Turkey's electricity energy market, which accounts for about 2.5% of the Turkish economy, has been in a state of constant change in recent years. Turkey's electricity sector is attractive to many investors and shows enormous potential, triggered by the economic and population growth of the country. This recent development has been rapidly changing the rules of the game, pushing the electricity sector towards liberalisation and market actors towards fast adaptation to changing provisions.

With a constantly developing legal infrastructure, the recent liberalisation and the establishment of an autonomous regulatory authority, the Energy Market Regulatory Authority (EMRA), Turkey's electricity market has changed significantly.

Investment needed

The impact of the global crisis on Turkish electricity demand was particularly strong in 2009. However, since the first quarter of 2010 a rapid recovery has occurred in Turkey's electricity demand. With the positive effects of this recovery, the instalment of an additional capacity of about 24,000 MW is deemed to be necessary within the next eight years. The electricity demand in Turkey, which had a compounded annual growth rate of ca 4.7% between 2005 and 2009, is expected to increase by 6.4% to 7% between 2009 and 2018. In order to meet this increasing demand there will be a significant need for additional investment (1).

Privatisation of the electricity generation and distribution segments

The ongoing privatisation of the electricity power plants of the state-owned electricity generation company (Elektrik Üretim A.Ş., EÜAŞ) will change Turkey's electricity energy market by decreasing the state share in this segment. This in turn will lead to an increase of competition, with higher commercial availability and more efficiency of privatised power plants. Privatisation of the generation business started in 2008. In 2009, privatisation continued with the tender of 52 hydro power plants. Another 45 power plants will be privatised in the near future. The privatisation of the electricity generation segment provides substantial opportunities for local investors who want to diversify their generation portfolio and for international investors who want to enter Turkey’s fast growing electricity market.

The privatisation of the electricity distribution companies of the state-owned electricity distribution company (Türkiye Elektrik Dağıtım A.Ş., TEDAŞ) will develop and expand electricity grids, advance service and technical quality, guarantee supply sustainability, improve operational efficiency and decrease larceny and loss. The privatisation of 11 distribution companies, whose tenders are already completed, account for a total value of ca USD 5 bln. The share of the private sector in the distribution segment will be about 46% after the completion of the privatisation of the four distribution companies in the regions of Uludağ, Camlıbel, Fırat and Vangölü, whose tenders were realised in February 2010. Furthermore, the tender procedures of the distribution companies in Boğazici, Dicle, Gediz and Trakya have already been completed in 2010, while the completion of the privatisation of these regions is expected in the near term. The tender procedures for the Toroslar, Istanbul Anadolu and Akdeniz regions started in August 2010. Privatisation of the whole distribution segment is expected to be completed by the end of 2011.

Recent legal developments

An effective legislative structure is an important requirement for a well-organised, reliable and efficient electricity market. Thus, with the Electricity Market Law (Elektrik Piyasası Kanunu, EPK) no. 4628, which came into force on 3 March 2001 and has been amended several times, an important step in creating a reliable energy market and conforming to the EU acquis communautaire has been taken.

One of the most recent laws concerning the Turkish electricity market is the regulation regarding licence applications with respect to the establishment of a generation facility based on wind park energy (Rüzgâr Enerjisine Dayalı Üretim Tesisi Kurmak Üzere Yapılan Lisans Başvurularına İlişkin Yarışma Yönetmeliği), enacted in September 2010. Wind licenses have been in limbo in Turkey since November 2007, causing huge frustration and delaying investments. EMRA's decision to restart wind energy project licensing will kick off a first wave of licensing in the next months, which may represent up to USD 1.77 bln. However, the regulatory environment must be changed to attract more potential investors. For example, legislation to fix a viable feed-in tariff for wind is needed.

With the amendment of the EPK by the amendment act no. 5784 (Amendment Act 5784), enacted on 26 July 2008, the transition period regarding vesting contracts has been extended to 31 December 2012. During the transition period, distribution companies that have obtained a retail sales licence have the exclusive right to sell electricity and/or capacity to non-eligible customers in their regions. After the transition period, private retail sales companies will be allowed to sell energy and/or capacity to all customers across the country by determining the distribution tariffs. Furthermore, a tariff equalisation system to transfer revenue across the regions is being applied by EMRA, and a fully cost-based tariff structure is in the works. Thus, a smooth transition from monopoly to a competitive market is expected.

In order to avoid the licence trading, the Amendment Act 5784 sets forth that licences belonging to licensees who have not realised their generation plant investments within the term stated in the legislation will be cancelled. These licensees may not apply for further licences for three years and may not participate (directly or indirectly) in another legal entity's application.

The EPK is a milestone in the liberalisation process of the Turkish electricity market. Within a decade after its enactment, Turkey has made remarkable progress in its electricity market. Still, although significant structural and legislative developments have been achieved in the last years, a well-organised, efficient and competitive electricity energy market is a long term process.