Argus White Paper: Turkey power sector coal demand outlook strengthens in 2020 Domestic plant suspensions may boost Turkish coal-fi red power generation in 2020, while a new Russian export port in the Black Sea has the potential to shift utilities’ buying preferences in the seaborne market Coal demand outlook boosted by domestic outages more strongly in the region when the new Taman port in the Turkish coal-fi red power generation fell by around 200MW Black Sea starts handling Capesize vessels. on the year to 69GW in 2019 and reduced the power sector’s NAR 5,700 kcal/kg-equivalent coal consumption to 22.24mn t Coal to remain ahead of gas in 2020 from 22.85mn t in 2018, according to Argus calculations. The Coal-fi red generation moved ahead of gas in the merit order year-on-year decline in coal-fi red generation was a result of in Turkey in August 2018, when state-owned gas distribu- record-high hydropower output, which gained by 3.3GW on the tion company Botas amended its domestic pricing scheme to year to 10.1GW last year. reflect the increase in its import costs. Renewable capacity will continue to grow in 2020, but the out- Coal-fi red utilities have maintained a price advantage against look for coal-fi red generation has strengthened as restrictions gas-fi red units since that date. at plants that run on domestic thermal coal and lignite will likely boost the reliance on other thermal units. Coal is likely Turkey does not have an emissions tax mechanism, but coal- to benefi t more than gas from the suspensions, as seaborne fi red generators are required to pay an import tax when coal coal continues to hold a cost advantage over natural gas. prices fall below certain levels. The tax eff ectively fi xes fuel costs for coal-fi red utilities at around $70/t, equivalent to Colombia has historically catered to the majority of Turkish around $10/MWh. import demand, but Russian exporters may begin to compete Turkey power mix GW Turkey coal import tax 40 Turkey imposed a conditional levy on coal im- 35 ports for power generation in 2016. The tax is 30 triggered only when the Ice Rotterdam balance- 25 of-the month coal futures contract settles below 20 $70/t on the last working day of the week prior 15 to the coal’s clearing date from the customs. 10 When the contract settles below $70/t, the importer pays $70/t minus the value of swap 5 contract in additional duties, in addition to the 0 Jan-2018 May-2018 Sep-2018 Jan-2019 May-2019 Sep-2019 Jan-2020 cost of the coal cargo. Coal Gas Lignite Hydro Other Copyright © 2020 Argus Media group - www.argusmedia.com - All rights reserved. Trademark notice: ARGUS, the ARGUS logo, ARGUS MEDIA, ARGUS DIRECT, Coal ARGUS OPEN MARKETS, AOM, FMB, DEWITT, JIM JORDAN & ASSOCIATES, JJ&A, FUNDALYTICS, METAL-PAGES, METALPRICES.COM, Argus publication titles and Argus illuminating the markets index names are trademarks of Argus Media Limited. Argus White Paper: Turkey power sector coal demand outlook strengthens in 2020 Y-o-Y coal, gas output vs margins TWh, $/MWh Renewable additions in 2020 With coal-fired generation firmly embedded ahead of gas in 4 Coal Gas Dark spread 40pc Spark spread 55pc 30 the Turkish merit order, rising renewable capacity presents 3 25 the only significant downside risk alongside the coronavirus 2 20 outbreak’s possible impact on power demand for coal-fired 1 15 generation in the near term. 0 10 -1 Turkish renewable capacity has grown steadily in recent years 5 -2 and reduced the country’s reliance on thermal generation. 0 -3 Annual growth in renewable capacity averaged 3GW, or 8pc, in -4 -5 2016-19, with the aggregate share of hydroelectric, wind and -5 -10 solar output in the Turkish generation mix rising by 10 percent- Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan 2018 2018 2018 2018 2018 2018 2019 2019 2019 2019 2019 2019 2020 age points to 41pc over this three-year period. This caps the outright margins available to coal-fired units Renewable capacity growth slowed in 2018-19 but is expected when seaborne prices fall below $70/t, as in 2019, but returns to rebound sharply in 2020 as state-owned hydraulic works for coal-fired generation remain attractive and more competi- administration DSI is planning to bring 1.7GW of hydroelectric tive than for gas. capacity on line this year . In 2019, the tax-adjusted month-ahead dark spread for 40pc The biggest addition to the country’s hydro fleet, the 1.2GW efficient coal-fired units averaged $21.76/MWh. Ilisu plant, located in the hydro-rich area of Euphrates in the Tigris basin, is expected