Turkey is dependent on imported energy because it does not produce enough for its own consumption. Consequently, energy prices are not cheap in line with the logic of the market. But consumers complain about high prices. How are electricity prices determined around the world and in Turkey? How does the system work? What is behind of the surge in spot electricity prices? We looked for answers with Kivanc Zaimler, Energy Group President of Sabanci Holding and President of the Association of Distribution System Operators of Turkey (ELDER), one of the institutions at the center of the Turkish electricity sector.
WHAT’S THE CURRENT SITUATION IN THE TURKISH ENERGY MARKET?
Turkey restructured the energy industry with the idea to transition into the free market since 2000. The establishment of the Energy Market Regulatory Authority (EPDK) and enacting the Electricity Market Law were among the important steps for this restructuring. Today, the private sector has a significant share in power generation; the private sector plays a more active role and the footprint of the public sector has decreased. The distribution and retail sales sides of the business are carried out by the private sector.
HOW HAVE THESE DEVELOPMENTS AFFECTED CONSUMERS?
There are nearly 45 million electricity subscribers, which we used to classify as residential, commercial, and industrial subscribers. But the classification today is as liberated and non-liberated consumers. Liberated consumers are those who can buy electricity from suppliers they want through negotiation. Non-liberated consumers are those who must buy electricity on tariffs announced by the public sector. Moreover, there is another group who can buy electricity through negotiation or tariffs. Residential subscribers are those with the lowest consumption. Subscribers who have the highest consumption, consuming more than 7 million kilowatt hours (kWh) per year (which is expected to decline to 3 million kWh as of 2022) are another group. This group is subject to the last resource supply tariff (SKTT). There is a system promoting them to buy electricity through mutual agreements. From this perspective, the subitems of the electricity bill at each segment differentiate. Energy production costs are the highest on this bill today. Prices paid for transmission and distribution are added to it.
HOW DO YOU MEASURE ELECTRICITY GENERATION COSTS?
Let’s assume that we need 100 units of energy. We maximize the usage of renewable energy resources like wind, solar and hydroelectricity, the cheapest and cleanest resources that we have. We produce 50 units through them and use primarily domestic coal and then imported coal in order to meet the remaining demand. Let’s assume that is 30 units. We’ll consume natural gas for the remaining 20 units.
WHY ARE SPOT ELECTRICITY PRICES INCREASING?
The demand was 100 before the pandemic and then rose to 115. More resources were needed to meet this additional demand. The share of domestic and renewable resources decreased from 50 to 40 as hydroelectricity power plants produced low energy due to drought in Turkey. That’s why the share of natural gas, the most expensive energy source, increased to 40. Thus, power generation costs surged.
WHAT SHOULD BE DONE TO CUT THE COST?
Electricity prices depend on natural gas in many countries including Turkey. The cost is set at the international market. As an import dependent country, Turkey bears this cost. Imported natural gas represents a considerable share in consumers’ electricity bills. As a country, we have to support operations that will reduce the share of natural gas in electricity generation.
WHERE ARE DISTRIBUTION COMPANIES IN THIS EQUATION?
Distribution companies were handed over to the private sector with foreign currency-based privatizations carried out from 2008-2013. USD 13bn was transferred to the public sector. Today, distribution companies distribute electricity that is generated and transmitted to them. That’s why they make investments needed by the network as their main task. With Turkey’s high urbanization rate, the number people per household is decreasing while the number of households is increasing. Manufacturing is expanding and new production plants are being built. That’s why the network should be grown and improved. The technical commercial losses there should be recovered and adjusted. Serious investments should be made in order to decrease power outages.
WHERE DO ELDER MEMBERS MAKE MONEY?
In order to finance the network investment to return in 10 years, you have to find external sources. If you find a loan at a lower cost than the amount of return, you will earn more revenues. On the other hand, there is a revenue base set by the EPDK against enterprise expenditures. Meter reading, repair and maintenance are allocated to distribution companies with a price in a cost-based structure. This is relevant to the size of the region they manage and structure of the network. But distribution companies are continuously kept under control in terms of quality and efficiency. Assertive goals are set, they are controlled based on a reward or penalty mechanism.
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