Investing in Turkish Power Market: Opportunities & Challenges

Gülefşan DEMİRBAŞ Strategy Development Department Head

29 May 2014, Madrid EMRA

• The sole regulator of the Turkish electricity, natural gas, LPG and fuel and lubricants markets. • The architect of the liberalization and regulation of the Turkish energy market • An independent public entity with administrative and financial autonomy established in 2001 • Governed by a 9-member board • Functions: – Issuing secondary legislation – Licensing market participants – Approving tariffs – Monitoring, supervising and auditing markets and market players

Objectives of EMRA

To establish … for delivery of • Financially viable • Adequately • Stable • Efficiently • Transparent • Continuously • Non-discriminatory • At high quality • Competitive • At low cost energy markets • Environment friendly energy Main Characteristics of Turkish Energy Market

2001=100

Source: BP Statistical Review 2013 Rapid growth in demand High level of import dependency • 20.5% pa in gas & 7% pa in electricity in the past • 91.7% in petroleum & 98.3% in gas quarter century despite economic crises in Relatively high figures for 1994, 1998, 2001 & 2008 energy intensity • 600 m3 pa & 3.200 kWh pa gross electricity • 280 koe/1000 USD consumption per capita Electricity Markets: Generation (2012)

6.5 TWh 22 TWh

9 TWh

47 TWh

251 TWh

240 TWh

56 TWh

42 TWh 50 TWh

Source: BP + Own Data HV Electricity Grid

BULGARİSTAN DIMODICHEV SİNOP TES HABİPLER BATUM ÇAYLI TES AKFEN BLACK SEA BABAESKİ SAMSUN HAMİTABAT ALİBEYKÖY TES CENGİZSAN -SEL İKİTELLİ A.ALANI BOYABAT ALTINKAYA TES SAMSUN HOP D.PAŞA Y.TEPE DGKÇ FILIPPI BEYKOZ KARABÜK A KAPTAN PAŞAKÖY EREĞLİ BORASCO BORÇKA Z.KÖY OSMANCA ÇARŞAMBA GUMRI UNIMAR AMBARLI ÜMRANİYE ÇANKIRI DERİNER ADA-GEBZE X ARTVİN İÇDAŞ TEPEÖREN ARKUN KARS KARABİGA ADAPAZARI BAĞLU TİREBOLU KALKANDERE ÇAYIRHAN M KAYABAŞI H.UĞURLU GÖKÇEKAYA SİNCAN HİSAR ORDU-2 İAKSU YUSUFELİ İÇDAŞ K.KALE DGKÇ IĞDI BURSA AKINCI GÖLBAŞI AĞRI R ÇAN BALIKESİR KARGI TEMELLİ SİVAS TUNÇBİLEK İÇANADOLU BABEK DEÇEKO KANGAL HORASAN DGKÇ ÖZLÜCE SOMA D.BEYAZIT SEYİTÖMER GÜRSÖĞÜT KAYSERİ ERZURUM

KEBAN VAN BAZARGAN KOCATEPE ELBİSTAN KHOY ALİAĞA TATVAN KARAKAYA İRAN YEŞİLHİSAR DİYARBAKIR ÇETİN KONYA HİLVAN IŞIKLAR BATMAN UZUNDERE DENİZLİ YEDİGÖZE ATATÜRK ILISU AYDIN ANDIRIN SİLOPİ TES DOĞANLI SEYDİŞEHİR KAVŞAK HAKKARİ ÇUKURCA PS3 YENİKÖY G.ANTEP YATAĞAN OYMAPINAR ADANA Ş.URFA CİZRE ERZİN BİRECİK KIZILTEPE ZAKHO KEMERKÖY ERMENEK KAYRAKTEPE KESEK AKSA VARSAK MERSİN IRAK İSKENDERUN İSDEMİR

HATAY HALEP MEDITERRANEAN SURİYE

Turkish power system is synchronized with the ENTSO-E

Source: TEIAS Electricity Market: Installed Capacity

Capacity by Ownership Others Capacity by Source 0,9% Petroleum 1,1% Wind State 4,3% Coal Owned 20,5% 37%

IPPs Hydro 48% 34,8%

Gas 38,5% Concess ionaries 15%

64 044 MW as of 2013 Electricity Market: Demand

300000,0 14,0 Net Gross Demand 12,0 Electricity Growth Rate 250000,0 Consumption 10,0 per Capita

200000,0 8,0

(GWh) 6,0 EU: 5 545 kWh 150000,0

Demand Demand 4,0 TR: 2 583 kWh Growth Rate (%) Rate Growth

Gross Gross 100000,0 2,0

0,0 Source: Eurostat 50000,0 -2,0

0,0 -4,0

1988 2001 1980 1981 1982 1983 1984 1985 1986 1987 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Legal Basis: The EML • A user-friendly systematic • Priority to viability of investments • Last resort supply obligation • Consistency with the EU Acquis • Non-discriminatory conduct between domestic and foreign investors • Enforcement of uniform nation-wide end user tariffs for a limited time period

