Jan Haizmann, of Corregio Consulting and the European Federation of Energy Traders (EFET), contrasts Turkey’s ambitions to become a regional hub with its strategy to attract investment
Turkey is uniquely placed to play the role of regional energy hub, connecting large energy suppliers to large European consumers. Jan Haizmann, managing director of energy consultants Corregio Consulting and chairman of the legal committee of the European Federation of Energy Traders (EFET), argues that the uncertain geopolitical environment only re-enforces Turkey's importance. However, the country will need foreign investment to meet its goal of becoming an international energy hub. To do this, says Haizmann, the government will have to pursue market liberalisation, including transparency on trading rules, operational trading platforms, competition and diversification alongside its large projects. Unpicking this, Haizmann looks primarily at the electricity, gas and renewables markets, reviewing moves by the Energy Market Regulatory Authority and developments in the gas market.
What is your analysis of the electricity and gas sectors in Turkey?
Following fast growth in the electricity sector, the Turkish market entered a period of consolidation in 2014. Turkey's launch of day-ahead and balancing in the electricity market was a major achievement. In 2015, national energy regulator Emra (Energy Market Regulatory Authority) set up the structure for the creation of wholesale electricity exchange Energy Exchange Istanbul (Epias), which was established in March 2015. However, the pace of liberalisation and privatisation has slowed down and electricity wholesale prices have fallen in recent years.
Looking forward, the Turkish government should complete market liberalisation and the privatisation of remaining state-owned power generation assets, and foster the functioning of the wholesale electricity market at Epias (day-ahead, intraday and longer maturities). Turkey needs a functioning forward market to provide the right price signals required for making investment decisions. A financial market can only develop based on a healthy physical over-the-counter (OTC) market and there remains work to be done.
The key prerequisite is the urgent creation of a gas trading platform
Progress has been slow in the gas sector. The Gas Market Law of 2001 has not been fully implemented, notably with regards to the full unbundling of gas supply and trade from transmission. Despite the efforts made to liberalise gas imports since 2013, only 20% has been purchased by private companies. System operator Botaş Petroleum Pipeline Corporation dominates gas imports, trade and supply and wholesale. Botaş imports 78% of all the natural gas consumed in Turkey and operates the gas network and one of two LNG import terminals. Botaş has investments in a gas storage facility and the first gas transit pipeline (the Trans-Anatolian Natural Gas Pipeline, or Tanap).
With regards to the gas market, competition cannot be improved unless third-party access is implemented by effective application of the network code of Botaş, and unless the unbundling of trade and transmission activities is carried out and restrictions on import and export fully removed. There is a clear mandate for a competition authority to oversee a transition of Botaş. An evolution towards an independent system operator is needed in this respect. The pending gas market reform should be adopted without delay.
Europe has given the example and Turkey will have increasing difficulty to decouple itself from the EU. The government should set out an action plan for the creation of a fully functioning gas market providing for effective unbundling. A transparent and cost-based pricing mechanism for gas has yet to be properly implemented, otherwise the liberalisation of the electricity market will have a very limited effect.
What influence have projects such as the TurkStream pipeline had on the country's gas sector?
Striving to become a regional energy hub, Turkey has recently become a participant in many big infrastructure projects, and is developing relations with countries with energy resources. Hopefully, Turkey will take the role of creating a new energy equation in the region with the help of a transparent policy for all parties. For example, an agreement has been concluded on the Tanap project, which will ensure the delivery of natural gas from the Caspian Basin to Europe. The TurkStream project is implemented jointly with Russia. In an effort to develop the LNG market, a number of projects have been implemented with Qatar.
Large projects such as TurkStream and Tanap allow Turkey to strengthen its natural position as a transit country between energy suppliers and consumers in Europe. Moreover, large projects combined with an open and transparent market design strengthen Turkey's energy security. With each project if combined with a complete market liberalisation, Turkey's weight on the global energy market increases. If the government is benefiting from its natural bridge position and if it recognises the need to co-operate across the borders, Turkey may achieve its goal and become an international energy hub. The transit through Turkey is the safest and cheapest solution for southeast Europe as well.
As Turkey becomes a transit route for natural gas, there is a need to create a transparent and liberal natural gas market with free price-discovery for power a gas. The role of the energy exchange Epias, which will form a free market of electricity and natural gas, will contribute to making Turkey one of the serious players in the regional energy market.
Conversely, current regional instability makes Turkey's integration with its regional trade partners even more important. Turkish and European energy security are strongly linked to each other and market integration has become more relevant. In a volatile energy region, Turkey's role for securing energy trade and transit to the EU is significant. Since 2015, the Turkish electricity system is formally synchronised with Entso-E Continental European system and trade flows are expected to grow in the future.
