Energy Central Professional

 

Turkey Utilities Network Analysis


Fitch Solutions Sector Intelligence  

 

    THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS COUNTRY RISK & INDUSTRY RESEARCH and is NOT a comment on Fitch Ratings' Credit Ratings. Any comments or data are solely derived from Fitch Solutions Country Risk & Industry Research and independent sources. Fitch Ratings analysts do not share data or information with Fitch Solutions Country Risk & Industry Research.

    Turkey Utilities Network Analysis

    • 07 Jun 2022
    • Turkey
    • Logistics & Freight Transport

    Key View: We have significantly revised down Turkey's Utilities Network score in light of recent developments both locally and regionally that have greatly increased the risks of disruptions to the supply and increased costs of utilities in the country. Rising political tensions in Europe since the outbreak of the Russia-Ukraine conflict mean that financing for key projects in Turkey may not be forthcoming. The widespread economic impacts of the conflict are also likely to cause Turkey and other markets in the region to reduce their focus on utilities provision and put planned projects on the backburner in favour of bracing themselves against macroeconomic headwinds and mitigating potential crises in food supply. The risks of disruptions in the supply of utilities to Turkey have ramped up as a result of the conflict, particularly regarding electricity and fuel supply; we highlight that Russia provides around 45% of Turkey's natural gas, 40% of its gasoline and 17% of its oil. The collapse in the Turkish lira and rocketing inflation are increasing the cost of electricity and fuel imports, on which Turkey remains heavily reliant, leading to higher end prices for domestic consumers. The same factors have led to the major broadband provider in the country increasing its prices by 67%. Compounding these risks are more long-term issues such as the frequent outbreaks of violence in Turkey, especially along the border with Syria, which pose a downside risk to energy supply as key infrastructure is targeted during clashes. Water shortages are also likely to become a major issue over the long term, restricting agricultural production and growth in key industries. On a more positive note, we highlight that Turkey has a sophisticated telecommunications market, substantial local gas reserves and a significant pipeline of utilities projects, particularly in the electricity space. As these projects come online over the long term, they will increase the local supply of utilities, reduce Turkey's import reliance and lower operating costs for businesses in the country. Turkey is now ranked in seventh place out of 12 markets regionally and 71st out of 201 global markets for Utilities Network, with a score of 56.5 out of 100.

    Rising Risks Have Seen Turkey Fall Down The Ranks
    South East Europe - Utilities Network

    Note: 100 = Lowest risk; 0 = highest risk. Source: Fitch Solutions Logistics Risk Index

    Latest Utilities Network Analysis

    • In April 2022, Turkey's Information Technologies and Communication Authority announced that Türk Telekom would raise its wholesale broadband tariff prices by 67%, citing inflationary pressures and currency devaluation as the main causes of the increase.

    • In March, Turkey Wealth Fund, the Turkish state’s investment arm, acquired a 55% stake in Türk Telekom. Upon regulatory approval, the sovereign fund's stake in the operator will increase to 61.6%, which would provide the government with significant control over Türk Telekom. In 2020, Turkey Wealth Fund also acquired a majority stake in mobile operator Turkcell. As a result, two of the three largest operators in Turkey are now majority-owned by government-linked shareholders, leaving Vodafone as the only independent, foreign-owned telecoms provider in the market. There is potential for this to reduce levels of competition, leading to price increases and a slowdown in innovation, which would be negative for businesses operating in Turkey.

    • In December 2021, SOCAR Turkey announced that it will increase the crude oil processing capacity of the STAR Refinery in Izmir Aliaga from 11mtpa to 13mtpa, adding around 200,000b/d of capacity once fully operational. It will use crude oil feedstock from Azerbaijan. This should drive an increase in local refined fuel production over the coming years. Nevertheless, reliance on imported feedstock means that price hikes will remain a major concern for businesses.

    • Six wind power plants are currently under construction in Turkey, along with one thermal, one nuclear and one solar power plant. There are around another 25 power projects in the pipeline, including Turkey's first battery energy storage project. We expect that businesses in the country will enjoy a more stable and affordable supply of electricity over the medium-to-long term as these plants are connected to the national grid and Turkey's import reliance declines.
    Utilities Cost And Availability

    Turkey has globally competitive broadband tariffs, reducing operating costs for businesses and widening the potential of the e-commerce market. In addition, the country's strategy of diversifying the power mix to curb expensive gas imports continues to gain momentum, and this will lower electricity prices in the long term. Although a reliance on fuel and gas imports as feedstock for electricity generation exposes energy-intensive operations to potentially higher tariffs, the cost of electricity and fuel are currently low by regional standards. The risk is that the ongoing recovery in global crude oil prices will increase the cost of both electricity and fuel for Turkish businesses, as there are no government subsidies to shield consumers and businesses. Overall, Turkey has a score of 67.3 out of 100 for Cost of Utilities, ranking first out of 12 markets in South East Europe and 30th out of 201 global markets.

