tepav Turkey s 2023 vision: An evaluation from the energy perspective Ozan Acar Paris, 2 July 2013 The Economic Policy Research Foundation of Turkey

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1 tepav The Economic Policy Research Foundation of Turkey Turkey s 2023 vision: An evaluation from the energy perspective Ozan Acar Paris, 2 July 2013

2 Turkey's 2023 vision and its energy needs Slide 2 Agenda Setting the context: Turkey s 2023 targets and the country s energy needs How to tackle rising energy demand? Supply side issues Demand side issues Conclusion

3 Turkey's 2023 vision and its energy needs Slide 3 No way out w/o more and more energy GDP per capita (TL, 1998 prices) Passenger cars (per 1000 pop.) Air passengers (million) 46% % % # of foreign visitors (million) Cement prod. (million tonnes) Iron and steel exports (bln $) 202% 32 71% %

4 Turkey's 2023 vision and its energy needs Slide 4 Turkey aspires to become the tenth largest economy in 2023 Turkey s rank in economic size (current USD) ,000 USD per capita income (117% increase relative to 2012) billion USD exports (229% increase relative to 2012) Several multibillion dollars infrastructure projects

5 Turkey's 2023 vision and its energy needs Slide 5 How to fuel 2023 targets? The next 10 years will be way more challenging Turkey s energy use (million tonnes of oil equivalent) 91% 50% Additional private sector investment is expected to be around billion USD

6 Turkey's 2023 vision and its energy needs Slide 6 Meeting the energy needs of 2023 is not an easy task Security of energy supply A conducive business environment Diversification of imports Indigenous sources/renewables Overseas exploration and production Efficiency and fairness issues Efficient use of energy Mitigating energy loss and theft Environmental standards

7 Turkey's 2023 vision and its energy needs Slide 7 Privatisation and liberalisation are prerequisites for boosting private investments There is an ongoing reform process in the Turkish power sector: Liberalized, efficient and economic market In 1993, the reform process started with the restructuring of Türkiye Elektrik Kurumu (TEK) TEK divided into TEAS (production, transmission and wholesale power supply) and TEDAS (distribution) In 2001, a new Electricity Market Law was enacted TEAŞ: EUAS (production), TEIAS (transmission), TETAŞ Energy Market Regulation Board (EPDK) was established Privatization of generation and distribution assets

8 Turkey's 2023 vision and its energy needs Slide 8 Private sector is the dominant actor in electricity generation and will continue to be so 60% of remaining state power generating capacity will be privatized 3 out of 21 distribution companies were sold to the private sector in Dec 2012 and the remaining 19 will follow Global financial conditions are important determinants of the phase of privatisations (in 2010 and 2012 several deals were cancelled b/o lack of finance) A new draft electricity market law is at the parliament to take another step in full liberalization Installed electricity generation capacity (MW) % Electricity generation (GW) % private sector share Private State Private State

9 Turkey's 2023 vision and its energy needs Slide 9 If it is FDI or long term foreign financing then the quality of governance matters Stadard difference between Turkey and the EU-27 countries in governance indicators Political stability Rule law Gov t effectiveness Regulatory quality Control of corruption Freedom of expression and accountability

10 Turkey's 2023 vision and its energy needs Slide 10 Oil and gas are the major sources of primary energy consumption in Turkey Primary energy consumption by resources (%, 2011) Wind solar geother mal, 2.5 Hydro, 4.1 Wood waste, 4.1 Lignite, 12.2 Hard coal, 14.1 Gas, 33.3 Oil, 29.7 Import dependency % 72 Oil: %92 Gas: %98

11 Turkey's 2023 vision and its energy needs Slide 11 In 2012, 70% of Turkey s oil imports were from three countries with Iran taking the lead Nigeria %2 Iran 39% Russian Fed. 11% Kazakhstan 7% S. Arabia 15% Libya 5% Italy %1 Iraq 19%

12 Turkey's 2023 vision and its energy needs When it comes to natural gas, dependency is a more acute problem Algeria %9 Nigeria %3 Azerbaijan %9 Iran %18 Russia %57 Slide 12

