Turkey to offer protection against strong coal prices

: Coal
22/03/17

Turkish energy regulator EDPK is planning to launch a scheme that will partially offset the power sector's energy import costs — including those faced by coal and gas plants — as high prices in the wider commodity complex threaten the country's energy supply security.

This could improve Turkey's power sector coal demand outlook significantly, given that some plants have been reducing their output amid unfavourable economics.

"The increases in costs stemming from higher fuel and raw material costs might also translate to unacceptable levels of increases in [power] prices … [EPDK] will offer assistance for up to six months to keep power prices from rising to unacceptable levels and to allow utilities which are not able to contribute to energy supply security because of high fuel costs," EPDK said in an announcement today.

"[EPDK] and the energy ministry will continue to monitor domestic and global energy markets and will take precautions as needed."

Details of the scheme could not be immediately confirmed, but some market participants expect the mechanism to provide a floor and ceiling price for renewable generators, domestic coal, imported coal and gas plants. The price range is expected to be a fixed price for generators that rely on domestic fuels such as lignite, while the range for imported coal and gas-fired plants will be calculated using a formula based on their fuel costs.

The support mechanism formula for imported coal-fired plants is expected to be linked to the API 2 index, which is widely used for indexation purposes in the country, to keep utilities from idling their plants when the grid needs a higher level of baseload generation.

Low-price tax offset by protection

The mechanism should offer some financial relief to Turkish imported-coal plants as they were not able to build equity to buffer for high fuel prices when coal prices were low. This was because they must pay top-up tax for coal imports when European coal prices fall below $70/t.

The recent steep increase in European coal prices has led generation costs for Turkish power plants to rise well above power prices.

Some plants were expected to idle their plants and postpone or divert their cargoes from their annual supply agreements amid unfavourable margins. But Turkish buyers might become active again in the seaborne market when the new power market mechanism comes into force, as they will be able to recoup their high fuel costs.

The country's imported coal-fired output declined to 5.6GW in 1-17 March down from 6.7GW during the same period earlier, implying a 166,000t drop in NAR 5,800kcal/kg coal consumption on the year.

Higher demand to weigh on seaborne availability

Re-emerging demand from the Turkish power sector might increase competition for limited supply availability in the seaborne market, as other buyers in Europe and the wider Mediterranean are also looking to source coal cargoes from non-Russian origins, which could offer some upside support to the European coal market.

Some traders were heard offering coal into Turkey and Europe with three-digit premiums against the API 2 index in recent weeks, but some Australian and South African supply was heard being offered at levels close to the API 2 index this week.

Turkish buyers are not looking to source Russian and Colombian supply as availability for both origins is extremely tight.

By Firat Ergene

Turkey coal, gas generation costs $/MWh

Turkey coal vs gas fuel switching levels $/MWh

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Cop: ADB, Kazakhstan tie up on early coal retirement

24/11/14

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24/11/13

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24/11/12

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24/11/11

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