E-World, April 2014
Interview with Okan Yardimci - Energy Specialist at the Energy Market Regulatory Authority (EMRA)
CAN YOU SHORTLY DESCRIBE THE FIELDS OF WORK OF EMRA AND POINT OUT YOUR OWN SCOPE OF DUTIES?
The process of opening monopoly markets to competition, so called liberalization, performed first in United Kingdom and then in some of the other European Countries, gradually gained momentum since the early 1980s. In parallel with this structural reform in Europe, Turkish Energy Market Laws aim liberal electricity, natural gas and oil markets. EMRA was appointed as the regulatory body to achieve these hard tasks with the fundamental objectives such as to ensure the development of financially sound and transparent energy markets operating in a competitive environment and the delivery of sufficient, good quality, low cost and environment-friendly energy to consumers and to ensure the autonomous regulation and supervision of electricity, natural gas and oil markets.
I have been working for the authority since 2006 and specialized on the tariff structure of the natural gas market. At the beginning of this year, I started to a law programme in Penn State University Dickinson School of Law with the support of EMRA. I am planning to stay in USA for two years and this period is an enormous chance to have an interdisciplinary understanding about the whole picture of energy business and analyze the Turkish Energy Market from outside.
CAN YOU ALSO SHORTLY DESCRIBE THE TIES BETWEEN EMRA AND THE MINISTRY OF ENERGY AND NATURAL RESOURCES OF THE REPUBLIC OF TURKEY (MENR)?
Various public institutions are involved in the Turkish energy sector. These institutions have to work coordinately with the Ministry of Energy and Natural Resources of the Republic of Turkey as attached, related or affiliated institutions. EMRA is an affiliated institution of MENR. On the other hand “independent decision making” is the main reason of the regulatory authorities’ existence. We have to put in mind that; dependent authority that consumes social welfare unnecessarily is worse than the lack of the authority. Working coordinately with the ministries and at the same time being independent authority is the most complicated duty of the agencies in all over the world. Most of the times, independency is just a piece of paper given by a law. Rather than the piece of paper, the executives of the agencies have to be the protector of this important property.
As an independent regulator in terms of decision making which is guaranteed by the primary law, EMRA is authorized with regulatory functions such as licensing to entries to the market, regulating the market to assure non-discriminatory third party access to the monopolistic infrastructures such as grids, setting tariffs for the natural monopoly companies, monitoring the market and supervising and penalizing to make sure that the market participants are in compliance with the rules and regulations. EMRA is governed by a board composed of nine members who are appointed by Council of Ministers for a term of six years. EMRA has its own budget, independent from any other governmental institution.
WHAT ROLE HAS EMRA IN THE ONGOING PRIVATIZATION PROCESS OF THE ENERGY INDUSTRY?
Privatization process of the energy industry is mainly executed by MENR and Privatization Administration in Turkey. Agencies such as EMRA and Competition Authority are involved in licensing procedures and competition investigations respectively.
Energy Market
IN 2015, THE 6TH WORLD FORUM ON ENERGY REGULATION WILL BE HOSTED BY EMRA. WILL THIS EVENT UNDERLINE THE FACT THAT THE TURKISH ENERGY MARKET HAS A CENTRAL ROLE IN THE EURASIAN REGION?
Both the 6th World Forum on Energy Regulation-2015 and 22nd World Petroleum Congress-2017 show enthusiasm towards the growing country; Turkey and the fascinating city; Istanbul. EMRA believes the importance of World Forum on Energy Regulation and holding the Forum in Istanbul will enable to attract interests of those countries, who have not liberated their energy markets or at very early stages of regulation of energy markets.
Moreover, EMRA actively participates in the international organizations such as; Energy Regulators Regional Association (ERRA), Mediterranean Energy Regulators (MEDREG), Agency for the Cooperation of Energy Regulators (ACER) and Council of European Energy Regulators (CEER). I believe Turkey’s particular experiences will be utilized not only in Eurasian but also in the other regions. Accordingly, a regulation school/academy has to be effective in the early future in Turkey.
IEA EXPECTS ENERGY USE IN TURKEY TO ALMOST DOUBLE OVER THE NEXT DECADE. THIS WILL CREATE A MAJOR CHALLENGE OF THE EXISTING ENERGY INFRASTRUCTURE. WHAT MEASURE WILL EMRA IMPLEMENT TO MODERNIZE THE EXISTING INFRASTRUCTURE?
EMRA practices various methods to incentivize the infrastructure investments. To begin with the natural gas transmission segment; the infrastructure investment budget of BOTAŞ, which is approved by EMRA in cooperation with the other authorities, has never been cut by the regulatory authority. Additionally, the accomplished investments have been generally lower than the yearly budget level. The prices, provisions and terms for the transmission activities of BOTAŞ are set out in BOTAŞ Transmission and Dispatch Control Tariff by taking into consideration the long term investment plans. Investment budget is one of the important tools of the authority in order to incentivize the investments. However, the main regulatory tool is Weighted Average Cost of Capital - WACC calculation that means a firm's cost of capital in which each category of capital is proportionately weighted. The firms, whether they are state owned or private companies, have to determine investment decision by considering the WACC rates. BOTAŞ’s WACC rates have been determined competence for the existing and new infrastructure investments.
