About this report
The guiding principles of Turkish energy policy continue to be market reform and energy security. Rapid economic and population growth in the past two decades have not only driven strong growth in energy demand but also an associated increase in import dependency.
Turkey has prioritised security of energy supply as one of the central pillars of its energy strategy, including efforts to boost domestic oil and gas exploration and production, diversify oil and gas supply sources and associated infrastructure, and reduce energy consumption through increased energy efficiency.
Turkey has seen considerable diversification of its energy mix in the past decade, in particular through the growth of renewable electricity generation. The commissioning of Turkey’s first nuclear power facility in 2023 will further diversify the country’s fuel mix.
Notwithstanding many the positive changes Turkey has made toward liberalising its energy markets and diversifying its energy sources, the government should ensure that policies in place to bolster energy security – including growth in coal-fired generation and support for various forms of electricity generation – do not impede the economic efficiency of markets and the country’s longer-term decarbonisation efforts.
In this report, the IEA provides energy policy recommendations to help Turkey smoothly manage the evolution of its energy sector.
Since the 2016 IEA in-depth review of Turkey, the guiding principles of Turkish energy policy continue to be market reform and energy security. Rapid economic and population growth in the past two decades have not only driven strong growth in energy demand, but also an associated increase in import dependency. As a result, Turkey has pursued a restructuring of its energy system with the aim of rationalising energy demand growth, lowering energy prices for consumers and slowing the pace of import growth. These reforms have included measures targeted at modernisation, liberalisation and increased domestic production capacity, including through more private and foreign investments.
Notably, Turkey has seen considerable diversification of its energy mix in the past decade. In particular, renewable energy has staged impressive growth, with renewable electricity generation tripling in the past decade. The commissioning of Turkey’s first nuclear power facility in 2023 will further diversify the country’s fuel mix.
Still, fossil fuels continue to drive Turkey’s economy, with a heavy dependency on imports, especially oil and gas (93% and 99%, respectively). Turkey has prioritised an expansion of domestic exploration and production to help reduce its oil and gas import dependency. However, given limits on upstream resources and with consideration to emissions reduction, Turkey should also place due consideration on cost-optimal demand-side measures such as efficiency improvements and fuel switching in the transport sector, which is still 98% reliant on oil. Moreover, there is still considerable scope for Turkey to target even more ambitious growth in renewables, not just in electricity, but also in other sectors such as heating.
In addition, Turkey’s efforts to use more domestic energy resources to meet its consumption needs might interfere with efforts to decarbonise the energy sector, particularly as it relates to the government’s policy to use more low-quality domestic lignite in power generation. In a similar vein, as many countries around the world increasingly look toward net-zero greenhouse gas emissions by the middle of the century, Turkey should consider the impact of its energy policy – especially its focus on coal-fired generation – on investor sentiment, local air pollution and the longer term emissions trajectory.
Security of energy supply
In light of its heavy dependence on oil and gas imports, Turkey has prioritised security of energy supply as one of the pillars of its energy strategy. The policy includes efforts to boost domestic oil and gas exploration and production, diversify oil and gas supply sources and associated infrastructure, as well as reduce energy consumption through increased energy efficiency.
Given that the share of domestic oil and gas production in consumption is low, Turkey has prioritised upstream oil and gas exploration and production. The Turkish Petroleum Law establishes some incentives to create a more attractive upstream fiscal regime, such as low royalties. Domestic crude oil production grew by 19% from 2017 to 2019, mainly due to the increased upstream activities of Turkish Petroleum Corporation (TPAO) (which holds most exploration and production licenses), though demand is still predominantly met by imports. Even with growth in domestic upstream activities, Turkey will remain heavily dependent on imported oil and gas to meet its consumption needs. TPAO has initiated an offshore investment campaign along with increased operations onshore, including shale oil and gas. Turkey’s natural gas import dependence will diminish following the recent discovery of the giant Sakarya field in the Black Sea. The field is planned to commence production in 2023, giving Turkey bargaining power in the renewal of its natural gas import contracts.
