# _investment could occur?”_

The answer is yes. The cost of local lignite depends substantially on the efficiency and output of the mine. Let us turn briefly to the main drivers of local lignite costs. The cost of local lignite is at least partially under decision makers’ control. It depends on the efficiency of the mine that supplies lignite to the plant, i.e. how many millions of tons of lignite are extracted annually. Most of the mine’s costs, including labor, electricity, and materials, are fixed and when production is down, prices are high. At low production in 2004, just before the project’s preparation phase, the mine produced only 6.7M tons, about 30% of the mine’s annual capacity of 18.6M tons, which were sold at 11.46 US$/ton (The World Bank, 2006). As part of this project, however, this mine would have been expanded and upgraded to ensure a cheaper and more stable lignite supply. Hence, policy makers have options to reduce the cost of lignite, for instance by improving the mine’s maintenance and operation.

From 2002 until 2008, gas prices increased sharply in Turkey, reaching over 300 US$/tcm (Ozen, 2012) but have since declined and stabilized at around 220 US$/tmc (DG Energy, 2012; Lomsadze, 2013). Hence, the highest ratio based on recent historical trends, when lignite cost is high (11.46 US$/ton) and gas price is low (220 US$/tmc), would be 5.2%. This exceeds the threshold of 4.5%. Indeed, if current trends continue to hold and the price of gas remains low, the cost of local lignite would have to be below 9.9 US$/ton (i.e. produce at least at about half of its capacity) to be under the 4.5% threshold (9.90/220).

It thus appears that rehabilitating the existing plant may not be the most cost-effective option under all plausible future conditions, though policy makers have options to influence those conditions.

We can more fully understand the relative merits of the two investments by also comparing their cost-benefit performance. Recall that rehabilitating the existing plant fails our costbenefit test in 99 of 500 futures, i.e. has an IRR below 12%, when two conditions hold:

1. The wholesale price of electricity is below 0.059 US$/kWh

2. Local lignite costs more than 6.3 US$/ton<sup>16</sup> Building a new gas-fired plant fails our cost-benefit test in 128 of our 500 scenarios, which occurs when:

1. The wholesale price of electricity is below 0.073 US$/kWh

2. Gas costs more than 220 US$/tcm<sup>17</sup> Rehabilitating the existing plant would be more robust to decreases in the price of electricity than would the gas-fired plant. In 2009, the Government of Turkey guaranteed a minimum price of 0.068 US$/kWh for the following 10 years (U.S. Commercial Service Turkey, 2009). This price is above the vulnerable threshold for rehabilitating the existing plant, but below

> 16 This condition is also a statistically strong predictor of when rehabilitating the existing plant fails the cost-benefit test. Of the 92 futures with these conditions, rehabilitation fails the cost-benefit test in 73 (79%). Of the 99 cases in which rehabilitation fails the cost-benefit test, this condition occurs in 73 (74%).

> 17 This condition is also a statistically strong predictor of when building a new gas-fired power plant fails the cost-benefit test. Of the 125 futures with these conditions, rehabilitation fails the cost-benefit test in 100 (80%). Of the 128 cases in which rehabilitation fails the cost-benefit test, this condition occurs in 100 (78%).

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