For more than two decades, Türkiye’s energy sector reforms have succeeded in providing energy services at affordable prices within a fast-growing economy with rapidly increasing energy needs. In the early 2000’s, Türkiye implemented a series of systematic, step-by-step reforms, including the establishment of an energy sector regulatory authority, the large-scale introduction of natural gas, the restructuring of state-owned energy companies, and more importantly, the creation of a functional electricity market. A decade ago, Türkiye introduced a cost-based energy pricing mechanism and a series of tariff adjustments. These reforms produced three outcomes: They attracted considerable private sector investments in power generation and distribution within the electricity market, improved the financial viability of the sector, and reduced energy subsidies and the need for large scale government support. Today, the electricity market has over 2,500 participants which enables competition and innovation, an overwhelming share of $10 billion investments in generation between 2001–2010 has been private, and total investments in privatized distribution networks between 2014–2020 has been $9 billion. Government has put in place programs to protect the poorest segments of the population from energy price fluctuations.
Policymakers in Türkiye realized a decade back that in addition to attracting private investments, Türkiye’s energy security would require it to be less reliant on imports to meet its energy needs. In that light, Türkiye launched a program to develop domestic sources of energy – which led to the doubling of renewable energy in a decade, from about 22.2 GW in 2012 to about 50 GW in 2020, of which 63 percent is from hydropower. Currently, electricity generation in Türkiye comes from the following sources: 42 percent renewable energy, 35 percent coal and 23 percent gas. More recently Türkiye succeeded in reducing gas imports from a peak of 52 bcm in 2017 to 46.1 bcm in 2021 (a reduction of 11.3 percent). In addition, Türkiye plans to commission its first nuclear power facility in 2023, and it is seeking to reduce the amount of imported coal.
That said, energy sector reforms are incomplete. Türkiye is still highly dependent on energy imports, which exposes the country to price volatility. Over 90 percent of oil and 99 percent of natural gas consumed in Türkiye are imported, with most of the natural gas coming from Russia (34 percent), Azerbaijan (24 percent) and Iran (11 percent), and the rest coming from liquified natural gas (LNG) imports from the U.S., Algeria, Nigeria, and Qatar (2020). Türkiye’s imported coal installed capacity is about 9 GW, which reflects about 45 percent of total coal capacity.
This year, the world is experiencing one of the worst energy crises in decades with significant price hikes, fueled by under-investments in energy supply, disruptions in the supply chain, and an increase in demand for natural gas in Asia and Europe as countries emerge from the COVID pandemic. The price of natural gas in Europe and Asia rose about 4-fold from pre-pandemic levels to its peak in October 2021, which triggered a 4-fold increase in the price of wholesale electricity in Europe which is highly dependent on imported natural gas for electricity generation (25 percent of the energy mix, of which 87 percent is imported). The global oil market experienced similar trends, with the price of oil exceeding $130 a barrel in early March 2022. These price increases have affected all countries, not only Türkiye. Moreover, the Russian invasion of Ukraine and the ensuing economic impacts have increased uncertainty, and further contributed to energy price hikes, especially given that Russia supplies about 40 percent of natural gas imports into Europe, and 12 percent of crude oil in the global market. The EU also imports about 49 million tons of coal from Russia (6 percent of Russia’s energy exports to Europe) and has announced plans to ban future imports by August 2022.
Governments around the world are designing and implementing short-term measures to mitigate the impacts of energy price increases, and the European Union has launched its RePower program to decouple from Russian gas imports. The measures being considered include diversifying energy suppliers and fuels, increasing imports of LNG and gas storage capacities, promoting domestic fuels including renewable energy, scaling up energy efficiency, developing affordable supply of hydrogen and increasing energy trade with reliable parties. In order to protect consumers from price increases, many countries are expanding social safety nets for the most vulnerable. Within that context, Türkiye has not been immune to energy price hikes and the shifts in the global gas markets. For Türkiye, gas imports are typically in U.S. dollars, and the steep depreciation of the Turkish lira since the last quarter of 2021 has further exacerbated the price volatility faced by Turkish businesses and households. This has spilled into electricity as well. Electricity generation companies that rely on gas saw a 186 percent price increase in input costs in 2021, which has led to increases in electricity prices for everyone. In response, the government is seeking to increase its gas storage capacity from about 3.1 bcm (2017) to over 5.5 bcm (by 2024), which will provide more flexibility. Türkiye is also seeking to diversify the sources of gas supply. Türkiye will undoubtedly also continue to pursue its overall policy objective of energy security by reducing its dependency on energy imports.
