Several banks in Türkiye have publicly committed to act on climate change, even setting net-zero goals. Serious investments in renewable energy have already been made, which have put in reach intermediate national goals like 120 gigawatts (GW) of wind and solar capacity by 2035. However, Türkiye invested heavily in coal until 2010 and gas from 2000 onwards, and there is significant outstanding debt from the construction of these assets. These were financed primarily by domestic banks, with few corporate bonds issued, and this lending now accounts for 2% of bank assets. The proportion of these loans that are non-performing is four times higher (8.72%) than those of the banks’ general loan portfolios.
Central banks around the world are calling on banks to better understand and manage the climate transition risks from their lending. Some of the most important risks for Turkish banks are:
- Stranding risk, which arises because financial returns from thermal power plants will be curtailed when those plants cease to be used, or even when they are used significantly less than anticipated.
- Carbon pricing risk, which will push up the cost of fossil fuel energy, eroding profit margins and further expanding the need for capacity payments.
- EU Carbon Border Adjustment Mechanism (CBAM) risks, which will cause energy-intensive customers to reduce their use of coal-fired power or face tariffs.
Several studies have demonstrated that the falling costs of renewables mean Türkiye can cost- effectively transition from coal to renewables and use the revenue earned from carbon taxes to compensate displaced workers in the coal supply chain.
Our study has taken a nuanced approach to modelling the practicality of switching to renewables, electrifying heat and transport, and the implications for electricity from coal. In particular, we have examined seasonal, rather than annual, demand for electrified heat and supply of renewables. This approach has revealed a more complicated impact on the demand for energy, which may require the use of seasonal storage technologies or an uneconomical, seasonal use of some thermal power plants.
We undertook seasonal modelling of supply and demand under two scenarios: Nationally Determined Contributions (NDC), which assumes Türkiye introduces no new policies, and a global Net Zero (NZ) by 2050 scenario (which sees emissions in Turkiye approaching but not quite net zero by 2050). In the NDC scenario, the advent of cheap solar means that demand for thermal power in summer is half the demand in winter from 2045. In the NZ scenario, there is actually negative demand for thermal power in summer from 2045 – meaning other sources generate so much power and so cheaply that all thermal power stations would be closed. Long before then, the load factors of thermal plants – that is, how much they are used – will have become uneconomical for much of the year. Only under the NDC scenario will load factors for thermal power rise significantly, and only in winter, due to the regularly planned decommissioning of old plants. However, a significant share of the current coal and gas fleet will not be fully depreciated by 2035.
This means that, in winter, there will be a shortfall in the amount of electricity generated, because of low solar output and high demand for electrified heat, but in summer there will be a surfeit.
As well as being a transition challenge (from fossil fuels to renewables), this is also a challenge to energy security because expected returns from thermal power do not account for only limited, seasonal use. The Government of Türkiye has three broad tools to manage this:
- invest heavily in electrolysers to convert surplus renewable electricity in summer into green hydrogen that can generate electricity in winter
- maintain efforts to reduce winter demand (for example, through energy efficiency, heat pumps) and implement higher thermal efficiency standards for new buildings
- retain flexible thermal power stations (while retiring inflexible older plant) and ensure they remain commercially viable using capacity payments or other subsidies.
The first option is attractive over the year as a whole as it uses solar and wind capacity more efficiently, but it carries risks because the technologies are not yet commercially proven. Option three does not solve the issue of stranded assets (the premature decommissioning of capital items that are yet to be amortised), it merely transfers the liability from banks to the government or customer funding the capacity payment. These capacity payments have grown markedly over time and now provide an important revenue line for local coal (1.16 billion Turkish lira (TL) in 2023) and gas power (TL2.5 billion).
The implications for Türkiye’s financial sector are significant. Just as banks need to expand lending to finance solar developers (and electrolysers), they also manage bad loans to the distressed thermal segment of the industry. Navigating this will require banks to interrogate power companies to ensure they have viable transition strategies to shift from uncompetitive thermal power to storage and renewables,
Minimising risks to the financial sector also requires clarity from government to ensure there exists a credible policy environment for the flourishing of green hydrogen, nuclear or any other alternatives that fill the winter shortfall identified in this research.
We examined the scheduled closure dates of gas- and coal-fired power stations to value the remaining assets at different points in the future. Around 80% of gas and 75% of current coal plants by capacity are scheduled to remain open through 2035, which is the government’s target year to reach 120 GW of wind and solar. The risk of stranding is therefore imminent. However, it proved difficult to undertake the cost analysis due to balance sheet data challenges, as most balance sheets are not publicly available. This difficulty was compounded by various revaluations of balance sheets, most recently in 2023, to counter their erosion through recent hyper-inflation.
The report lays out some suggestions for the Government of Türkiye, regulators and the financial sector to account for transition risks and prepare for opportunities. These are laid out along the following lines:
A. Better strategic direction to inform investment and withdrawal of investment. More consistent long-term goals and intermediary targets, with an advisory body to assess their alignment with current policies, would provide assurance to the financial sector of the direction of policy. This direction should include a carbon pricing mechanism and sectoral missions to ensure viable seasonal storage options.
B. Better risk management. Regulators in Türkiye should set clear guidelines for risk management in banks, including scenario analysis and climate stress tests.
C. Improved energy data and modelling. There exists a community of climate and energy modellers in Türkiye that is ready to support the assessment of transition risks. This community would benefit from greater transparency and access to government energy models and assumptions, as well as to corporate balance sheets. A modelling forum would bring stakeholders together and encourage banks to pursue their own risk analysis.
