Turkish market expects rise in power tariff but not gas

Turkish energy companies expect an average 4% power tariff hike from as early as July, but a natural gas tariff rise is unlikely to happen until the end of the year at the earliest, according to a survey conducted by ICIS.

The market is expecting an average gas tariff rise of 6.5%.

Tariff increases help guarantee minimum margins for companies active in the gas and power sectors and tend to trigger increases in free-floating electricity and gas prices.

A total of 11 companies responded to the survey and their expectations related to the tariff hike and the likely timeline for the increase are given in the graphs below.

Shrinking margins

Unlike on previous occasions when companies expected the power and gas tariff increases to happen at the same time, respondents now said that the government was likely to stagger the tariff rises, with the power sector given priority. This indicates that firms active in the electricity sector are feeling particularly squeezed by rising energy costs and ever-shrinking margins.

The price of electricity bought on the spot market has averaged TL157.72/MWh since the beginning of the year, nearly TL20.00/MWh higher than the last ICIS assessed price for the 2017 delivery contract at the end of 2016.

The worst hit are retail companies, which buy their energy on the spot and sell it on to end consumers.

In addition to the raw energy costs, companies also have to pay contributions for the feed-in tariff as well as other ancillary taxes, which have pushed up their bill at a time when the retail tariff charged to end consumers has stagnated.

On the edge

Increasing the retail tariff may tide retailers over for a while, but it would affect the manufacturing sector at a time when inflation has increased and the Turkish lira is weak.

Political instability at home and predicted gradual increases in the US federal funds rate could destabilise the exchange rate and spell more woes for Turkey’s economy.

One of the worst and most immediately hit parts of the economy would be the natural gas sector where US-denominated import costs are expected to rise, while lira-denominated tariffs to end consumers would stay unchanged.

Although Russian import prices cannot be officially confirmed, shippers say the spread between the import costs plus taxes and the end-consumer gas tariffs has turned, or is likely to turn negative.

The worst hit are wholesalers whose margins have shrunk following the depreciation of the lira and the increase in oil-indexed import tariffs.

Forever quick fixes

Although a tariff increase for power and gas companies would bail them out for the time being, the odds are that the government may refrain from enacting a hike.

The energy minister Berat Albayrak has stated that such an increase may not happen this year since Turkey, fresh out of a constitutional referendum in April, is braced for possible parliamentary elections later this year. Any gas price increases could alienate voters.

Turkish gas companies may also be looking to Russian supplier Gazprom to grant a discount to private importers.

A meeting between private importers, the gas incumbent BOTAS and Gazprom is scheduled in the upcoming days following several months of a stalemate.

Gazprom may refrain from generous gestures at a time when it expects flexibility from the Turkish government on multiple other energy issues.

In the absence of a major devaluation of the Turkish lira or a breakthrough in Turkish-Russian gas price negotiations, the government looks unlikely to raise gas tariffs this year.

The government may opt to prioritise the electricity sector in a bid to bail out retailers and prop up generators. aura.sabadus@icis.com

Disclaimer

While changes in the price of natural gas and electricity are the remit of the Turkish government, ICIS has intermittently run surveys since the beginning of 2012. The survey aims to reflect market participants’ expectations for tariff increases or decreases, and follows their request for greater transparency in the Turkish electricity and gas markets.

The survey targets a minimum of 10 companies. It asks standardised questions and collects data on an anonymous basis.

The average of the expected tariff increase or decrease reflects the arithmetic average of all the percentage figures submitted to ICIS.

The timing of the anticipated tariff increase reflects the mean of all the percentage figures submitted to ICIS each month.