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Turkey: Which

Thermal Power Plant

T

o B

uy?

–

OpEd

By

By Haluk DireskeneliHaluk Direskeneli

November 25, 2012

Our job is “energy

generation,” and it is

specifically “thermal

power plants” firing local

indigenous coal. In our

new legislation, all

thermal power plants are

in the privatization

scheme. There will be no

more public power plants

operated by the state

establishments. First, the

1120 MWe (1154 MW after

rehab) output capacity

gas-fired Hamitabat will

be sold on January

be sold on January 14,14,

2013. The Kütahya

Seyitömer 4×150 MWe

local coal-fired plant will

be privatized on December

20, 2012. The Sivas

Kangal coal-fired 3×150

MW plant will be sold on

January 17, 2013. The next

Soma 1034 MWe power

plant is expected to be

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auctioned shortly. These auctions are not property sales, but a transfer of operating rights for the next 30-49 years.

In privatization, new owners are expected to conduct fast and

reasonable rehabilitations to upgrade availability, achieve better efficiency, and meet EU

environmental emission standards in former public power plants, most of

which were neglected for a long time due to a lack of public funds. Most of them have low

availabilities, low

operation efficiencies, and are without environmental filters to meet the latest EU stack emission norms.

our political opinion may be against any

privatization, and you may prefer to operate the

plants under the public administration. But local legislation has fully and irreversibly been changed, hence there is almost no possibility of operating them under public

ownership due to no funds being available for

upgrades. It is a fact that energy investments are to be made via private funds

under private ownership investment, and

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privatization was inevitable. We do not know in the end if this initiative will create

positive outcomes for the best interests of our

nation. Anyhow, we are energy professionals and we are to work in our business environment with the newly created

financial investment environment. These new investment opportunities should be considered in accordance with the new situation.

On the other hand, the Turkish Coal Board (TKI short) has local lignite mine fields but the Board has almost no budget or funds to build new

thermal power plants to operate and generate electricity. So the ruling government decided to initiate an auction for royalty transfer leasing tenders to operate the existing coalfields under private management for 30 to 49 years.

Earlier, the Adana Tufanbeyli coalfield royalty transfer leasing tender to build a 600

MWe thermal power plant for the long term (30

years) was completed. The winning price was 2.57

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or 1.42 U.S. cents per kw-hr. Then, the Manisa

Soma Deniş coalfields for a 450 MWe thermal power plant construction was tendered. The final price was 4.69 Turkish kuruş

per kw-hour or 2.60 U.S. cents per kw-hr. Last but not least, the Bursa Keles coalfield for >270 MWe TPP has been completed. The last price was 5.61 Turkish kuruş per kw -hr or 3.11 U.S. cents per kw-hr. We expect that new tenders for operating the Konya Karapınar,

Eskişehir, and Tekirdağ Saray coalfields will follow.

It is a logical and

economical solution to lease the coal basin to an experienced private group under the condition that they build a thermal power plant nearby,

operate the coalfields, feed the thermal power plant with the nearby coal,

generate electricity, sell the electricity to the local market, earn money and pay rent to the Treasury per kw-hr sold. This is called a “long-term royalty transfer leasing” tender. It is rational, economical, and feasible, at least on the paper upfront. We do not know the outcome yet

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since it has not been

enforced or implemented. We shall all see the

outcome later in time if all is true.

With some of our existing plants, the authorities decided to install the new power plant on the

coalfields in order to get close to the existing HV transmission lines and to avoid extra expenses. But they cannot exploit the coalfields underneath the thermal power plant. It is like a joke, but this is a reality in public

investments. So try to avoid any location on coalfields, choose a site nearby without coal mines underneath.

We expect that the new owners of the existing thermal power plants being privatized will have

new rehabilitation

programs to upgrade the plant availability, overall plant efficiency and

installations of the new and biggest electrostatic precipitators (ESPs) and flue-gas desulphurization (FGD) units to meet EU environmental norms. Currently, Soma-B

thermal power plant Units 1-2 have new bigger ESPs, but no FGDs. We expect

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that the Seyitömer, Kangal and Soma thermal power plants will have new FGD units. New owners will have reasonable grace periods for investment in the installation of FGD units.

Now let us ask our

questions. If we were the investors, which thermal power plant should we buy? Which one is the best buy option? How much is

each worth? What is the expected payback period for each project?

