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ICIS View: Turkish lira crisis spells new concerns for energy sector

By Aura Sabadus on 15-Aug-2018

After losing nearly one fifth of its value within the last week, the Turkish lira recovered some losses, stabilising at TL6.5 to the US dollar in Tuesday’s session.

The rebound brought some welcome relief to domestic and international markets, which had been on edge amid fears of national bankruptcies and contagion to the Eurozone and emerging markets.

But the fallout of the crisis, which started last week amid Turkey’s refusal to release a US pastor held captive since 2016 and climaxed on Friday when the US president tweeted he had doubled tariffs on Turkish steel and aluminium, could have a lasting impact on the Turkish energy sector.

On Tuesday, Turkish electricity companies voiced fears that some producers may seek to cancel supply contracts for delivery this year but which were concluded last year before the lira started to fall, shedding almost 40% of its value in the past eight months.

The spread between the last price assessed by ICIS for Calendar Year 2018 Baseload and actual delivery values this week has widened to as much as TL139.00/MWh (€18.65/MWh),

While it is true that producers may be losing money, cancelling the contracts may create a dangerous precedent and spark a chain of court cases. It could also spell the end of the over-the-counter (OTC) electricity market in Turkey. The losses incurred by producers are, no doubt, significant, especially for those who may not have hedged against the lira depreciation. Unfortunately, even those who may have taken the necessary measures to guard against the falls may have been blindsided by the sequence of events this month.

At the beginning of August the gas incumbent BOTAS said it would seek to implement a mechanism that was first introduced in 2008, but hardly used since, and which would allow the US dollar-denominated price of gas sold to gas-fired power plants to be converted at the exchange rate on the date of the invoice.

The government set a baseline price for gas-fired producers at $270.00/kscm, which meant that regulated tariffs to consumers had been raised by nearly 50% month on month.

Although the measure was welcome by some gas wholesalers, who had been badly hurt by soaring import costs and negative margins caused by low regulated tariffs, it became clear as the Turkish lira started to fall last week that the latest government decision was not sustainable.

Producers told ICIS last week they were accruing an estimated TL300,000/day in costs linked to the falling currency, which prompted some gas-fired generators to ramp down production. By Monday, some companies warned that the country was on the verge of curtailments as only five out of 11 efficient gas-fired power plants were operating, with other fuels such as hydro, wind and coal operating at full throttle to cover soaring summer demand.

Although the financial storm abated by Tuesday afternoon, companies remained on tenterhooks, fearing a new currency rout with harmful effects on the energy sector.

The country’s president Recep Tayyip Erdogan has sought to portray the crisis as a war waged by the West and global markets against Turkey, arguing that the country was ‘under siege’ and calling for a crackdown on social media outlets for disseminating ‘fake news’ about the lira’s plunge.

Of course President Erdogan is entitled to his views, often unorthodox, particularly when it comes to discussing the causes and remedies of the lira depreciation.

Yet, the reality remains that the experience of the last few days both on the financial and energy markets was the result of years of slapdash measures often applied to quickly fix earlier errors and keep stakeholders happy and compliant. Perhaps, rather than find internal or foreign scapegoats, the Turkish ruling elite should start to take a mature approach to stand its economy in good stead and devise a solid playground for all those who want to be part of it.