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Turkey needs to transition its energy system rapidly in order to reduce its reliance on imports, which account for 3 out of 4 units of Turkey’s total primary energy supply. With a growing population and economy, the country’s imported energy costs have reached alarming levels, driving a significant share of Turkey’s current account deficit. Turkey’s population grew from 70 million only a decade ago to 81 million people in 2017—the equivalent of adding a metropolitan region the size of the Rhine-Ruhr in Germany or Chicago in the United States.¹ Alongside this population growth, the economy has seen gross domestic product (GDP) per capita growth averaging 3 percent per year, with growth exceeding 7 percent in 2010 and 2017 and 9 percent in 2011.²

This increasing demand has driven rapid growth of the country’s energy system, including in conventional fossil fuels and renewable energy. Fortunately, Turkey is endowed with significant renewable energy resources, a flexible financial sector, an entrepreneurial business approach, and a large manufacturing and engineering base. Turkey’s auction scheme for tenders—or awarding the rights to undertake renewable energy projects—means that much of the installed renewable energy equipment will also be locally produced, a product of government efforts to position the country for the wider, global energy transition as part of its ambitious plan for the 2023 centenary of the Republic.³

Turkey’s energy transition is a largely positive story that has not received enough attention by country analysts. By the end of 2017, renewable energy accounted for nearly 30 percent of all Turkey’s electricity generation.⁴ Still, the country needs to do more to transition its energy system to a more secure, affordable, clean, and sustainable model, as well as attempt to meet its ambitious energy and climate goals.

This report first explains the need for energy transition in Turkey, considering the following three issue areas: energy security and the balance of trade; job creation and economic activity; and environmental effects. The report then explores the current standing and future opportunities of Turkey’s energy system. After providing an overview of existing national energy and climate strategy and policies, it discusses the crucial role of the electricity generation sector and the need for adaptation in end-use sectors to improve efficiency and incorporate variable renewable energy generation. The report also highlights useful lessons that can be learned from the United States and Germany. It concludes with recommendations for how Turkey can sustain its progress and advance a smart energy transition.

Unquestionably, Turkey’s top policy priority is to secure its energy supply and keep up with the demand to sustain its economic growth as its population increases. (see Figure 1) In addition to meeting growing demand, Turkey’s specific economic priorities are shaping its energy transition. These priorities include reducing the adverse environmental and economic impacts of increasing fossil fuel use, making markets more competitive, giving consumers more energy choices, and rapidly increasing renewable energy investments in both large and distributed generation assets.⁵

Government incentives for and investments in renewable energy technology and production stand to pay big dividends for Turkey. These efforts will help strengthen energy security and the country’s bargaining position with suppliers; reduce the current accounts deficit and ease inflationary pressures; grow the high-technology industry; and create economic activity and jobs. They will also reduce carbon emissions and improve the environment.

Energy security and balance of trade

In 2016, Turkey’s total primary energy supply reached 135 million tons of oil equivalent (Mtoe) per year—up from around 100 Mtoe in 2007. Although Turkey’s total energy demand trails that of other countries in the Organization for Economic Cooperation and Development (OECD) and the Group of 20 (G-20), it is the country with the fastest-growing market by demand.⁶ Electricity demand grew by 7 percent per year in the 2000s and has continued to grow by 4–5 percent per year.⁷ Total electricity demand is projected to reach between 440 terawatt hours (TWh) and 550 TWh per year by 2030.⁸ The higher end of this range would be equivalent to just less than double the current levels—295 TWh in 2017—over the period. Around three-quarters of Turkey’s overall supply is imported, including almost all gas and crude oil and two-thirds of coal.⁹

Demand for natural gas represents roughly 30 percent of the country’s total primary energy supply. In 2015, Turkey used nearly 45 billion cubic meters (bcm) of gas per year; this amount nearly doubled over the past decade.¹⁰ Russia accounts for more than half of all supply of natural gas to Turkey, with Iran, Azerbaijan, Algeria, and Nigeria making up the majority of the remainder.¹¹ Likewise, oil accounts for more than 20 percent of Turkey’s total primary energy supply,¹² with 92 percent of crude oil imported largely from Iraq, Russia, and Iran.¹³ Of course, Turkey’s ties with Russia and Iran bring with them fraught political considerations and a degree of political vulnerability—concerns that are also shared by the member states of the North Atlantic Treaty Organization and the European Union (EU). Turkey’s strong energy and trade relationships with its powerful neighbors rely on relative political stability on all sides.¹⁴ Turkey also remains reliant on coal for about 27 percent of its total primary energy supply,¹⁵ and imports of hard coal have doubled over the past decade.¹⁶ Coal is the only fossil fuel of which Turkey has a meaningful supply, with some hard coal reserves in Zonguldak Province and significant lignite spread across the country.¹⁷

