Turkish coal-fired utilities face tighter margins as weakness in the local currency against the US dollar has supported generation costs, but most imported-coal-fed plants maintain their competitive edge against gas.
The Turkish lira has shed about 5pc of its value against the US dollar since the beginning of August. This reduces Turkish buyers' purchasing power for US dollar-denominated coal from the seaborne market, thereby boosting import costs for coal-fired utilities.
Gas-fired utilities are shielded from the currency volatility for the time being, as they procure their fuel from state-owned utility Botas through a lira-denominated tariff that is usually revised monthly. Botas has kept its tariff for utilities unchanged since July, after reducing it to 1,400 lira/'000m³ (TL137/MWh) from TL1,600/'000m³ in June.
This improved gas' competitiveness against coal in the merit order recently. The front-month dark spread for a 40pc-efficient coal-fired unit fell below $13/MWh this week for the first time since June, while generation margins for 55pc-efficient gas-fired plants remained stable at $7/MWh.
In theory, coal-fired utilities have the ability to reflect the higher cost of generation in the spot power market, but further currency weakness would continue to narrow their cost advantage against gas.
The generation cost for most coal-fired utilities in Turkey is about $25/MWh, as the country's import tax on coal fixes fuel costs for utilities at $70/t when Europe-delivered coal prices are lower than this level.
Gas utilities face higher generation costs than coal-fired plants in Turkey, as there is no emissions tax in the country and Botas' procures most of its gas through long-term oil-indexed pipeline agreements, which limit its ability to benefit from lower spot LNG prices.
The generation cost for a 55pc-efficient gas-fired plant eased to $33/MWh yesterday from $35/MWh a month earlier, but the currency weakness alone is unlikely to push gas ahead of coal in the power mix, as it would require a currency depreciation exceeding 30pc, based on current prices. A possible monthly adjustment of Botas' tariff in September also could reverse any cost advantage gas utilities gained so far.
Botas' calculated import costs from Azerbaijan and Russia will be about $17/MWh and $18/MWh until October, which is about $1/MWh lower than the regulated tariff with the current US dollar exchange rate. This implies the company may choose to hike its tariff for power utilities in the coming months, should the lira continue to lose value against the dollar, otherwise it would have to bear a portion of the import cost itself.
In August 2018, Botas briefly indexed its tariff to the US dollar to shield itself against currency volatilities, coinciding with a sharp divergence between its import costs and the tariff. The decision was revoked later, but the company kept its monthly tariff in line with its import costs since then, hiking the tariff when a weaker lira pushed its costs higher (see chart).
Utilities turn to alternative origins
Coal-fired output has remained strong during the first half of this month, as it remains ahead of gas in the Turkish merit order.
Turkish coal imports grew during the first half of this year, bucking the downward trend in coal consumption.
But Colombian coal producers' decision to reduce output in response to low seaborne coal prices could weigh on Turkish buyers' supply options, as historically they have met the majority of their coal requirements from this origin.
There is no availability of Colombian cargoes in the spot market, a market participant said. This means utilities may turn increasingly towards alternative origins such as Russia, South Africa and Australia for their remaining spot purchases. But spot demand is likely to be limited to only a few cargoes over the next months, as most of the utilities have already settled their needs for the rest of this year.
