Regulatory and Market Disharmony in the Turkish Electricity Industry

Since the early 2000s, the electricity industry in Turkey has been on the way of liberalization through privatization of distribution units, stimulating investments in generation and deregulation in the retail electricity market. Significant improvements have been achieved in the generation and wholesale markets. However, introducing competition in retail electricity supply has lagged behind expectations.

A variety of factors may explain this apparently unsatisfactory performance. In a recently published article, we examine the regulatory and market disharmony as an explanation. Specifically, we show that cost allocation of the support mechanism for renewable energy resources and suboptimal regulated retail tariffs have distorted economic incentives and undermined competition in the retail market for electricity. 

Regulations to encourage growth in the development of renewable energy resources for electricity (RES-E) have been used since the 1990s in most jurisdictions worldwide. Incentives for RES-E based on specific support schemes, such as feed-in-tariff (FIT), have gained popularity by achieving high levels of renewable installed capacity during the last decades.

Turkey has implemented a RES-E mechanism since 2005. A generous FIT mechanism, structured as a fixed-price tariff, has been applied since 2010 and guarantees that generators can sell their electricity to the grid at supported prices. The cost gap is covered by retail suppliers through charges to final customers. However, this cost allocation scheme has an increasingly adverse effect on retail competition in the electricity sector. The increasing installed capacity in RES-E combined with the depreciation in TRL against USD (in which the FIT is given) has increased the pass-through cost to the retail suppliers and hence their price offers to customers.

The increase in final customer electricity prices caused by RES-E support schemes has been examined in the literature. What makes the Turkish case interesting is the regulated retail tariffs, which prevent the increase in final electricity prices by creating a ceiling for the retailers’ commercial offers.  Market distortions associated with regulated prices in electricity markets have been examined.  This analysis shows how the regulated retail tariffs accompanied by the RES-E support mechanism affect retail competition. We show, through the Turkish case, how competition and regulation are two sides of the same coin in a network industry.

The reference of the article is given below:

Köksal, E. & Ardıyok, Ş. (2018). Regulatory and Market Disharmony in the Turkish Electricity Industry. Utilities Policy, 55, 90-98.

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