 2011 and this to be operational in 2017. the terminal operators. It is regulated that volume was taken over by private sector

43 Turkish Energy Market Outlook | Achievements, Overview and Opportunities

Natural Gas Market Value Chain

Natural gas market in Turkey is highly in alignment with the EU Acquis in all areas of the supply chain providing full third party access to gas networks, state of the art tariff mechanisms and gradually opening retail market.

Even though Turkey has very limited natural gas reserves and production, Total Import Volume: 48.4 bcm Turkey is surrounded by resource rich countries and therefore supplies natural Total Production Volume: 0.4 bcm gas from high number of sources. Import & Import Production Production

# of Entry Points: 9 Turkey has a resilient transmission # of Compressors: 9 system that is extensive support Total Length of High Pressure Lines: ca. 13,000 km increasing natural gas usage throughout the country. Entry Volume: 50.2 bcm Max. Daily capacity: 205 mcm/day Transmission

The ongoing and planned investments for underground storage, FSRU and LNG LNG Terminal Underground Storage re-gasification facilities will enhance supply security and flexibility of system # of Active LNG Terminals: 2 # of Active Underground Storages: 1 operations and support Turkey’s vision Total LNG Import: 7.6 bcm Storage Capacity: 2.8 bcm to establish a natural gas trading center. Total Tank Capacity: 535,000 m3 Injection Capacity: 16 mcm/day The growth potential of the market puts & LNG Storage forward further investment requirements Total Re-gasification Capacity: 12 bcm/a Withdrawal Capacity: 25 mcm/day Underground in this area. Max. Design Capacity: 16 & 18 mcm/day

Turkey’s geographical position provides # of Import Licences: a great potential to establish and develop a liquid natural gas trading Pipeline: 15 center to serve supply security of the LNG: 44 countries in the region, Europe and # of Wholesale Licences: 45

Turkey. Wholesale

The greenfield natural gas distribution tenders have been a great success Total Length of Distribution Lines: ca. 80,000 km and supported rapid increase in usage Total Investment: USD 11.4 billion of environment friendly natural gas # of Subscribers: ca. 12 million throughout the country. The projections reveal that, with increasing penetration # of Eligible Subscribers: ca. 0.5 million rates, natural gas demand of households & Retail # of Distribution Companies: 68 Distribution and industry will be the prevailing areas # of Gas Supplied Cities: 77 of natural gas demand increase in the coming years. Competitive Regulated Note: All data represents 2015 values. 44 Turkish Energy Market Outlook | Achievements, Overview and Opportunities

Natural Gas Demand Development

Natural gas consumption in Turkey has The residential natural gas demand is Even though share of been growing in line with economic typically temperature sensitive. During developments, driven by industrialization the cold days, gas is primarily consumed natural gas usage in and urbanization. Additionally, population for space heating in households and total electricity generation is growth expectations show a great potential natural gas consumption volume increases for further growth. due to the heating requirement. Maximum likely to drop, increasing monthly residential gas consumption in penetration rates, The CAGR of natural gas consumption 2015 winter period is about eight times volume for the period 2002-2015 is 8.1%. more than the average monthly residential population growth, In 2015 natural gas consumption realized consumption in summer period. urbanization and as 48 bcm. The share of natural gas in total energy consumption of Turkey reached Moreover, industrial natural gas demand is industrialization will lead 33%. Natural gas demand consists of expected to increase in line with increasing to continued natural gas three sub segments, which are electricity GDP and economic growth. generation, industry and heating. demand increase in the coming years. Electricity generation has the highest share among natural gas consumption in industry Historical Demand Development Breakdown and heating. It is expected that share of 2015 Breakdown natural gas in electricity generation will be 50 Heating suppressed by the upcoming base load 45 Industry 31% electricity generation projects utilizing coal 40 Electricity Generation and nuclear power. However, the need for 35 flexible natural gas fired power plants will 30

continue for system security reasons. cm 25 29% b 20 Industrial and residential natural gas 15 10 consumption is expected to continue rising 40% in the coming years. The studies reveal that 5 the main demand driver is the growth of 0 residential demand. Gas distribution line investments and the consequent increase 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: EMRA in penetration rates are expected to increase the number of natural gas users. Top 10 European Gas Consumers, 2015 As a result, residential use of natural gas is expected to climb.

461 81 72 68 48

th Russia Germany United Italy Turkey Turkey is the 5 largest Kingdom country in Europe in terms of natural gas consumption 40 39 35 28 19 with 48 bcm and still has Netherlands France Ukraine Spain Belarus Source: IEA potential for growth. Note: All consumption values are in terms of bcm. 45 Turkish Energy Market Outlook | Achievements, Overview and Opportunities

Import & Production

Turkey is an import dependent country security of supply by both diversifying In 2015, total import share is 84% (40.6 due to limited local production (0.4 bcm in the supply sources and enhancing the bcm) for BOTAŞ and 16% (7.8 bcm) for the 2015). Only 1% of the total consumption can infrastructure. private sector players. be met by domestic production. Natural gas is supplied via 12 long term Reducing BOTAŞ market share is one of Import volume has been growing in line pipeline contracts, 2 long term LNG the provisions covered in the NGML with with the increasing natural gas demand. contracts and spot trading (various a purpose to create a competitive and In 2015, ca. 48.4 bcm of natural gas is countries such as Qatar, Norway etc.). liberal natural gas market. In line with this imported to the domestic market. The Moreover, there exists a contract with target, 4 bcm contract of BOTAŞ in West CAGR of import volume for the period Turkmenistan (16 bcm/a); however, there is Line was transferred to private sector between 2005-2014 is 6.2%. Even though no pipeline at the moment for such supply through a process that started in 2005 and Turkey is dependent on import of natural alternative. was concluded in 2009. Second release gas, all necessary steps are taken to ensure was realized in 2012 as renewal of 6 bcm contract of BOTAŞ by private sector players.

Long Term Contracts

Playground for Private Sector Contract Release 80 Azerbaijan Phase-II via TANAP Pipeline Azerbaijan Possible renewal of Iran Nigeria LNG 70 Algeria LNG Russia Blue Stream Russia West Total Demand current BOTAŞ contracts 60 Demand Projections by private sector 50 companies provides an

bcm 40

30 extensive playground for

20 private sector players and 10 newcomers.

0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Source: BOTAŞ, EMRA

Contracted Importing Company Source Country Imported Company Quantity Total Import Volume, 2015

7 Private Companies Russia (West Line) GazProm 10.0 bcm/a 3% Russia Sector Private 5% 8% Iran BOTAŞ Russia (Blue Stream) GazProm 16.0 bcm/a 13% Azerbaijan BOTAŞ Iran NIGC 9.6 bcm/a 55% Algeria (LNG) BOTAŞ Azerbaijan SOCAR 6.6 bcm/a 16% Nigeria (LNG)

Public Sector BOTAŞ Russia (West Line) GazProm 4.0 bcm/a BOTAŞ (LNG) Algeria Sonatrach 4.4 bcm/a SPOT (LNG)

BOTAŞ (LNG) Nigeria NLNG 1.3 bcm/a Source: EMRA Source: BOTAŞ

46 Turkish Energy Market Outlook | Achievements, Overview and Opportunities

West Line Blue Stream

South Caucasus

Eastern Anatolia

West Line - Russia Blue Stream - Russia Eastern Anatolia - Iran The total length of the pipeline: 842 km The total length of the pipeline: 1,213 km The total length of the pipeline: 1,491 km Contract volume: 14 bcm/a Contract volume: 16 bcm/a Contract volume: 9.6 bcm/a Source country: Russia Source country: Russia Source country: Iran Max. daily capacity: ca. 51.4 mcm/day Max. daily capacity: ca. 47.4 mcm/day Max. daily capacity: ca. 28.6 mcm/day Importers: BOTAŞ (4 bcm/a) and 7 Private Importers: BOTAŞ Importers: BOTAŞ Sector Players (10 bcm/a) BOTAŞ contract termination date: End of 2025 BOTAŞ contract termination date: July 2026 BOTAŞ contract termination date: End of 2021

South Caucasus - Azerbaijan LNG - Algeria LNG - Nigeria The total length of the pipeline: 692 km Contract volume: 4.4 bcm/a Contract volume: 1.3 bcm/a Contract volume: 6.6 bcm/a Source country: Algeria Source country: Nigeria Source country: Azerbaijan Importers: BOTAŞ Importers: BOTAŞ Max. daily capacity: ca. 19.1 mcm/day BOTAŞ contract termination date: October BOTAŞ contract termination date: October Importers: BOTAŞ 2024 2021

