An easy win for Turkey: leaving behind imported coal

New wind and solar power now cheaper in Turkey than running existing coal plants relying on imports

Ufuk Alparslan

Regional Lead (Turkey, Ukraine & the Western Balkans)

28 September 2021 | 5 min read

Available in: Türkçe

Highlights

-50%

Change in new solar power plant cost in the last five years

-32%

Change in new wind power plant cost in the last ten years

+200%

Change in hard coal prices in a year

About

This analysis calculates variable generation costs of hard coal power plants with varying efficiencies and compares them with the lifetime per unit generation costs of new wind and solar power plants to be constructed in Turkey.

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Executive summary

Key findings

Rising coal prices in the world now make it cheaper to build a new wind or solar park for power generation in Turkey than running even the most efficient hard coal power plant that relies on coal imports.

01

Coal prices are on the rise

International hard coal prices are 3 times higher than a year ago. Coal prices are doubled in less than four months and have reached the highest price in the last decade. This has also affected the prices of coal Turkey mainly imports from Colombia.
02

Wind and solar power costs are declining

In Turkey, new wind power installation costs are 32% lower than five years ago, and new solar power installation costs are 50% lower. Hence new wind and solar power are now cheaper than existing imported coal power generation costs, even without a carbon price.
03

Turkey imports billions of dollars coal

Turkey has 9 GW of coal power installed capacity that relies on coal imports, which makes up 45% of its total coal power capacity. If hard coal power plants continue running at high capacities, coal import bill in 2021 can set a new record by reaching 5 billion US dollars, 3 billion of which is estimated to be burned by coal power plants. Turkey can dramatically lower its multi billion dollars coal import bill and potential carbon border levy by switching to cheaper green alternative.

A short history of costs

Wind and solar getting cheaper, while coal prices are skyrocketing

Sharp decline in wind and solar power installation costs

Wind and solar are becoming more competitive each year. The costs of new wind and solar power plants have seen a dramatic decrease in the last ten years, including within Turkey. In Turkey, the Levelized Cost of Electricity (LCOE) of wind dropped by 64% in the last decade and 32% in the last 5 years. Similarly, utility-scale solar power LCOE is now 50% lower in comparison to 2016.

Hard coal prices are highest in a decade

While wind and solar are getting cheaper, international hard coal prices are skyrocketing. The prices have climbed to their highest level in a decade at an unprecedented pace, such that they have doubled in less than four months. This also affects Turkey’s imported coal prices, which are mostly sourced from Colombia.

Turkey spends billions of dollars on coal imports every year

Turkey has 9 GW imported coal power installed capacity, which makes up 45% of its total coal power capacity. However, Turkey’s reliance on imported coal is relatively recent. In 2010, the country generated only 7% of its power from imported hard coal. Since then, the electricity demand has increased by 50%, much of which was met by imported coal, which rose to a 21% share in 2020.

This reliance comes with a cost. When the coal price reached its previous peak in 2018, coal imports cost 4.7 billion USD to Turkey over the course of the year, of which an estimated 2.85 billion USD was imported for power generation. This represents a more than a sevenfold rise between 2014-2018, since in 2014 coal imports for power generation cost an estimated 400 million USD. In the first half of 2021, Turkey delivered 9.5 million tonnes of hard coal to the coal power plants, close to the volume in 2018-H1. Under current coal price levels, if imported coal plants continue running at high capacities, the coal import costs may set a new record by reaching almost 5 billion USD in 2021, 3 billion of which is estimated to be burned for power generation.

A milestone in costs

Wind and solar are now cheaper than hard coal

New wind and solar are now cheaper than running existing imported coal plants

According to IRENA’s latest study, Renewable Power Generation Costs 2020, in Turkey the LCOE of wind is 40.8 USD/MWh while solar LCOE is 51.9 USD/MWh. In comparison, with the front month coal futures price (179 USD/tonne), imported coal power generation costs are between 62-77 USD/MWh for typical power plant efficiencies in the country (between 37-47%). This translates into an average marginal cost of 73 USD/MWh for imported coal power plants. The front quarter’s (Q4-21) futures prices yield similar results. This places new wind and solar generation costs significantly lower than the existing imported hard coal short run marginal costs, even without taking into account carbon pricing. That means that it is now cheaper to generate electricity from new wind and solar power than to run existing coal plants that rely on coal imports.

Record low prices in latest solar auction in Turkey

The market expects solar power to become even cheaper within the next couple of years. In the latest solar auctions, totaling to 1 GW held between April-May this year in Turkey, the prices were between 21.5-37.9 USD/MWh for solar parks varying between 10-20 MW capacities. The projects are expected to be completed by 2024. The weighted average cost of these projects was 25 USD/MWh, which is just 60% of the hard coal generation marginal costs calculated with 2024 coal futures prices. Even the most efficient imported coal power plant’s marginal cost for 2024, 35.7 USD/MWh, remains well above the weighted average of the latest solar auction prices at 25 USD/MWh. In other words, in the following years it is expected to be even cheaper to generate electricity from new solar power than to run the existing power plants that rely on coal imports.

Conclusion

Low hanging fruit: Imported Coal

Barriers on utility-scale solar power

The support for renewable energy via feed-in tariffs helped to accelerate the energy transition in Turkey in the last few years. However, following the end of the US-dollar denominated feed-in tariff scheme, the country now mainly relies on renewable auctions, especially for solar power. The latest solar auction prices proved the fact that the market did not even need the support of generous subsidies for further growth. On the other hand, the recent boom in solar power capacity in Turkey materialized due to unlicensed, relatively small projects, not utility-scale.

As of May 2021, 91% of total solar installed capacity consists of prosumer solar projects. While the investment appetite is very high, as seen in the auctions, utility-scale solar projects lagging far behind draws attention to potential barriers on utility-scale solar investments. Lack of new capacity at transformers allocated for licensed solar power by the TSO leaves solar auctions as the only option. But solar auctions are offered at very limited capacities with several restrictions. Large consumers are also unable to sign a long term power purchase agreement for new solar installations. These obstacles against solar power need to be removed to let Turkey thrive in clean power and reach its enormous potential for solar power.

Win-Win-Win: lower import bills, lower emissions, lower carbon levy by the EU

Turkey could see several advantages from switching from imported fossil sources to local alternatives for power generation. It will not decrease the import bills only, but decrease the carbon intensity of power generation as well. A possible implementation of a carbon border tax including indirect emissions from the goods imported by the EU from Turkey may cause an economic loss between 2.7-3.6% of Turkey’s GDP by 2030. A switch into wind and solar from imported coal is not only economically more viable and keeps a huge amount of money inside Turkey, but it will also reduce air pollution. Despite their young ages, some imported coal power plants in Turkey rank highly for air pollution among all European coal power plants.

The transition from imported coal to domestic wind and solar is also in line with the energy strategy of Turkey established on using local and renewable energy sources in electricity production. The feed-in tariff appears to have accelerated the energy transition recently by enabling it to reach 13% wind and solar share in power generation. However, now the country enters into a new era without generous subsidies. The fate of this new era will depend on Turkey’s level of ambition to curb its import bill.