Turkey is also pursuing exploration to determine the domestic potential of shale gas, gas hydrates and coal bed methane.
Beyond upstream efforts, for natural gas security, Turkey is also successfully diversifying its import sources and routes. In the early 2000s, the Russian Federation was the dominant gas supplier, but Turkey began importing gas from the Islamic Republic of Iran in 2001 and from Azerbaijan in 2007. Turkey has recently further expanded its gas import infrastructure, including by increasing the capacity of existing pipelines and introducing new ones, such as the TurkStream route from Russia and the TANAP route from Azerbaijan.
Investments in liquefied natural gas (LNG) and underground natural gas storage are considered priorities to advance energy security. Several new floating storage and regasification terminals have been commissioned in recent years, existing LNG entry capacity has increased and new entry points are being connected to the gas network to ensure supply diversification. Already, the country has ramped up the procurement of spot LNG to boost optionality of import sources. In addition, Turkey has undertaken sizeable recent and planned upgrades to storage capacity, which will also significantly lift the country’s gas security.
Turkey has also diversified its sources and modes of oil supply, with crude oil provided by both pipelines and tankers. Its top suppliers of crude in recent years have been Iran, Iraq, Russia and Saudi Arabia. Oil products are provided only through tankers. In addition, Turkey has five operational refineries that meet around half of the country’s gasoil and gasoline demand.
Turkey recognises that a primary foundation to improve energy security is to slow the rate of consumption growth by improving energy efficiency. To this end, the National Energy Efficiency Action Plan (NEEAP), covering the period 2017-23, aims to reduce Turkey’s primary energy consumption by 14% from business-as-usual levels across several sectors, including buildings and services, power and heat, transport, industry and technology, agriculture, and cross-cutting areas.
Though it is a very timely policy initiative, progress to date on the NEEAP has been mixed and additional efforts will be needed to reach the 2023 target of 23.9 million tonnes of oil equivalent (Mtoe) saved with USD 10.9 billion invested. Implementation gaps remain across and within sectors, with policy progress slowed by delays in secondary legislation and lack of demand or incentives for energy efficiency products and services, among other factors. To foster timely progress, the NEEAP Steering and Coordination Board, consisting of high-level representatives of the responsible institutions of the NEEAP under the leadership of the Ministry of Energy and Natural Resources, was established. One of the important recent steps regarding promotion of energy efficiency in buildings are obligatory efficiency targets for public buildings. With the Presidential Decree dated 16 August 2019, public buildings with energy managers assigned according to the Energy Efficiency Law No. 5 627 are expected to procure energy savings of 15% until 2023, in order to use public resources efficiently and to reduce the burden of energy costs on the public sector. The Presidential Decision on the Procedures and Principles Regarding Energy Performance Contracts in the Public Sector from 21 August 2020 sets out the procedures and principles for energy performance contracts to be concluded by public administrations.
Expanding domestic energy production
Beyond expanding upstream oil and gas development, Turkey’s strategy to boost the domestic production of energy includes plans for the development of renewable resources, nuclear energy and lignite mining.
Turkey has experienced impressive growth in renewables in the past decade (notably solar, wind and geothermal), driven by a favourable resource endowment, strong energy demand growth and supportive government policies. In particular, renewable electricity generation has nearly tripled in the last decade, and its share in total power generation reached 44% in 2019 (including notable growth in distributed solar generation). As such, Turkey has already exceeded its target of 38.8% of power generation from renewables set out under the Eleventh Development Plan (2019-2023). Turkey aims to continue to promote the expansion of renewable energy resources and will commission 10 gigawatts (GW) each of solar and wind capacity in the period 2017-27.