Active Import Contracts BOTAŞ contract termination date: April 2021

TANAP - Azerbaijan Turkish Stream - Russia Iraqi Gas

Contract volume: 16 bcm/a (6 bcm/a to Prospective volume: 31.5 bcm/a (15.75 Prospective volume: ca. 3 bcm/a Turkey) bcm/a to Turkey)

Iran – Turkey - Europe East Mediterranean Gas Turkmen Gas

Prospective volume: 35 bcm/a (Total) Prospective volume: 10-20 bcm/a Contract volume: 16 bcm/a Prospective

47 Turkish Energy Market Outlook | Achievements, Overview and Opportunities

Natural Gas Transmission Sector

BOTAŞ is the sole company licensed for With the ongoing and planned investments, Turkey transmission and regulations allow for other players to invest in this area. The has a well developed and resilient transmission grid. investments of BOTAŞ to expand its Turkish natural gas transmission system with a total transmission network to cover the whole country have been largely completed, and pipeline length of ca. 13,000 km is one of the biggest the total length of high pressure lines has transmission systems in Europe. reached approximately 13,000 km. Gas is supplied to the main transmission network aimed at increasing gas dispatch capacity. The sum of maximum allocable capacities from 4 other (international) transmission Within TANAP Project two additional of the foreign network connections, LNG networks, 2 LNG terminals, 1 underground off-take stations will be located along the terminals, underground storage facility and storage facility and 2 domestic extraction pipeline, one located in Eskişehir and the 2 domestic extraction sites constitute the sites. Gas is off-taken from the network other in Thrace. With 19 km running under maximum supply capacity that the network at more than 300 Pressure Reducing and the Marmara Sea, the main pipeline within can offer in daily basis. Currently Turkey’s Metering Stations directly connected to the Turkey will reach a total of 1,850 km. natural gas network entry capacity is 205 network. Future investments are focused mcm/day, but it can meet up to 240 mcm/ mainly on the construction of loop lines and day by using linepack. Moreover, these installation of new compressor stations, figures will increase in 2016-2017 winter through capacity expansion of LNG terminal and additional FSRU facility. WEST LINE

BLUE STREAM SOUTH CAUCASUS

BOTAŞ MARMARA LNG Terminal

EASTERN ANATOLIA EGEGAZ ENERJİ LNG Terminal

Existing Gas Pipeline Planned Gas Pipeline / Under Construction Source: BOTAŞ, Deloitte Analysis International Entry Point Compressor Station

48 Turkish Energy Market Outlook | Achievements, Overview and Opportunities

Underground Storage & LNG Terminals

Underground Storage ongoing investments storage capacity, Underground storage The main objectives of the underground withdrawal and injection capacities of Silivri natural gas storage facilities are to meet underground storage facility will improve. facilities and LNG peak demand in the short term, to store terminals introduce great natural gas as strategic reserve, to manage The main project which plans to enhance take-or-pay obligations, to balance the Turkish Grid’s storage capacity is BOTAŞ’s flexibility in management flow in pipeline system and to decrease Tuz Gölü underground storage facility and of the natural gas grid. price fluctuations. In Turkey, there is one 80% of the project has been completed. active underground natural gas storage The project will increase the storage Turkey needs further facility with 2.8 bcm total storage capacity capacity of Turkish market by 1 bcm. investment in these two and ca. 6% of Turkey’s annual natural Moreover, there are three licensed private gas consumption can be stored at Silivri sector storage projects. The ones in Tarsus areas in addition to its underground storage facility. Through Region have capacities of 3 bcm and 1 bcm. currently active facilities.

# of active storages: 1 (BOTAŞ) Active Underground Storage (BOTAŞ) # of storages under construction: 1 (BOTAŞ) Storage capacity: 2.8 bcm (4.3 bcm in 2024) # of licensed storage projects: 3 (Private Sector) Injection capacity: 16 mcm/day (45 mcm/day in 2024) Withdrawal capacity: 25 mcm/day (75 mcm/day in 2024)

Active LNG Terminal (BOTAŞ) Tank capacity: 3x85,000 m3 (255,000 m3) Max. re-gasification capacity: 6 bcm/a (9.3 bcm in 2018) Max. design capacity: 18 mcm/day (27 mcm/day in 2018) Daily truck loading capacity: 75 Length of jetty: 380 m Available for 40,000-130,000 m3 LNG cargoes

Active LNG Terminal (Private) Tank capacity: 2*140,000 m3 (280,000 m3) Max. re-gasification capacity: 6 bcm/a Max. design capacity: 16 mcm/day (24 mcm/day in 2017) Daily truck loading capacity: 50 Length of jetty: 340 m Available for 60,000-220,000 m3 LNG cargoes Underground Storage (Active) LNG Terminal (Active)

Underground Storage (Licensed Project) LN G Terminal (Licensed Project) # of active terminals: 2 (1 BOTAŞ, 1 Private Sector) Underground Storage (Under Construction) FSRU Terminal (Under Development) # of licensed terminal projects: 3 (Private Sector) Source: EMRA # of FSRU projects: 1 (Private Sector)

LNG Terminals by a private company. Additionally, there Underground storage and LNG terminal There are two active LNG terminals in are 3 licensed private sector LNG terminal investments are defined as “priority Turkey, one is owned by BOTAŞ (Marmara projects in İzmir and Adana. Moreover, new investments”. Regardless of their actual Ereğlisi LNG Terminal) and LNG cargoes are projects are supported to diversify natural investment region, their regional support imported to the terminal with the Algeria gas source. Turkey’s first FSRU project is is extended to Region V by the Regional and Nigeria long term LNG purchase under development. Investment Incentives Scheme to enjoy contracts of BOTAŞ and spot LNG. The several investment benefits. other LNG terminal in İzmir Aliağa is owned 49 Turkish Energy Market Outlook | Achievements, Overview and Opportunities

Turkey as a Natural Gas Trading Center

Acting as a natural gas trading center its own consumption. Pipeline gas has an investments in transmission grid, LNG and country induces three opportunities with indispensable role in the European supply underground storage, other prospective economic and strategic benefits. and Turkey is perfectly located to become sources of gas and FSRU facilities, Turkey Europe’s south eastern supply node. The strengthens its import source variability Macroeconomic Impacts establishment of Turkish Natural Gas and increase the gas import capacity. #trade #employment Trading Center would make a contribution The spot natural gas market that is being #GDP #investments to supply security by diversifying supply developed by EXIST to be operational by

Gas to Gas Competition Supply Contestability sources and gas transmission routes for 2017 will support natural gas wholesale #competitive pricing # flexibility of both Turkey and Europe. market and the target to become a natural #reference price managing the demand formation #security of supply gas trading center. Turkey, due to its geographical advantage, is fully aware of its potential, responsibility Considering Turkey’s great potential and Turkey is located on the cross-roads of and strategic role, and aims to improve the ongoing and expected investments world’s major natural gas source countries upon its current position by becoming in infrastructure and diversification of (East Mediterranean, Iraq, Azerbaijan, a natural gas trading center. With resources, Turkey’s ambition to establish a Russia, Iran) and large consumption nodes international gas transmission projects regional liquid natural gas trading center is such as European countries, in addition to (TANAP and TAP), ongoing and planned likely to materialize earlier than expected.

