Currents of Change
􀂃 Structural factors fuel long-term growth -- High economic growth, urbanisation, and the limited electricity price
hikes have underpinned the demand for electricity in Turkey, especially over the past decade. While having bolstered
consumption, the limited electricity price hikes have created an unfavourable operating environment for private and state
generation companies, which have been strained by input cost inflation and limited electricity prices. As of 2006, with a
number of private players no longer finding it feasible to continue their operations, the authorities have decided to
introduce the Balancing and Settlement Market (DUY), which has been followed by the Automatic Pricing Mechanism
(APM), aimed at deregulating the market, as well as eliminating daily supply demand imbalances. While these steps have
provided a temporary relief to the private sector, DUY is still far from qualifying as a true spot market. As a result of softer
demand due to the global downturn, supply shortage problems seem to have temporarily been resolved for 2009; yet this
and a number of other entrenched problems widely acknowledged by the sector players need to be addressed.
􀂃 Deregulation and privatisation are essential to ensure supply safety; yet, Turkey lags behind schedule --
With electricity demand down 8% ytd, supply shortage problems are temporarily resolved. However, an economic
recovery will definitely reinvigorate electricity demand, similar to the past decade. Yet, Turkey is likely to fall short of
meeting the demand, due to insufficient new investments, as the overwhelming state control in pricing, generation, and
distribution has scared off private investments. Estimates suggest that Turkey needs to invest heavily to expand its
production capacity to 90k MW until 2016, which corresponds to a total investment outlay of c.US$60bn. To realise such a
vast amount of investments, the government needs to provide a feasible and reliable operating environment for private
generators through market liberation. Nonetheless, Turkey appears far from attaining its initial target of liberalising the
market by 2011, as the majority of distribution and generation assets have failed to be privatised, due to the global
liquidity crunch, along with a lack of investor interest. It seems that the “transition period” will continue for another
couple of years, until market deregulation and privatisations are completed.
􀂃 Diversification of generation sources gaining momentum -- More than 60% of the electricity production in Turkey
is on imported inputs, mainly natural gas. Furthermore, roughly 50% of the natural gas imports needed for electricity
production is derived from a single country, which poses the risk of overdependence. The government has taken
initiatives to promote renewable energy investments. As a result, out of the 110k MW worth license applications pending
Energy Market Regulatory Authority (EPDK) approval, 89k MW pertain to renewable energy source investments.
􀂃 Long-awaited privatisations have kicked off with distribution assets; next in line are generation assets --
Privatisation of distribution companies and generation assets will enable the revamping of the infrastructure, along with
efficiency improvements through decreasing the loss/theft ratios. This will translate into lower prices for end users, in
addition to improving the supply chain performance, eventually relieving the generators as well. The thermal and hydro
power plants of state-owned generation company EUAS, commanding a total capacity of around 15.5k MWs, have been
organised into 6 different packages slated for privatisation as of 2010. The remaining 7.5k MWs of hydro power plants
(mostly in the GAP region) will remain to be owned by the state, given their strategic importance. The privatisation of
these 6 portfolios is a landmark development towards reaching a fully liberal market, which would speed up private
investments. The government could raise around US$17bn from the sale of power assets.
􀂃 Limited exposure to the sector through listed companies -- The listed companies, though quite active in terms of
M&A, represent a minor percentage of the total sector. Investors seeking exposure to Turkey’s energy sector could do so
through listed utility stocks Akenerji (AKENR; BUY), Zorlu Enerji (ZOREN;NR), Ayen Enerji (AYEN;NR) and Aksu
Enerji (AKSUE;NR), while conglomerates such as Enka Insaat (ENKAI;BUY), Sabanci Holding (SAHOL;BUY), Dogan
Holding (DOHOL;HOLD), Yazicilar Holding (YAZIC; BUY) and Alarko Holding (ALARK;HOLD) would provide partial
exposure to the sector as a business line.