to start generating power in the Generation costs for gas-fired units were much higher in 2019, second quarter of 2020. The plant has been building hydro as the country secures most of its gas through long-term reserves since the second half of 2019. oil-linked supply contracts, which restricted utilities’ ability to take advantage of lower spot LNG prices last year. Month- Generation from the 517MW Cetin dam in Siirt might also ahead spark spreads for 55pc gas-fired units stood at $2.62/ start later this year, after the facility started to build reserves MWh last year, using state-run gas utility Botas’ regulated in early 2020. tariff for utilities. The timeline for the other projects is less certain, but they Botas’ import costs for Russia, the biggest pipeline supplier are also likely to come on line over the next two-year period. to Turkey, were around $24/MWh ($6.71/mn Btu) for the first The 560MW Yusufeli dam in Artvin is 70pc complete, and the quarter of 2020 and, even though the cost may fall further in 500MW Lower Kalekoy dam achieved substantial completion the second quarter to around $22/MWh, gas is likely to remain in the first few weeks of 2020. uncompetitive with coal for power generation, as long as Bo- tas’ regulated tariff for utilities reflects import costs. Capacity additions from other renewable sources were moder- ated last year amid uncertainty about the future of the coun- The recent steep drop in oil prices will not translate to a try’s renewable support scheme, Yekdem, and growth is not similar level of decrease in Botas’ import costs of Russian gas expected to recover significantly in 2020. Overall additions of later this year, as the long-term agreement also has clauses wind, solar and geothermal capacity fell to 1.7GW last year, that soften the impact on lower oil prices fall below $50/bl. compared with 2.38GW in 2018, according to data from grid Botas gas tariff vs import costs $/’000 m³ Turkey renewable capacity by year GW 50 Botas regulated tariff Botas calculated cost of Russian gas imports Hydro Solar Wind Geothermal 350 45 40 300 35 250 30 200 25 20 150 15 100 10 5 50 0 0 2015 2016 2017 2018 2019 Jan-2018 May-2018 Sep-2018 Jan-2019 May-2019 Sep-2019 Jan-2020 argusmedia.com 2 Copyright © 2020 Argus Media group Argus White Paper: Turkey power sector coal demand outlook strengthens in 2020 operator Teias. New installations of solar plants, which made Output at restricted domestic coal units GW up majority of the renewable additions under the Yekdem scheme, fell to 924MW from 1.64GW in 2018. 2.5 2 The Yekdem scheme offers renewable energy investors state- backed power purchase guarantees for 10 years, but is set to 1.5 expire at the end of 2020. Renewable plants completed after this date will therefore not be able to benefit from the favour- 1 able rates offered to investors through the scheme. 0.5 Details about a new scheme to replace Yekdem have not been announced yet, but the government is working on a draft law 0 to extend the mechanism with a lower guaranteed purchase Jan-2019 Mar-2019 May-2019 Jul-2019 Sep-2019 Nov-2019 Jan-2020 price than in the current scheme. Afsin-Elbistan-A Kangal Seyitomer Soma-B Tuncbilek Catalagzi The government also initiated the Yeka scheme as an alterna- plants may offset the growth in hydroelectric and solar genera- tive to Yekdem, which was meant to boost renewable capacity tion. The government has suspended the operating licenses of by holding tenders for larger scale projects. A 1GW tender was around 3.4GW of domestic thermal coal and lignite-fired plants awarded in 2017, and despite facing some initial delays, the that failed to meet the required environmental standards. But project is expected to be completed by 2021. the majority of the Turkish lignite-fired units run with low load factors in the country, which implies the drop in lignite genera- The government is now planning to widen the scope of the tion is likely to be smaller than the restricted capacity. Yeka scheme by including smaller scale projects to attract more investors. An auction for 10-50MW solar units in about Output from the 1.3GW Afsin Elbistan A unit — the plant with 40 cities with strong irradiance potential is expected to be the highest capacity among the shut down units — was only held in the second quarter of this year. 217MW last year, implying an utilisation rate of 16pc, and the country’s lignite-fired fleet generation stood at 5.3GW in 2019, But the Turkish government is planning to introduce lira-based implying an utilisation rate of 53pc.