Spark spreads in Turkey, measuring the profitability of gas generation, are seen to triple once an expected 10-15% cut in Turkey’s regulated industrial gas tariffs gets implemented in October. Though this gives CCGT operators some relief – profit margins of coal power will remain way more attractive.
Anticipating a 10% tariff cut from current levels at TL73.53/MWh ($24.23/MWh), Argus analysts see the spark spread for October to triple from TL5.31/MWh under the existing tariff to TL18.67/MWh, considering a gas power plant with 55% efficiency.
A cut in fuel costs of natural gas would give CCGT operators some breathing space after having been squeezed for years due to falling electricity prices, rising renewable penetration and a weaker Turkish lira which made gas imports more expensive.
Contribution of gas-fired generation in Turkey fell 9% to 232 GW over the first half of this year, while its share in overall plant dispatch fell from 36% to just 31%.
Coal power maintains the upper hand
Yet, even a 10% cut in gas tariff would not shift the pendulum towards more gas generation. Dark spreads, the profit margins for burning coal, would still remain nearly three times higher than comparable spark spreads, according to Argus analysis based on 38%-efficient coal power plants.
For October, the Iskenderun dark spread is TL62.99/MWh, based on a plant with 34pc efficiency – the comparable spark spread could rise to TL18.67/MWh, assuming an optimistic 10% cut in gas tariffs.
The Q4 dark spread of TL67.99/MWh compares even more favourably with spark spreads, even assuming a rise in the latter from TL10.31/MWh to TL23.67/MWh.
Coal will consequently retain its dominance in Turkey’s power generation sector while a cut in regulated gas tariffs would mostly benefit large industrial gas users, analysts conclude.
Erdoğan prioritizes use of domestic coal
The Turkish President Recep Tayyip Erdoğan repeatedly stressed his goal to minimise energy imports by tapping more of the country’s domestic coal resources (see illustration).
Erdoğan wants Turkey’s to “use its own resources to achieve its 2023 energy goals.” To that end, the government has already incentivised the use of domestically-produced coal and granted tax break for investment in coal mines to raise output and improve working conditions.
A wave of new power projects need to be realised in Turkey as about 5 GW, or 7% of the country’s current installed thermal capacity is approaching the end of its lifetime and will be gradually phased out before 2020.
According to Garanti Bank estimates, around 13.5 GW of thermal capacity will be built over the next ten years but the share of gas generation is seen to fall to under 20%, down from nearly 50% some six years ago.