Monday, October 20, 2014

Does Turkey Enter Energy Bottleneck?

Dear Readers,

In upcoming days, we shall have new developments in our energy markets. Therefore we should make upfront predictions to develop appropriate strategies. We have serious problems in natural gas supply. Even if we do not have any political friction with Ukraine or Russia, in the days when outside temperature drops to below "-5 ° Celsius", we will have serious shortage of natural gas.

There are optimistic expectation that we may have gas supply from ShahDeniz-2, Israeli offshore fields, Northern Iraq. However these are not materialized in real contract form yet. At this difficult times, in overly complicated geography, these optimistic expectations are not more meaning than "wishful thinking", whereas we cannot configure our future on those loose conditions.

Our installed electricity generation capacity has reached 68,000 MW, but the peak (maximum) supply does not exceed 40,000 MWe. We have limited new thermal power plant investments in the recent years, which are not sufficient for necessary annual increase.

Currently we have new generation capacity, in which their investment decisions are initiated in year 2007 and earlier. Those opportunistic investments in wind and geothermal power plants have been increased. There is nothing new in thermal power plant investments. Those new thermal power plant investments under construction in Tufanbeyli, Göynük, Adularia, Iskenderun are expected to be commissioned in 2015 at the latest. There are no other new thermal power plants.

Hydro-electric power plant investments are saturated. There is general shortage of natural rain water in the dams. In recent years, our land have received less rainfall. The hydro dam reservoirs are half-full. During and after winter season, we may have some more rain water in hydro dams, but we are not so sure that those accumulations will be enough for demand.

There are new natural gas firing combined cycle thermal power plant investments. There are not enough natural gas reserve to feed them. Moreover we do not yet have free market conditions, as well as essential legal framework for safeguarding the system.

You may release new laws, and regulations, but still in the long term you may not secure necessary gas demand. Gas prices should not be subsidized by public funds. Cost of natural gas have increased between 2005-2007, whereas electricity prices were kept constant between 2002-2007 by subsidizing, so private market players were kept in difficulty.

"Shell" company has initiated 2-separate drilling for shale-gas exploration in South East of our country, each with cost at 40 million US Dollars. The third well is awaiting approval for drilling. There are optimistic estimations for about 1.8 trillion m3 shale gas reserves in South East Anatolia. So with 45-billion m3 of current annıal demand, that reserve can meet our needs for at least next 40-years. However we need to make substantial investments in new drilling. Who will pay this expenditure?

In last 10-years, public companies could not make any investment in energy sector. Public institutes have only promoted, and encouraged local and foreign investors to put money. Public institutes tried to avoid any legal responsibility, nor agreed to guarantee any purchase for energy sales. They did not take any legal, contractual or financial responsibility. Country has to invest more in energy generation but there is no easy hot money available any more. Local and foreign investors both have serious concerns in terms of the reliability of the investment environment.

Old local coal-fired thermal power plants were sold in privatization, however their availabilities are low, their operational efficiencies are low, they have poor environmental equipment, low quality electrostatic precipitators. Most of them have no flue gas desulphurisation units. Plants need costly rehabilitation, or even complete replacement.

Thermal power plants have legal exemptions from rehabilitation and they can work until 2018 without any upgrading. That procedure is cancelled by the judicial decision but the new work is not enforced. So application remains the same until a new legal measure is installed. Old existing coal-fired thermal power plants continue to pollute the environment without the use of new better bigger environmental equipment. There is also 3-year extension possibility for the exemption status.

New thermal power plants which are Diler 600-1200 MW, Cen-AL 1200 MW, Biga 1200 MW, Şırnak 405 MW, Soma 450 MW, Kırıkkale 800 MW, Bandırma 920 MW CCPP plus some 400 MW of small thermal power investment constructions are continued.

Most of the dam construction of the hydroelectric power plants, such as most controversial Ilisu 1,200 MW, Kalehan 300 MWe, plus some 3-5 GW could be activated within a few years. New wind energy investments around 500 MW per year for the next 4 years may also enter into energy generation.

