By Humeyra Pamuk
ISTANBUL (Reuters) - When Austrian energy company OMV started operating its power plant in Turkey in 2013, the country's electricity sector was the darling of foreign investors, lured by promises of market liberalization and the highest growth forecasts outside China.
Five years later, OMV has sold off its Turkish plant for barely half of the 600 million euros it initially invested and Turkey's power companies are in debt restructuring talks with banks, amid a tumbling lira and rising energy costs.
With the promised liberalization only partly delivered, and state-owned plants at times undercutting market prices, private sector firms found their margins squeezed even before the lira crisis drove up repayment costs on foreign currency loans.
"Turkey no longer fits our product portfolio," said an OMV spokesperson in Vienna. OMV also sold off its wholly owned fuel retailer Petrol Ofisi in 2017, two years after its former CEO described the Turkey investments as "a disappointment".
With their margins squeezed, many power companies are fighting to keep cash flows stable and struggling to find buyers, as the outlook darkens for the Turkish economy and for a still heavily state-regulated electricity market.
"We will be seeing cash tightness more frequently. I don't want to think of a scenario where the private sector or the state is not able to deliver on its pledges," said an industry source who works in a power generation company.
According to a report by Boston Consulting Group and Turkish business group Tusiad, a total of $95 billion of investments have been poured into the Turkish electricity market over the past 15 years, largely funded by cheap credit. Of this, around $50 billion is yet to be repaid.
Several Turkish companies, including power firms, are seeking to restructure their debt after the lira lost 40 percent this year due to concerns over President Tayyip Erdogan's opposition to higher interest rates and a bitter diplomatic dispute with the United States.
Conglomerate Gama Holding is among the latest in talks to sell some of its assets, including a stake in its Gama Energy, which produces electricity from hydro, wind and natural gas with around 1,100 MW installed power across Turkey.
Such financing issues risk clouding the outlook even for the renewables sector - a relative bright spot in Turkey's power market. Fitch Ratings last month downgraded its near-term forecasts for Turkish solar and wind capacity as it expected fewer projects to gain financing in the short run.
"It should not be a surprise for (power) companies to file for bankruptcy one after the other," said a senior manager at a Turkish energy firm. "Many companies are really in a dire situation and they are in a panic to restructure," he said.
STATE INTERVENTION
Turkish energy officials declined to comment for this story.
Turkey has reduced the state's role in power production through privatizations and also brought power trading onto an exchange to boost transparency.
But the government still holds 25 percent of total installed power supply and often offers prices below market levels, effectively setting a ceiling that can defy market fundamentals.
The natural gas market has remained largely under state control, hampering further development of the power market. More than 37 percent of the 85,200 MW electricity generation uses natural gas. As a result, power plants fed by natural gas, which have more flexible production levels than renewables and coal-fired plants, are the hardest hit.
Turkey's state pipeline operator Botas has more than doubled prices for gas supplied to power plants, to 1,700 lira per kilowatt hour (KwH) this month from 717 lira last year.
But electricity sale prices for those gas-fired power plants have risen much less. The market clearing price at Turkey's Energy Bourse (EPIAS) rose 67 percent over the same period, while household power prices only rose 33 percent.
"Our margins have evaporated. There is no predictability or visibility in the market, which makes it even more difficult for restructuring. And that jeopardizes the financial stability of these companies," said Selim Guven, Commercial Director of Acwa Power in Turkey.
"When you are indirectly subsidizing the manufacturing sector and consumers with cheap electricity, you are damaging the financial sustainability, predictability and the foreign investor appetite in the power industry."
When OMV and other foreign investors flocked to Turkey, its power market looked to be the only one in Europe promising returns, with energy demand forecasts second only to China.
Turkey's overall energy demand still grew at 4.4 percent a year in the decade to 2016, more than twice the global average, BP's Statistical Review of World Energy said.
But Turkey's recent economic woes have prompted economists to downgrade growth forecasts, and some now see prolonged economic contraction into 2019.
Some government measures - including incentives for power plants to use domestic coal to help reduce a $37 billion energy import bill - have damaged price predictability.
"You need predictability, consistent state policies, financial stability and access to longer term funding," Guven said. "At the moment we are struggling in all these aspects."