Import dependency across these fossil fuel markets has important economic implications, leaving Turkey’s economy vulnerable to volatile global energy prices and substantially contributing to the current account deficit. When energy prices peaked in 2014, for example, Turkey’s energy import costs reached US$53 billion. In 2017, import costs declined to US$36 billion following the decline in global energy prices.¹⁸ In view of recent developments, as well as forecasts for the remainder of 2018 and  growing energy demand in Turkey and globally, the import bill is likely to remain high given the volatility in energy prices.¹⁹ The latest Central Bank of the Republic of Turkey data show that the current account deficit reached US$53.4 billion between February 2017 and February 2018, with energy imports comprising the largest part of that shortfall.²⁰

Driving the transition away from imported fossil fuels and toward domestically produced renewable energy is therefore a crucial priority for Turkey. Prioritizing the use of domestic renewable energy will reduce Turkey’s political reliance on energy exporters such as Iran or Russia as well as insulate Turkey against price shocks and fluctuating energy prices. In 2017, for example, Turkey generated around 7 percent of all its electricity from wind and solar, amounting to 18.8 TWh per year.²¹ If Turkey were able to triple this generation to replace electricity generated from imported fossil fuels, it would save more than US$1 billion per year in energy imports, equivalent to the annual electricity expenditure of a medium-sized Turkish city.

Turkey’s account deficit is also deepened by its current dependence on imported energy-related equipment and machinery. Despite Turkey’s otherwise strong manufacturing sector, the country’s net imports related to energy supply equipment amounted to US$2.8 billion in 2015, equivalent to 1 percent of overall net trade imports. This is driven in part by rising imports of renewable energy equipment, which have grown recently by 5 percent per year. China, Germany, and Italy represent half of all imports. Turkey is, however, a net exporter of wind equipment, with a total volume of US$1.1 billion per year, but this was outweighed by net solar and coal equipment imports with a total volume of US$4.2 billion per year in 2015.²²

Jobs and economic activity

The energy transition will bring benefits and opportunities beyond saved import costs and an improved balance of trade; it could also drive badly needed value-added manufacturing and employment. Turkey’s auction system for energy tenders aimed to reverse the trade imbalance—particularly in electricity generation equipment—and foster broader domestic economic development.

Under the new system, bidders that win auctions to develop solar or wind fields are required to manufacture and use equipment that is at least two-thirds locally produced. This aims to drive economic activity and incentivize Turkey’s local production capacity. This sort of higher value-added equipment manufacturing is essential to Turkey’s broader economic agenda as well as to its efforts to create jobs and avoid the middle-income trap.²³ It is also important that Turkey develop a strategy that offers a long-term view of the gigawatt-size market while creating investor confidence.

By the end of 2017, about 84,000 people were already employed in Turkey’s renewable energy sector, primarily in the solar industry.²⁴ (see Figure 2) By comparison, the entire legacy electricity and gas sector employs a total of 819,000 people—and only directly employs one-third of that number.²⁵ Indeed, local content requirements will drive up economic activity and create new jobs, but one should also consider the upfront costs and time needed to create a domestic manufacturing base. Turkish stakeholders should factor in these considerations when planning for the country’s energy transition in order to avoid both delays and increases in the current account deficit.

Environment

Finally, the energy transition could have dramatic positive impacts on the environment and human health. These positive results would stem from avoiding emissions of carbon dioxide (CO2) and air pollutants that are released during the conversion of fossil fuels into final energy products such as gasoline, diesel, or electricity, as well as the consumption of these products in power plants, transport, and heating or cooking.

