Once darling of foreign investors, Turkey's power market struggles
* Tumbling lira, rising costs hurt Turkey's power plants
* Heavily indebted energy firms face cash squeeze
* Power market partially freed, state intervention persists
* Lack of predictability keep foreign investors on sidelines
By Humeyra Pamuk
ISTANBUL, Sept 10 (Reuters) - When Austrian energy company
OMV started operating its power plant in Turkey in 2013, the
country's electricity sector was the darling of foreign
investors, lured by promises of market liberalisation and the
highest growth forecasts outside China.
Five years later, OMV has sold off its Turkish plant for
barely half of the 600 million euros it initially invested and
Turkey's power companies are in debt restructuring talks with
banks, amid a tumbling lira and rising energy costs.
With the promised liberalisation only partly delivered, and
state-owned plants at times undercutting market prices, private
sector firms found their margins squeezed even before the lira
crisis drove up repayment costs on foreign currency loans.
"Turkey no longer fits our product portfolio," said an OMV
spokesperson in Vienna. OMV also sold off its wholly owned fuel
retailer Petrol Ofisi in 2017, two years after its former CEO
described the Turkey investments as "a disappointment".
With their margins squeezed, many power companies are
fighting to keep cash flows stable and struggling to find
buyers, as the outlook darkens for the Turkish economy and for a
still heavily state-regulated electricity market.
"We will be seeing cash tightness more frequently. I don't
want to think of a scenario where the private sector or the
state is not able to deliver on its pledges," said an industry
source who works in a power generation company.
According to a report by Boston Consulting Group and Turkish
business group Tusiad, a total of $95 billion of investments
have been poured into the Turkish electricity market over the
past 15 years, largely funded by cheap credit. Of this, around
$50 billion is yet to be repaid.
Several Turkish companies, including power firms, are
seeking to restructure their debt after the lira lost 40 percent
this year due to concerns over President Tayyip Erdogan's
opposition to higher interest rates and a bitter diplomatic
dispute with the United States.
Conglomerate Gama Holding is among the latest in talks to
sell some of its assets, including a stake in its Gama Energy,
which produces electricity from hydro, wind and natural gas with
around 1,100 MW installed power across Turkey.
Such financing issues risk clouding the outlook even for the
renewables sector - a relative bright spot in Turkey's power
market. Fitch Ratings last month downgraded its near-term
forecasts for Turkish solar and wind capacity as it expected
fewer projects to gain financing in the short run.
"It should not be a surprise for (power) companies to file
for bankruptcy one after the other," said a senior manager at a
Turkish energy firm. "Many companies are really in a dire
situation and they are in a panic to restructure," he said.
Turkish energy officials declined to comment for this story.
Turkey has reduced the state's role in power production
through privatisations and also brought power trading onto an
exchange to boost transparency.
But the government still holds 25 percent of total installed
power supply and often offers prices below market levels,
effectively setting a ceiling that can defy market fundamentals.
The natural gas market has remained largely under state
control, hampering further development of the power market. More
than 37 percent of the 85,200 MW electricity generation uses
natural gas. As a result, power plants fed by natural gas, which
have more flexible production levels than renewables and
coal-fired plants, are the hardest hit.
Turkey's state pipeline operator Botas has more than doubled
prices for gas supplied to power plants, to 1,700 lira per
kilowatt hour (KwH) this month from 717 lira last year.
But electricity sale prices for those gas-fired power plants
have risen much less. The market clearing price at Turkey's
Energy Bourse (EPIAS) rose 67 percent over the same period,
while household power prices only rose 33 percent.
"Our margins have evaporated. There is no predictability or
visibility in the market, which makes it even more difficult for
restructuring. And that jeopardises the financial stability of
these companies," said Selim Guven, Commercial Director of Acwa
Power in Turkey.
"When you are indirectly subsidising the manufacturing
sector and consumers with cheap electricity, you are damaging
the financial sustainability, predictability and the foreign
investor appetite in the power industry."
When OMV and other foreign investors flocked to Turkey, its
power market looked to be the only one in Europe promising
returns, with energy demand forecasts second only to China.
Turkey's overall energy demand still grew at 4.4 percent a
year in the decade to 2016, more than twice the global average,
BP's Statistical Review of World Energy said.
But Turkey's recent economic woes have prompted economists
to downgrade growth forecasts, and some now see prolonged
economic contraction into 2019.
Some government measures - including incentives for power
plants to use domestic coal to help reduce a $37 billion energy
import bill - have damaged price predictability.
"You need predictability, consistent state policies,
financial stability and access to longer term funding," Guven
said. "At the moment we are struggling in all these aspects."
(Reporting by Humeyra Pamuk
Additional reporting by Can Sezer, Kirsti Knolle in Vienna,
Orhan Coskun in Ankara
Editing by Gareth Jones)
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