Under the Renewable Energy Support Mechanism (YEKDEM), Turkey offers feed-in tariffs for renewable power plants, including wind, solar, biomass, hydro and geothermal. Additional support is provided if plant components are manufactured in Turkey. The scheme will expire at the end of June 2021 and the government is currently deciding on a new mechanism to replace it. According to the Presidential Decree published on 18 September 2020, the implementation period for the YEKDEM scheme was extended by six months until 30 June 2021 due to construction delays stemming from the COVID‑19 pandemic. Renewable electricity generators can benefit from YEKDEM if commissioned before 30 June 2021 and if they apply to the Energy Market Regulatory Authority for the guaranteed price.
In 2016, the government introduced Renewable Energy Resource Areas (YEKA), a tender process for larger scale renewable energy projects in renewable energy zones, which are deemed most suitable for renewable power generation. To date, the support schemes have been successful in driving sizeable new investments in renewables, and the government has demonstrated a willingness to adjust the terms of the auctions for future projects to ensure investor interest. Such a planned auction of smaller capacities is planned toward the end of 2020.
Though the targets of 10 GW each of additional solar and wind are commendable, there are likely more sizeable volumes that Turkey could achieve given its considerable resource endowment. As such, Turkey could look to further raise the ambition of its targets. In particular, the IEA encourages a higher expansion of wind, given its low costs.
Beyond electricity, both solar and geothermal energy used for heating have more than doubled within a decade, but growth has stalled since 2015. Turkey is among the leading countries for solar water heater installations, notably in the absence of subsidies or policy support. However, technology and infrastructure quality needs to improve significantly to maximise its potential, especially given its geographical location and favourable irradiance conditions. The sizeable share of energy consumption in buildings also offers untapped potential for other renewables, such as direct geothermal and heat pump applications.
Turkey has embarked on an ambitious nuclear power strategy to build its first nuclear power plant to limit the use of imported fuels for power generation. Turkey is planning to install three nuclear power plants (NPPs) for a total of 12 reactor units. Currently, the first NPP (Akkuyu NPP) is under construction in Mersin Province on the southern coast of Turkey and comprises 4 units with a total installed capacity of 4 800 MW. The first unit of the Akkuyu NPP is scheduled to enter into operation at the end of 2023.
State-owned electricity supplier EÜAŞ will buy around half the nuclear power generated from Akkuyu for 15 years at a pre-determined price. Studies are ongoing for the construction of other nuclear power plants, according to the country’s nuclear programme.
Turkey’s approach to coal mining and coal-fired generation is also rooted in a strategy to reduce dependence on imported natural gas and imported coal. The policy to reduce gas consumption is focused on the power sector, where gas-to-coal (and nuclear) switching is easier compared to other sectors such as industry. As such, the government has pursued a plan to boost the domestic production and consumption of Turkey’s sizeable coal reserves. Lignite, in particular, is a priority area for development, mainly for use in power generation. Hard coal is intended to be used more heavily in the industrial sector. On the flip side, the government is trying to reduce the use of coal in household heating in favour of natural gas.
To advance its goals, Turkey provides several incentives to both encourage coal mining as well as the use of domestic coal in power generation. Efforts by the two state-owned coal companies, TTK and TKİ, to ramp up production have reversed a trend of declining production (led by TTK) since 2015. Moreover, the government has promoted more privatisation of the coal-mining sector and incentivised increased domestic coal production by relicensing the non-producing areas of public companies via a tendering system to private companies. Some of the tenders grant the right to mine coal/lignite on the condition that a thermal power plant be installed near the mine site, from which state-owned power provider EÜAŞ is obliged to purchase power for a fixed term at a pre-determined rate. Most of the tenders grant the right to mine coal/lignite on the condition that they supply domestic households and industry. To date, five licenses (one with an obligation of installing a power plant and four to supply industrial coal) have been transferred to the private sector under these processes. All other coal plants benefit from voluntary priority power purchase agreements with EÜAŞ for a limited percentage of electricity generated if supplied by domestic coal, as well as from capacity payments.