For the global community, the current energy crisis should be a wake-up call for the need to reduce dependency on fossil fuels and accelerate the clean energy transition. Unfortunately, some governments have shown opposite tendencies, putting a pause to their energy transition goals, reducing energy imports in favor of cheaper but more polluting domestic fuels such as coal to provide temporary energy security and nontargeted energy tax waivers and subsidies to provide immediate price relief.
We believe that these responses are misguided and short-sighted. While a policy response is needed to the current energy crisis, it is important to remember that the increase in the use of fossil fuels in the short-term is also contributing to climate change, which will have adverse consequences in the long-term – with a risk for cascading crises. Instead, sustainable energy solutions can provide a cost-competitive alternative to the status quo and support longer-term development. This is why the World Bank has provided financing of more than $42 billion for clean energy over the past decade.
In the case of Türkiye, the efforts to increase the domestic production of renewable energy have proven effective – the cost of wind and solar energy have declined by one-third and one-half respectively over the past five years, and renewable energy is now price competitive compared with domestic coal. Energy efficiency is even cheaper—with the cost of energy saved at less than 1.4 U.S.¢ per kWh, much cheaper than the average cost of new supply (typically about 4-10 U.S.¢ per kWh). Global experience shows that aggressive clean energy programs contribute to an increase in GDP, thanks in large part to investments in energy efficiency, new technologies and lower fuel costs; and are also expected to enhance competitiveness and foster green jobs throughout the clean energy supply chain. With the introduction of the EU Green Deal (and the possibility of similar initiatives elsewhere), using today’s crisis to accelerate the shift towards cleaner energy in Türkiye will help retain and potentially expand access to global markets and value chains that are increasingly favoring green products and green production processes. A return to coal would likely lead to the opposite effects, reducing economic growth in the medium-term and likely leading to stranded assets.
The good news is that Türkiye has the natural resources needed – wind, solar, geothermal and hydropower – and it can build on its significant achievement in renewable energy to accelerate the shift towards cleaner energy. Türkiye can achieve this goal by scaling up or accelerating investments not only in renewable energy, but also in energy storage from batteries and hydropower, grid integration and resilience, as well as electrification of transport, industrial demand and household heating to further reduce dependency on fossil fuels. In the medium-term, local production of hydrogen as well as carbon capture and storage technologies (the cost of which is currently high but expected to decline) could also be explored. Although much of the required investments would come from the private sector, the government still has a critical role to play by setting the right policies, incentives and programs to facilitate such changes.
Türkiye can also do much more on energy efficiency – by building on its National Energy Efficiency Action Plan. In the short-term, this could include: (i) expanding national outreach and communications on energy efficiency, including ways that households can save energy and contribute to energy security; (ii) promoting behavior changes, such as turning off lights when not in use, and cleaning radiators/fridge coils from dust; (iii) considering bulk purchase and give-away programs for simple appliances such as lighting and electric heat pumps; (iv) providing financing or subsidies to households to support renovations (wall/roof insulation, replacement of windows/doors) and replacing old coal and gas boilers with more efficient solutions such as pellet boilers, geothermal or electric heat pumps; and (v) providing financing or subsidies to install solar panels on rooftops, which will reduce energy demand from the grid.
The energy transition will not impact all Turkish citizens equally. While some businesses will see growth opportunities, other markets (e.g., coal mining) will decline. The impacts on the price of electricity will also be disproportionally felt by the poor and most vulnerable citizens. Therefore, the World Bank calls on the need for a Just Transition to ensure careful management of economic and labor market adjustments, investments in human capital and education, strong and adaptive social protection systems, and targeted interventions for retraining and reskilling. The World Bank applauds recent decisions by Türkiye to join the Paris Agreement and set a timetable for carbon neutrality by 2053. The World Bank stands ready to work with the government and other stakeholders to meet this net-zero goal in a manner consistent with inclusive and sustainable development goals. Indeed, clean energy solutions to the current global energy crisis are consistent with Türkiye’s objectives to achieve energy security and a just transition to carbon neutrality.
* Chares J. Cormier, Regional Director for Infrastructure, World Bank, and Auguste Tano Kouame, Country Director for Türkiye, World Bank.
Hurriyet Daily News