Turkey NG Consumption By its geographical , urmenistan Aeraian , position, Turkey is located cm cm cm at the center of natural cm , ran cm gas producer countries srae with total ca. 113 tcm cm ean cm , atar reserves and large cm Europe NG Consumption Forecast consumption nodes such eseres , cm pt as EU countries with total cm , 435 bcm demand. cm ia , cm cm ussia cm

Source: European Commission, IEA, BP

50 Turkish Energy Market Outlook | Achievements, Overview and Opportunities

Natural Gas Distribution & Retail Sector

Through the last two decades, gas pipelines continuous investment program and the The total number of residential subscribers have spread across the country with current value of cumulative investments reached to ca. 12 million as the end of large amount of investments and Turkey has reached to USD 11.4 billion by end 2015 and it is expected to be doubled by experiences a rapid growth in penetration of 2015 from USD 2.6 billion in 2006. 2030. It is also estimated that 66% of the of natural gas. By the end of 2015, the Moreover, planned total investment total population has access to natural natural gas distribution penetration is amount is USD 2.4 billion for the 7 years gas infrastructure and 55% of the total increased to 95% with gas supplied to 77 period between 2016-2022 corresponding population is using natural gas. cities out of 81; in 2003, it was only supplied to USD 342 million annually. to 6 cities. Such rapid expansion of gas Eligibility limit decreased dramatically distribution is closely associated with the In parallel with the investments in between 2007 and 2016 from 1,000,000 success of greenfield tendering of gas distribution regions, total pipeline length m3 to 75,000 m3. As a result, number of distribution licenses run by EMRA. has reached ca. 80,000 km which has eligible gas consumers increased to ca. 0.5 tripled through the last decade. million, which consumed 21 bcm natural Natural gas is supplied to 77 cities via gas in 2015. Currently gas retail business 68 licensed natural gas distribution The gas distribution grid is fully open for the captive customers is conducted companies. In order to increase to third party access providing non by natural gas distribution companies. penetration and provide better services, discriminatory access to all system After unbundling of distribution and retail these companies have executed a users. segments is accomplished and the market is fully open to competition, the market will offer great opportunities for the retail Number of Gas Supplied Cities Total Investment Made by The segment. Distribution Companies 90 74 77 14 80 68 69 62 Currently the state incumbent BOTAŞ 70 57 58 12 60 50 10 provide gas to 90% of CCGTs and 50% of 50 38 8 industrial consumers. An analysis reveal 40 30 6 30 18 USDbillion that private sector players can capture a 20 6 10 4 10 2 market size of 20 bcm/a from the highly Number of Cities 0 0 price sensitive industrial and electricity sectors in line with the development of the 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: EMRA market. Source: GAZBİR Turkey offers outstanding Residential Subscribers opportunities with its and Consumption Projection, Development of Eligible developing gas retail 2016- 2030 Consumer Limit 1,200 23 25 22 22 22 1,0001,000 21 21 1,000 sector to domestic and 19 20 1,000 18 800 20 17 18 16 15 800 700 14 20 20 20 21 international investors, as 13 19 19 3 15 18 18 17 600 15 16 14 the country experiences 10 13 300 11 12 m x1000 400 300 Number of Subscribers (million) a steady infrastructure 5 200 100 75 75 Consumption of Subscribers (bcm) development and 0 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 constructs a countrywide Source: GAZBİR Source: EMRA gas network.

51 Coal Market 5. Overview 53 Turkish Energy Market Outlook | Achievements, Overview and Opportunities

Coal Market Overview

As an emerging market with ever growing In Turkish coal balance 2014, coal consumption energy demand, coal in Turkey has important role in the energy mix thanks to its cost and reached 95.9 million tons 68% of it was met by local accessibility advantages. sources and the remaining demand was supplied by

In 2014, Turkish proven coal reserves coal imports. increased to 16.9 billion tons and also coal consumption reached to 95.9 million tons. As Value Chain (2014) an important source in the total coal supply, 1. Reserve 2. Supply (million tons) 3. Consumption local production reached to 1.8 million tons (billion tons) Production Import (million tons) of hard coal and 62.6 million tons of lignite. TTK represented nearly all of the local hard TTK Hard TTK (1.3) Import (29.8) coal production and state owned companies Private Sector Private Sector (0.5) 5.6 5.3 Coal (1.3) 20.4 like TKİ and EÜAŞ held more than 50% of lignite production. As a result of the lignite power plant privatizations, private sector EÜAŞ (8.5) TKİ (14.9) players in total has become the leader TKİ (3.4) Lignite EÜAŞ (19.0) producer in the lignite production. MTA (2.6) Private Sector** 4.0 Private Sector (1.1) (28.7) 57.5 3.0 Hard coal import of 29.8 million tons dominated hard coal market and Total (64.4) Total (29.8) Total (16.9) Total (95.9) represented 94% of total hard coal supply. Total (94.2) As a leading coal consuming sector, Conversion Sector * Stated in Strategy Paper 2009, MENR Strategy Plan (2015-2019) and 10th conversion and energy sector constituted Household & Services*** Development Plan Industry 81% of total coal consumption. On the ** Private sector's lignite production is subjected to approval other hand, residential & services and *** Includes agricultural consumption industry represented 10% and 9% of coal Source: EÜAŞ, TKİ, MENR, Deloitte Analysis consumption, respectively.

Main Actors in the Sector Coal Sector Incentives and Targets* On 06/04/2016, 6446 Electricity Market Law MİGEM: On behalf of MENR, MİGEM carries Exploration and research services for local has been amended and TETAŞ has been out activities such as license granting, auditing coal mines will be accelerated. enabled to make power procurements from and project evaluating for mining sites operational lignite fired power plants. The belonging to public companies. Ready for use coal reserves held by public procurement price is set to 63 USD/MWh sector will be handover to private sector (185 TL/MWh) for 2016 which is ca. 1.5 fold of MTA: MTA, a public institution, provides in return for royalty payments and proven current market price levels. exploration and research services for coal reserves will be utilized in electricity mining sites belonging to public and private generation by the year of 2023. companies. Lignite fired power plant investments, TKİ, TTK, EÜAŞ: These 3 public companies are are included in Region V of the Regional responsible for contributing coal fields to the Investment Incentives Scheme and economy by performing activities such as coal consequently benefit different tax and social mining and trading within legal bounds. security premium advantages, land acquisition rights and other financial supports. The details Private Sector: Private companies can of the Support Scheme is further discussed in participate in any mining activities by obtaining the final section of this report. related legal rights and licenses. 54 Turkish Energy Market Outlook | Achievements, Overview and Opportunities

Coal Reserves

In 2015, it is announced that Turkey has Turkey has 1.3 billion tons Lignite Reserve 1.3 billion tons of hard coal reserves with Increase CAGR of hard coal reserves. In % different calorific values swinging between 4.8 (2004-2015) 5,450 – 7,050 kcal/kg. Among the reserve the recent years, reserve / types, coking reserves has 67% share in Turkey’s Lignite total reserves with 0.9 billion tons whereas volume of major hard 15.6 Reserve Amount semi coking and non coking reserves have coal fields remained billion tons 32 million and 0.4 billion reserve volumes, / respectively. at the same level. On the other hand, lignite As an important lignite country, Turkey’s lignite reserves have shown steady growth reserves increased from in line with the exploration activities. For 9.3 billion tons to 15.5 the years between 2004 and 2015, lignite reserves have increased by CAGR of 4.4% billion tons. from 9.3 billion tons to 15.5 billion tons which constitutes 4.1% of the total lignite reserves in the world. In general, Turkish lignite reserves have calorific value in a range of 1,000 kcal/kg - 4,200 kcal/kg and 90% of the total reserves have calorific value under 3,000 kcal/kg.

Hard Coal Reserves (2015) Lignite Reserves (2004-2015)

18 16 14 31% 12 10 Hard Coal 8

Reserves (billion tons) 6 Lignite Lignite Reserves 1.3 4 billion tons 2 67% 2% 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Source: TKİ

Non Coking Semi Coking Coking

Source: TTK

55 Turkish Energy Market Outlook | Achievements, Overview and Opportunities

Coal Supply

Hard Coal Supply a prominent role in production and as the In order to meet Turkish hard coal supply has shown steady end of 2015, private sector share increased growth in recent years and reached to 35.4 to 54%. increasing hard coal million tons in 2015. demand, Turkish hard Although, recent developments in Decreasing production rate of TTK and conversion and energy industry increased coal supply leaned to local private sector players lead hard coal the total lignite demand, for the six years imports and as a result importers to match the increasing hard coal between 2009 and 2014, local lignite demand. In order to uplift the decreasing production plummeted by 17% from import ratio in hard coal hard coal production of TTK, mining sites 76 million tons to 63 million tons. This supply reached to 96%. are transferred to private sector players reduction in the total production is caused in exchange for royalty fees starting from by decrease in the industry and household 2005. However, both TKİ and private consumption. production levels kept decreasing. Hard Coal Supply (2000-2015)

Since 2010, local hard coal production 40 100% Production Import Import Ratio decreased from 2.4 million tons to 1.4 35 million tons. At the same time period, 95% 30 coal imports increased by 6% annually, supported by newly commissioned coal 25 90% fired thermal power plants and imported 20 coal ratio in the total supply increased from 15 85% 84% in 2000 to 96% in 2015. 10 Import Ratio 80%

