New 1360 Mwe TPP investment in Çatalağzı

Dear Colleagues,

A local investment holding company announced last Sunday in Hurriyet Daily News that they placed total 1.6 billion US Dollar investment in Zonguldak Catalagzi thermal power plant, and they created 3500 new jobs, of which 1500 of them would be workers from China.

The project won award of year 2009 from Project Finance magazine of EuroMoney group.

Investment decision is given in year 2008, and construction initiated in year 2008. Project is financed by local Guaranty and Isbank.

They have 3500 workers at site for plant construction. First unit with 160 MWe is completed. Second and third units each with 600 MWe are in construction and expected to be completed later this year. Upon completion of total 1360 MWe, the new plant will generate 5% of total Turkish electricity generation capacity.

Coal will be imported from Ukraine. In order to unload the incoming imported coal, the investor company has built the Black Sea's largest port next to the plant with an investment of 220 million dollars. 180 thousand-ton coal capacity ships will bring coal from South Africa, Colombia, Brazil. Plant will need 3.5 million tons of coal per year.

Chinese company CMEC has received the order for second and third units, which will consist of Power Island covering steam boilers and steam turbines. 1 billion 50 million dollar portion project finance is covered by local Guaranty Bank and ISBank.

It was the biggest loans for each of these financing entities. There is no Treasury counter guarantee in this project financing.

We need to evaluate the new plant investment from a broader perspective. Since its cheaper cost in comparison to many alternative fuels, convenience for use, and absence of problems related with storage, the demand for natural gas, which entered the Turkish energy sector from late 1980s onwards, has increased its use up dramatically.

Despite high amounts of natural gas consumption, there is no active gas storage facility in our country at this time. The biggest factor in the increase in natural gas consumption is that the generation of electrical energy is mostly dependent upon imported natural gas.

Initially natural gas was very cheap. Combined cycle power plants firing natural gas were also cheap in unit installed capacity and their construction period were quite fast compared to other power plant constructions.

Now natural gas is NOT so cheap. Our Northern neighbor increased its unit price tremendously. Price is unbearable now. It is a real threat against our national security.

Our eastern neighbor cuts the natural gas flow each New Year putting the force majeure clause as “Act of God”, although it’s their own decision in order to put more pressure on our local government in international politics.

In Turkey, nearly 65% of the imported natural gas is used for generating electricity, and hence 55% of generated electricity is based on natural gas.

We have an enormous energy supply risk on our energy business. That is not because of natural gas but also huge amount of imported coal for our thermal power plants.

“Clean Coal” expression may not be oxymoron anymore, thanks to new modern technologies. However “Imported Coal” is an oxymoron expression. Coal should not be imported. Coal Exporting Countries would certainly be delighted to find countries to export their coal.

Countries should be clever not to import the coal. Desperate countries with limited local fuel resources are to be clever not to import that dirt whatever the desperation is.

Coal is not a fossil fuel only; it comes with its ash, unburnable materials, plus radioactive elements with huge health hazards. That is also import of CO2 emissions which will make you under burden against Kyoto Protocol. Global warming is very sensitive issue.

There was a time when European and U.S. coal producers worried that imported coal might threaten their domestic industry. Several large U.S. companies today own shares in foreign coal mines and sell imported coal in the United States and other countries.

From the customer’s point of view, imported coal has been an option for power plants or industries situated well for delivery-- usually at attractive prices—but some have been reluctant, or found infrastructure lacking in the tidewater.

Here we are close to Russian and Ukrainian coal suppliers. On the spot market, South African coal sold out for the year; now it appears South American coal is no longer available. Initially, consumers gave Colombian, Venezuelan, and Indonesian coals a second look because of good prices, because they offer low- and very low-sulfur products, and because they offer some supply diversity.

Prices are currently more volatile in international coal markets, but the low-sulfur coals from South America and Indonesia can in the longer term help keep some domestic mines producing. The two coal types can be blended to “manufacture” blends that meet the emission limit of 1.2 pounds of sulfur dioxide per million Btu, or just to keep it within ranges covered by emission allowances. Because of their Btu levels, some imported coals also react well in reducing nitrous oxide emissions.

Local private companies may be too eager to make partnership with foreign companies to construct new thermal power plants on our beautiful sea shores since imported coal is cheap at first. But who would guarantee the cheap coal prices forever.

Initially we were all expecting cheap natural gas prices for the long term in our feasibility studies. Natural gas is not cheap anymore. Moreover Natural gas has huge energy supply risk.

Imported Coal also has the same energy supply risk as well as environmental hazards. Although our Energy Markets Regulatory Board and the Ministry both keep low profile in licensing the imported coal applications in the local market, we visualize that our local public authorities as well as our local NGOs put high profile reaction to avoid in Imported Coal firing new thermal power plants.

The first thermal power plant firing Columbian imported coal is built in Sugozu seashores of the Mediterranean coast despite of resistance from engineering and other civil organizations.

We visualize the local public reaction to new imported coal firing thermal power plants in Iskenderun Bay, on the Aegean and Mediterranean coasts.

European Union advised their members to utilize their local indigenous lignite to the fullest maximum extent whatever would be the cost. EU furthermore advises its own members to make more investments on renewable energy resources.

The other hand, imported coal has currently reasonable prices in the spot markets,

Now in Richards Bay South Africa FOB coal price is more than 86+ FOB US Dollars per ton

and in Rotterdam ARA coal market for 6000+ kcal/kg LHV, it is now more than 81+ FOB US Dollars per ton, as of last week.

We calculate and compare the US Dollar coal price per 1-million BTU heat capacity gross based. That is 1.75 USD per 1-million BTU for Afsin Elbistan, and 4.24 US Dollar for imported coal, 10.40 USD for natural gas at market figures.

Compared to local mine-mouth prices of less than 8 US Dollars per ton for 1150 kcal/kg LHV in massive Afsin Elbistan lignite mine premises, there is almost no reasoning for imported coal fired thermal power plants in future.

It is our sincere feeling that those investors who dare to invest in “imported coal firing thermal power plants” would have difficulties, and should consider high calculated risks, and high unforeseen cost/ risks in their technology selection, project finance and overall project execution.

Therefore,

We have to reduce dependence on imported fuel/energy that also includes imported coal
We have to reduce energy consumption by improved energy efficiency,
We have to employ maximized local engineering and local qualified work force at all times,
We have to produce more energy from our own local energy resources, wind/ hydro/ local lignite,
We have to develop most efficient processes and use the best technologies CFB, IGCC where applicable, within our own engineering capacity,
We have to control our CO2 emissions to reduce climate change and dangerous health effects,

Though it is late, but as saying goes "It is never too late to mend".

Your comments are always welcome

--
Haluk Direskeneli, Ankara based Energy Analyst,