|Despite large installations like the Atatürk Dam in southeastern Turkey, the nation still imports 72% of its power and private electricity generation has surged to 61% as of 2013
Credit: Emma Jackson
The cogeneration market in Turkey is in flux. Overall combined heat and power (CHP) capacity has dropped over the past decade from 15% of total energy capacity in 2004 to 14% in 2013, primarily due to high oil and gas prices in the wake of market liberalisation that made CHP less cost-effective. CHP production has marginally increased recently, with 200 MW added over the past six months, reaching 8500 MW as of August 2014, and a further 200-250 MW is to be added over the next year. However, recent legislation, in addition to delays in implementing other energy-related laws, has made CHP less attractive in the market. Furthermore, regional geopolitical issues are presenting Turkey with serious energy challenges to meet and secure rising demand across the board.
A hard-hit sector
Cogeneration capacity took off in Turkey from 1992, and trebled since the turn of the century to reach 6400 MW in 2009, bolstered by 80 cities being supplied with gas. Yet, in the past five years, Turkish CHP output has only increased by 2000 MW. The drop was due to the spike in energy prices, to which Turkey is heavily exposed with an import dependency of 72%, according to the energy ministry. Indeed, natural gas imports account for some 43% of total electricity production.
‘By 2012, the government, due to a limited amount of gas [earmarked] for power generation, could not afford to promote natural gas power plants and imposed tax on imported cogeneration [feedstock], which is why the market disappeared and there was a greater focus on local fuels, coal and hydro, until gas is more readily available,’ says Christer Strandvall, western Europe regional director of Finland’s Wärtsilä, which operates in Turkey.
The government’s decision to lower its gas import bills, which were causing a large deficit in the state’s coffers, hit the CHP sector particularly hard, providing incentives for domestic energy producers and reversing former incentives to operate gas-firing combined cycle plants.
|Building the Arab Gas Pipeline linking Turkey and Syria – a key link that is now blocked because of the civil war in Syria. Credit: Euro-Arab Mashreq Gas Co-operation Center (EAMGCC)|
‘New CHP investments are also suffering from the cancellation of the former incentives: custom duty exemption; income tax exemption for 10 years; and tax reduction from the total investments cost,’ says Ozkan Agis, chairman of the Turkish Cogen and Clean Energy Technologies Association (TURKOTED). ‘We are putting pressure on the authorities to reactivate the incentives but the necessary legal procedures are running very slow,’ he adds.
Such legislative issues have reduced support and investment in CHP ‘step by step,’ says Dr Fiona Riddoch, managing director of Belgium-based industry association COGEN Europe. ‘CHP has not made ground as expected. It shows the complexities of [rolling out] CHP, which doesn’t exist with pure power delivery, as delivering heat and power brings an extra dimension to CHP, which requires a good policy environment through the ups and downs,’ she adds.
As a result of Ankara’s policies, certain heavy oil-firing CHP facilities have been dismantled, and demand has slowed for CHP projects, which had primarily been targeted at industrial consumers – the biggest demand in 2013, for instance, was in the textile sector, at 56%, followed by paper (14%), ceramics (13%), food (9%) and wood (8%), according to TURKOTED.
With industrial CHP having reached saturation, newer projects have focused on hospitals, shopping malls, university campuses and mass housing projects, said TURKOTED. However, recent legislation has curbed CHP’s attractiveness. This is reflected in state housing operator TOK˙I, which is building 100,000 new apartments nationwide and opting for conventional heating systems rather than CHP. ‘TOK˙I is afraid of the time impact of new CHP integration as it thinks new CHP systems will cause delays to the overall construction programme of mass housing projects,’ explains Agis.
The failure to implement the Natural Gas Market Law (No 4646), adopted in 2001, is also hindering market development. It was supposed to open up the sector and stipulated that state-owned gas firm BOTAS¸’ market control – currently 85% – was to be reduced to 20% by 2009. ‘The gas market is not free, being under the control of BOTAS¸; but on the other hand, the electricity market is free, so this unfair situation is creating uncertainties for new CHP investments,’ Agis says.
Indeed, electricity generation by the private sector has surged from 38% a decade ago to 61% as of 2013, according to the energy ministry, while just 15% of the gas sector is in private hands. With BOTAS¸ monopolising the market by dictating wholesale and retail prices, the price surged by 260% in the six years between 2004 and 2013, according to TURKOTED.
|Distributed energy is spreading in Turkey – even to rural communities such as this in Cappadocia, central Anatolia
Credit: Emma Jackson
Barriers and delays
Bureaucratic delays have equally hindered greater liberalisation. For instance, Ankara had revised a 2001 Electricity Market Law (No 6446) that came into effect in March 2013, and passed a new Petroleum Law (No 6491) in May 2013. In addition, a new regulator that was also to provide a gas reference price, the Energy Markets Operating Corporation (EPIAS), was slated to start operating in September 2013, but has yet to be established as of mid-2014, and is not expected to be operational until 2015.
