The IEA Commends Turkey’s Progress in Liberalising Energy Markets, but Calls for More Energy Efficiency and Environmental Protection.

(Ankara) — 19 April 2005

“Turkey has made impressive progress in addressing energy security, economic efficiency and environmental protection since 2001. It has introduced new laws to liberalise energy markets and established an independent regulator. The international climate change convention has been ratified. Oil and gas infrastructure have been upgraded, strengthening Turkey’s security of supply and that of the entire European continent. In addition, the government has recently renewed its pursuit of the nuclear option, which could further enhance the country's energy security,” said Claude Mandil, Executive Director of the International Energy Agency (IEA), today in Ankara at the launch of “Energy Policies of IEA Countries – Turkey 2005 Review”. He added: “Building on this success, Turkey must now focus on obtaining real benefits from energy market liberalisation and improving energy efficiency.”

Market liberalisation and privatisation
Turkey has made great strides towards market liberalisation and privatisation. Its adoption of the 2001 Electricity and Natural Gas Market Laws was a major milestone. The country has established an independent regulator, EMRA, and given it considerable powers.

However, there is reason for concern. The Turkish government plans to keep large parts of the country’s hydropower generation facilities in its hands. Turkey should avoid giving state enterprises a special role in competitive areas of the market, as it may result in barriers to entry for new market participants and investors.

Despite the good legislative and regulatory framework, not much competition has developed in the electricity market. It is difficult for new entrants to compete with the state-owned incumbents and only 29% of the market is free to choose suppliers. The “Electricity Strategy” of 2004 contains key elements for tackling these issues and should be followed. The share of the liberalised market could be increased sooner than planned and the transmission system operator (TSO) should be independent from government control.

In natural gas, 80% of the market is free to choose suppliers. Nevertheless, competition has failed to develop because of the de facto monopoly of the state-owned company BOTAS. The Turkish government should lift contract barriers for other parties. Regarding transmission, BOTAS has been nominated as the national TSO. However, there are open questions about its independence. Legal unbundling should be considered.

With respect to EMRA, there is some concern that it has over-regulated certain markets, particularly the oil market, and should strive to take a more light-handed approach.

Energy subsidies
There have been cross-subsidies in electricity and gas prices both between different consumer groups, notably from industrial consumers to residential consumers, and between different geographical areas. The IEA commends the government for its plan to base energy prices on costs. Cost-reflective prices are a prerequisite for ensuring private investment and efficient use of energy.

Turkish hard coal production is not competitive. It receives high subsidies for social, regional and employment reasons. The IEA does not consider these subsidies justified. Turkey should reduce them, set a clear deadline for their elimination and use other means to address social and regional challenges.

Energy efficiency and environment
Turkey’s energy policy approach has been highly supply oriented; energy efficiency has been a lower priority. Turkey’s energy use per unit of GDP is rising – in contrast to the trend in most other IEA countries – and is now higher than the IEA average. The draft “Energy Efficiency Law” is a good first step to realise an energy savings potential of 25-30%. To reach this goal, stronger policies are necessary, particularly in the transport sector.

Turkey’s ratification of the international climate change convention should be followed by a completed climate change strategy. The government should consider defining emissions targets. Despite significant progress in reducing air pollution, work remains to be done to comply with existing standards by all market operators. While investments have been made to increase security in the congested tanker traffic through the Turkish Straits, continued efforts are necessary.


Emergency oil stocks
In the past, Turkey has had difficulties meeting the IEA stockholding obligations, which require member countries to keep 90 days of oil net imports for emergency situations. The IEA welcomes the fact that, since 1 January 2004, Turkey has continually met its obligation. The Turkish government should ensure future compliance at all times by developing a new stockholding capacity and clearly defining any stockholding obligations of market participants.

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