Turkey and Russia have sealed the strategic Turkish Stream gas pipeline agreement late on Monday which, according to President Putin, includes a “mechanism for providing a discount on gas [for Turkey].” Imported gas is having a hard time in Turkey to compete with domestic hard coal and lignite as a fuel for power generation. Yet, cheaper gas imports and implementation of a cut in Turkey’s industrial gas tariffs later this month could turn things around and help prop up spark spreads.
Spark spreads, the profit margin of burning gas for power generation, could triple in Turkey – if the anticipated 10% cut in regulated gas tariff gets put into practise. Analysts expect this move could 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.
Lower fuel costs of natural would give CCGT operators some respite and could gradually increase the dispatch of gas-fired generation which dropped 9% to 232 GW over the first half of this year. The share of flexible gas power plants in Turkey’s energy mix has plunged below 30%, down from 36% at the start of this year – as operators turn to cheaper lignite as a fuel faced with falling wholesale power prices and rising renewables penetration.
Though discounted Russian gas imports – viable only after the maritime tread of Turkish Stream will be built by December 2019 – will help prop up gas generation, this alleviation in prices is still a long way off. In the short term, even a 10% cut in regulated gas tariffs will maintain the profitability of coal over gas.
Dark spread, the profit margin for coal power, is anticipated to remain nearly three times higher than comparable spark spreads, based on 38%-efficient coal power plants. The Q4 dark spread of TL67.99/MWh compares even more favourably with spark spreads, according to Argus analysis, even assuming a rise in the latter from TL10.31/MWh to TL23.67/MWh.
Domestic coal has for long been prioritized, with the Turkish President Recep Tayyip Erdoğan repeatedly calling on power producers to “use its own resources to achieve its 2023 energy goals.” The government already granted tax break for investment in coal mines to raise output.
New-builds urgently need to come forward, as about 5 GW, or 7% of the Turkey’s installed thermal capacity is nearing the end of its lifetime by 2020. The latest accord between Russia and Turkey also includes nuclear, notably Turkey’s first ever] Akkuyu Nuclear Power Plant. “Here we reached an agreement to increase the construction pace even more. I’m sure that we’ll be able to catch up on the time that was lost recently,” Erdogan said.