Local air pollution is a growing concern in Turkey: 97 percent of the country’s urban population is exposed to particulate matter emissions higher than the EU and World Health Organization limits. In 2010, an estimated 29,000 premature deaths in Turkey were attributed to exposure to particulate matter and ozone emissions.²⁶ A recent study shows that just 6 out of 81 surveyed cities meet the air pollution standards for sulfur dioxide and particulate matter.²⁷

Perhaps more profound in the long run are the effects Turkey’s energy transition could have on global climate change, which stands to upend modern life and reshape economies and societies wholesale in the coming century. Turkey’s energy-related CO2 emissions reached 317 million tons (Mt) in 2015. Emissions from coal—by far the most emission-intensive fuel—used for electricity generation represented more than 40 percent of this total. In 2015, the sectoral breakdown of the country’s total emissions was as follows: 40 percent for electricity generation; 23 percent for transport; 14 percent for manufacturing, industry, and construction; 9 percent for residential buildings; and 14 percent for commercial buildings and smaller sectors such as agriculture and forestry.²⁸ When non-CO2 greenhouse gases (GHG) are included, Turkey is the world’s 20th-largest emitter of GHG and ranks first in terms of GHG emissions growth among Annex I countries since 2006 given its rapidly growing energy demand and population.²⁹ If its emission growth rate continues to increase at its current pace, Turkey could become one of the world’s largest emitters by 2030, making it a crucial crossroads country for global mitigation efforts.³⁰ The advancement of Turkey’s energy transition will therefore contribute to improved health and well-being in the country and make a meaningful contribution to the global effort to mitigate climate change.

The economic, strategic, environmental, and health factors outlined above all point to the potential benefits of a well-planned energy transition. This section offers an overview of the Turkish government’s current strategies and action plans to drive the country’s energy transition. Many of these plans have a target date of 2023, the centenary of the Turkish Republic.

While the ambitious goals set out in these planning documents are welcome, the planning process would benefit from a more extended timeline, deconfliction between strategic plans, and inclusion of lessons learned from other countries.

Overview of existing national energy and climate strategy and policies

Turkey has signed but not yet ratified the Paris climate agreement.³¹ Its Intended Nationally Determined Contribution (INDC) under the agreement projects that, according to its business-as-usual scenario, Turkey’s GHG emissions will grow 2.5 times between 2015—when it stood at 415 Mt CO2 equivalent—and 2030.³² The mitigation scenario Turkey introduced to meet its obligations proposes a 21 percent reduction by 2030. Turkey’s INDC relies on the rapid deployment of renewables, mainly in the power sector, and improved energy efficiency across the entire energy system.

However, Turkey is in an unusual position with respect to its climate policy. Turkey is a founding member of the OECD grouping of developed economies and is therefore often treated as a developed country; but in the climate context, Turkey regards itself outside of this definition. There are no established criteria to define countries as developed or developing, and Turkey falls somewhere in between depending on the context.³³ Indeed, Turkey has thus far been a low emitter of CO2 and a small consumer of energy per capita, yet the country aspires to become one of the largest world economies and is on the path to becoming one of the largest CO2-emitting countries in the world. This future would leave Turkey with a “critically insufficient” INDC pledge.³⁴ Turkey has delayed ratifying the Paris climate agreement, hoping for differentiation from the developed industrial Annex I countries that would allow Turkey access to international climate finance.

The Turkish government has put forward a number of plans outlining how it intends to transform the energy sector. Measures to improve energy efficiency form the core of these strategies, as efficiency improvements cut across all sectors that must contribute to Turkey’s long-term targets. Most recently, in January 2018, the government released a National Energy Efficiency Action Plan (NEEAP) that outlines 55 detailed actions in all six energy sectors—industry, transport, buildings, agriculture, energy generation, and cross-cutting issues—that would reduce Turkey’s primary energy demand by 14 percent by 2023. In fulfilling this target, the government estimates the actions will attract a US$10.9 billion investment over this period.³⁵

Alongside these efficiency guidelines, the government has laid out a vision for the expansion of the renewable energy sector. The 2014 National Renewable Energy Action Plan provides overall renewable energy deployment targets through 2023 by energy sector and technology.³⁶ These targets match those of the Electricity Energy Market and Security of Supply Strategy, calling for 34 gigawatts (GW) installed capacity of hydropower, 20 GW of wind, 5 GW of solar, 1 GW of geothermal, and 1 GW of biomass by 2023.³⁷

Taken together, these various strategies to 2023 cover Turkey’s approach to energy efficiency, renewable energy, and climate change in great detail. Several issues, however, warrant further attention from policymakers. Turkey’s energy and climate strategies focus on 2023—the centenary of the Republic. Numerous country examples demonstrate the need for longer-term policies to allow market certainty for the private sector. Currently, much of Turkey’s policy focus is on the next five years. The power sector’s role is undoubtedly crucial for energy transition, but the focus must be broadened to include renewable energy’s roles in buildings, industry, and transport with a long-term focus and to accelerate the uptake of all low-carbon technologies in these sectors.

