The Definition of Insanity: Turkey’s Nuclear Tenders

The definition of insanity, according to Albert Einstein, is doing the same thing over and over again and expecting different results – What can the man who gave the world the theory of relativity – a critical discovery on the road to nuclear energy (and weapons) – tell us about Turkey’s troubled nuclear tender process? A lot actually . . .

Plagued by a chronic trade imbalance, fueled largely by its reliance on foreign energy suppliers, Turkey has long identified nuclear power as critical for its energy future. The Turkish government has engaged foreign companies for the sale of nuclear power reactors in the 1970s, 1980s, 1990s, and the 2000s. In all cases, the government justified its interest in nuclear power by arguing that Turkey’s energy use was increasing, its reliance on unstable foreign energy suppliers was growing, and that it needed nuclear energy to combat both issues. Despite its enthusiasm, Turkey’s efforts to come to terms with foreign suppliers have been plagued by a slow tender process, internal instability, and the government’s refusal to provide financial guarantees for foreign nuclear firms. Turkey has, since at least the 1980s, insisted that the contracting firm provide 100 percent of the financing, partner with a private firm, and recoup expense from guaranteed electricity sales. Eager nuclear companies have agreed to this unique model, but have conditioned the conclusion of contracts on the government guaranteeing the loans needed for construction. Turkey has refused to provide these guarantees, which inevitably leads to the break down in talks and the eventual cancellation of the tender.  Despite having dropped the tender process – in favor of bilateral negotiations – Turkey is still following the same financial playbook. If Ankara does not change its demands, or Western/Asian (non-Chinese) suppliers don’t have a radical change of heart, Turkey will not be able to meet its very ambitious nuclear power plans. Will Turkey cut corners to fulfill its promise to derive 5 percent of its energy from nuclear power by 2023? Or will Turkey change its terms? The answer is likely to dictate Turkey’s nuclear future.

Turkey first decided to pursue a build-operate-transfer financing model for its 1983 nuclear tender. Turgut Ozal, the late Prime Minster and former President, argued that the supplying company should pay 100 percent of the construction cost, operate the reactor for a specified period of time, and then transfer the operation and ownership to a local firm. The foreign nuclear firm would recoup its expenses through guaranteed electricity sales at a fixed cost. Once the specific time had elapsed, and the reactor had been transferred to the Turkish private company that had partnered on the original deal, the Turkish company would pay a percentage of the plant’s profits to the constructing firm.

This financing model had never been used for nuclear reactor construction before it was first proposed by Turkish atomic energy officials. Canada’s AECL, which was eager to win a nuclear contract in the lucrative Middle Eastern market, emerged as the front runner for Turkey’s 1980s era nuclear tender. Progress, however, slowed when the two sides began discussing the BOT financing model. AECL appeared willing to accept BOT, but when it approached the Canada’s Export Development Bank for the multi-billion dollar loan, the financing officials (very naturally) wanted some collateral – namely a guarantee from the Turkish government. Turkey refused, the deal fell through, and the tender was eventually cancelled in the late 1980s.

Eager to try again, Turkey invited suppliers to submit bids for the construction of nuclear power plants at the Akkuyu site in 1996. Necmettin Erbakan, Turkey’s former Islamist Prime Minister, was reported to have favored the AECL bid. Erbakan believed that the Candu heavy water reactor, which operates on non-enriched fuel, would allow Turkey to use its own domestic uranium reserves to power the reactor. This would allow Turkey to be more self sufficient. Erbakan was eventually forced from office in 1997 in what has been dubbed Turkey’s post-modern coup. After Erbakan’s forced departure, Mesut Yilmaz, Turkey’s more pro-Western Prime Minister, was reported to have favored Westinghouse’s nuclear bid. Yilmaz delayed the tender process to accommodate Westinghouse’s proposal, drawing the ire of French and German nuclear companies competing for the contract. Nevertheless, the tender process was continually delayed (the Turkish government missed seven self-imposed deadlines), and eventually cancelled in 2001. The government had made clear that it supported the BOT financial model; however, the mis-managed tender process prevented negotiations with any suppliers from reaching an advanced stage.

Turkey tried again in 2008, launching another tender for the construction of nuclear reactors at the Akkuyu site. However, this time around only a Russian consortium made up of Inter RAO, Atomstroiexport and Turkey’s Park Teknik submitted a bid. The other Western and Asian suppliers passed, simply sending thank you notes. They quietly made clear that Turkey’s 2015 deadline to begin construction and . . . wait for it . . . wait for it . . . the BOT financing model were the two major reasons for the lack of interest. Turkey, which appeared to be caught off guard by the lack of Western/Asian interest, found itself in a bind. The Russian consortium appeared willing to accept a build operate own format (rather than BOT – more on this later), but it wanted to charge Turkey 21.35 US cents per kilowatt hour (kWh). Turkey had set its price point at 12.35 US cents per-kWh. After Turkey proposed its counter offer, the Russian consortium agreed to the price change. The new terms raised questions about the legality of the last minute price change and prompted officials to cancel the tender, rather than risk being sued by Western/Asian energy companies.

