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Wednesday, 10 March 2010


The Energy Markets Regulatory Board (EMRA or EPDK) Chairman recently announced that the 1120 MWe Hamidabad CCPP, 2x160 MWe Can CFB, 4x150 MWe Seyit Omer TPP, and the 1034 MWe Soma TPP will be privatized later this year.

The overall capacity in privatization is 16,000 megawatts, and public authorities expect to get the equivalent of $10 billion USD in privatization income for the Treasury after the sales of electricity generation plants.

Our new job is to figure out the proper procedures and the face value of the plants for privatization, plus the terms and conditions of the scheme. Let us choose a sample thermal power plant and estimate its face price for sale -- for example, how much it should cost to buy the Soma Thermal Power Plant.

In our country, we have a rule-of-thumb expectation that an investment should repay itself within the next three years. That may be extended to four years at most.

A thermal power plant with an electricity output capacity of 1034 MWe, with 7000 hours annually of average working availability after privatization, and with an average of 10 US cents per kWh as the prevailing electricity market price, the plant’s net profits would total approximately $350 million USD per year, after deducting coal and operation costs. Taking into consideration the repayment period years, the sale price for the plant should not be less than $1 billion USD.

Now we have to deduct the necessary rehabilitation expenses from $1 billion USD. Rehabilitation expenses should cover the cost of six new Flue Gas Desulphurisation (FGD) installations, at approximately $25 million USD per FGD unit. That figure is derived from past tenders of the Kemerkoy, Yatagan and Orhaneli thermal power plant FGD installations.

Next are new Electrostatic Precipitation (E/P or ESP or dust collector) installations for the remaining four units. We know that the plant has already paid 9 million Euros for the ESPs of the first and second units of the Soma-B plant. Also, the boiler pressure tubes, safety valves, soot blowers, and coal mills need to be updated.

In the end we come up with a rough figure of $300 million USD for rehabilitation. That is to be deducted from the gross price of $1 billion USD.

One should keep in mind that in the privatization period, the new owners normally prefer to keep the existing qualified and experienced engineering staff active in operations. The technical staff gets better monthly salaries provided that they continue to generate value added contribution to the organization. However, the senior laborers are asked to retire. That is the natural outcome of the privatization process.

The most important risk in operation is in the quality of the incoming coal to feed the thermal power plant. In the past, the low and fluctuating quality of the incoming coal was the most apparent critical risk as foreseen by the interested foreign parties in the early 2000s.

The new investors would like to purchase the nearby coal reserves in order to keep themselves free from the risk of incoming coal quality fluctuations. Constant coal quality is to be secured with selective mining. Unburnable materials are to be screened and removed.

So we need to estimate the prevailing price of the available coal reserves. That is again three years payback of the current annual income of the reserves. Coal is sold to the plant at $2.50 USD per million BTU heating capacity. That is a reasonable global price for lignite reserves. To generate 1034 megawatts of electricity would cost $60 million USD per year for coal. That adds up to approximately $180 million USD over three years.

After privatization of the existing coal reserves, the investor should enforce selective mining operations for better coal quality. This requires more mechanization in open pit mining and a reduced labor force in underground mining. That is the nasty reality of privatization. These realities should be foreseen and evaluated in the long term prior to full enforcement of privatization.

All interested parties should be prepared for the outcome. The treasury is certainly hesitant to spend public funds on power plant rehabilitations. It feels that public spending is not under proper control. Public tenders take long evaluation periods and they are completed in a long period of time. In the end most of them are not operated effectively or properly. The treasury is also hesitant and reluctant to spend due to possible corruption in public spending.

The prevailing political administration may prefer to privatize all of the plants rather than spend the money to rehabilitate them. After privatization, the public authority could enforce the buyers to agree on the necessary rehabilitation spending from their private sources. It is proven that private spending in rehabilitation is faster, cheaper and more effective in the end.

The human cost of privatization is that the labor force is reduced in time. Hiring and firing would be easier. Senior staff will be retired. Better-educated and qualified new staff will be recruited. The existing technical staff will be kept unchanged for a while since they are the most important human capital of the establishment as long as they maintain their contribution to the operation. They normally would get paid more than they did earlier. Their material satisfaction is fulfilled by the new private owners. On the other hand the technical staff will get more freedom in their spending for rehabilitation and programmed maintenance.

More plant availability and higher capacity output are expected in the long run. Electricity would be sold in the local national market at prevailing rates and more income generation would be created. That is more taxable income for the public funds.

There is also a new investment potential to construct a new coal-fired thermal power plant with a capacity of 2x300 MWe in Soma in the future. That new investment would also be integrated with the privatization package to encourage and attract more attention to the project.

In the end we may find that a proper private ownership may also bring better operation, better rehabilitation, and a better environment under strict public scrutiny, and would generate more income for the workers.

Moreover, they should make more funds available to scientific research in the nearby universities for better coal firing and the better utilization of coal reserves. New scientific research institutes are to be established. More academic research funds need to be allocated to the local university’s engineering and technical departments.

They could sponsor upgrading the living standards of the nearby settlement. They could sponsor cultural and historical sites/activities in nearby ancient sites, which are Bergama/Pergamon and Truva/Troy.

We have lignite coal as our biggest fuel source, and we all agree that we should use that coal

with maximum efficiency and availability,
with maximum contribution to society,
with minimum harm to mother nature,
with minimum impact on global warming,
with maximized employment for the qualified local labor,
with maximized employment for local engineering, and
with maximized employment for local contracting.

Please do note that Turkey has picked McKinsey & Company as an advisor to help shape up the sales strategy for the privatization of the state-owned thermal power plants of the public electricity producer EUAS.

We hope that this report, despite requiring continuous updating, will provide the interested reader a frank view of the Soma Thermal Power Plant for future operation.

This article is an independent work which has been prepared with the available information received from the Soma Thermal Power Plant, and attempts to provide a candid picture of the existing situation. It is free from any public interpretation.


Haluk Direskeneli, Ankara based Energy Analyst, (born in Ankara, 1951), is a graduate of METU Mechanical Engineering department (1973). He worked in public, private enterprises, USA Turkish JV companies (B&W, CSWI, AEP), in fabrication, basic and detail design, marketing, sales and project management of thermal power plants. He is currently working as freelance consultant/ energy analyst for thermal power plants basic design software for private engineering companies, investors, universities and research institutions.

HalukDireskeneli@gmail.com