www.ifc.org/ThoughtLeadership Note 33 | March 2017 CREATING MARKETS IN TURKEY’S POWER SECTOR The World Bank Group’s engagement in Turkey’s power sector, which began in the 1990s and continues today, has helped to expand independent power production and privatize electricity distribution in the country. Significant investments made in both generation and distribution shifted the power sector toward private investment and management while meeting growing energy needs. Since 1998 the World Bank Group has been actively engaged In 1984, with legislation that removed monopoly power, the in the liberalization and privatization of Turkey’s power sector, country began a process of unbundling state owned enterprises, initially with technical and financial support from the World paving the way for private participation in the energy sector. Bank, and culminating in IFC investments into private Liberalizing the sector offered the potential to remedy many of companies. These efforts have successfully created new the challenges and drawbacks inherent in full state ownership. markets in the sector, resulting in greater access to reliable And privatization allowed for the creation of a competitive electricity, accelerated economic growth, and an increase in market with greater access to entry for private enterprises. The labor force participation. potential results of those efforts were greater efficiencies, increased supply and, ultimately, lower prices for both Energy and the Economy consumers and industry. Turkey’s economy has exhibited strong growth in recent decades, with average annual GDP growth of 7 percent between Turkey’s Power Sector Transformation 2003 and 2013. While growth has slowed since then, Turkey The 1984 legislation introduced several new investment continues its steady transition toward an industrialized and models, including Build-Operate-Transfer, Build-Operate- diversified economy. Own, Transfer of Operating Rights, Independent Power Production, and auto-production. These models differed mainly A side effect of strong economic growth, in addition to ongoing in ownership conditions, but all allowed for the involvement of industrialization and population growth in Turkey, is that the private firms in one form or another. nation’s energy needs have also risen rapidly. Growth of per capita electricity use has outpaced GDP per capita growth rates The Electricity Market Law of 2001 provided for the for the last two decades. And energy intensity—a measure of unbundling of state owned electricity assets, opened the market energy consumption per unit of GDP —has grown on average above a certain level of electricity consumption, and allowed 5.5 percent annually between 2000 and 2015. Due to a heavy third-party access to the grid. It also mandated that all reliance on power hungry industries such as motor vehicle and generation capacity be sold to wholesalers, retailers, or directly steel production and mining, rising electricity prices threatened to consumers, either directly or via a spot market. to make the economy less competitive. In addition, power outages, due to demand exceeding supply, have been common With technical and financial assistance from the World Bank, for ordinary Turks, occurring on average five times a month. the state owned generation and transmission company was unbundled and divided into three separate entities responsible The inability of Turkey’s power sector to keep up with demand for generation (EUAS), transmission (TEIAS), and wholesale was largely a result of a noncompetitive market. Until the 1980s (TETAS) (See figure above). At a later stage in the unbundling Turkey’s energy sector was dominated by a vertically process, the wholesale component moved from being a single integrated, state owned monopoly—the Turkish Electricity buyer of private generation to an individual participant in a Authority—for generation, transmission, and distribution. competitive market. Since 2003 the number of wholesale actors in the market has expanded rapidly, with some 156 private As illustrated in the figure on page 3, the World Bank Group1 entities holding wholesale licenses today. provided technical policy assistance on market structure, regulation, and pricing, as well as financing toward the initial Further unbundling of the power sector, in both distribution and liberalization of the electricity market. By 2007 about 40 retail activities, resulted from the Electricity Market Law of percent of the energy market was liberalized. In 2008 IFC made 2013. In 2015, with technical assistance from the World Bank additional investments in private electricity companies — Group, the independent Energy Market Regulatory Authority— further promoting the participation of private firms in Turkey’s which issues licenses, approves tariffs, and performs other energy sector. The Multilateral Investment Guarantee Agency functions that facilitate private participation in the energy (MIGA) contributed $300 million in guarantees. By 2015, total market—announced the establishment of the Turkish Energy World Bank Group investments and commitments stood at over Stock Market. That year 30 percent of total electricity was sold $7 billion, with the power sector transformed into a fully through the stock market, with the remaining electricity competitive market. purchased through bilateral contracts. Overall, IFC made considerable investments in Turkey’s power A Comprehensive World Bank Group Approach sector, in both distribution and generation, spurring innovation and market creation. Since 2008 IFC has committed $3 billion In efforts to promote access to reliable energy and the (including $1.2 billion from IFC’s own account and associated economic benefits that come with it, the World Bank mobilization of $1.8 billion). Four power generation Group, including IFC, has actively supported and financed the companies—Enerjisa Enerji, ACWA, Akenerji, and Rotor liberalization and privatization of Turkey’s power sector and the creation of markets for electricity in the country. 1 The World Bank Group includes the World Bank, the International Finance Corporation and the Multilateral Investment Guarantee Agency. This publication may be reused for noncommercial purposes if the source is cited as IFC, a member of the World Bank Group. Elektrik—received a total of $1.8 billion in loan capital, while electricity costs, industrial power use has increased, boosting a total of $407 million in equity investments were made for GDP and employment growth. Around 20,000 new jobs have Akfen Energy, Gama Enerji and UNIT Equity. A distribution been attributed to IFC investments alone. In addition, the company, SEDAS, received $150 million in loan capital from proportion of Turkey’s population with access to electricity has IFC and an additional $90 million sourced from international increased from 62 percent in 1990 to 96 percent in 2009, with a banks. noticeable reduction energy intensity. Outcome and Lessons Learned World Bank and IFC investments in Turkey illustrate market creation in action. The World Bank Group was able to help The effects of the World Bank Group’s role in Turkey’s power correct market failures and imperfections in the power sector, sector have been broad and far-reaching, contributing to the ultimately allowing for the development of an open and success of privatization. Direct investments into the sector have competitive energy market by 2015. And IFC investments in increased Turkey’s total installed capacity. IFC-financed plants private companies spurred new ideas and activities in the currently contribute over 4 percent of capacity, with energy sector. In Turkey’s case, a holistic approach that approximately 3,000 megawatts operational and an additional leveraged different members and capabilities of the World 3,000MW under construction. The increase in Turkey’s power Bank Group was the best strategy. Comprehensively addressing fleet has also resulted in cheaper electricity tariffs for end-users; market imperfections and structural challenges, building they fell from 3.5 percent in 2010 to 1.3 percent in 2015, when capacity, and providing both financial and technical assistance compared to a hypothetical situation in which IFC-financed were necessary to foster successful and self-sustaining capacity was not realized. markets. The macroeconomic impact of IFC and World Bank power Kopo Mapila, Consultant, IFC (kmapila@ifc.org) sector investments have been substantial. With cheaper Hayat Abdulahi Abdo, Senior Strategy Officer, IFC (HAbdo@ifc.org) This publication may be reused for noncommercial purposes if the source is cited as IFC, a member of the World Bank Group. 