Rather than pursue a new nuclear tender, Turkey and Russia opted to negotiate bilaterally. The two sides struck a deal in May 2010 for a Rosatom led consortium to build-own-and operate four 1200 MWe VVER (AES-2006) units at a cost of  $20 billion. The reactors will be 100 percent Russian owned, though Rosatom has indicated that it may sell a 49 percent stake in the managing company to a local Turkish company. Turkey has agreed to buy 70 percent of the energy output from the first two reactors for 15 years, or until 2030, for 12.35 US cents per-kWh. Turkey has also agreed to buy 30 percent of the output from reactors three and four for 15 years at the same price. Russia will sell the excess energy at market rates. After the contract expires, and recouping its initial investment, Rosatom will pay 20 percent of the profits made at the Akkuyu site to the Turkish government. Rosatom has agreed to go ahead with construction without receiving financial guarantees from the Turkish government.  Rosatom, backed by the Russian government, has  assumed all of the financial risk in the project. Construction was slated to begin 12 months after the signing of the agreement. However, the Turkish government has yet to grant the Rosatom a construction license. Rosatom has announced that they expect to receive the permit in 2014 and begin construction on the reactor in 2015. (This has put the project behind its initial construction timetable)

Buoyed by its success with Rosatom, Turkey turned its attention to securing a second agreement for the construction of power plants at Sinop. Ankara had dropped its pursuit of the open tender process, in favor of bilateral negotiations for reactor sales. Ankara and South Korea’s Kepco began discussion in 2010. The two sides had wanted to sign a reactor construction agreement at the August 2010 G-20 summit, but Kepco and Turkey could not agree on the financing. Kepco reportedly wanted the Turkish government to be the largest stakeholder in the contracting Turkish company (thus guaranteeing the financing); however, Ankara refused, arguing that it wanted Kepco’s partner to be a private company. Thus, the BOO financing model prevented the signing of a construction contract and appears to have been the major reason for the break down in talks in late 2010.

Turkey pursued similar discussions with Japan’s Tepco pre-Fukuishima. Tepco cancelled its negotiations with Turkey shortly after the meltown at the Daichi plant, leading Mitsubishi to step in and begin negotiations. Canada’s AECL has also expressed interest, and the two sides have engaged in discussions for the construction of four Candu reactors at the Sinop site.

China has also had some discussion with Turkey, and has indicated that it is willing to provide 100 percent of the financing without receiving government guarantees. If true, this would mean Beijing is willing to follow the Russian financing model. China, however, is not able to export its most advanced reactor designs. They are being built in cooperation with Areva and Westinghouse, meaning that the two Western firms own the design information. Therefore, China would have to export its older reactor models, which are based on older western designs. While not unsafe in theory, China has little experience exporting reactors. Thus far, its only client outside of mainland China has been Pakistan.

Turkey, therefore, faces a choice. Previous efforts to contract with Western/Asian (non-Chinese) suppliers have failed because of the Turkish government’s refusal to give loan gaurantees. Ankara, therefore, has opted to contract with Russia. While the Russian VVER-1200 is a safe reactor – meeting EU standards – it does little to address Turkey’s original goal of becoming more energy independent. (Turkey is already dependent on Russia for its natural gas) Turkey will rely on Russia for the supply of the reactor’s fuel rods and will return the spent fuel (Though it must be noted that spent fuel sits on site in spent fuel ponds for at least 5 years before being transported back to the country of origin). Moving forward, Ankara appears to be at a crossroads. It remains rhetorically committed to nuclear power, but unwilling to break with precedent and offer loan guarantees. If Ankara opts for the Chinese reactors, it will also have broken its pledge to pursue only the latest and safest nuclear designs.

Therefore, Turkey watchers are likely to be subjected to stories like this for a while, unless one side capitulates. Given the massive costs involved, it remains unlikely that any Western/Asian (non-Chinese) firm will give in to the demands. It simply seems infeasible for a government in a democratic country to underwrite the construction of a multi-billion dollar reactor in a foreign country without any semblance of a financial guarantee. This leads me to believe that Turkey is unlikely to meets its self imposed nuclear goals. However, the negotiations point to a larger issue – namely Turkey’s insistence on an infeasible financing model.  No matter how you spin it, the BOT/BOO format has prevented Turkey’s nuclear expansion. Ankara does not appear to have learned from its previous encounters.  Turkey remains committed to pursuing a failed policy, while also expecting a different result. Insanity.