Currently, total top five importing countries Supply (million tons) 5 (Colombia, Russia, South Africa, Australia 0 75% and USA) constitute more than 90% of

Turkish hard coal imports. 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: MENR Lignite Supply Due to its low calorific nature, lignite Lignite Production (2000-2015) reserves are generally consumed in the 90 mine-mouth area and its place in global coal 80 trade is fractional. Therefore, total supply of 70 the lignite is highly proportional to the local 60 consumption since there is no market to sell the supply surplus. 50 40 Lignite reserves are used as primary fuel 30 of lignite power plants which are operated 20 by EÜAŞ and private electricity companies. Due to the recent lignite power plant 10 privatizations, private sector started to take Production (million tons) 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Source: TKİ

56 Turkish Energy Market Outlook | Achievements, Overview and Opportunities

Coal Consumption

Turkish coal demand is mainly generated by In parallel with development in hard coal power plant 3 sectors: conversion & energy, household & services and industries. In 2014, hard investments and lignite power plant privatizations, coal consumption reached to 31.5 million coal consumption of conversion & energy sector tons and also lignite consumption reached back to 64.6 million tons. increased to 78 million tons and compensated the total coal consumption loss in the industry and By sectorial consumption, conversion & energy sector increased its hard coal household & services. As a result of political support consumption by 15% from 17.8 million tons to use more local resources for electricity generation, in 2013 to 20.4 million tons in 2014. Lignite consumption in conversion & energy sector lignite consumption in electricity generation is also increased by 22% and reached to 57.5 expected to further increase. million tons. Total coal consumption in household & services decreased by 13% and become 8.6 million tons. Whereas, industry coal consumption is increased by 11% and reached to 9.4 million tons.

Conversion & Energy Household & Services* Industry

As the biggest coal demand contributor, Despite of the advances in natural gas Although industrial coal consumption conversion & energy sector constituted grid, coal consumed for heating purposes decreased from 9 million tons in 2008 65% of hard coal and 89% of lignite still has an important place in total coal to 8.3 million tons in 2014, major coal consumption. In last 5 years, coal power consumption and it reached its maximum consumers like cement companies still plant investments increased the hard coal level in 2012. After that, coal consumed in consuming around 4.5 million tons of hard consumed in power plants by 58% also household & services sector plummeted coal annually. As one of the top 10 cement after lignite power plant privatization in by 48% from 16.6 million tons in 2012 to markets, Turkish industry is expected 2012 lignite consumption increased slightly 8.6 million tons in 2014 as a result of the to have important place in the hard coal from 56 million tons to 57 million tons. residential penetration of natural gas use demand. for space heating.

Conversion & Energy Household & Services Consumption Consumption Industry Consumption 100 15 10 80 8 60 10 6 40 5 4 20 2 0 0 0 2008 2009 2010 2011 2012 2013 2014 2008 2009 2010 2011 2012 2013 2014 2008 2009 2010 2011 2012 2013 2014

Hard Coal Lignite Source: MENR * Includes agricultural consumption

57 Petroleum 6. Market Overview 59 Turkish Energy Market Outlook | Achievements, Overview and Opportunities

Petroleum Market Overview

Petroleum consumption in Turkey with With its growing demand Turkey is located in a region that includes 32.5 Mtoe takes the third place in energy 70% of the explored oil and gas reserves consumption after natural gas and coal. and geographical all over the globe. Therefore, Turkey During the last decade, annual crude oil location, Turkey outshines has a geographical advantage for both production of Turkey realized at stable transportation and exploration of oil. levels as 2 to 2.5 million tons and met ca. as a prominent market Declining oil prices decreased the number 9% of crude oil consumption and ca. 7% of for petroleum sector of oil exploration activities globally, total petroleum consumption of 2015. Most nevertheless there are still large number of the domestic oil extraction is from the investments especially of ongoing exploration activities. Turkey is fields in Batman and Adıyaman. in areas of exploration, leading in terms of number of exploration activities within EU countries however Crude oil imports constitute 63% of total refinery and trade. compared to the rest of the world, number petroleum imports. Imported crude oil is of active oil rigs in Turkey low. As of August processed in the refineries to produce the 2016, more than 1,500 rigs are active in qualified petroleum product that is supplied the world and the rigs in Turkey constitutes to both national and international markets. 2% of it, showing a potential for further oil exploration activities.

Market Overview of Petroleum Products Number of Active Oil Rigs* Million Tons Supply Side Demand Side United States

Exploration & 481 Import Refining Consumption Export Production Refining Export

Crude Oil 2.5 25.1 27.5 Middle East 379 Diesel Fuels 11.9 8.5 20.6 <0.1 Gasoline Fuels 0 5.1 2.1 3.1 Fuel Oil Types 0.9 0.5 0.6 1.0 Canada Aviation Fuels 0.2 5.0 1.3 3.8 129 Marine Fuels 0.1 2.3 0.2 2.4 Non-Fuel Products 1.5 6.3 7.3 0.5 Turkey Total: 14.6 Total: 27.9 Total: 32.1 Total: 10.8 31

Source: EMRA Rest of the World 527

*As of August 2016 Source: Baker Hughes

60 Turkish Energy Market Outlook | Achievements, Overview and Opportunities

Import & Export

Import Although more than Crude Oil Import Turkey imported ca. 40 million tons of Share in Total crude oil and petroleum products in 2015. half of the petroleum 63 % Petroleum imports is crude oil, with / Imports (2015) 63% of petroleum imports was realized as Refined Products crude oil and all of them were processed the help of sophisticated Export Share in by refineries in Turkey. Diesel fuels refineries in Turkey, all of % constituted one fourth of the imports with 100 Total Exports ca. 12 million tons. Domestic consumption the petroleum product / (2015) and export of gasoline fuels are met exports are in the form by refineries, so gasoline fuel was not imported in 2015. of value added refined petroleum products. More than half of the imports are supplied by three countries (Iraq, Russia, Iran) while 75% of imports are met by five countries. ra Malta Export Turkey exported ca. 11 million tons of ussia Egyt petroleum products in 2015. To ran To E Imports countr Exports countr Aviation, gasoline and marine fuels are vaues in miion nia tons vaues in miion erany the leading exported products among tons petroleum products. Since domestic raia ain consumption of diesel fuels was ca. 20 million tons, all refined and imported diesel fuels are consumed in Turkey, so diesel ra export was realized at a very low level. Malta

ussia Turkey exported petroleum products to Egyt

high number of countries,To in 2015 more ran To E than 130 country importedImports petroleum countr Exports countr products from Turkey.vaues But, in miion ca. 45% of the nia tons vaues in miion erany exports are made to top five countries and tons raia Malta, Egypt and United Arab Emirates are ain the leading countries that Turkey exports petroleum products. Source: EMRA

61 Turkish Energy Market Outlook | Achievements, Overview and Opportunities

Crude Oil Transportation & Storage

More than one million barrels per day is East and Caspian Regions. Furthermore, in Railcars and marine vessels are another supplied from Ceyhan Marine Terminal to order to transport Russian and Caspian oil sources for oil transportations. Currently, international markets and the Terminal's to the international markets a new pipeline, 71 marine transportation companies hold capacity is expected to be increased Samsun-Ceyhan Pipeline that crosses petroleum transportation licenses and substantially with existing and projected Turkey vertically is projected. This crude there are six licensed railway transportation international pipelines. Ceyhan Marine oil pipeline with marine terminal storage companies in Turkey. Terminal is located at cross- roads of tanks and pumping stations is expected to globally important oil reserves of Caspian ease the increasing tanker traffic in Turkish Storage of crude oil and petroleum sea, Middle East and Russia. Due to its Straits. Currently, 5% of the global maritime products has a crucial importance in terms strategic location, Ceyhan has the potential trade of petroleum is transported through of supply security, therefore in addition to to be an oil trading center and this vision is the Straits. storage capacity of existed refineries there also widely supported. are more than 100 storage facilities, which Domestic pipelines are constructed to have a total of ca. 12 million tons of storage Turkey supplies crude oil to international provide crude oil to Kırıkkale Refinery and capacity, active in Turkey. Total storage refineries through BTC and IT pipelines by transport domestic oil extraction to Ceyhan capacity is ca. 50% of Turkish consumption. transporting extracted oil from Middle Marine Terminal. Turkey also holds a strategic petroleum stocks equivalent to 90 days of Turkey's annual imports. International Pipelines Black Sea İ zmit Refinery Iraq – Turkey (IT) Pipeline 11.0 Mton NCI: 14.5 Number of Lines: 2 İstanbul Kırıkkale Refinery Total length of the pipeline: 1,876 km (986+890) Marmara 5.0 Mton NCI: 6.32 Annual Capacity: 70.9 Million Tons Transported Crude Oil, 2015: 26.1 Million Tons İ zmir Refinery Ankara Transporter: BOTAŞ 11.0 Mton NCI: 7.66