Legal Basis: Fundamentals of the EML • Unbundling: Legal unbundling regime among market activities supplemented by privatization of distribution and generation assets. • Third Party Access: Regulated TPA regime. Transmission and distribution companies should allow open, guaranteed, and non- discriminatory access to their networks, which is backed by Regulator’s oversight. • Cost-reflecting pricing: Regulated tariffs should not include any non- activity items. • Wholesale Market Design: Bilateral contracts market complemented by a residual balancing mechanism. • Power Exchange Approach: Intra-Day Market, Day-Ahead Market, Derivatives Market. • Mitigating Market Power: Static precautions in terms of limiting market share i.e. 20%. Electricity Market Model

Generation Transmission Wholesale Distribution Retail

Eligibles Concessionaires

Assigned Suppliers Hydro

Portfolio Captives Supplier

IPPs Power Exchange Approach

•Balancing market • Market operation as •Interconnections •Day-ahead market a separate activity •Intra-day market • Withdrawal of market operation from TEİAŞ: Enhancing TEİAŞ EPIAS system operation capabilities • Possibility for •Derivatives alternative markets TEIAS • Identification of Exchange for derivatives trading

Borsa Capacity Istanbul Mechanism Markets in Progress

Market Prices Winter 350 2013 Winter 300 Summer 2012

250 2010

200

150 TRY/MWh

100

50

0

DAM Prices BM Prices Licensing Framework

• An easy licensing approach: Enhanced with Pre-Licensing scheme • Freedom of share transfer • No regulatory approval for pledge of shares, right of usufruct and assignment of claims • Step-in rights: Grant of license to a third party identified by the financer upon a limited or non-recourse project financing

Licensing Portfolio (Private)

Licensed (85 269 MW) At other stages (94 862 MW) Others Others Hydro 12% 21% 9% Wind 2% Other Renewabl Hydro es 25% 9%

Natural Gas Wind 37% 12% Coal 28% Other Renewab Natural Coal les Gas 13% 1% 31% Renewables

• FIT thru RESUM RESUM Portfolio – Annual participation 1000 165

possibility 900 160

800

• Annual announcement of 155

700

available connection 150 600 capacity reserved for wind 145 & solar 500 140 400 • Annual measurement data (MW) Capacity 135

300 DAM Price ($/MWh) Price DAM requirement for license 130 application 200 100 125 – Solar applications during first 0 120 5 working days of April 2011 2012 2013 2014 – Wind applications during last Hydro Wind 5 working days of April Geo Biomass Average DAM Price RES Incentives

• Licensing fee facilities: – Only 10% of pre-licensing & licensing fees (valid for other domestic sources) – Exemption to pay annual license fee for 8 years in operation • Connection priority • Exemption from being a balancing unit • License exemption for renewable power plants up to 1 MW capacity. Perception by Investors

Ownership Shift (MW)

State Owned Autoproducer Private Contracted Private IPP

7.052

27.429 3.736

9.375

3.457 21.058

23.783

2002 2013 Investment Requirement

300 Firm Energy Reserve Margin (%) Cumulative Greenfield Investment Requirement

13,0 243 250

8,3 7,0 6,5 6,6 200

157

3,2

TL

-0,5 150 Billion 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 100 78 -3,7

50 -7,3 23

-11,2

0

2016 2012 2013 2014 2015 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Source: Generation Capacity Projection + Own Data Overall Assessment: Conditions for Success • Well established market design • Confidence in proper functioning of the market • Attractive increase in demand and the availability of new capacity investment needed to meet demand • Availability of adequate negotiable generation margin • Wholesale prices that appeal to investors • Involvement of financially viable buyers in the market • Eligible consumers selecting their own suppliers with competing firms through bilateral contracts

Opportunities

• Greenfield generation investment requirement due to high demand increase rate • Well designed market rules continuous monitoring for market build up • Increasing trade • Promising possibilities for cross-border trade • M&A

Challenges

• High demand increase rate • Insufficient metering and communication infrastructure • Lack of REMIT type rules • Employment of uniform tariffs • Inadequate harmonization of infrastructure investments

Last remarks…

• pursues its goal of market liberalization in energy sector enthusiastically. • The regulatory environment is being designed and established along the path of EU accession. • Regional cooperation and integration regards to the energy sector and participation in the energy-related international institutions are among the highest-priority of Turkish policymakers. • There are substantial opportunities for greenfield investment and privatization opportunities. • That is; a good opportunity and a growing market that often times “nudges” the potential investors domestic and international alike.