Turkey Achieved Breakthrough in Energy Liberalisation - but now the Environment needs Attention

In a report released today in Ankara, the International Energy Agency commends the steps Turkey has taken towards energy liberalisation in the last two years. The notion of privatisation has been introduced into the Turkish constitution. New legislation to introduce competition into the electricity and gas markets will reduce the dominant position of the state-owned energy companies BOTAS and TEAS. These laws will help the country cover its rapidly growing energy demand and address its chronic reliability problems in electricity supply. But Turkey’s rapid growth in energy demand growth could imperil the environment. The IEA recommends that all energy subsidies be eliminated and that competition be introduced without delay. Turkey should also adopt measures to limit greenhouse gas emissions.

Review

The new book Energy Policies of IEA Countries – Turkey – 2001 notes that Turkey has made repeated efforts to increase foreign investment in its power industry. Turkey’s energy demand is growing at 8 per cent a year, one of the highest rates in the world. But investment has lagged far behind what is required to ensure reliable supply. Investors have not been given sufficient control over their investment. Until 1999, privatisation was prohibited under the constitution.

The Electricity Market Law adopted in February 2001 calls for opening of the power industry to competition in early 2003 for customers consuming 9 GWh or more per year. A regulator for the electricity and gas industry is to be established. It will be charged with determining the pace of further market opening, enforcing open access, and regulating prices for grid services. In 2000, TEAS was split into three parts covering transmission, generation and wholesale trading. The split became effective in October 2001.

“Going beyond the Build-Operate-Transfer programme and allowing privatisation represents a breakthrough in the government’s attempts to liberalise the electricity market”, said Robert Priddle, Executive Director of the IEA. “There is now a real possibility that supply will cover long-term demand and that reliability will improve.” The new legislation should be implemented fully and without delay. It is essential to establish the independent regulator and independent system operator as soon as possible. In November 2001, the head of the regulatory agency was appointed and recruitment of staff is under way.

In 1998 an automatic pricing formula was introduced linking Turkish ex-refinery prices to that of a basket of Mediterranean crudes. A new Petroleum Market Bill is meant to reduce government intervention in oil prices further. The increasingly market-oriented oil and gas industries can help Turkey to establish itself as a transit country for supplies from the Caspian region. Several pipeline projects, including the Baku-Tbilisi-Ceyhan crude-oil line, are progressing. They could enhance the diversity and security of supply in consuming countries and help avoid further environmental strain on maritime routes through the Bosporus.

The Natural Gas Market Law of May 2001 will open the gas market to competition by 2003. Turkey’s natural gas company BOTAS is to be split in two by 2009, with one company responsible for trading, the other for transmission. Meanwhile, BOTAS’s share of gas imports will be reduced to 20 per cent of Turkey’s gas consumption, and the company will be required to sell part of its existing gas import contracts. The IEA commends these initiatives and encourages the government to introduce gas-to-gas competition as quickly as possible. BOTAS’s transmission and marketing activities should be completely separated and its trading activities privatised.

At the time of drafting of the IEA report, Turkey had not signed the UN Framework Convention on Climate Change (UNFCCC). As an OECD country it would have been included among Annex I and II countries. But with its much lower GDP and CO₂ emissions per capita, the Turkish government believed the country had neither the technical or the financial capability to commit itself to the required emissions reductions. This situation has now changed. The Conference of Parties to the Climate Convention in Marrakech (COP 7) decided to remove Turkey from Annex II. Turkey has now become a Party to Annex I of the Convention, with the obligation to implement policies and measures for emissions reductions, but without an emissions target. Ratification is pending.

Despite this change of status, the main conclusions of the report remain valid. Turkey’s energy use causes serious air pollution problems. Furthermore, the government forecasts strong growth in fossil fuel use, including a four-fold increase in coal use by 2020 that would cause large greenhouse-gas emissions. While the forecasts may overestimate fossil fuel demand growth, the government must address the environmental issues rapidly. Specifically, Turkey needs a strategy that allows it to assume a concrete greenhouse gas emissions target no later than the second commitment period of the Kyoto Protocol.

The IEA believes that there is potential for greater energy efficiency and greater use of renewable energy sources. Turkey’s industrial energy consumption could be reduced by 24 per cent and energy demand for residential space heating by over 40 per cent, at little or no extra cost. Electricity grid losses are very high and could be halved. The IEA recommends that all remaining energy subsidies, direct and indirect, be eliminated, and that price-setting and regulation be made more transparent.