Turkish coal-fired power output is likely to remain firm in the first quarter as coal units have extended their price advantage against gas-fired plants.

 

Output from the country's 8.9GW coal-fired fleet almost reached technical capacity at some points in 2020, with utilisation rates surpassing 90pc for extended periods, boosted by firm power demand and strong fundamentals for coal burn.

 

And power-sector coal demand is also likely to remain strong in the coming months amid rising costs for gas-fired plants. State-owned gas distribution company Botas has slightly increased its tariff for power utilities to 1,414 lira/'000m³ ($18.04/MWh) in January, from TL1,400/'000m³ in December, widening coal's cost advantage against gas.

 

This was the first increase in the monthly gas tariff since July 2019, and is in line with higher first-quarter import costs for Botas. The firm's import costs from Russia and Iran will fall by 32¢/MWh to $16.07/MWh and by 58¢/MWh to $15.45/MWh, respectively, but overall costs are set to increase because of a rise in prices for Azeri gas to $16.92/MWh, from $15.32/MWh in the fourth quarter, according to Argus calculations (see chart).

 

Botas' generation costs are likely to be slightly higher in January compared with February and March, as Iranian gas deliveries to Turkey have been restricted since 26 December because of a technical malfunction at the Mergenler compressor station that reduced deliveries to only a third of daily contractual volumes.

 

Gas-fired plants will struggle to compete against coal-fired units in January, as generation costs for a 55pc-efficient gas units stood at $32.81/MWh today, while those for a 40pc-efficient coal plant were stable at $25/MWh (see chart).

 

Prevailing prices in the seaborne coal market imply that coal is likely to maintain its cost advantage in the coming months, with the paper API 2 February and March contracts remaining below $70/t. But fuel costs for Turkish coal-fired plants that run on imported feedstock are fixed at around $70/t because of a top-up tax that is applied when European delivered coal prices are below this threshold.

 

In the first quarter, a 40pc-efficient coal-fired plant will remain competitive against a 55pc-efficient gas-fired unit, as long their fuel costs do not exceed $83/t, according to Argus analysis and assuming that Botas continues to reflect its import costs in its monthly tariff.

 

Lira strength supports coal-fired margins

The recent recovery in the lira's value against the US dollar has also supported generation margins for coal-fired power plants. A weak lira erodes their competitiveness against gas-fired units in the short term.

 

Botas sets its monthly tariff in lira, which provides a natural hedge against currency volatilities in the short term. The firm steadily adjusted its tariff when the regulated tariff fell below import costs in recent years, but falling import costs and the weak lira nearly brought generation costs for gas-fired units to parity with coal-fired plants in November.

 

The Turkish central bank gradually increased its benchmark interest rate in the fourth quarter, to 17pc on 24 December from 10.25pc in October. This supported the lira's value against the dollar, with the currency appreciating by 12pc since November, and in turn cut generation costs for coal-fired utilities, while costs for gas-fired units remained stable in lira terms.