BMI View: We continue to expect Turke y to remain the most attractive power market in the CEE region this quarter. We foresee p ower demand in Turkey to be robust over the next decade, given the high levels of investment being channelled into its power sector, the country's capacity expansion plans and its improving economic outlook . T here is also considerable political backing for power sector expansion as the government continues to strive for greater energy security and to lower the country's heavy reliance on imports of natural gas through expanding domestic capacity - with renewables and domestically sourced coal leading the way.
Yet, while the outlook is bright, the development of Turkey's power sector is complicated by the county's precarious economic and political position. The need to reduce its reliance on foreign capital, narrow external deficits and rebalance away from private consumption towards more domestic saving and investment will necessitate a period of slower growth. Although the government and central bank have clearly demonstrated an aversion to allowing rebalancing to play out through lower GDP growth rates in the medium term, we believe this is simply delaying the inevitable. Risks of a more pronounced and rapid fall in headline growth remain high in light of the deterioration in the global macroeconomic outlook for emerging markets that has seen investor confidence suffer and capital inflows dry up. As it stands, our country risk team forecast real GDP growth to be significantly slower over the next few years than the 9.0% average reading recorded in 2010-2011.
That said, we are retaining a cautious, but positive long-term view on the sector, based on the fact that finding a solution to existing energy-related imbalances is central to the performance of the country's wider economy, making reform and new investment in the power industry a top priority. Furthermore, relative to other power markets in Central and Eastern Europe (CEE), Turkey emerges as the clear outperformer based on longer-term macroeconomic and demographic fundamentals that continue to support our forecasts for electricity generation, and thus consumption. With our forecasts indicating that power consumption will grow at an annual average of 5.34% year-on-year (y-o-y) between 2015 and 2024, substantial investment in new generating capacity will be necessary, suggesting rewards on offer in the Turkish market will outweigh the risks.
Key Trends And Developments
We expect thermal generation to dominate the electricity generation mix to the end of our forecast period. While coal- and gas-fired will grow in absolute terms, we expect both to lose their share of generation to hydropower and non-renewables (and potentially nuclear). By 2024 we expect gas to account for 40.37% of total electricity generation (as opposed to 41.86% in 2014), coal to account for 24.85%, hydropower to account for 22.03% and non-hydro renewables to generate 12.07% of all electricity.
Natural gas will remain the predominant source of electricity in the Turkish power mix over our 10-year forecast period to 2024. The renegotiation of contracts to offset lira weakness - with contracts denominated in USD - and additional imports coming, highlight the fuel's continued importance in the mix. This view is strengthened by the fact there is significant gas infrastructure already in place - both pipeline interconnections and generation capacity - and the fall in gas prices, which in Turkey's case are closely indexed to the oil price.
While we maintain our positive outlook for Turkey's renewables segment, we do not believe the sector alone can rebalance the country's power mix. We expect the government to meet its target of generating 30% of electricity from hydropower and non-hydro renewables sources (wind, solar, biomass and geothermal) by 2023, with our forecasts projecting 22% (hydro) and 12% (non-hydro) being generated by that year. On the other hand, lower capacity factors for non-hydro renewables and the risk of drought - which would limit hydropower output - suggest the sector will be unable to contribute a greater proportion of the power mix by the end of our forecast period.