Subsidies to Coal and Renewable Energy in Turkey

The electricity system in Turkey faces three challenges. First, demand for electricity is growing as economic growth brings increased energy usage. Second, as the electricity supply expands to keep pace with demand there is the need to ensure that electricity prices remain affordable. Third, as energy and electricity are at the heart of modern economies, energy security is critical for the electricity sector. To balance the competing demands of demand growth, affordability and energy security, policy must seek to create a framework that promotes technologies and projects that meet these needs and deliver sustainable development. To meet these challenges, current policies in Turkey propose to increase the supply of electricity through a considerable investment in coal-fired generation. Generation from coal has economic, social and environmental costs. This paper presents an overview of the cost of promoting investment in coal in the form of subsidies. It also considers the external costs of coal use (including environmental and health costs). This paper seeks, where possible, to quantify the costs of subsidies and external costs so that the impact of these policies can be understood. By way of comparison, the costs are presented alongside analysis of the costs and impacts of solar and wind energy. Fossil-fuel subsidies are generally considered to have negative economic consequences. They are often costly, causing government budgets to be reduced in other areas, increase wasteful consumption and distorted markets. Despite these disadvantages, governments use subsidies to support vulnerable groups, promote economic development and promote energy security. However, subsidies frequently fail to meet their intended objectives. This study finds that there are significant subsidies to coal in Turkey and presents a preliminary estimate for these of between US$0.01–0.02 per kilowatt hour (kWh). The total subsidy to the coal industry that it has been possible to quantify is approximately US$730 million in 2013. This figure includes direct transfers to the hard coal industry, subsidies to exploration of coal resources, rehabilitation of power stations and coal aid to poor families. Further subsidies were identified but not quantified. If included, the unquantified investment guarantees and exemptions from customs charges, VAT, social security, land allocation and below market interest rates would raise the estimate significantly. Quantification of these measures would help to shed further light on the true costs of coal subsidies. Subsidies to Coal and Renewable Energy in Turkey v Furthermore, when externalities are included in a consideration of the costs of energy, this study finds that electricity generation from wind and solar is already cheaper than generation from coal and the costs of renewables are expected to fall significantly over the next 15 years. Quantifiable subsidies to coal in 2013 make up around 0.1 per cent of Turkey’s nominal GDP, which may not appear significant. However, the continuation of these subsidies, together with new incentives and guarantees, locks the country in to a set of technical, institutional and legal structures dependent on coal and impedes renewable energy development. It is recommended that Turkey phase out fossil-fuel subsidies. Where the reduction in subsidies will have adverse impacts (such as a fall in employment in coal-related industries) mitigation strategies should be developed. The true cost of coal, including the social and environmental impacts, should be built into energy sector decision making processes. There is the potential for a much larger role for renewable energy in Turkey’s energy mix in the future. Finally, the assumption that domestic coal production will provide energy security should be reconsidered.