But for that to happen, the Turkish government and the energy regulator need to ensure the swift finalisation of Epias' trading rules, and support the development of the financial markets for electricity and gas, as well as the adoption of the necessary rules for the integration with Entso-E markets in the coming years. Turkey has a strong opportunity to increase its integration with regional electricity markets, which can foster security of electricity supply and system operation.
Both projects' implementation will have a positive impact on the volume of gas, which will help Turkey aspire to the role of a regional hub, especially if the issues on construction of pipelines for further transportation from the Turkish border to the EU are resolved. The main benefit Turkey will receive from TurkStream is that the third country transit will be eliminated. As long as Turkey-Russia political relations continue to be stable, this is a very important national gas security of supply advantage for Turkey.
What have been the key recent legal changes underpinning the energy sector?
In December 2014, the Turkish Minister of Energy and Natural Resources introduced a new strategic plan (2015-2019). The strategic five-year plan aims to increase the share of wind, solar, hydroelectric and biomass resources in Turkey's energy production facilities.
Turkey is planning to construct the world's largest solar energy centre and aims to meet about 50% of its electricity needs from renewable sources by 2030.
Throughout 2016, Turkey placed importance on domestic and renewable energy resources for electricity production. At the same time, consumption of natural gas is increasing, and using natural gas in homes and industries has been found to be more beneficial than using natural gas for electricity production. The Turkish government's policy of reducing the share of gas in the power generation sector to 30% by 2023 and increasing the share of domestically produced energy resources is already close to being achieved, thanks to the measures the government started implementing in 2014.
Competition cannot be improved unless third-party access is implemented by effective application of the network code of Botaş
In May 2016, the Ministry of Energy and Natural Resources (MENR) issued the Regulation on Renewable Energy Resources which set out terms and conditions of the government support scheme to renewable energy producers to attract more investment and increase the share of solar and wind energy in the electricity generation energy mix. As a result, the share of renewable energy (solar and wind only) in the power generation sector increased from 3.4% in 2014, to five percent in 2015 and to 7.8% in 2016. At the same time, the share of gas in power generation decreased to 47.9% in 2014, to 37.9% in 2015 and 33% in 2016.
Despite the fact that the government only offered a feed-in tariff at a breakeven rate, companies have benefited from the guarantee of not being exposed to market and foreign exchange rate volatility risks. Equally, companies have the opportunity to sell their product in the liberalised market for a better price, although the majority of companies have preferred to sell under breakeven feed-in tariffs with a purchase guarantee. The great rush of companies to produce more renewable energy prompted Emra to act to modify the law and create more competition between the companies.
In October 2016, MENR published its Amendment to the Regulation on Renewable Energy Resources Law 5346, introducing new terms and conditions which will create new competition between companies. The most important part of the Amendment is that the purchase guarantee will be given only to the companies that produce energy using locally-manufactured products and technologies.
However, there are some issues with the Amendment that make the implementation of the terms and conditions of the law difficult. It is not clear how Emra or the MENR will identify the origin of equipment. Even if this is done, how will the relevant authority rank the local product and identify the winners? Emra needs to clarify these issues. It is at the moment working on the Amendment to clarify the ranking of the products produced locally which are used in renewable energy production.
The Amendment has strengthened competition between renewable and gas-fired generating companies. It is expected that during 2017 there will not be any significant increase in renewable power production. After an initial phase with rapid take-off in the deployment of renewable generation during the last three years, the rush for investment in this sector of the economy will be slower in 2017 and the share of renewables will remain stable or with little growth.
However, on a longer-term perspective, the Turkish government is expected to sustain its support for renewables and attract more investment. We hope that Turkey will learn from lessons in Europe where poor renewable energy sources (RES)-integration has triggered serious problems for the utilities. It is clear that late integration of RES into the future market will distort price signals, create operational grid problems and lead to overcapacities.
Are you anticipating possible sweeping reforms to the energy sector?
Turkey is interested in using its geographical position to play a key role in the energy market. The geostrategic position of Turkey is also mentioned as an integral part of the national priorities and the government has incorporated the country's geographical position into its calculations on foreign policy. However, Turkey needs more investment in infrastructure to increase the capacity of its refineries and natural gas storage facilities if it wants to become an energy hub.