Due to the insufficient storage capacity in Turkey, EMRA still determines the tariffs with a premium in WACC calculation for the new investments. Furthermore, the methodology, which was come into force this month, will take the minimum WACC as 10%. The shorter depreciation period, ca 15 years, may also counted as another incentive for the new storage investments. The longer tariff durations, between 3-10 years aims the forecastability of the investors. Apart from these, exemption of the third party access till 2025 for the new LNG terminals is on the agenda of the draft natural gas amendment law.
For the natural gas distribution segment, the investments are motivated by the tariff design, although the infrastructure is new. EMRA, sets the tariff that determines the revenue requirements of the Turkish natural gas distribution companies by using a popular type of an incentive regulation, price cap method. Similar to the natural gas market we can see competence WACC rates and incentive methods for the transmission and distribution segments of the electricity market. As a quantitative comparison, all of the five segments mentioned above have a current WACC rate more than 10% (pre-tax and without inflation). Consequently, by the means of tariff regulations a reliable and convenient investment environment has been created.
DUE TO TURKEY’S ELECTRICITY DEMAND GROWTH INVESTORS PLAN POWER PLANTS THAT WILL USE IMPORTED COAL — A TREND THAT RUNS PARALLEL TO THE GOVERNMENT’S DESIRE TO BREAK THE COUNTRY'S HIGH DEPENDENCY ON GAS-FIRED POWER. HOW CAN EMRA CONTRIBUTE TO REDUCE THE DEPENDENCY ON THE IMPORT OF FOSSIL FUELS?
Literally that trend is not parallel to the government’s desire as written on the paper. According to the latest Electricity Market and Security of Supply Strategy Paper (2009); domestic lignite has to be exploited effectively. While domestic and renewable resources are given precedence in meeting the need for electricity energy, power plants based on high-quality imported coal will also be made use of, taking into consideration supply security and developments in utilization of such resources. EMRA is criticized a lot due to the licenses types given. However contribution of the authority is defined within the framework that is determined by the policy makers.
ENERGY PRICES ARE A SENSITIVE ISSUE AS THEY MAY HAVE DIRECT IMPACT ON TURKEY’S ECONOMIC GROWTH. WHAT TOOLS DO EMRA HAVE TO INSURE REASONABLE PRICE LEVELS?
Policy makers have to take into consideration all impacts of the energy prices. On the other hand, generally, regulatory agencies focus on the fairness between the energy companies and the consumers. They ignore the other impacts such as industrial development, importation and exportation figures etc. In fact they do not have any expectations from the elections. Literally this is one of the reasons behind the establishment of the agencies. Although, the conflict of interest between the government and the agency is so critical in all over the world; both the governments and agencies utilize the same tools such as financial and economical theorems with different interpretations.
IN 2013, EMRA REPORTED TO HAVE RECEIVED NEARLY 500 FEED-IN TARIFFS (FIT) APPLICATIONS FOR RENEWABLE POWER PLANTS. THE CAP OF A 600 MW CAPACITY WAS EXCEEDED BY 15 TIMES. WILL THE CAP OF 600 MW ISSUED LICENSES BE RAISED IN 2014?
Security of Supply Strategy Paper (2009) stipulates that the share of renewables in power generation will reach at least 30% by 2023. This general framework is the main guidelines of the EMRA and the developments may be expected in this direction as far as the legislative framework is eligible.
Energy Exchange
A KEY ELEMENT OF THE LIBERALIZATION PROCESS IN ENERGY MARKET IS THE ESTABLISHMENT OF EPIAS AS PART OF THE BORSA ISTANBUL. WHAT IS THE ROLE OF EMRA IN THE CREATION OF A POWER AND GAS EXCHANGE?
Establishment of sophisticated commodity markets for electricity and natural gas are important steps of the proper, modern and easy energy trade. Its major role is to provide forecastability for the producers and the consumers through the future contracts. Moreover, managing commodity price risk using hedging and options are the comfortable opportunities of the parties.
On the other hand, I do not consider the commodity market as a key element of the liberalization process. In fact, this tool is open to abuse at the unready markets. According to me, the key elements of the liberalization process are; independent authority, eliminating the physical market barriers, achieving the competition and raising the consumers’ awareness for the energy markets. Liberalization process has to be completed for the physical market before a compatible advanced financial instrument. EMRA is the main actor, even a director, of the liberalization process. Definitely, qualified human resources will be the main contribution of EMRA for the next steps.
THE ELECTRICITY MARKET LAW PROVIDES A CLEAR FRAMEWORK FOR A LIBERALIZED POWER MARKET. SUCH A FRAMEWORK IS STILL NOT AVAILABLE FOR THE GAS MARKET. WHAT DOES EMRA SUGGEST TO LIBERALIZE THE GAS MARKET?
Market based natural gas prices are necessary not only for a proper natural gas market but also a successful electricity market. We have experienced that, interventions on natural gas prices also disturbs the electricity market and cause welfare loss by losing the cheap LNG opportunities or unnecessary consumption. EMRA has been working on the changes of the transmission network code accordingly for a while.
The interview was conducted by conenergy agentur gmbh. We thank Mr. Yardmici for his time and detailed answers. Unfortunately, du to other obligations abroad, Mr. Yardmici will not be able to attend the E-world Turkey Conference in April 2014.
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