Turkey: Electricity Prices In Turkey And The Market Liberalization

Last Updated: 20 August 2014
Article by Safak Herdem

The recent growth of the Turkish economy that had sprawled to the entire last decade gave birth to a new phenomenon of energy price hikes. The country's growing appetite for ever more energy supplies necessitates a coordinated action on the part of the regulatory authorities to make the energy prices to stay in a stable and predictable course. Especially the pricing mechanism should be based on a more liberal approach that would allow the changes in demand and supply to be reflected in energy prices. In order to ensure such an environment for the energy market to operate the Turkish authorities has taken the steps towards the liberalization of the energy market. The special emphasis was given to the electricity market.

The Underlying Reasons for Liberalization

The drive for change on the part of the Turkish authorities came as a result of various different developments. The rising demand for the electricity as the result of increasing industrial capacity was accompanied by financial problems that had led the authorities to come up with new solutions. Moreover previously authorized bodies; the municipalities were reluctant to funnel electricity generated incomes for new electricity generation capacities that would contribute to the reduction of prices. Also the rising costs and very expensive purchasing guarantees had matched the ill effects of dwindling investments that failed to match the increases in demand. These recurring problems hastened the drive for more change in the Turkish electricity market.

The New Regulatory Regime

Electricity Market Law No 4628 which was enacted in 2001 marked the beginning of energy market liberalization in Turkey. During the same year came the establishment of the Energy Market Regulatory Authority that would later serve to enact critical regulations both for the organization of the energy market and for its liberalization. Following the distribution of first electricity generation licenses in 2003, the critical step came in 2008 that led to the privatization of distribution. The efforts for more liberalization of the market had reached the zenith with the introduction of the option for all non-residential consumers to chose their suppliers. The efforts to establish an energy stock exchange will take the liberalization of the Turkish energy market in to the next level in which the inflexible nature of the electricity prices will be replaced by a mechanism that would allow the prices to be determined in a more stable fashion that would bring forward a reference pricing system. This means a great deal of predictability for the investors.

What will EPİAŞ Bring?

EPİAŞ is designed to serve as the energy exchange of Turkey and is expected to be integrated in to Borsa Istanbul which is the umbrella institution that all the exchanges in Turkey operates within. There are different scenarios circulating around about the partnership structure of the EPİAŞ, however none of them have been confirmed yet. The only information disclosed to the public regarding the partnership structure is that the share of the public companies in EPİAŞ will not exceed 15%. It is expected that certain specific roles that are currently being carried out by TEİAŞ (Turkish Electricity Transmission Company) such as balancing acts and some of its human and technological capital will be transferred to EPİAŞ. The prime task of EPİAŞ is envisaged in the relevant law as working for the emergence and the formation of new markets within the wholesale electricity markets. However it is also tasked with even more crucial role for the market player which is the determination of prices pertaining market operations. Moreover if the standardized electricity contracts will managed to be exchanged in international future and options markets, this will signify a great deal of integration for the Turkish electricity market in to the world markets.

Even though such measures are substantial steps for the liberalization of the electricity market in particular and energy market in general, for the desired changes to take place there must be taken few more steps. Efforts should be done to reduce the country's dependency to foreign energy resources since such dependency might slow down the formation of a well functioning free market where the prices can take shape freely. The measures taken by the authorities such as increasing incentives for renewable energy demonstrates that the authorities have already started to take the necessary steps for reducing foreign energy dependency.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Safak Herdem
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