    Turkey lacks significant hydrocarbon resources available for exploitation to supply its large, energy-intensive domestic market, making it one of the world's largest net energy importers. Although electricity grid coverage is good, there is a risk of disruption to energy imports due to instability in neighbouring states and source markets, including Ukraine and Iraq. Turkey's attempt to position itself as a regional energy transit hub may mitigate these risks over the long term, but the threat of shortages will remain a concern. Businesses face similar risks with regard to the water supply, as several economies in the region rely on the same sources. In addition, over-extraction and climate change have resulted in water shortages and droughts that have had a severe impact on agriculture and other water-intensive industries. Although Turkey offers widespread access to internet services for both businesses and consumers, boosting the potential for e-commerce, download speeds remain sluggish on a regional comparison, which will deter investment in high-tech industries. These factors underpin Turkey's moderate score of 45.6 out of 100 for Availability of Utilities, ranking it ninth regionally out of 12 markets and 111th globally out of 201 markets.

    Electricity

    The electricity generation sector in Turkey is exposed to a number of risks, including declining water resources, terrorist attacks on infrastructure and dependence on potentially unreliable gas imports. Shortages have led to blackouts in recent years, which disrupt business activity. The collapse in the Turkish lira significantly increased the cost of importing natural gas, which is gradually being passed on to consumers in the form of higher electricity prices. More stable supplies of fuel for electricity generation are expected to be secured over the medium term, as Turkey bids to become a major energy hub, which should mitigate the risk of power shortages to some extent. In particular, the first phase of the Trans Anatolian Natural Gas Pipeline Project was opened in June 2018, connecting Azerbaijan with Turkey via Georgia. Phase two will be used to distribute gas to the European market. The 1,850km, USD8bn pipeline will have the capacity to supply 10% of Turkey’s gas imports, in addition to making the country a hub for natural gas distribution.

    Turkey - Electricity Risks
    Source

    Energy mix (according to our 2022 forecasts): coal 31.3%, natural gas 29.4%, hydropower 19.8%, non-hydropower renewables 19.2%

    • Investment will focus on expanding hydropower and non-hydropower renewables capacity over the medium-to-long term.
    • Coal is Turkey’s largest source of electricity generation, natural gas is the second largest source, and hydropower is the third largest source and the fast-growing segment of non-hydropower renewables.
    • Although sources of power generation are well diversified, theoretically reducing the risk of shortfalls in supply, continued reliance on hydropower and imported gas poses risks to electricity production.
    Availability

    100% of the population has access to electricity

    • One advantage for investors is that the electricity network in Turkey covers almost the entire population, which means that energy-intensive businesses will not be restricted regarding location.
    • It takes 34 days on average for new business premises to get connected to the electricity grid, which is the shortest among the 12 countries in South East Europe, with a regional average of 103.3 days.
    Reliability

    12.8% of total power output is lost owing to transmission and distribution losses. 0.7 power outages a month on average; 1.8% of sales value lost owing to power outages

    • Risks of disruption to Turkey's sources of electricity generation threaten the stability of the power supply. Hydropower generation is at risk from increasingly unfavourable climate conditions, which result in droughts, preventing turbines from functioning. The use of hydropower for electricity generation is therefore likely to diminish over the medium term.
    • Shortages of gas supplies have in the past led to inadequate resources for electricity generation, resulting in power outages.
    • In addition to these risks to electricity generation, there is a lack of efficiency in transmission and distribution networks, which increases losses and the risk of blackouts. This leaves energy-intensive businesses reliant on private generators to guarantee a continuous power supply, adding significantly to operational costs and reducing competitiveness.
    • Turkey's connection to the European power grid alleviates some of these risks, as it allows for power sharing, electricity trading and greater cooperation on energy security. This mitigates the threat of shortages as any shortfall in generation can be met by electricity imports, though the potential for unexpected disruption to power infrastructure remains.
    Cost

    USD0.07 per kilowatt hour (/kWh)

    • Electricity costs in Turkey have fallen significantly in recent years, from USD0.10/kWh in 2012 to USD0.07/kWh currently, a rate last seen in 2001. This fall is partly a result of increasing diversification and the growing role of domestic renewable power generation, which is less costly than imported energy. This boosts Turkey's appeal as a location for energy-intensive manufacturing businesses.
    • In August 2018, however, Botas (Turkey's state natural gas pipeline operator) imposed a 50% price hike for gas used to generate electricity, while the Energy Market Regulatory Authority increased electricity prices by 14% and 9% for industrial and residential consumers respectively for the second consecutive month, amid a collapse in the country's currency.
    Other risks