Air pollution in major cities, including from coal-fired power plants, is a serious concern. Thermal power plants in Turkey are subject to the Industrial Air Pollution Control Regulation, which sets limit values for air pollutants such as SO2, CO, NOX and particulate matter. The government’s decision to not grant extra time to existing privatised and public thermal power plants that were exempted from securing environmental permits until the end of 2020 was a step in the right direction.
The government and state-owned mining companies have also stepped up efforts in recent years to improve occupational health and safety practices at mine sites, including in response to mining accidents.
Domestic technology and equipment production
Turkey also believes that an important dimension of the country's self-sufficiency in energy and natural resources is the presence of domestic technological capacity. This strategy is reflected in a number of measures to advance R&D, innovation and technology in the country. In particular, the government has implemented policies to increase the domestic production of machinery and equipment used in energy production from renewable energy sources (including by requiring the construction of local production facilities as part of early YEKA auctions) as well as the production of necessary materials and equipment for the construction and operation of nuclear power plants.
Energy market liberalisation
The third pillar of Turkey’s energy strategy is to continue to advance the liberalisation of energy markets and improve the predictability and transparency of its pricing.
Following the liberalisation and privatisation of the electricity market in 2001, electricity generation, distribution and supply were opened up to private entities and are now carried out by both private and state-owned companies.
EXIST (Energy Exchange Istanbul) was officially established in March 2015. This was an important step toward the liberalisation of the electricity and gas markets. Organised wholesale electricity markets had been operated by Turkish Electricity Transmission Corporation (TEİAŞ) since 2009. Wholesale electricity markets have been operational on EXIST since 2015 and a wholesale gas trading platform has been operational since September 2018. These markets provide price signals to investors and increase transparency. Development of physically settled power and natural gas futures markets are also underway. The depth and liquidity of the market is expected to benefit from the derivatives market that will be established in 2021, as well as a range of contracts over various time horizons and delivery windows that have become operational in 2020.
Gas market liberalisation is also a critical element of Turkey’s efforts to improve transparency in energy markets, with the Energy Market Regulatory Authority serving as the implementing organisation for reform efforts. Its task is to set up and implement regulatory measures to ensure the establishment of a liberal and competitive natural gas market where all market segments are open to new entrants. A new balancing methodology, under which balancing of the network is carried out by the transmission system operator that enters the continuous trade platform as a residual balancer, has helped ensure that prices are determined in an objective and transparent manner.
However, notwithstanding many positive changes that have been made to the gas market regulatory framework, the dominant position on the gas market of state-owned BOTAŞ remains as progress in releasing gas contracts to other parties has stalled. In 2019, BOTAŞ even increased its market share to 95%, compared to 80% in 2017. This stands in sharp contrast with the Natural Gas Market Law, which in 2001 introduced an obligation to reduce BOTAŞ’ market share to 20% by 2009.
More broadly, additional steps toward establishing more competitive energy markets and greater private sector participation will help mobilise needed investments into the energy sector.
The Turkish government has made big strides toward investing in its position as a regional energy trading centre, notably for gas, with the opening of the TurkStream and TANAP pipelines, as well as ongoing investment in gas storage and LNG entry points (including floating storage and regasification terminals). The establishment of a natural gas spot market platform in September 2018 is a big step toward making Turkey an international gas trading hub, if this platform can be expanded with trade in futures contracts.
- Gradually phase down power market support mechanisms such as subsidisation and the obligated procurement by EÜAȘ of a significant share of electricity generation to keep system costs down.
- Significantly strengthen incentives, market mechanisms and access to finance for energy efficiency projects, especially in the industrial and buildings sectors.
- Develop a cross-governmental road map to reduce oil consumption by strengthening demand-reduction and fuel switching policies in the transport sector, including the promotion of electric vehicles.
- Reduce the dominant position of BOTAŞ and foster increased competition in the Turkish gas market.
- Define long-term targets for the development of renewable energies that take into account the maximum potential per technology.
- Define mid- and long-term emissions reduction and local air pollution targets to help guide sustainable energy policy making, including a plan for peaking of emissions.