Energy: Power to the foreigners as plants go to market

By David O’Byrne, June 28 2010, FT

As a taster for the planned sell-off of Turkey’s state-owned power stations, the sale last month of 50 tiny hydroelectric power plants for almost $500m, could hardly have been more successful.

With more than 600 bids received for 19 groups of plants, the sale took two months longer than expected to complete and the prices paid averaged $3.7m per megawatt of capacity – more than two and a half times the cost of building the power stations from scratch.

This augurs well for the planned sale this year of 43 of the big state-owned plants, a figure that includes all 23 of the state-owned gas- and coal-fired power stations and 20 of the remaining hydroelectric plants – more than 12,000MW in all.

“For international power companies, buying in a privatisation sale means you don’t have to take a local partner, and it takes considerably less time to realise your investment than the two to three years it would take for a greenfield power plant,” says Cihan Saraoglu, energy analyst at EFG Istanbul Securities.

However, the expectation of intense foreign interest together with the potential for adding value to existing power stations means that prices are expected to be high.

Also, decades of underinvestment and bureaucratic delays have left many of the power stations in poor condition and in need of vast renovation. The four most efficient plants are to be offered for sale individually, but to ensure that even the worst are sold, the remaining 39 plants will be offered in nine groups, coupling the bad with the good.

“Most of the state-owned plants are inefficient and require lengthy maintenance,” explains Mr Saraoglu, pointing out that the three state-owned gas-fired plant have efficiencies as low as 60 per cent, against industry standards of 80 to 85 per cent.

But he believes investment by buyers should see good returns: “Renovation would mean less downtime and much more efficient operation. And you always have the option of increasing the installed capacity, which in turn lowers cost per megawatt.”

But the need for renovation goes beyond the need to increase efficiency. Many of the thermal power stations fail to meet even Turkey’s poorly implemented environmental regulations.

One plant, the 600MW Yatagan coal-burning power station, has for the past decade suffered repeated closures and fines for exceeding sulphur dioxide emission levels.

“Some of the plants are a veritable disaster,” says Haluk Direskeneli, an Ankara-based energy consultant. “Unlike private sector plants, the state power plants have generally not been obliged to meet environmental regulations,” he says.

Under the conditions of the sale, buyers will be given up to three years to bring their purchases up to scratch. “That sounds like a long time, but it’s not feasible to do it immediately,” he explains.

Turkey’s energy policy dictates that domestic resources should be used wherever possible, which means that power stations will be forced to continue to burn low grade local coal for the foresee­able future.

The policy also creates an added consideration for potential buyers interested in the smooth operation of their new purchase. The sell-off currently offers the 13 state coal-fired power stations as stand-alone operations, reliant on nearby state-owned coal mines as their only source of fuel.

“If you can’t control the coal production, you can’t guarantee the efficient operation of the power plant,” explains Haluk Direskeneli.

It is a dilemma that has already seen the postponement of the first planned sell-offs, scheduled to begin this month. Legislation that will allow the mines to be sold with the power stations is expected to be passed by parliament, ensuring the sale continues before the end of the year.

Mr Saraoglu sees the issue more as an opportunity than a stumbling block: “Companies with no mining experience will form joint-ventures with mining companies – either from Turkey, or overseas.”

Questions remain over purchase guarantees however, which many believe should be offered in order to ensure the sales.

Guarantees already exist for new projects in Turkey’s renew­able energy sector, such as the 4,800MW nuclear plant for which the government recently signed a contract with a Russian-led consortium.

“Nothing has been said yet,” says Mr Saraoglu, “But it would make sense to offer some guarantees – even if only for a short time.”