Baku – Tbilisi – Ceyhan (BTC) Pipeline Batman Refinery Number of Lines: 1 STAR Refinery 1.1 Mton 10.0 Mton NCI: 1.83 Total length of the pipeline: 1,776 km Annual Capacity: 50.0 Million Tons Doğu Akdeniz Transported Crude Oil, 2015: ca. 36.0 Million Tons Refinery 15.0 Mton Transporter: BOTAŞ International Limited Ceyhan Marine Marine Terminal Terminal Refineries National Pipelines Mton: Million Tons Planned Refineries Source: EMRA, TÜPRAŞ Ceyhan – KırıkkalePipeline Pipelines Number of Lines: 1 Planned Pipelines Total length of the pipeline: 448 km Annual Capacity: 7.2 Million Tons Transported Crude Oil, 2015: 4.3 Million Tons Transporter: BOTAŞ Ceyhan Marine Terminal with ca. 200 million tons of

Batman – Dörtyol Pipeline annual capacity has a potential to be an oil trading Number of Lines: 1 center by integrating Russian, Caspian and Iraqi oil Total length of the pipeline: 511 km Annual Capacity: 4.5 Million Tons with international markets. Transported Crude Oil, 2015: 2.8 Million Tons Transporter: BOTAŞ

62 Turkish Energy Market Outlook | Achievements, Overview and Opportunities

Refineries

More than USD 5 billion was invested Even though refineries in Turkey are in existing refineries in the last decade, distinguished from the Mediterranean İzmit Refinery one more refinery is under construction region refineries with qualified final Annual Capacity: 11.0 Million Tons and one additional refinery project is petroleum products, a continuous Capacity Utilization: 111.3% being developed. Due to its current investment program is applied and ca. USD Nelson Complexity Index: 14.50 Storage Capacity: 3.02 Million m3 refinery capacity and huge refinery 5.5 billion was invested in the refineries Owner: TÜPRAŞ investments, Turkey has further potential over the last decade. USD 3.1 billion of it to supply qualified petroleum products to was invested for the Residuum Upgrading KırıkkaleRefinery international energy markets utilizing its Project on İzmit Refinery and NCI – a metric Annual Capacity: 5.0 Million Tons geographical advantage and huge refinery to measure white product yield- of the Capacity Utilization: 87.1% investments. refinery was increased to 14.5. Nelson Complexity Index: 6.32 Storage Capacity: 1.38 Million m3 Four refineries are located in Turkey with In order to meet Turkey's demand and Owner: TÜPRAŞ annual oil processing capacity of 28.1 export qualified petroleum products to million tons. 27.9 million tons of crude oil international petroleum markets two İzmir Refinery was processed in 2015 with 98% average refinery projects are ongoing which are 11.0 Million Tons capacity utilization. STAR and Doğu Akdeniz refineries. STAR Annual Capacity: Capacity Utilization: 102.8% Refinery, one of the largest foreign direct Nelson Complexity Index: 7.66 investments to Turkey, is scheduled to Storage Capacity: 2.51 Million m3 start operation by March 2018 with the 10 Owner: TÜPRAŞ million tons crude oil processing capacity. Batman Refinery Annual Capacity: 1.1 Million Tons Refinery Production of Turkey, 2015 Capacity Utilization: 91.4% Million Tons Nelson Complexity Index: 1.83 0 1 2 3 4 Storage Capacity: 0.25 Million m3 TÜPRAŞ 1 4.1 Owner: 2.8 Crude Oil İzmit3 2.9 Production Refinery 0.8 2.5 Million 5 0.4 Tons 0.5 Turkey is differentiated 7 3.0 from Mediterranean 9 1.7 İzmir 1.6 countries with Refinery11 1.5 0.2 13 3.0 sophisticated refineries

15 1.4 Diesel Fuels and continuous Crude Oil Kırıkkale 0.6 Gasoline Fuels Refinery17 0.5 Aviation Fuels refinery investments Imports 1.7 Marine Fuels 19 25 Million Batman Fuel Oil Types in conjunction with Refinery 1.0 Tons Non-Fuel Products increasing demand on Source: EMRA complex petroleum products both in national and international markets.

63 Turkish Energy Market Outlook | Achievements, Overview and Opportunities

Consumption & Distribution of Petroleum Products

Transportation sector is continuously Turkey experiences growth in several sectors like developing with major infrastructure investments and dominates sector transportation, automotive and aviation which demand and trends with 80% share in consequently increases domestic petroleum products total petroleum consumption. Although motor vehicles become more efficient, demand. consumption of petroleum products In parallel with the infrastructure and fleet These distribution companies offer increased through the last decade investments, aviation sector expands merger and acquisition opportunities associated with the motor land vehicle consistently leading to a significant increase to the investors. Recently, an M&A deal development. Between 2012 and 2015, fuel in usage of aviation fuels in recent years. It for one of the biggest private sector consumption experienced an increase with is also important to note that, Turkey still distribution companies has been realized CAGR of 7.2%. have an important growth potential in this and TP Petroleum Distribution Company sector compared to the mature markets. is currently going through a privatization Diesel is the most common fuel by process. It is known that there are further constituting 80% of domestic petroleum Globally known petroleum product potential M&A opportunities for private product consumption and annual demand distribution companies are active in sector distribution companies. on diesel fuels are increasing. In the last distribution market with considerably high decade diesel fuel consumption almost volumes. In 2015, Turkey domestically A national marker specified by EMRA doubled due to the increase in number of consumed ca. 25 million tons of petroleum is added to petroleum products diesel cars and agricultural machinery. fuels. Top five distribution companies were in order to block the distribution the international companies while state of illicitly obtained or smuggled Although the prices of diesel and gasoline owned distribution company (TP Petroleum fuels. Consequently, quality of the fuels are similar in international markets, as Distribution Company) was the sixth and distributed fuels are protected the tax on diesel is relatively lower, diesel these six companies distributed more than throughout the country. consumption has a competitive advantage. 70% of consumed petroleum fuels.

LPG is an other commonly used fuel in motor vehicles which is cheaper than Shares of Motor Land Vehicles by Fuel Type both diesel and gasoline. As result, motor 100% vehicles are modified for LPG fuel usage and share of LPG fueled vehicles reached to 80% 34.4%; 47.9%; 3.8 M 9.6 M 22% of total motor land vehicles. 60%

Fuel Consumption by Type 40% 50.3%; 29.9%; 5.6 M 6.0 M 1% 2% 20% 5% 9% 11.7%; 21.8%; 1.3 M 4.4 M 0% Gasoline Fuels 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 24.824.8 Diesel Fuels Number of Motor Land millionMillion Tons tons Fuel Oil Types 11 12 13 14 14 15 16 17 18 19 20 Aviation Fuels Vehicles (millions) Marine Fuels Share of LPG consuming vehicles in Total Share of Gasoline consuming vehicles in Total Share of Diesel consuming vehicles in Total 83% Note: Sums of shares are less than 100% due to unknown fuel types. Source: TurkStat Source: EMRA