    • Direct gas pipelines serve Turkey from Russia via the Blue Stream pipeline, as well as via Bulgaria. However, natural gas infrastructure has been a target for terrorist attacks, which leaves Turkey exposed to disruptions to the supply.
    • There have been several attacks on oil and gas and electricity infrastructure since the resumption of hostilities, and the potential remains for such incidents to occur again.
    • There is the potential for Islamic State (IS), which has already targeted Turkey on multiple occasions, to launch attacks on energy infrastructure.
    Planned projects

    • Overview: We believe that Turkey's power sector will see robust growth over our 10-year forecast period, with the non-hydro renewables sector set to drive the most significant growth. The government's aim to increase the share of domestic power sources, which will lead to strong growth across the renewables, coal-fired power and hydropower sectors, supports this outlook.
    • Bright prospects for renewable energy: The renewable sector, such as wind, solar and geothermal, will enjoy major growth opportunities over our forecast period, as the government aims to diversify the power mix and reduce its reliance on imported thermal feedstock.
    • Six wind power plants are currently under construction in Turkey, along with one thermal, one nuclear and one solar power plant. There are around another 25 power projects in the pipeline, including Turkey's first battery energy storage project. We expect that businesses in the country will enjoy a more stable and affordable supply of electricity over the medium-to-long term as these plants are connected to the national grid and Turkey's import reliance declines.
    Source: International Energy Agency, national sources, Fitch Solutions
    Prices Currently Low But Vulnerable To Hikes
    South East Europe - Cost Of Electricity, USD Per KWh

    Source: National sources, Fitch Solutions

    Fuel

    Turkey will remain a small producer of both oil and gas, with dependence on imported natural gas and crude oil expected to increase through to 2031. A lack of domestic oil reserves means that Turkey's fuel supply is exposed to similar risks to electricity generation, due to dependence on imported feedstock. The sharp depreciation of the lira has increased the country's energy bill significantly. This has raised refined fuel prices in the country and will act as a severe headwind to demand growth in the short term. Although the defeat of IS in much of Iraq has reduced security risks to supply from its southern neighbour, the country remains unstable, and Turkey will have to ensure that its imports remain well diversified in order to mitigate the risk of disruption. We expect tensions to continue to rise as Turkey presses on with proposed exploration in the Cypriot Exclusive Economic Zones and the eastern Mediterranean in general.

    Turkey - Fuel Risks
    Source
    Refined petroleum largely imported from other European countries, including Russia, Greece and Bulgaria, as well as India and Israel
    • Turkey has negligible domestic reserves of crude oil, and production falls far short of meeting local demand, meaning that it is reliant on oil imports to meet its fuel needs.
    • Turkey imports both crude oil and refined products, with the former mostly sourced from Russia, Kazakhstan and Nigeria.
    • The refining sector is somewhat limited, which means that more expensive refined products are imported in larger quantities. Refined fuel is mostly imported from Europe, Russia and India, entailing long supply chains, which increase the risk of disruption.
    Availability
    Refined petroleum net exports: -286,200 barrels per day (b/d)
    • The lack of sufficient domestic refining capacity, combined with the huge demand for fuel from its large market, means Turkey is the biggest net importer of refined petroleum in the wider Emerging Europe region and the 17th biggest globally.
    • Turkey is looking to import fuel directly from the more stable Kurdistan region of Iraq, which will provide it with a nearby and more secure supply of fuel than its current sources. However, opposition from Baghdad, which continues to claim direct control of all oil exports, may hinder the full utilisation of this source.
    • Further diversification of import sources, particularly from more stable regions and countries, will ensure a more secure fuel supply over the medium term, to some extent mitigating the risk of shortages.
    Reliability TOP


    Copyright © 1996-2022 by CyberTech, Inc. All rights reserved.
    Energy Central® and Energy Central Professional® are registered trademarks of CyberTech, Incorporated. Data and information is provided for informational purposes only, and is not intended for trading purposes. CyberTech does not warrant that the information or services of Energy Central will meet any specific requirements; nor will it be error free or uninterrupted; nor shall CyberTech be liable for any indirect, incidental or consequential damages (including lost data, information or profits) sustained or incurred in connection with the use of, operation of, or inability to use Energy Central. Other terms of use may apply. Membership information is confidential and subject to our privacy agreement.