Under the electricity law, producers were exempted from having to get production licences from the Energy Market Regulatory Authority (EMRA) as of October 2013. However, cogeneration facilities are only exempt if they have a high-cycle efficiency, which the energy ministry has yet to establish.
TURKOTED has proposed a draft in line with the EU’s Energy Efficiency Directive (EED), but Turkey’s existing lowest cogeneration efficiency level is considered high at 80%. ‘We have tried to set-up a new regulation clarifying the methodology of calculation of cycle efficiency, and are happy to say that our efforts have (recently) born fruit and a new regulation, which is designed in line with the European cogeneration directive, is to be issued by the energy ministry,’ confirms Agis.
While that barrier is on its way to being removed, another barrier to CHP investment is that the Turkish Electricity Distribution Company (TEDAS¸) and the state-run Turkish Electricity Trading and Contracting Company (TETAS) are not required to buy surplus electricity from CHP facilities. Although CHP producers can sell to the free electricity market, connecting to the local grid is not always simple. To get the CHP sector back on track and account for greater capacity production, TURKOTED is putting pressure on the government to pass a new Gas Market Law, which is expected to be enacted later this year.
Turkey is not alone in struggling with rising gas prices, to the detriment of investment in CHP. This is reflected in the slide in overall CHP capacity. ‘Such a drop means the underlying economic fundamentals are not right – that it is a market failure. In the EU, cogeneration is also suffering right now as there’s too much cheap coal on the market, and too much surplus capacity from renewables, which is not helpful unless it comes when energy is required. Gas CHP’s economic problems today are an issue of policymakers,’ warns Paul Voss, managing director of Brussels-based Euroheat & Power, the international association representing the district heating and cooling and CHP sector.
|Taner Yildiz, Turkey’s minister of energy and natural resources.
Credit: World Economic Forum
Turkey is considered ripe for expanding CHP to meet growing energy needs while improving efficiency in line with the EED as part of the country’s long-term aim of joining the EU.
The market fundamentals are also there, with a large population of 77 million, some 80 cities connected to the gas grid, and a government goal of becoming the world’s tenth largest economy within the next decade – up from the current number 17 by gross domestic product (GDP).
‘The EU is increasingly recognising CHP and district heating as part of a broader energy transition to a low-carbon economy, and that is no less true for Turkey than elsewhere. Many of the pre-conditions for district heating are there, with a young and urbanising population, which is a good start, and the concentration of energy needs in cities certainly suits the development of district heating,’ explains Voss.
A changing energy mix
‘In the marketplace,’ Voss continues, ‘a big winner for district heating and cogen is probably geothermal energy, as there appear to be significant geothermal resources in the country, with some 20 geothermal networks under review and planned.’ It is early days, however, for geothermal CHP, which has been established in the cities of Izmir, Afyon, and Aydın, but its total capacity does not exceed 50 MW, according to TURKOTED.
While geothermal power could provide up to 524.95 MW in Turkey once operational, the country is actively diversifying its energy mix through power generation via domestically sourced lignite, asphalite, biogas and biomass. It is aiming to increase imports of liquefied natural gas (LNG), with current imports coming from Nigeria and Algeria, and it is in talks with the world’s top supplier, Qatar. ‘Turkey, like other EU countries, is looking into LNG terminals, with four ports under consideration,’ says Strandvall.
|Energy policy in Turkey could change now that Recep Tayyip Erdogan has been elected president.
Credit: World Economic Forum
Ankara aims to have 30% of energy from renewables by 2030, but questions are being raised about whether this will be achieved. Investment so far has focused on wind power and hydroelectric power plants (HPPs), and to a much lesser extent solar (primarily small-scale installations such as solar-powered water boilers). As in many other countries, there is local resistance to expanding wind turbines and HPP. ‘Local people are against these [HPPs], claiming that they are killing the environmental habitat and their income sources. On the other hand, wind power investments are mostly concentrated in western Turkey instead of [less populated and economically developed] eastern Turkey,’ says Dr Tu˘gçe Varol of Uskudar University in Istanbul and head of the energy security department at the 21 Century Turkey Institute.
