Electricity prices do not make happy reading for gas-fired power producers in Turkey nowadays.
A surge in renewable generation, slowing demand and the impact of falling commodity prices have all contributed to pare the spot price for the last 14 months.
The story is not dissimilar to what has been happening in European power markets in recent years where renewable generation is gradually displacing thermal production, depressing power prices. The difference is that in Turkey there is a pressing need for more gas generation because of the pending expiry of contracts for public-private gas-fired plants.
But just as 5 GW of thermal plants built under the so-called build-own-operate and build-own-transfer (BOO/BOT) partnerships some 20 years ago are to be phased out in 2018/2019, there are also growing fears that Russia may act on its threats to discontinue the transit of gas through Ukraine to dependent countries by 2019.
Turkey’s public and private gas companies have combined contractual annual imports of 14bn m³/yr through the Western Line, which transports the gas from Russia via Ukraine, Romania, Bulgaria into the northwestern Marmara region of Turkey.
Almost all BOO/BOT plants are located in this part of the country and have been dependent on the Russian imports.
Gas-fired generation needed
Although the expiry date of most BOO/BOT contracts and the possible cancellation of the Ukrainian gas transit would coincide, the reality is that Turkey cannot afford to lose 5GW, or 7% of its total installed capacity (at current levels).
This is for two reasons. First, despite an accelerated growth in renewable capacity, Turkey continues to require baseload thermal capacity to ensure security of supply.
Garanti Bank, a high-profile Turkish lender, estimates that a total of 13.5 GW thermal capacity will be built in Turkey over the next ten years, although it concedes that the share of gas fired-generation in the total capacity mix would drop from nearly half six years ago to under a fifth.
Second, as most of the BOO/BOT power plants are in the highly industrialised and urbanised northwest, it is impossible to deprive the area of thermal production because it would cripple industrial output.
Turkey’s cross-border electricity interconnections with Greece and Bulgaria have provided an element of security for the Marmara region in recent years.
However, they are still not sufficient to compensate for the potential loss of thermal production when BOO/BOTs reach their shelf life and Russia may decide to curb exports to the region.
Turkey plans to double the current interconnection capacity to nearly 2 GW, but the process is slow because of technical constraints inside the Turkish electricity transmission network.
Because of the structure of the transmission system – gas-fired generation is concentrated in the west and hydro production in the east – it is technically and geographically challenging to flow electricity from one side of the country to the other.
Furthermore, expectations for the completion of the 4.8-GW Akkuyu nuclear power plant which was due to be built by Russia’s Rosatom by the beginning of the next decade, are fading amid escalating political tensions between Ankara and Moscow.
This means that alternative options such as better cross-border electricity interconnections, or nuclear and renewable generation could not plug a capacity deficit that is looming on the horizon.
The most obvious and immediate solution is to overhaul the existing BOO/BOT fleet, phasing out plants with efficiencies lower than 52% and carrying out upgrades to the newer ones.
As contractual arrangements change and plants switch from selling their production from the regulated to the non-regulated market, they will also be incentivised to become more competitive.
However, the inevitable questions that arise are how to raise sufficient cash to underwrite much-needed investment and where will the natural gas come from?
Investments
In a recent interview, the newly appointed energy minister Berat Albayrak noted that the Turkish energy sector required $100bn of investments in the next decade.
With the forward price of electricity losing nearly a quarter of its value by time of delivery last year, it is hard to see what could incentivise investors to bring cash into the sector.
In order to rebalance electricity prices to a level that is competitive enough to attract investments, there is a need to review Turkey’s current renewable policies.
The high-volatility of the Turkish lira against the euro-dollar basket in the last 18 months has prompted renewable generators to seek the safety of the regulated feed-in tariff, pegged at an average $73.00/MWh.
This meant that in 2015 nearly 5 GW were operating under the feed-in tariff, three times the volume of 2014, while in 2016 that figure further tripled to 15 GW.
The feed-in tariff rewards them for continuous operations, regularly depressing off-peak prices to zero.
The energy regulator has several options – to reduce the feed-in tariff for prospective renewable plants to curb investments in new capacity; to introduce a feed-in premium that would force companies to produce according to the demand-supply logic; or to introduce a portfolio management scheme that would involve better forecasting and optimisation.³
Any delays in overhauling the feed-in tariff scheme would lead to a vicious circle.