We recall the recent

tender for royalty sales of the Formula One racing course. The winning group decided to turn down the order, since they felt that the project was not

feasible for reasonable payback and had made their earlier calculations incorrectly. They decided to cancel the tender, and leave the project. This is not acceptable. The

investor has no such luxury. Investors are to take their calculations seriously prior to tender participation. This is serious business. We talk about millions. It is

incorrect to act on the idea of “First let us get the

order no matter what the price is, then we shall find

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a way to make a profit.” In a tender for the

privatization of an existing thermal power plant or royalty transfer of a coal basin for new thermal

power plant construction, there is no cancelation right for the winning party. There is no such luxury. You cannot say “Our estimations for an overburden on the coal stream is more than we expected, so we are

loosing money, there is no payback in the short term, so we want to turn over the contract and leave the project.” It is too late. However, there are such unacceptable instances in the local environment. We notice the price

escalation in tenders for the transfer of royalty in coalfields. Each new tender is higher than before. The last tender

price gives us an expected payback period of more than 10 years. That is not feasible. A project with a more than 10-year

payback period is not feasible. Simple bank accounts give you the

same return. Why are you wasting your time and

money?

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estimation methodology of the price structure in a new power plant royalty transfer scheme or in the privatization of an existing thermal power plant. How can we figure out the

price? What payback is reasonable? Which one to choose?

First, there are some essential rules and assumptions prior to estimations. You should prepare “due diligence” reports. In order to prepare “due diligence” reports, you should visit the site (the plant site or the coalfields). Tender documents are not enough. Tender

documents do not clarify everything. There are many details at the site. The devil is in the details.

ou should spend time at the site with your project group. Not one day, maybe one week, or even one

month would be much better. The investors’

project development group should spend time at the site and speak with everyone, take notes, check and inspect every item, the equipment and machinery. The investors should hire experienced experts, preferably those who worked at the plant or

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coal basin earlier.

Then your expected group should prepare a

pre-feasibility study to match the financial details,

availabilities, and assumptions of the decision-makers of the investment group, to finalize the feasibility prior to the declaration of the tender price.

In the sale of an existing plant tender, you take the rehab cost first. Your

group should calculate the unit coal price per kw-hr, before and after

rehabilitation. You should estimate the current and future O&M costs per kw-hr. You should calculate the expected personnel cost per kw-hr again. You should conduct

restructuring in personnel numbers for a better and more qualified workforce.

ou should estimate the electricity sales price for the available electricity markets.

In a royalty transfer tender, you should

consider completely new thermal power plant costs in unit kw-hr in lieu of the rehab cost above. Now you have the best availability and best efficiency, since the plant is new.

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Now, we need to have assumptions for the

necessary financing. You develop a certain figure for the reasonable payback period of your money invested. Cash flow is important. We should keep in mind that in a coalfield utilization

scheme, we have at least a 4-5 year construction

period for a new thermal power plant, where we shall have no cash-in. On the other hand, in the privatization of the

existing thermal power plant, cash-in starts overnight. You get more since the plant is in

operation. However, the plant needs overhaul for higher availability, higher efficiency, and new

equipment to meet EU environmental norms.

That is rehabilitation. That needs interruptions in the operation. These rehab expenses are to be

calculated and taken into account in the price

structure.

In estimation of the

buying price of a thermal power plant, there are many methodologies. I will try to explain a

simple, easy method below. When the other

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completed and presented for your final decision, please double check them with this method.

In our methodology, we need to calculate the

overall unit cost of the kw-hr we generate in our

plant. First, we need to calculate the share of coal costs in our unit kw-hr electricity generation. That figure could easily be calculated from the

MMBTU price of the coal available at the coal basin. Then we should calculate the unit costs of rehab expenses, Operation & maintenance (O&M), and unit personnel cost. Add up all these shares to find the final cost of kw-hr electricity generation. Then, we should assume a reasonable payback period for our investment in our environment. That is normally between 3-10 years. It is preferable for

periods to be close to 3 years, but not preferable if

more than 10-years. We should also estimate tax and the cost of business on our unit kw-hr. The

electricity price prevailing in the national markets for our expected payback

period should also be predicted. The difference between the predicted

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electricity sale price and our final cost is our net profit per unit kw-hr. Then multiply the net profit by the annual plant availability, normally 6500 to 7500 hours per year, and average the

plant output capacity, which is to be calculated

from site statistics. Normally you will take over an existing plant at 6500 hours per year

availability, then conduct necessary rehab work to upgrade that figure to 7500-800 hours of

operation. The final figure is your annual net income. That figure is to be

multiplied by your

payback period, in order to come to your best tender price to quote.

In how many years do you expect to get your

investment back? It is between 3-10 years. If you

presume 3 years and declare a price based on that short payback period, your price could be too

low. You may loose the tender. If you presume a long payback period, you may receive the order but never get your investment back in that long period.

That is the investor

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With that final price, will you be able to receive the

order? I do not know. That is why you are the

investor. Anyhow, you got the feeling of how much you should be spending

for a particular project. During open tendering, do pay close attention to your competitors. This is a real application of the “Game Theory” of John Nash, in practice. Some companies may increase their final prices for some irrational reasons, some do the same for some other rational reasons. You never know. All you have know is

where to stop and execute your game strategy