Most of these new power plant investment decisions have been initiated much earlier. Their construction and equipment purchasing are in advanced stage in financial markets, despite the negativity which may be experienced for any delay.

New Solar plants with capacity 1-3 GW can contribute to meet necessary summer peak predictions within next 4-5 years. With an average of 10-13 GW new power plant capacity may be introduced in the next 3 to 4 years. We should also consider nuclear power plants. Investment financing is conditional upon social and political climate we shall have. 

According to new "Medium Term Economic Program", Turkey's growth rate will fall to 4.5% per year, and annual increase in energy demand will be readjusted accordingly. Politics based on economy, and growth rate. For more annual growth rate, one should create more annual growth in electricity generation. Simple as that.

On natural gas supply, if we can have no failing in domestic transmission, if Ukrainian- Russian crisis does not climb, if there would be no technical problem at Russian entry points, then we may consider new contracts to purchase extra gas. European gas consumption is predicted to decline at least 10%, as a result natural gas prices inevitably decline to probably to levels less than 240 US dollars per thousand cubic meter, whereas current price is floating around 400 US dollars per thousand cubic meter. So for Russians, any additional gas sale is a very valuable gain in future.

In Elbistan coal fields, each plant has four units each with 350 MWe. Afşin-A plant is running only one unit at 240 MWe capacity. Afşin-B plant has only two units at full capacity. Other units are down, they need rehabilitation, maintenance or even complete replacement. For new rehabilitation works, new engineering consultancy tender is released which will take some time to complete. Çöllolar coal field is closed due to past land slide in the mine. Hurman Creek which passes through coal mine field will have new artificial river bed. Dewatering coal field works are under execution.

New investments for exploitation of Elbistan C-D-E coal fields are underway. Sites visits, feasibilities, preliminary contract works are carried out by Chinese, South Korean, Japanese, and Qatar investor groups.  An investment portfolio around US $ 12-billion budget is discussed. Public side should also participate to risk sharing in this investment projects.

New Afşin power plants in Elbistan coal fields will face four (4) major risks in which public should have major initiatives. These are changing river bed, replacing and removing existing power transmission lines away from coal field, land expropriation and resettlement of local population, and construction of new water dam to meet plant water needs. Those are to be within the scope of public enterprises since private entities can not respond in these scopes.

On the other hand, imported coal prices in the international markets dropped to FOB US 60-70 Dollars per metric ton, which means approximately 2.40-2.50 US Dollars per MMBTU. In the past that price was floating in the range of 80-90 US dollars per metric ton, and even climbed to 160 Dollars. This is a sort of gambling and investor is to accept that risk.

However local coal price tends to be stable in the long run. It is around 2.00-2.50 US Dollar equivalent at mine mouth delivery per metric ton. There is limited or small fluctuations in these local coal prices.

We may also consider production of Synthetic Gas from low quality underground coal mines, whereas its calorific value is 1/4th or 1/5th of natural gas at around 1500-2500 kcal HHV per thousand cubic meter. Syn Gas has less environmental pollution risks compared to coal firing. A couple of pilot field test plants are continued in Soma-A and Tuncbilek.

All in all, with those emerging events, we have serious problems to face in our local energy markets, to meet with our ever increasing energy demand which is vital for our economic and social development.

Prinkipo, 21 October, 2014

Haluk Direskeneli is a graduate of METU’s Mechanical Engineering Department (1973). He has worked in public and private enterprises, US-Turkish JV companies (B&W, CSWI, AEP, Entergy), and in fabrication, basic/detail design, marketing, sales, and in project management of thermal power plants. He is currently working as a freelance consultant/energy analyst of thermal power plants, basic/detail design software expertise for private engineering companies, investors, universities, and research institutions. He is a member of METU Alumni and the Chamber of Turkish Mechanical Engineers Energy Working Group.

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