Renewable generation would be incentivised to produce at full throttle, depressing prices, which in turn would discourage renewable generators to operate on the free market, switching to the feed-in tariff, instead.
Swift reform in the renewable sector would have to be backed up by plans to ensure more gas imports.
More gas
Although over the last decade Turkey has been busy courting all gas producing countries in the region for more volumes, the promise of more imports looks bleak.
Let’s start with Azerbaijan. The country has pledged to sell 6bn m³/yr to Turkey when new volumes come onstream from Shah Deniz 2 by 2019.
The arrival of the new gas could come at a time when Russia threatens to cancel its gas transit via Ukraine. Even so, there would still be an 8bn m³/year deficit as the Russian imports via the western Marmara region amount to 15bn m³/year.
Even if Turkey requested Azerbaijan to increase its export volumes, this would be hardly possible.
The country is struggling to plug its own gas demand, which is set to increase from the current 15bn m³/yr to 20bn m³/yr by the end of the decade and is in talks with the local electricity incumbent AzerEnerji to change its contractual arrangements.
AzerEnerji could start purchasing volumes from Russia’s Gazprom rather than the Azeri oil and gas incumbent Socar, although nothing has been confirmed yet.
Iraq, and in particular northern Iraq, could provide an additional 10bn m³/yr by the beginning of the new decade, but as it happens the plans do not meet the reality on the ground.
Gas sourced in the Kurdish Region of Iraq (KRI) has a high sulphur content, which means that it needs costly processing to remove it.
KRI observers have noted that initial up and midstream costs could hover between $3bn and $5bn, a heavy financial burden for any oil and gas company currently facing low returns because of falling oil prices.
Furthermore, even if all the costs were met and the gas were to be produced, Turkey may still not be able to import more than 3bn m³/yr for the nameplate 10bn m³/year capacity, since it lacks vital pieces of infrastructure such as compressor stations to flow the gas inside its system.
Iran, also a possible exporter, already sells around 8bn m³/yr to Turkey. However, despite talks that it may double the volumes, in reality, Iran itself requires more gas, particularly in its heavily-urbanised northern region.
One do would well to ask why would Iran want to export cheap gas when it could use it to generate comparatively more expensive electricity, part of which could be used domestically and part exported regionally?
Finally, the most difficult question to ask is whether Russia would indeed act on its threat to discontinue gas supplies via the western route.
Alternative plans to build Turk Stream, a 63bn m³/yr pipeline that would have diverted the Russian gas via the Black Sea to Turkey and further to the Turkish-Greek border for consumption in Europe have fallen through.
It is realistic to expect that without a Plan B, Turkey remains vulnerable to possible supply disruptions.
Turkey’s private importers, who between themselves clinched import contracts amounting to a total 10bn m³/yr from 2012 for a period of 23 or 30 years are at risk as they off-take the gas from the western line.
As one Turkish private shipper put it in an interview with the author, if Russia wanted to stop the gas, “it would not care much about what was written in contracts.” Such an option, he said, would be much safer and cheaper than going to war with a country.
However, he also pointed out that Russia itself would be harmed if it were to stop exports to Turkey, not least because Turkey is its second largest market and losing it would hurt its already ailing economy.
Still, Turkey needs to consider backup plans.
First, it needs to invest in its own infrastructure. This may not be easy at a time when Botas is losing money because of its support of a wasteful subsidies system.
If Turkey were to reform its market to make it more competitive, it would start attracting investment.
Second, it needs to invest in cross-border gas interconnections either by building a new link such as the one connecting it to Bulgaria or by upgrading the existing one with Greece to allow for higher export/import capacities and reverse flows.
Given that demand for gas is subdued in southern Europe, Turkey could absorb excess volumes.
Third, Turkey needs to explore the opportunity of building more LNG capacity, either as onshore terminals or as floating storage and regasification units (FSRUs).
Despite claims that US LNG volumes, which are due to reach the global markets from this year are unlikely to be competitive enough against Russian pipeline gas, if Turkey’s relationship with Russia worsens to the point where the latter would stop exporting volumes, Turkey would have no option but to consider more LNG imports.
These are difficult times for Turkey and if no plans are devised now, the country will risk facing major crises in the years to come.
Aura Sabadus is a journalist specialising in Turkey’s energy sector
SOURCE