64 Turkish Energy Market Outlook | Achievements, Overview and Opportunities

65 Energy Efficiency 7. and Climate Change 67 Turkish Energy Market Outlook | Achievements, Overview and Opportunities

Energy Efficiency

As an emerging market, Turkey’s increasing •• reduce energy intensity, energy losses, fossil •• Annual energy consumption in the public energy consumption raises the importance fuel consumption and carbon emissions sector buildings and facilities shall be of energy efficiency due to costly imports decreased by 20% by the year 2023. •• increase efficiency in power generation and in energy supply. To promote energy public sectors •• The number of original design and/or efficiency investments, Turkey is introducing product, which would be commenced complementary legislation and action plans •• strengthen institutional structures, to be manufactured based on domestic to create opportunities for investors to competitive ESCO market and financial R&D results, shall be at least 50 by participate in energy efficiency activities. mechanisms. the year 2023 in the areas of energy efficiency and renewable energy In 2007, Energy Efficiency Law was enacted The Strategy Paper Targets by 2023 resources. to increase energy efficiency in energy and •• At least one fourth of building stock in the industry. In the following year, regulations year 2010 shall be made as sustainable Energy efficiency investments have a regarding energy efficiency in transportation, building by the year 2023. superior pay back period which is as buildings and use of energy sources were short as 2 years. With the help of energy introduced. •• The average cycle efficiency of the coal efficiency financing agreements, it is also thermal power plants shall be increased possible to turn the investment into profit In addition to local legislation improvements, over 45% by the year 2023. within that period. Currently, Turkey is Turkey has published Energy Efficiency •• Demand side management shall be investing in energy efficiency projects; Strategy Paper (2012-2023) and prepared developed for decreasing the electrical however, in order to achieve efficiency National Energy Efficiency Action Plan energy intensity at least 20% until the year targets stated in the Strategy Paper and (NEEAP) which established policies, strategies 2023. NEEAP, there is still more to do which and actions to improve the energy efficiency provide business opportunities for local in line with the EU requirements. and foreign investors. In the Strategy Paper, Turkey specified strategic targets in order to Turkey‘s aim to boost energy efficiency in various sectors provides vast investment opportunities for local and foreign investors and benefits from various financing agreements. Prospective Investment Areas in Energy Efficiency

Energy Service Companies (ESCOs): Equipment Suppliers: Energy Construction Sector: Urban Turkey plans to have at least 50 efficiency programs target to enable transformation will increase market ESCOs specialized in the industrial sector in replacement of old and inefficient equipment share of Green Buildings and Efficient order to implement energy audits and renew (boiler, burner, electric motor, etc.) with new (greater than C Class) Buildings in the audits every four years. and more efficient substitutes. This provides construction sector. Expected restriction on huge opportunities for equipment suppliers sales of C Class Buildings in 2017 will provide Energy Efficiency Financing and leasing providers. investment opportunities for efficient building Agreements: Industry sector players projects. can benefit from international financing Resource Efficiency & Circular agreements (IBA, TuREEFF, TurSEFF, MidSEFF, Economy: As a result of old and Electric and Hybrid Car Sector: EKOkredi) in order to get financial support inefficient equipment replacement target, In order to incentivize electric from several institutions eager to provide opportunities will arise for recycle sector. and hybrid cars, Turkey reduced special loans with better terms. Turning waste from one industry into useful consumption tax (SCT) on electric and hybrid feedstock for another will provide another cars. It is expected that same incentives will value creation opportunity for recycle sector. be expanded for hybrid cars.

68 Turkish Energy Market Outlook | Achievements, Overview and Opportunities

Environment and Climate Change

In line with the increasing population and In 2015, Turkey submitted its Intended As an emerging flourishing economy, Turkey has increased Nationally Determined Contributions its carbon emissions by 57% and reached (INDC). According to the INDC, Turkey is market, Turkey, whose to 468 million tons of CO2 in 2014 with expected to reduce its 2030 emission greenhouse gas respect to 2000 values. When the sector level from 1,175 million tons of CO2 to 929 and sub-sector breakdowns of emissions million tons of CO2 in line with the Paris emissions contributes are analyzed, it is seen that ca. 72% of GHG pledge. to global cumulative at emissions are from the energy industry. On the other hand, industry, agricultural and As an emerging market, in order to achieve a level less than 1%, is waste emissions have a share of 13%, 11% CO2 emission targets stated in the INDC, ready to join the global and 3%, respectively. Turkey aims to increase the energy savings, energy efficiency, share of renewable fight with climate change. According to the most respectable energy and carbon certifications. Inline economy expertise organizations, including with the CO2 targets, Turkey will evaluate OECD, energy needs of developing local fuels through clean combustion Carbon Emission Distributed by Sectors countries will continue to increase so will technologies and will be in the fight Carbon Emission Distributed by energy demand of Turkey being a major with climate change through providing Sectors and still growing economies. Turkey’s per incentives and enabling investments in Energy Agricultural capita electricity consumption is 23% renewable energy resources. It is also 500 Industry Waste of USA and ca. 38% of OECD average in expected that Turkey will benefit from 450 2015. Electricity demand of our country is the Green Climate Fund to reduce the 400 350 expected to be 581 TWh by 2030 according greenhouse gas emissions. Additionally, 300 to projection studies. This number is twice international sustainability funds are also 250 of today’s electricity generation, which calls available for investors for eco friendly 200 150 for a two-fold increase in our electricity projects. 100 production within next 15 years. 50 Emission (million tons CO2) of tons (million Emission 0 Carbon Markets

In order to reduce its CO2 emissions and Currently, Turkey has growing voluntary 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 fight against the climate change, Turkey carbon market where carbon consultancy Source:Source: TurkStat TurkStat acceded to the UNFCCC and then became firms are verifying projects to gain carbon Party to the Kyoto Protocol. In December certificates or carbon credits. Although Greenhouse Gas Emissions of 2015, Turkey signed a new climate carbon prices in Turkey are lower than Turkey agreement in Paris COP21 which has European Carbon Markets, certified 1,400 been agreed to limit global temperature investors enjoy trading carbon credits in Previous Emission Values 1,200 increase to well below 2 °C and rise USD the voluntary market. Trading activities and Turkey's Paris Pledges 1,000 100 billion "Green Climate Fund", funded by carbon prices are expected to increase in Turkey's Base Scenario developed countries to support developing line with the introduction of carbon market 800 countries for reducing their emissions. which will provide standardization and 600 trading opportunities for investors. 400 Million Tons of CO2e of Tons Million 200

0 1990 1995 2000 2005 2010 2015 2020 2025 2030 Source: The Ministry of Environment and Urbanization

69 Energy Sector 8. Incentives Scheme 71 Turkish Energy Market Outlook | Achievements, Overview and Opportunities

Energy Sector Incentives Scheme

Investments in the field of energy play A. The Overall Tax Incentives Scheme investment requirement is removed and a vital role in Turkish economy. The in Turkey Available to Energy Investors until the end of 2023 investments with a ascending growth in the electricity demand Investment incentives are available to fixed investment amount of TL 500 million in Turkey has necessitated significant investors through an “Investment Incentive can benefit from VAT refund in relation investments especially in the production Certificate” (“IIC”), which is obtained from to the unrecoverable VAT borne over the of energy. Accordingly, the investors in the General Directorate of Incentive construction works. This relief is applicable the energy industry are encouraged with Application and Foreign Capital under until the end of 2023. The Council of various types of tax incentives with the the Ministry of Economy. The companies Ministers holds the authority to reduce aim to support and orient investments, in operating in the energy industry may the threshold to TL 50 million or increase conformity with the objectives of Turkish benefit from the incentives as below it two-fold on a general or industry specific Government, to reduce the regional according to the context of the investment basis. disparities within Turkey, create new regulated by Council of Ministers and employment opportunities, and to realize the region where the investment will be Interest Rate Support: Turkish the international competitiveness and located. The available incentives under the Government contributes to interest environmental protection. general incentive regime are explained as payments on the loans obtained in the below; scope investment incentive regime. The highest amount of contribution is TL Turkey encourages the Value Added Tax Exemption: Machinery 900,000 for investments located in Region and equipment imported or locally VI. However, the contribution can reach up energy investments with purchased within the scope of an to TL 50 million for strategic investments. various tax incentives. Investment Incentive Certificate can benefit from VAT exemption. Social Security Insurance Premium Support (Employer’s Share): Turkish Customs Duty Exemption: Machinery Government supports the employer’s and equipment which are imported portion of the social security contribution from foreign countries for investment up to the minimum wage level of an and approved within the framework of employee. The total amount of contribution Investment Incentive Certificate benefit is designated as a percentage of fixed from 100% Customs Duties and fund investment amount except for Region VI payments exemption. in which the support is granted without an upper limitation for a maximum period of Value Added Tax Refund: Investments 10 years. with a fixed investment amount of at least TL 500 million can benefit from VAT refund. According to the Law, strategic

72 Turkish Energy Market Outlook | Achievements, Overview and Opportunities

Social Security Insurance Premium Investment Land Allocation: Land The scope of energy Support (Employee’s Share): The may be allocated for investments, with employee’s share of social security an investment incentive certificate, in investments within the premium is contributed by the Government accordance with the rules and principles investment incentive for investments in Region VI only and for a set by the Ministry of Finance, depending period of 10 years. on the availability of such land. scheme is expanding.

