Turkey is on track to surpass Germany as Europe’s largest coal-fired electricity generator in 2024 as high inflation causes power producers to cut purchases of expensive natural gas and boost the use of cheaper coal in electricity generation.
According to data from the environmental think tank Ember, Turkey produced an unprecedented 117.6 terawatt hours (TWh) of electricity from coal in 2023, resulting in a historic emissions total of 118 million tonnes of carbon dioxide and related gases.
In comparison to Germany, the largest coal-fired electricity producer in Europe, which generated 117.9 TWh, Turkey’s electricity generation from coal, standing at 117.6 TWh, was very close. Furthermore, it significantly surpassed the 97 TWh produced by Europe’s most coal-dependent power system, Poland.
Germany and Poland both experienced significant declines in coal generation in 2023, and they have committed to further reducing their reliance on coal. Additionally, they are aiming to accelerate the deployment of renewable energy sources for electricity generation in the coming years.
On the contrary, 2023 marked the second consecutive year of increased coal-fired electricity production in Turkey. It appears that Turkish power producers are inclined to continue prioritizing cost-effective coal over alternative methods of electricity generation, given the country’s struggle with one of the highest inflation rates globally.
Runway Rates
Turkey faced a staggering annual inflation rate of 64.77% in 2023, which ranked among the highest globally. This surge was attributed to initially controversially low interest rates during the first half of the year, followed by significant price increases across several key sectors in the latter part of the year. In an effort to combat rising prices, Turkey’s central bank underwent a dramatic shift in June, initiating an aggressive campaign of raising policy rates from below 9% to over 42% throughout the second half of the year.
The series of interest rate hikes has managed to decelerate the rate of price increases. However, economists anticipate that the cycle of rate increases will continue until mid-2024 before inflation indicators consistently show a decline.
The Turkish lira has significantly depreciated in foreign exchange markets due to the ongoing battle against inflation. According to data from LSEG, the exchange rate between the lira and the U.S. dollar has declined by approximately 30% since June.
Power Pain
The combination of rapidly increasing interest rates and a depreciating currency has had a detrimental impact on power producers heavily reliant on fuel imports for electricity generation. This situation led to a reduction in the purchase of natural gas, particularly expensive liquefied natural gas (LNG).
In 2023, Turkey’s imports of LNG decreased by 8.2% compared to the levels in 2022, reaching the lowest point since 2019, as indicated by ship tracking data from Kpler. Consequently, power generators had to scale back gas-fired electricity production by a similar percentage, resulting in just over 66 TWh of generation, the lowest in four years.
To compensate for the shortage of natural gas, power companies increased electricity production from coal plants by 3.5% compared to the previous year, reaching a new record. This shift raised coal’s contribution to the national electricity generation mix from 35.4% in 2022 to 37%, according to data from Ember.
Turkey’s overall coal imports remained relatively stable at approximately 39.3 million metric tons, according to data from Kpler. However, there was a significant shift in the sources of these imports, with a notable increase in purchases from Russia. Russia, which had been subject to European Union sanctions following the Ukraine invasion in 2022, offered highly discounted energy exports.
Turkey’s thermal coal imports from Russia reached a record high of 22.8 million tons in the previous year, marking a 25% increase from the previous year, as reported by Kpler. Additionally, Russia’s share in Turkey’s coal imports rose to a record 58%, up from 46% in 2022 and less than 20% in 2018.
To accommodate the influx of Russian coal, Turkey reduced its imports from other coal-producing countries such as Colombia, South Africa, Australia, and North America. This strategic shift likely resulted in significant cost savings for importers, despite the overall volume of coal imports remaining relatively constant.
Given the continued financial challenges faced by power companies due to rising costs, it is expected that Russian coal will continue to play a crucial role in electricity generation in 2024. This occurs even as the supply from renewable sources like solar and wind continues to increase.
If coal-fired electricity generation in Germany remains unchanged, Turkey is poised to become Europe’s leading coal-fired electricity producer in the current year. This shift highlights the growing significance of southern Europe in the ongoing energy transition efforts.
