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The privatization tender of Çayırhan-2 coal reserve area and the construction of a coal-fired power plant project (“Çayırhan-2 Project”) was concluded on February 6, 2017, which has been the first of the new wave of privatization of coal reserves and construction of lignite coal-fired power plants in Turkey in line with the recent incentives regarding utilization of domestic coal reserves for electricity generation. This client alert outlines the main novelties in relation to this new wave of lignite-fired power plant tenders, which is expected to continue with several other privatizations in 2017 as explained below.
Background
Turkey highly depends on fossil fuels and imported resources for energy generation, and faces a significant challenge in meeting the growing demand for energy, which is expected to be increased twofold by 2023[1], due to its rapidly growing population and industry. This has led the government to develop a strategy focusing on developing domestic coal resources, such that growth in coal-fired power generation is expected to be highest of all Organisation for Economic Co-operation and Development (OECD) countries, and fourth globally.[2] In accordance with the 10th Development Plan[3] of the government, domestic coal-based electricity generation is intended to be increased to 60 billion kWh in 2018 which was 39 billion kWh in 2012.[4] In line with such development plan, the electricity market law and other relevant legislation were amended in 2016 to provide additional incentives for the generation of electricity from domestic coal-fired power plants, including the new privatization method, which started to be sued with the Çayırhan-2 Project.
Furthermore, Turkish Coal Enterprise (TKI) has also been making a significant effort to explore new coal reserves in the last decade under the project “Development of Our Lignite Reserves and Exploration of Lignite on New Sites” which already revealed 5.8 billion tons of new coal reserves and increased the coal reserves by over 50%.[5] Furthermore, important amount of subsidies have been brought by the government for utilisation of domestic coal as demonstrated in Table 1 below which is estimated to be equal to 0.88% of the GDP or approximately USD 6.8 billion.[6]
Several public-private partnership models had been discussed for the utilisation of these coal reserves in electricity generation and most recently, in line with the amendments to the Electricity Market Law introduced in June 2016, a new investor-friendly model has been adopted and started to be used for the first time in the privatization of Çayırhan-2 Project.
Main Features of the New Privatization Method
The tender process for privatization of Çayırhan-2 Project, comprising the transfer of operation rights of a lignite mine area and the construction of a power plant with an estimated total installed capacity of 700-800 MW was concluded on February 6, 2017.
The tender process basically consisted of a three-stage process including the submission of offers in sealed envelopes, a negotiation phase and a Dutch auction based on the submission of lowest the price for electricity to be generated by the power plant. Accordingly, a joint venture group comprised of three leading Turkish companies has won the Çayırhan-2 tender by submitting the lowest bid of USD 60.4/MWh.
With this new model of tender procedure for privatization of coal reserves and construction of coal-fired power plants, for the first time, successful bidders will be executing two separate agreements. Accordingly, an electricity purchase agreement for a certain period of time stated in the tender specifications of each tender will be executed with the state-owned Turkish Electricity Wholesale Company (TETAŞ) and an agreement for transfer of operational rights for a period to be determined in the tender specifications will be executed with the state-owned Electricity Generation Company (EÜAŞ). In accordance with the price envisaged under the electricity purchase agreement, TETAŞ will provide a purchase guarantee for electricity to be generated by the Çayırhan-2 coal-fired power plant. In the event the construction of the Çayırhan-2 power plant is completed before the construction deadline, remaining period will be added to the operational phase.
Privatizations in the Pipeline
The Çayırhan-2 Project being the first tender of this new wave of privatization, it is anticipated that new generation coal-fired power plants such as Afşin-Elbistan C-D-E, Konya-Karapınar, Eskişehir-Alpu, Afyon-Dinar, Trakya-Çerkezköy-Çatalca and Kırklareli-Vize are expected to follow Çayırhan-2 project. Reserves and estimated installed capacities of these projects are as follows:
[1] Turkey’s Coal Policies Related to Climate Change, Economy and Health, p.27, Ümit Şahin, Istanbul Policy Center, April 2016. http://ipc.sabanciuniv.edu/wp-content/uploads/2016/01/IPM_eng_KomurRapor_13.04.16_WEB1.pdf
[2] Coal and Renewable Energy Subsidies in Turkey, p.1, Acar, Kitson and Bridle, International Institute for Sustainable Development, March 2015. https://www.iisd.org/gsi/sites/default/files/ffsandrens_turkey_coal_eng.pdf
[3] http://www.mod.gov.tr/Lists/RecentPublications/Attachments/75/The%20Tenth%20Development%20Plan%20(2014-2018).pdf
[4] http://www.enerji.gov.tr/tr-TR/Sayfalar/Elektrik
[5] Oil Change International (OCI). (2014). Turkey’s coal subsidies and public finance. Oil Change International. http://priceofoil.org/content/uploads/2014/07/Turkey-Coal-Subsidies-Full-07.28.14.pdf
[6] Monetary estimate based on 2011 nominal GDP for Turkey of $774.8 billion. Taken from: IMF, 2013. Turkey: Staff Report for the 2013 Article IV Consultation. International Monetary Fund, November 1, 2013. http://www.imf.org/external/pubs/ft/scr/2013/cr13363.pdf
This information is provided for your convenience and does not constitute legal advice. It is prepared for the general information of our clients and other interested persons. This should not be acted upon in any specific situation without appropriate legal advice. This information is protected by copyright and may not be reproduced or translated without the prior written permission of Ergün Avukatlık Bürosu (www.cergun.av.tr).