Income Withholding Tax Allowance: This B. Investment Incentive Regime volume of incentives vary depending on incentive is granted to investors only for Implementation of the incentives regime the location of such investment, apart the investments in Region VI limited to 10 varies depending on the location, scale, from other merits of such investment. years, and without an upper limit. Amount importance and subject of the incentive. Investments located in Region VI are of support for each employee is limited to In order to qualify for state incentives, favored most as it represents a less the amount of tax that would be calculated it is necessary to obtain an investment developed zone in Turkey. on minimum wage. incentive certificate before the investment Nuclear fired electricity power plants is initiated. benefit from regional incentives based on Corporate Income Tax Reduction: The the location of the investment. The tax general Corporate Income Tax rate of General Incentive Regime: Generally fixed incentive regime is generally specified in 20% is reduced for qualified investments investment amount should at least be TL the Host Government Agreements (HGA) under incentive regime. The CT rate may 1 million for investments made in Region I and Intergovernmental Agreements (IGA). be reduced down to 2% and the such and II TL 500,000 for the investments made reduced rate will continue to apply over in Region III, IV, V and VI. On the other hand, some investments are earnings generated from the investment till prioritized under the incentive regime and the total contribution amount is reached In general, energy investments can benefit are granted with the incentives applicable without a time limitation. Within specific from the general incentives. Natural gas to Region V, even the investment is rules, the reduced CT rate may also be fired electricity generation power plant made in Regions I, II, III and IV except for applied for income from other operations investments are not qualified to benefit investments that are made in Region VI, during the investment period. With the from the incentives regime except for those i.e. investments made in Region VI benefit very recent changes, on the condition that that are granted with generation licenses from incentives applicable to this Region. the investment is completed, the remaining from Energy Market Regulation Authority The energy investments that are classified part of the investment contribution amount prior to 06/19/2012. as priority investments are; that is not benefited during the taxable year can be carried forward indexed with Regional Incentive Regime: Under the •• Electricity generation investments using revaluation rate. regional incentives regime, Turkey has been minerals specified in Article 2/4-b of grouped into six regions with respect to Mining Law No. 3213 with valid mining their development level. The types and operating rights and permissions given

73 Turkish Energy Market Outlook | Achievements, Overview and Opportunities

by the Ministry of Energy and Natural contribution rate to investment which is C. Other Tax Incentives Resources, ten point higher than contribution rate to The energy investments are further investment of Region V. supported with other incentives under the •• Energy efficiency investments that would Large Scale Investments: Large scale tax regulations in addition to the incentive reduce energy consumption in unit investment projects in relation to 12 regime. Among those, the primary ones production by a minimum of 20% for at specific sectors which exceed minimum are; least 5 years in existing manufacturing investment amounts can benefit from facilities with an annual consumption of the incentives. In general, the energy New Incentives for Eligible Investments least 500 toe energy, investments are not listed as large scale on a Project Basis: In addition to the •• Investments for electricity generation investment, however, investments on general incentive regime, a project based through waste heat recovery in a facility transportation by transit pipelines with an investment incentive package has been (excluding natural gas fired electricity investment amount of at least TL 50 million recently introduced in the Laws that is generation plants), can qualify for large scale investment aiming to provide financial support for incentives. innovative, technology oriented, R&D •• Liquefied Natural Gas (LNG) and focused, high value added projects underground natural gas storage with a Strategic Investments: Priority that also contributes to reduce foreign minimum investment amount of TL 50 investments with a minimum fixed dependency. Projects seeking support million, investment amount of more than TL 3 under the new law must be in conformity •• Investments for the manufacturing billion are considered to be strategic with Turkish Government’s targets set forth of turbines and generators used in investments. in national development plans and annual renewable energy generation, and programs, and also with those specifically investments for the manufacturing of In addition to the general promoted by the Ministry of Economy. blades used in wind energy generation, Some of the project based support incentives scheme, Turkey instruments and exemptions are as follows: Furthermore, priority investments with a provides other significant •• Full Corporate tax exemption for income minimum fixed investment amount of more generated from the investment for up to than TL 3 billion are treated as strategic tax relief to the energy 10 years, investments and become eligible for higher investors. level of incentives. •• Income tax withholding support,

•• Customs duty exemption, Additionally, previous fixed investment amount of more than TL 1 billion can •• Free land allocation for 49 years, benefit from VAT reduction by using a •• Free transfer of these immovable

74 Turkish Energy Market Outlook | Achievements, Overview and Opportunities

properties for projects completed Resource Utilization Support Fund: Stamp Tax: In general, stamp tax is and that provided the anticipated Importation of electricity and loans applied to a wide range of legal documents employment for at least five years, obtained for financing such importation such as contracts, agreements, letters of will not be subject to Resource Utilization undertaking, deeds of settlement, letters •• Social security premium support for Support Fund (RUSF). In general, RUSF of cancellation, letters of guarantee, employer’s share for up to 10 years, applies at the rate of 6% for credited financial statements, returns and payroll. •• Compensation of up to 50% for energy imports. The general stamp tax rate is 0.948% consumption expenses related to the with a cap of TL 1,797,117.30. However, investment for up to 10 years, Special Consumption Tax: Fuels that are the energy investments that are granted used for the generation of electricity are with an Investment Incentive Certificate •• Up to 10 years, abolition of interest on exempt from Special Consumption Tax are entitled to stamp tax exemption for a loans utilised to cover fixed investments, (SCT), under certain conditions as specified variety of documents. •• Salary support for qualified employees in this code. for up to five years; eligible support Additionally, under Electricity Market Law, is capped at twenty times the gross Value Added Tax: The reduced VAT rate of certain stamp tax incentives are addressed monthly minimum wage, 1% is applicable on delivery to and delivery/ for such investments. For instance; financial leasing by the financial leasing generation license holder legal entities •• State partnership of up to 49% provided companies of wind power plants with an shall benefit from stamp tax exemption that an IPO or direct sale to investors will output power between 50 kVA – 500 kVA. over their documents signed in relation be conducted within 10 years, A substantial benefit with a reduced VAT to the generation plant, provided that •• Provision of purchase guarantee by the rate of 1% instead of the regular rate of the documents are signed during the Council of Ministers, 18% is provided to the renewable energy investment period and the operation starts investments. for the first time before 12/31/2020. •• Facilitation of the legal and administrative procedures by the Council of Ministers, On the other hand, imported solar panels •• Completion of the infrastructure have been removed from the scope of investments, incentive certificates to encourage the domestic production of such panels.

75 Turkish Energy Market Outlook | Achievements, Overview and Opportunities

General Incentive Regional Investments - Scheme Regional Investments Priority Investments Large Scale Investments Strategic Investments

Region I-V Region VI Region I Region II Region III Region IV Region V Region VI Region I-V Region VI Region I Region II Region III Region IV Region V Region VI Region I-V Region VI VAT Exemption ü ü                 Customs Duty Exemption                  

Interest Rate Support (TL/Foreign Currency) - - - - 3/1 4/1 5/2 7/2 5/2 7/2 ------5/2 5/2

Limited to lower of 5% of the Interest Rate Support Upper Limit (TL) (1) - - - - 500,000 600,000 700,000 900,000 700,000 900,000 ------fixed investment amount or TL 50 million

Social Security Premium Support - Employer’s - - 2 3 5 6 7 10 7 10 2 3 5 6 7 10 7 10 Share (Year)

Rate of Social Security Premium Support Employer’s Share to the Fixed Investment - - 10 15 20 25 35 No Limit 35 No Limit 3 5 8 10 11 No Limit 15 No Limit Amount (Upper Limit) (%)

Social Security Premium Support - Employee’s - 10 - - - - - 10 - 10 - - - - - 10 - 10 Share (Only For Region VI) (Year)

Payroll Tax (Income Withholding Tax) Support ------10 - 10 - - - - - 10 - 10 (Only For Region VI) (Year)

Corporate Income Tax Reduction Rate (%) - - 50 55 60 70 80 90 80 90 50 55 60 70 80 90 90 90