In view of the rapid technological and market changes, targets need to be updated continuously. This will help provide certainty for investors. While existing technologies can and will drive much of Turkey’s energy transition system, in order to achieve significant reductions in GHG emissions, further innovation, research, and development will be necessary for the deployment of new low-carbon technologies. In some of these burgeoning technological fields, Turkey may be able to carve out a competitive market position.

The key to these strategies will be implementation: Achieving an effective energy transition will require new regulations, policy instruments, financing, and business models. Turkey has prioritized its energy regulatory framework in recent years, for example, by raising building energy efficiency regulations and making them compatible with the EU Energy Efficiency Directive.³⁸ It also released two action plans on renewables and efficiency that align with EU requirements. To ensure a cost-competitive transition to a low-carbon economy, financing must be ensured, and related mechanisms and business models need to be in place to drive investments and the overhaul of the energy sector.

International finance institutions and programs such as the World Bank, the Global Environment Facility, and the EU’s Instrument for Pre-accession Assistance (IPA) have supported Turkey’s energy efficiency implementation through loans—often on favorable financial terms—and technical assistance. The European Bank for Reconstruction and Development also has a portfolio of around €1 billion in the Turkish energy sector, mainly directed toward renewable energy capacity.³⁹ Similarly, the European Investment Bank sets aside large sums of money out of its €500 million portfolio of loans across various sectors.⁴⁰

The crucial role of the electricity generation sector

Turkey’s energy system has seen a considerable transformation over the past decade. In an effort to liberalize the power market, incentivize investments, and improve the efficiency of the system, the government has privatized large shares of the legacy thermal power fleet and built new gas- and coal-fired power and wind plants. Parallel to these efforts, a wholesale market was introduced, the distribution system was privatized, and the Turkish power system was connected synchronously to the European Network of Transmission System Operators.⁴¹

Indeed, developments in 2017 were unprecedented, as economic arguments started to work in favor of disruptive solar and wind development. The latest solar tender in Karapınar was finalized at US$0.0699 per kilowatt hour (kWh), and wind was finalized at US$0.0348 per kWh. By comparison, the recent lignite coal tender in Çayırhan resulted in a power purchase agreement at US$0.0604 per kWh, and the nuclear power plant under construction in Akkuyu has a guaranteed electricity sales price of US$0.125 per kWh.⁴²

Beyond the favorable auction results, two-thirds of the net capacity additions came from renewable energy sources, of which solar and wind represented three-quarters. Despite the need to increase domestic production, planned electricity generation capacity continues to focus more on conventional power-generation technologies than on renewables. For example, Turkey has roughly 25 GW of coal-fired generation capacity in the permitting process.⁴³ Compare that with the recently unveiled plans to include a 1 GW tender for an offshore wind park as part of the plan to build an additional 10 GW of renewable generation over the next 10 years. (Note that this plan is not necessarily a part of Turkey’s current targets to reach 25 GW installed wind and solar capacity by 2023).⁴⁴ Taken together, these developments mean that renewable energy accounted for 28.5 percent of all electricity generation by the end of 2017. The share of solar and wind power was at 7.1 percent from a total generation of 18.8 TWh and a total installed capacity of 6.5 GW of wind and 3.4 GW of solar. Turkey also ranks fourth in the world in geothermal power use, with its total installed generation capacity exceeding 1 GW.⁴⁵

There are also vast opportunities in building-integrated rooftop photovoltaics (PV) which convert sunlight into usable electricity. Nearly 500 million square meters across residential, commercial, and public buildings hold a market potential for up to 4 GW of installed capacity to be reached by 2026. This is a conservative estimate that considers grid capacity, growth in sales of rooftop systems, income levels, and creditworthiness. The technical potential reaches 47 GW, of which half is in residential buildings.⁴⁶ With regulations now in place to govern the use of rooftop systems, investments are expected to accelerate, offering to those with capital a cost-competitive alternative to household electricity prices. The challenge remains to widen access to financing for rooftop solar projects with payback periods that can easily reach up to 10 years, even in regions with frequent sunshine. To address this challenge, several options are worth consideration, including self-consumption, net metering, and net billing models. The rollout of business models such as peer-to-peer trade systems will also be important.

As renewable energy generation increases, the question of how to integrate fluctuating, distributed power generation while ensuring secure and reliable operation of the grid is paramount. As part of its 10-year network development plan, transmission system operator Türkiye Elektrik İletim Anonim Şirketi (TEİAŞ) plans for about 20 GW solar and wind capacity by 2026 (14 GW wind and 6 GW solar). It anticipates that