13 Turkey's 2023 vision and its energy needs Slide 13 Indigenous and renewable sources are important to decrease import dependency Untapped local potential Hydro: kwh Wind: 120 kwh Geothermal: 5-16 kwh Solar: 380 kwh Lignite: kwh Biomass: 35 kwh 767 billion kwh note: Electricity consumption in 2011 was 229 billin kwh Decreasing import dependency? New gas fired power plants Under construction: 13,284 MW New licenses processed and/or under evaluation: 36,582 MW In total, 94% of total current capacity Coal-fired plants that work with imported coal 21 new licenses 17,448 MW additional capacity 30% of current capacity

14 Turkey's 2023 vision and its energy needs Slide 14 Does Turkey s import dependency in energy use really decreasing? Energy imports, net (% of energy use)

15 Turkey's 2023 vision and its energy needs Slide 15 In order to reduce its import bill, Turkey is joining the nuclear club Turkey s 2023 nuclear energy targets 2 reactors in Akkuyu and Sinop will be put into operation Construction of a third facility will be started Two reactors is expected to replace 16 bcm natural gas and decrease the import bill by 7.2 billion USD Government s decision to build nuclear reactors raises some concerns among multiple parties

16 Turkey's 2023 vision and its energy needs Slide 16 To what extent does the Turkey s national oil company contribute to Turkey s energy security? TPAO has exploration and production activities in only 5 countries Kazakhstan, Azerbaijan, Colombia, Iraq, and Libya Competitors are active in higher number of countries Austia s OMV in 16 countries Oil India in 14 countries S. Korea s KNOC in 17 countries Why TPAO is not as active as its competitiors in overseas markets? TPAO cannot act like a private sector company, No incentive to play risky bets, Bureaucratic structure is highly rigid

17 Turkey's 2023 vision and its energy needs Slide 17 Efficient use of energy would be extremely helpful in lowering import dependency Energy efficiency in Turkey (energy requirement to produce 1 unit of real GDP) % There is a significant untapped potential Buildings: 50% Industry: 20% Transport: 15% Total cons: 25% Energy efficiency strategy document was published in 2012 Secondary legislation is not in place yet Everybody knows how important it is but Who is the champion?

18 Turkey's 2023 vision and its energy needs Slide 18 Energy losses during transmission and theft are other issues that need to be tackled Electric power transmission and distribution losses (% of output) % in upper middle income countries 10% middle income countries

19 Turkey's 2023 vision and its energy needs Slide 19 Lagging behind in environmental standards is a limiting factor on energy efficiency Efficiency in environmental governance Private sector s responsiveness to environmental issues Sweden Canada Belgium USA Netherlands Switzerland S. Korea Australia UK Germany France Japan China Mexico Italy Average Turkey

20 Turkey's 2023 vision and its energy needs Slide 20 renewables + energy efficiency + environmental standards = green growth + industrial development World s major industrial nation s competitiveness in green machinery Share of green machinery in total machinery exports (2010) Mexico Japan US 21 Singapur Italy 20 S. Korea 19 France UK 18 Germany Taiwan 17 Turkey Spain 16 China Canada Switzerland 15 Thailand Belgium Netherlands 14 Australia 13 Czech Rep Sweden Change in world market share ( , %)

21 Turkey's 2023 vision and its energy needs Slide 21 Producing higher value added goods can solve the CA problem despite the high import dependency in energy Electric power transmission and distribution losses (% of output) 100 Import dependency in energy (% of total) Turkey Ireland Luxembourg S. Korea Japan Belgium Chile Australia Germany Switzerland CA balance (% of GDP)

22 Turkey's 2023 vision and its energy needs Slide 22 Conclusion To reach 2023 targets Turkey needs to double its energy generation capacity Turkey should ensure its energy security while increasing the generation capacity Diversification and the Turkish foreign policy making are not independent from each other Energy constraint can serve as a push factor for Turkey s industrial advancement