Turkish gas tariff cut could triple spark spreads

OREANDA-NEWS. August 01, 2016. An expected cut to regulated Turkish industrial gas tariffs could more than triple the profitability of operating gas-fired plants during certain months, but they would still be less competitive than imported coal-fired plants.

Turkey's energy minister said on 25 July that regulated gas prices would be cut before the winter. Market participants expect the cut to come in October, reducing the industrial tariff by 10-15pc from its current TL73.53/MWh (\\$24.23/MWh).

Assuming a 10pc cut, the front-month spark spread for October would more than triple from TL5.31/MWh under the existing tariff to TL18.67/MWh, based on a plant of 55pc efficiency and yesterday's October base-load contract close of TL139/MWh.

Using the same assumptions, the fourth quarter spark spread would increase from TL10.31/MWh to TL23.67/MWh, while the calendar year 2017 spark spread would go from TL5.11/MWh to TL18.47/MWh.

A cut would provide some relief to Turkey's gas-fired plants, which have been under pressure this year from lower power prices, a higher share of renewables generation, and a weaker Turkish lira increasing the burden of their foreign currency debts.

Average daily generation by Turkey's gas-fired plants between 1 January-28 July is down by 9pc compared with the same period a year earlier to 232GWh, and its share in overall demand has decreased from 36pc to 31pc.

But even with a 10pc cut in gas tariffs, dark spreads would remain around three times higher than comparable spark spreads, based on a coal-fired plant of 38pc efficiency and using the Argus cif Iskenderun 20-day prompt price assessment. For October, the Iskenderun dark spread is TL62.99/MWh, based on a plant with 34pc efficiency, TL67.99/MWh for the fourth quarter, and TL62.79/MWh for the 2017 calendar year.

The announcement on 25 July triggered a sell-off in front-year contracts this week, with the 2017 calendar year price closing yesterday at TL1.45/MWh below the level at the start of the week.

Industrial users to benefit

A cut in regulated gas tariffs will largely benefit industrial users, whose average gas consumption of 59mn m?/d accounted for 47pc of Turkey's total gas use in 2015, compared with a 32pc share for power plants and 21pc for residential users.

Botas has kept regulated gas tariffs unchanged since 1 October 2014, with industrial users paying TL782/'000m? for eligible users that consume more than 300,000 m?/yr, residential users paying TL848/'000m? and organised industrial zones paying TL779/'000m?. Most gas-fired generators buy natural gas at regulated industrial gas tariffs.