Contribution Rate to Investment (%) (2) - - 15 20 25 30 40 50 40 50 25 30 35 40 50 60 50 50

% of Total Tax Relief through the use of reduced Corporate Income Tax Rate that can - - 80/20 80/20 80/20 80/20 80/20 80/20 80/20 80/20 80/20 80/20 80/20 80/20 80/20 80/20 80/20 80/20 be benefited during the investment/operation period (3)

Refund of Input VAT Amount over construction works of an investment with a projected VAT Refund (4) - - - - - fixed investment amount of TL 500 million and that is not recovered in a taxable year

Land Allocation - -                

76 Turkish Energy Market Outlook | Achievements, Overview and Opportunities

General Incentive Regional Investments - Scheme Regional Investments Priority Investments Large Scale Investments Strategic Investments

Region I-V Region VI Region I Region II Region III Region IV Region V Region VI Region I-V Region VI Region I Region II Region III Region IV Region V Region VI Region I-V Region VI VAT Exemption ü ü                 Customs Duty Exemption                  

Interest Rate Support (TL/Foreign Currency) - - - - 3/1 4/1 5/2 7/2 5/2 7/2 ------5/2 5/2

Limited to lower of 5% of the Interest Rate Support Upper Limit (TL) (1) - - - - 500,000 600,000 700,000 900,000 700,000 900,000 ------fixed investment amount or TL 50 million

Social Security Premium Support - Employer’s - - 2 3 5 6 7 10 7 10 2 3 5 6 7 10 7 10 Share (Year)

Rate of Social Security Premium Support Employer’s Share to the Fixed Investment - - 10 15 20 25 35 No Limit 35 No Limit 3 5 8 10 11 No Limit 15 No Limit Amount (Upper Limit) (%)

Social Security Premium Support - Employee’s - 10 - - - - - 10 - 10 - - - - - 10 - 10 Share (Only For Region VI) (Year)

Payroll Tax (Income Withholding Tax) Support ------10 - 10 - - - - - 10 - 10 (Only For Region VI) (Year)

Corporate Income Tax Reduction Rate (%) - - 50 55 60 70 80 90 80 90 50 55 60 70 80 90 90 90

Contribution Rate to Investment (%) (2) - - 15 20 25 30 40 50 40 50 25 30 35 40 50 60 50 50

% of Total Tax Relief through the use of reduced Corporate Income Tax Rate that can - - 80/20 80/20 80/20 80/20 80/20 80/20 80/20 80/20 80/20 80/20 80/20 80/20 80/20 80/20 80/20 80/20 be benefited during the investment/operation period (3)

Refund of Input VAT Amount over construction works of an investment with a projected VAT Refund (4) - - - - - fixed investment amount of TL 500 million and that is not recovered in a taxable year

Land Allocation - -                

(1) The priority investments with a minimum of TL 3 billion of fixed investment amount is classified as a strategic investment. However, the interest rate support amount is limited to TL 700,000. (2) Priority investments with at least TL 1 billion of fixed investment amount will be entitled to 10 additional points to the contribution rate to investment that is applicable to Region V. (3) Investors are allowed to apply reduced corporate income tax rate for the earnings derived from other activities during the investment period as a set off against the total contribution amount of the investment, with some limitations, i)tax relief in a year cannot exceed investment expenditures made in that year and ii) the amount of tax relief in the whole investment period cannot exceed specified portion of the total tax relief. (4) According to the recent changes in VAT Code, the condition of being classified as a strategic investment is abolished to benefit from VAT refund claim. The input VAT amount, which is not recovered in a taxable year, over construction works of an investment granted with an Investment Incentive Certificate with a fixed investment amount of at least TL 500 million, can be refunded upon request of the taxpayer. The relief is applicable until the end of 2023.

77 Turkish Energy Market Outlook | Achievements, Overview and Opportunities

78 Turkish Energy Market Outlook | Achievements, Overview and Opportunities

°C Celsius HEPP Hydro Electric Power Plant NPP Nuclear Power Plant The Organisation for Economic Co- Automatic Meter Reading Host Government Agreements AMR HGA OECD operation and Development bcm Billion Cubic Meters IBA Impact and Benefit Agreement OPEX Operating Expenditure bcm/a Billion Cubic Meters per Annum IDM Intra Day Market OTC Over-the-Counter

BIST İstanbul Stock Exchange IEA International Energy Agency PP Power Plant

BO Build Operate IGA Intergovernmental Agreements PPA Power Purchase Agreement

BOO Build Own and Operate IIC Investment Incentive Certificate PV Photovoltaics

BOT Build Operate Transfer IMF International Monetary Fund R&D Research and Development State Owned Natural Gas and Intended Nationally Determined Electricity Retail Company BOTAŞ Petroleum Pipeline Corporation INDC Contributions RetailCo BPM Balancing Power Market IPO Initial Public Offerings ROR Run of the River Investment Support and Promotion Baku-Tbilisi-Ceyhan Crude Oil Pipeline Resource Utilization Support Fund BTC ISPAT Agency of Turkey RUSF ca. Approximately IT Iraq-Turkey Crude Oil Pipeline SCT Special Consumption Tax State Oil Company of Azerbaijan Compound Annual Growth Rate Kilocalorie CAGR kcal SOCAR Republic CAPEX Capital Expenditure kg Kilogram TAEA Turkish Atomic Energy Authority

CBRT Central Bank of the Republic of Turkey km Kilometer TANAP Trans Anatolian Pipeline

CCGT Combined Cycle Gas Turbine kV Kilovolt TAP Trans Adriatic Pipeline

CO2 Carbon Dioxide kVA Kilovolt Ampere tcm Trillion Cubic Meters Turkish Electricity Distribution Carbon Dioxide Equivalent Kilowatt Hour CO2e kWh TEDAŞ Corporation Conference of the Parties - Sustainable Liquefied Natural Gas National Transmission Grid Operator COP21 Innovation Forum LNG TEİAŞ CSP Concentrated Solar Power LPG Liquefied Petroleum Gas TETAŞ State Owned Wholesale Company

CT Corporate Tax LTA Long Term Agreement The Republic of Turkey, Ministry of Energy Ministry and Natural Resources DA Decommissioning Account M Million TKİ Turkish Coal Enterprises DAM Day Ahead Market M&A Mergers and Acquisitions TL Turkish Lira DEPA Greece Public Gas Corporation m2 Square Meter toe Tonnes of Oil Equivalent DisCo Distribution Company m3 Cubic Meter ton Metric ton EDAŞ Electricity Distribution Company mcm Million Cubic Meters Transfer of Operating Rights Republic of Turkey, Ministry of Energy TOR Economist Intelligence Unit EIU MENR and Natural Resources General Directorate of Turkish Hard Turkish Mid-size Sustainable Energy TTK Coal Institution Energy Efficiency Loan EKOkredi MidSEFF Financing Facility Turkish Petroleum Refineries TÜPRAŞ Corporation EMRA Energy Market Regulatory Authority MİGEM General Directorate of Mining Affairs Turkish Residential Energy Efficiency European Network of Transmission General Directorate of Mineral TuREEFF Financing Facility ENTSO-E MTA System Operators for Electricity Research & Exploration TurkStat Turkish Statistical Institute ESCO Energy Service Company Mtoe Million Tonnes of Oil Equivalent Turkey Private Sector Sustainable TurSEFF Energy Finance Facility EU European Union MVA Megavolt Ampere TWh Terawatt Hours EÜAŞ State Owned Generation Company MW Megawatt United Nations Conference on Trade UNCTAD and Development EXIST Energy Exchange İstanbul MWh Megawatt Hour United Nations Framework Convention UNFCCC on Climate Change FDI Foreign Direct Investment NCI Nelson Complexity Index USD United States Dollar FIT Feed-in Tariff NEEAP National Energy Efficiency Action Plan VAT Value Added Tax FSRU Floating Storage Regasification Unit NG Natural Gas Weighted Average Cost Of Capital Natural Gas Distribution Companies WACC GAZBİR NGML Natural Gas Market Law Association YEKA Renewable Energy Resource Areas GDP Gross Domestic Product NIGC National Iranian Gas Company Renewable Energy Resources Support YEKDEM Mechanism GW Gigawatt NLNG Nigeria LNG Limited

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Turkish Energy Market Outlook | Achievements, Overview and Opportunities

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