In addition to renewables, Ankara has signed contracts to build two nuclear power plants, yet gas-fired electricity generation is slated to be the mainstay of energy production, with BOTAS¸ forecasting gas demand to almost double from 45 billion cubic metres (bcm) in 2012 to 81 bcm by 2030.
Sourcing such gas, including for the CHP sector, will be crucial, although analysts are not overly optimistic given the current instability in nearly all of Turkey’s neighbours. This is warding off development and the rollout of gas pipelines, with Turkey a crucial crossroads, criss-crossed by pipelines and more planned that are essential to supply the country and further afield.
‘Turkey has not signed the required gas contracts for 2030. There is a high-volume contract with Turkmenistan; however, bringing gas from there is unrealistic at the moment. The only realistic additional gas contract is with the Trans Anatolian Natural Gas Pipeline (TANAP) project for 6 bcm – but, compared to Turkey’s economic growth, that amount is not sufficient for the near future,’ warns Varol. Meanwhile, the Nabucco pipeline, which had been slated to provide 10 bcm and run from central Asia to Austria, has essentially been shelved due to its high projected costs.
‘It is a race, of course,’ Strandvall explains. ‘Nabucco is too massive and has too many questions still to be resolved, but TANAP is at a more advanced stage, so Nabucco is very far away and politically driven. It is a geopolitical issue.’
Meanwhile, new geopolitical risks that have emerged on the nation’s eastern and southern borders also pose problems for Ankara. The Arab Gas Pipeline, which ran from Egypt to Syria and was in the final stage to Turkey, has shut down due to the conflict in Syria, while the rise of extremist group the Islamic State (IS) is jeopardising oil and gas exports to Turkey.
‘It is not only Iraq and Syria, but also the Ukraine-Russia and Azerbaijan-Armenia crises that might affect Turkey’s current and future natural gas security supply projects. As a result of the Ukraine crisis, the pipeline that carries Russian gas to Europe and Turkey through Ukrainian territory might be cut by both sides of the conflict at any time,’ warns Varol.
To anticipate such an eventuality, Turkey signed a new contract with Russia’s Gazprom for an additional 3 bcm of gas from the sub-Black Sea Blue Stream pipeline, starting from this year. Turkey currently imports 14 bcm per year of Russian gas via Ukraine (out of Turkey’s total 52 bcm per year of gas imports), according to energy information provider Platts.
The ongoing and unresolved crisis between Azerbaijan and Armenia is a further issue. ‘It is the worst scenario for the TANAP project, as any further military conflict between Armenia and Azerbaijan may postpone construction and directly affect the energy security of Turkey. On the other hand, such a crisis in the Southern Caucasus would trigger the implementation of the South Stream project’ linking Russia with eastern Europe under the Black Sea, predicts Varol.
Nuclear power plant (NPP) projects also face geopolitical ‘what-ifs,’ which may push Ankara to diversify energy in other ways, especially as the plants will not be operational for another decade. One of the planned plants, in Akkuyu, is to be constructed by Russia’s Rosatom. ‘If the tensions grow further between Russia and the west, the west may knock on Turkey’s door and remind them that Ankara is a NATO member and should suspend its NPP with Russia,’ says Varol – which, as Russia’s direct military involvement in Ukraine has become clearer, looks increasingly likely.
The plant is also near the Syrian border. ‘Syria is extremely unstable and there are a lot of al-Qaeda type terrorist organisations actively operating in the region, so there is the possibility that any terror attack (in the area) may suspend the NPP project,’ she adds.
Light at the end of the tunnel
Yet, while geopolitical issues may throw a spanner in the works for sourcing gas, a new energy policy is possible following elections. A general election is due in June 2015, following this year’s presidential election, which has seen former prime minister Recep Tayyip Erdogan become head of state. Indeed, the recent uptick in CHP capacity and TURKOTED pushing the government on CHP efficiency levels signal that while Turkey is struggling to get its policy right, CHP will remain a part of the country’s energy mix.
‘There is light at the end of the tunnel…Turkey is following what is happening in Europe, and I do see a continuation on CHP in the future,’ says Strandvall. ‘They will follow the implementation of the EED within the EU and most probably follow or implement part of the directives in the Turkish market in due course.’
He adds that, ‘in my opinion, CHP is part of the whole package, but plants producing electricity are also needed because there are still areas that lack power, and areas where the grid is weak and daily frequency/voltage fluctuation is causing problems. Also, there is demand for flexible power plants which can operate in a peaking or balancing mode, enabling renewable energy systems like wind and solar to be integrated in the power system. On the other hand, there’s still a lot of industrialisation with their own cogeneration needs,’ he concludes.
Paul Cochrane is a journalist focusing on energy matters.