Dr. Nejat Tamzok
News about an analysis made by Fitch Solutions, an affiliate of international rating agency Fitch Ratings, discussing the impacts of depreciation of Turkish Lira on Turkey’s energy sector are published in the media last week.
The main prediction of the analysis of August 2018 was about that the recent negative economic conditions in Turkey would further increase the orientation towards renewable energy and domestic coal.
I will make comments about the analysis, but first a brief summary…
***
According to the analysis, renewable energy projects will slow down in 2018 and 2019 to a certain extent due to the financial difficulties which will be caused by excessive weakening in the Turkish Lira. Short-term financing challenges will especially compel wind and solar investors, which will hamper the upward trend towards the renewables for a while. As a result, the share of non-hydraulic renewable power in total electricity installed power will decline compared to the forecasts before the foreign exchange crisis.
However, after this first impact, the slowdown factor in the economy besides the weakening of Turkish Lira will work for the advantage of domestic energy resources. At this point Fitch forecasts that in the next 10 years (2018-2027) the annual average economic growth in Turkey will be 3.3 percent and concordantly, the electricity consumption, which grew by 7 percent in 2017 will decelarate and increase by only 4.2 percent annually on average in 2018-2027 period.
This picture will create an opportunity for the energy management aiming to reduce dependence on imported resources, and during the 2020-2027 period, energy imports, primarily natural gas and imported coal will decrease, while the share of domestic energy resources in electricity generation will increase also with the help of state subsidies.
In its analysis, Fitch Solution particularly emphasizes on two factors in terms of prominence of renewable resources. The first one is the low exchange rate risk due to the US Dollar-based purchase guarantees in renewable electricity, and the other one is the reduction of the costs in renewable investments as the result of prominence of large-scale tenders instead of projects based on purchase guarantees and their becoming more attractive for the sector.
In conclusion, according to Fitch Solution forecasts, while the share of natural gas in Turkey’s electricity production will decrease from 36 percent to 26 percent from 2018 to 2027, the share of coal -with the investments to be made in domestic coal- will increase from 32 percent to 33 percent and the share of renewable energy from 11 percent to 21 percent.
***
Fitch seems to have solved the problem with a short and very simple formulation.
In fact, this picture anticipated for 2027 is extremely attractive both for energy supply security and current account deficit and environmental considerations.
But how realistic is this?
***
If we look at the New Economy Program (NEP) published by Ministry of Treasury and Finance of Turkey last week, we see that as of 2020 Turkey have targeted more than the annual 3.3 growth rate which is forecasted by Fitch. 3.5 percent for 2020 and 5 percent for 2021 has been targeted in the program. Therefore, it will not be possible to meet the electricity consumption required for the growth rates of 5 percent or more with the renewable investments, as expected by Fitch.
However, -without expecting a significant change in crude oil prices- leaving the energy imports approximately constant for 2019-2021 period in the program means that it is targeted to reduce the share of imported energy resources in electricity production and meet the resulting deficit from the domestic and renewable resources.
Again, we can say that to particularly mention in the policies and measurements section of NEP that the share of renewable energy and domestic coal resources in the electricity production will be increased and to count the energy sector among the priority investment areas to reduce the current deficit support the forecasts of Fitch.
***
On the other hand, we also have concrete data regarding that the share of renewable resources in electricity generation will increase in the next 10 years: Turkey could raise the share of non-hydraulic renewable energy resources in total electricity production to the level of 10 percent in recent years by making a significant breakthrough. About 35 percent of the capacity of the plants new activated in the last five years was from these resources. Finally, the tenders of a solar and a wind power plant each with a capacity of one thousand megawatts are made in 2017. These plants are expected to be activated in the next two years.
It is understood from the held statements that similar tenders will continue to be made. One of these, the tender of the first offshore wind farm with a capacity of one thousand and two hundred megawatt is planned to be made in October this year. Meanwhile, draft tender specifications for the second YEKA GES-2 (Renewable Energy Source Field / Solar Power Plants) competitions are published recently. According to the YEKA GES-2 draft specification, a total capacity of one thousand megawatts will be allocated for Şanlıurfa-Viranşehir, Hatay-Erzin and Niğde-Bor districts in the tender to be made in January 2019. According to the YEKA RES-2 (Renewable Energy Source Field / Wind Power Plants) draft specification, there will be four competitions in Balıkesir, Çanakkale, Aydın and Muğla districts, each to be 250 megawatts.
***
For the realization of the forecast on renewables anticipated by Fitch for the year 2027, it is required to activate plants over 2 thousand megawatts each year in the next 10 years. But, if the upward trend towards renewable energy continues, it will not be difficult to achieve this.
However, it should not be overlooked that there are significant bottlenecks on the side of domestic coal. Although there have been significant incentives in this area in recent years, it is known that the investor still stands distant to the domestic coal due to the unique difficulties of coal. The fact that the tender of Eskişehir-Alpu was postponed several times, the tender for Tekirdağ-Saray and Afyon-Dinar could not be made and the coal fields in Afşin-Elbistan could not become a current issue still confirms that there exist problems at this point. Therefore, to anticipate that the installed capacity of power plant based on natural gas and imported coal will be frozen at its current level and the base load power plant needs can only be met by investments in domestic coal power plants would be extremely optimistic.
Let’s finish this article by mentioning that the missing part in this picture is the nuclear power plant. It is worth noting that the nuclear power option which was planned to be activated from 2023 onwards, is not included in the analysis of Fitch, but this issue is also not mentioned in the NEP.
Ankara/September 2018