Turkey is an important gas market and its geographical location is favourably located to access the large regional resources. In the medium-term, global LNG supplies will be plentiful and cheap. Benefitting from well-supplied LNG markets and the diverse resources within its neighbourhood, Turkey has a considerable opportunity, along with EU markets, to diversify sources and routes, and to enhance the collective gas security.
For Turkey to become a regional energy hub, the government will need to diversify its long-term supply contracts and routes to increase competitive supplies in the market. The key prerequisite is the urgent creation of a gas trading platform. A market will require the separation of trade/supply, import and transmission, and the creation of an entry-exit regime incentivising all importers to sell to the platform. Only an independent system operator can ensure transparent balancing and congestion management and the compliance with third-party access to the gas storage and transmission capacity. This will attract private investments, including in new LNG terminals, natural gas storages and pipelines.
How open is the market now in terms of the diversity of players and opportunities for investment, and what are the key barriers to market entry?
In the last decade, the Turkish government has made significant reforms in the provision of energy, moving forward the participation of private entities and creating a more competitive market. The privatisation of energy generation assets, coupled with a strategy to clear the way for more private investments, has resulted in an increased share of private entities in the electricity generation sector, from 32% in 2002 to 75% in 2015. Another step taken by the Turkish government towards a more competitive energy sector is the establishment of an energy exchange. Once operational, the exchange will not only enhance the liberalisation of the market, but will also ensure transparency and help maintain a healthy balance between supply and demand.
With each project if combined with a complete market liberalisation, Turkey’s weight on the global energy market increases
In addition to having a large domestic market, Turkey is in a strategic location between several major energy consumers and suppliers, and so serves as a regional energy hub. The existing and planned oil/gas pipelines give Turkey increased leverage over energy prices and reinforce its gateway status.
However, for example, in case of natural gas imports, one of the most significant issues to consider is the country restrictions imposed by the National Law. According to the Law, no new natural gas purchase agreements can be executed for importing pipeline natural gas from the countries that Botaş has gas import contracts with. The only exception to this prohibition is the contract transfers of Botaş. Botaş is entitled to transfer the entire contract or a certain volume of import contracts. It looks like a good idea to verify whether this exemption should not be made larger to allow for alternative supply as the best risk insurance for security of supply issues.
What sort of energy market is emerging from the recent geopolitical challenges?
The Turkish energy sector and energy policies need to evolve in step with the requirements to meet rising energy demand, foster sustainable economic growth for its cities and industries, and ensure the energy security needs of an emerging market located at the crossroads between Europe, Asia, and the Middle East in a period of geopolitical turmoil.
Geopolitical challenges remain significant in the region. Turkey is dependent on gas pipeline imports from Russia (55.1%), Iran (16.2%) and Azerbaijan (12.8%), but also on LNG imports from Algeria (8.1%) and Nigeria (2.9%). The gas system has a low capacity margin and has difficulties coping with demand peaks or major transports, impacting the country's electricity security, as almost 50% of all natural gas is consumed in the power sector. Imports and transits of oil products from the Middle East increased. While Turkey is compliant with its oil stock obligations, security of oil transit infrastructure has become a concern amid regional instability.
Turkey's key location for energy supplies and regional affairs means the EU has always considered it a strategic partner. The country's accession process for membership started back in 2005. And this same strategic importance may be useful even today – some have suggested Europe's timid response to President Recep Tayyip Erdoğan and his crackdown after the attempted coup is because of Turkey's crucial role in supplying the EU with energy.
As the EU seeks to become less dependent on Russian gas it will need to develop supplies from the Caspian Basin through Turkey's Tanap, while also increasing its supply from global LNG markets. At the same time, Russia will continue to reroute its gas exports away from Ukraine, instead increasing flows through Turkey. It is therefore highly unlikely that the strategic nature of EU-Turkey relations will change in the foreseeable future.
|About the author|
Dr Jan Haizmann is a qualified lawyer in Germany, UK and Belgium. Haizmann started his career at a German law firm, specialising in European competition law and industry regulation. In 1999, he moved to London to work as regulatory affairs manager for Enron Europe, focusing on industry regulation applicable to the power and gas sector.
Haizmann gained commercial experience as origination manager at the front desk of Glencore Energy in London. Since 2005, Haizmann has been an independent consultant to the energy trading industry, based in Brussels, advising clients on legal and regulatory aspects of energy trading. Haizmann has been appointed expert in several arbitration proceedings. In parallel to his consulting activities, he holds different executive functions within the European Federation of Energy Traders (EFET) and is member of its board of directors since 2009. Haizmann is member of the exchange council of the European Energy Change and is in charge of educational activities as director for energy of EAR (European Academy of the Regions).