Who will pay for the hike in energy costs?

The energy crisis wracking the world has led to economic struggle – including bankruptcy – in countries around the world. The United Kingdom has been particularly affected. Many energy companies have had to throw in the towel, while the future is not looking bright for companies with energy-intensive production.

With a heavy reliance on imported energy and an outward-oriented economy, Turkey has been greatly affected by the energy crisis. Enterprises operating in the manufacturing industry in Turkey, as well as those that consume natural gas, are having to deal with rapidly increasing price hikes. However, it’s not just natural gas bills that are on the rise.


Large-scale manufacturers will have to pay additional bills as a result of the price surge in energy commodities. In order to understand what, exactly, these bills will be, it’s necessary to understand why natural gas prices are climbing.

Turkey generally relies on imported energy and particularly depends on external resources to generate electricity. It imports 98% of its natural gas from Russia, Azerbaijan and Iran through pipelines, and from many suppliers, including Algeria, Qatar and the U.S., in liquified natural gas (LNG) form. Nearly 90% of Turkey’s oil is imported by tankers from suppliers around the world not sanctioned by the U.S. and Western countries. Coal, which is mainly imported for electricity generation, is supplied from countries such as Australia, Colombia, and Russia.


Energy prices around the world are breaking records every day, and the rise in prices doesn’t seem to be easing. Oil prices are approaching USD 90 per barrel. LNG is now over USD 1,000 per cubic meter. The price of steam coal, which is used for processing and electricity generation in the manufacturing industry, has jumped nearly 300%.

Turkey doesn’t have any impact on the price rate of these resources on the international market. In fact, no single country has the power to determine prices.


Turkey imports energy and doesn’t set the prices for energy products. Because energy prices are surging, they are sure to affect the country’s macroeconomic balances. Turkey’s import expenditures are sure to rise, and those, who buy, use, and consume these energy products, will pay the cost of this surge.


In order to understand who will pay for this surge, it’s critical to understand who and what, exactly, consumes natural gas, coal and oil. Petroleum products are mainly consumed by vehicles, including personal, public, and company vehicles. Natural gas is consumed primarily by industrial enterprises, electric power plants, and by households for heating.


The natural gas price hike will prevent BOTAS Petroleum Pipeline Corporation (BOTAS) from having higher losses due to increased costs. Natural gas consumers, mainly industrialists, but also residential consumers, will pay heavier bills.

Natural gas has another important role in Turkey: it is one of the country’s primary means of generating electricity. The increase of the price of gas will positively affect BOTAS’ balance sheet, while cutting the profits of companies that generate electricity from natural gas.


Those who pay for the cost increase of natural gas will not just be those that run power plants. When the cost of gas – and therefore energy production – increases, this cost is reflected onto the products they sell. Accordingly, the cost of electricity will surge. Normally, electricity prices are expected to increase in such a case. It’s also normal to see tariffs implemented for residential, commercial, and industrial subscribers so their bills don’t increase. However, the price hike in production will affect prices down the line. It’s hard to believe that the price of a product whose production costs have increased would not become more expensive, but right now energy bills for consumers do not seem to be rising and energy companies say they have not increased prices.

These rising costs may not reflect on individual users, mainly residential customers, who consume electricity at prices set by the public sector – the “regulated tariff.” However, these costs are reflected on industrial companies who are now forced to meet their electricity needs by bargaining with suppliers on the market.

This “industrial” segment, to which the government hasn’t made an electricity supply commitment with a fixed tariff, was limited to subscribers whose total consumption was above 7 million kilowatt hours (kWh) before November 1.


So, this segment consumes electricity at the price it pays e to private sector players on the market. If it can’t find gas on the market, it can consume electricity from the last resource supply tariff (SKTT). The SKTT is formed on the energy change and is indexed with with variables including market clearing price – it is considered the benchmark price. However, due to a decision made on November 1, 2021, more industrialists will now be able to be SKTT subscribers – the benchmark has now been lowered to 3 million kWh annual consumption, rather than 7 million kWh.


The hike in manufacturers’ electricity bills due to the increased resource cost will be different for each industrial enterprise subscribed to SKTT. This difference in cost will become clear when the bill comes.

Residential consumers will also be affected

Residential consumers will also be affected by this cost increase because the electricity purchased by non-eligible residential and commercial subscribers from incumbent supply companies (GTS) has a cost. These firms buy around approximately onethird of their electricity from the Electricity Generation Company (EUAS), while they have to find the remainder on the market. As prices increase on the market, the cost of electricity acquired by GTSs to sell to residential subscribers rise. This cost increase needs to be, then, reflected on tariffs by the Energy Market Regulatory Authority (EPDK). Tariffs weren’t raised on November 1, however. The recent increase was only reflected on tariffs on July 1, 2021.

Subscribers will pay the interest rate through tariffs

An approximately TRY 4.5bn deficit has been appeared on the balance sheets of GTSs as because the cost increase in the second half of the year was not reflected on tariffs. This deficit may reach TRY 6bn if prices for residential and commercial consumption to not, once again, increase. If the EPDK doesn’t increase tariffs, it will need to find another way to address this financial deficit. If this deficit is filled by the Treasury, Turkey will be unable to compete on the market. GTSs have closed the deficit acquired in recent months through loans. Interest rates on these loans, essentially used as tariffs, have not been increased so as to not burden citizens. This increases the deficit, and payment of the deficit will return to citizens once again.

Natural gas prices tell exporting producers to ‘cut manufacturing ’

economic actors in Turkey have started to CRITICAL further feel reflections of the global energy crisis. The agenda of the market is focused, once again, on energy, as it was in the last three months. The BOTAS Petroleum Pipeline Corporation (BOTAS) has introduced regulation to increase natural gas price tariffs for the past three months. Successive price increases by 15% in natural gas used by industrial enterprises and power plants in September and October continued through November. The price of natural gas used by power plants increased by 46.8% and the price of gas used by the manufacturing industry raised by 48% in November 2021.


Moreover, this price hike will reflect more intensely on companies operating in certain branches of industry. BOTAS classified these companies as Stage-2 customers operating in the petroleum/petroleum chemicals/chemical, fertilizer, metal and non-metals sectors. If these companies consumed their average rate of natural gas for the first nine months of the year, 60% of this consumption will be billed at the newly increased tariff, while 40% will be priced at an additional 50% above the new tariff. In practice, that means that the energy cost for large-scale natural gas consumers has risen by 78% per unit.


With these additional regulations, BOTAS has tries to find a solution to keep natural gas consumption demand as low as possible in Turkey until Spring, when it estimates the fluctuation in the international energy markets will slacken and prices will ease. It has essentially told enterprises operating in sectors, such as glass, ceramic, iron-steel, and cement to not consume gas this winter. These enterprises will have to cut natural gas consumption in order to only use 60% of their average and avoid paying the 78% tariff.


The effect of the November 1 price hike on industrial enterprises that consume natural gas is clear. If they decide to increase exports, which is strategically wise in a period where FX rates have increased, they will be forced to pay the sky-high 78% tariff.

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