What the world can learn from Türkiye’s energy transition strategy heading into COP31

This is a thought leadership report issued by S&P Global. This report does not constitute a rating action, neither was it discussed by a rating committee.

Energy transition strategies are increasingly being framed as more than pathways to net-zero or Paris Agreement alignment. For governments and companies, they are also becoming tools to strengthen resilience in an energy and economic landscape more exposed to geopolitical, supply chain and price shocks — as illustrated most recently by the energy and trade reverberations linked to the Middle East war and the effective closure of the Strait of Hormuz.  

Türkiye, host of this year’s UN COP, provides a clear example — its strategy is driven not just by decarbonization, but by a strategic necessity to reduce fossil fuel import dependency. Imports currently account for about 70% of its primary energy supply. The roadmap focuses on diversifying resources through wind, solar and nuclear power to enhance macroeconomic resilience. However, the transition is characterized by a lack of a formal coal phaseout timeline, suggesting a cautious and potentially fragmented approach to decarbonization. The country set a target to achieve net-zero emissions by 2053. This target speaks to a fundamental challenge that many countries around the world are facing: a heavy reliance on imported fossil fuels that consistently pressures the current account deficit and exposes the economy to global price volatility.

By diversifying its energy mix, Türkiye seeks to enhance its energy security and build long-term economic resilience. The scale of this ambition, according to the country’s climate change mitigation strategy and action plan, the 2053 Long Term Climate Strategy publication, is reflected in its projected investment requirements, which range from $160 billion to $165 billion cumulatively by 2053 (see Figure 1). Crucially, the front-loading of these costs is significant, with an estimated $85 billion to $90 billion required by 2035 alone, primarily to overhaul the power sector and improve energy efficiency.

The cornerstone of Türkiye’s transition is the decarbonization of its power sector. To reach its 2053 goals, the country is prioritizing the rapid deployment of wind and solar capacity. This shift is intended to replace expensive gas imports with domestic renewable resources. Furthermore, nuclear energy is poised to become a pillar of the new energy mix; the Akkuyu nuclear power plant is expected to supply up to 10% of the nation’s total electricity demand once it reaches full operational capacity.

In particular, the national strategy estimates that $85 billion to $90 billion of investments are needed by 2035, almost completely related to energy (including renewable energy and energy efficiency, see Figure 2). In later phases, the country expects to focus on decarbonizing industrial sectors, mostly steel and cement, by 2053.

While the country’s long-term goal is to reduce fossil fuel dependency, near-term energy security priorities may take precedence over long-term decarbonization, including reducing external fossil fuel reliance. This highlights a key tension between energy sustainability and security that is apparent in many markets. In contrast with many other OECD nations, Türkiye has not committed to a formal phaseout timeline for coal, nor has the country announced many carbon capture and storage projects. While the Turkish government has canceled or shelved dozens of coal projects over the past decade due to financial and public pressure, like China, India and Indonesia it is looking to continue exploiting its natural resources to provide crucial energy diversity. The Turkish government also  provided a major financial lifeline in September 2025  to the domestic coal sector: state guarantees to buy domestic coal-fired electricity at an elevated price of $75/MWh until 2030, an incentive designed to keep domestic lignite plants profitable and operational despite rising global carbon pressures.

In the near-to-medium term, focus will likely be reducing the reliance on external energy supply rather than fossil fuel dependency, given the volatility of gas prices. Türkiye continues to grow its domestic coal reserves. The country’s 12 billion tons of proven lignite (brown coal) reserves are a vital component of national energy security, though imports of coal — predominantly from Russia — have risen from around half of total demand in 2006 to two-thirds in 2025.

This tension between energy transition and energy security ambitions creates a coal paradox. For heavy industries like steel and cement, the inability to access a "green" grid means that even significant onsite renewable energy investments may not fully insulate them from carbon penalties under frameworks like the EU’s Carbon Border Adjustment Mechanism (CBAM), potentially affecting future trade. CBAM is a fee placed on key goods such as aluminum, cement or steel imported to the EU based on the good’s embedded emissions and went into full effect on Jan. 1, 2026. Türkiye’s heavy exporters, such as steel, chemicals and cement, will need to decarbonize to maintain EU market access under CBAM, yet high interest rates and currency volatility constrain necessary capital expenditure.

Consequently, the success of Türkiye’s long-term ambitions is heavily contingent on the state's ability to synchronize grid modernization with the rapid expansion of renewable capacity. So while clean energy capacity has grown from 25% to 45% of total power supply in the last 20 years, according to S&P Global Energy data, coal continues to receive regulatory support (see Figure 3). This creates a dual-track energy policy  in which the renewables expansion must coexist with a persistent coal baseline, potentially slowing the overall decarbonization trajectory.

Beyond electricity, Türkiye’s transition strategy encompasses high-emitting industrial sectors, transportation and buildings. As the roadmap progresses past 2035, the focus will shift from the power sector to the "hard-to-abate" industries such as steel, cement and chemicals. For these sectors, the transition is not merely an environmental preference but a commercial necessity driven by international trade dynamics, specifically CBAM (see Figure 4). Türkiye has taken decisive steps to align its domestic governance with international standards, most notably through the adoption of the July 2025 Climate Law. This legislation is a move toward creating a functional national emissions trading system  covering cement, iron and steel, aluminum and fertilizers by strengthening monitoring and verification requirements. By building this architecture, Türkiye is proactively preparing its economy for international carbon-pricing mechanisms such as CBAM, thereby aligning domestic regulation with the needs of its major export markets.

COP31 is driving increased international scrutiny of Türkiye’s domestic decarbonization policies. The country submitted an updated nationally determined contribution in 2025 reaffirming its 2053 net-zero goal and introducing a new 2035 target to reduce emissions by 42% relative to business-as-usual levels. Despite policy acceleration, current targets remain below the levels required by ambitious decarbonization scenarios to limit warming to 2 degrees Celsius. Although Türkiye’s energy-related emissions are expected to be lower than they would have been in the absence of policy action, the S&P Global Energy base case scenario projects only a small decline in total emissions in the long term (see Figure 5).

Türkiye’s transition policy will require a sophisticated mobilization of capital, as the sheer volume of required investment exceeds the capacity of domestic traditional banking alone. Turkish banks rely on external funding, and the sustainable finance market, while growing (see Figure 6), is heavily concentrated in renewable energy loans, not bonds, leaving critical areas like climate adaptation and hard-to-abate sectors underfunded.

Sustainable loans account for approximately 85% to 90% of total sustainable finance activity in the country (see Figure 7). While sustainable bond issuance (excluding sovereigns) represented roughly 15% to 20% of total bond issuance during the 2024-2025 period, the loan market remains the primary vehicle for green projects, particularly in renewable energy.

Sustainable financing is likely to become more diverse as the market continues to develop. In particular, this could see some shifts from mainly renewable energy projects toward financing climate adaptation and water-related projects. In addition, developing more robust sustainable finance mechanisms to support the decarbonization of the manufacturing, chemical and mining sectors could also boost capital market activity, including the labeled debt market. This could continue the trend in the number of nonfinancial participants, whose share has grown threefold in the last five years (see Figure 8).

The primary investment drivers are the potential long-term cost savings from reduced fuel imports and the increasing demand for "green" industrial products. However, the appetite from foreign capital providers is tempered by macroeconomic volatility. While there is significant interest in Türkiye’s renewable energy potential, international lenders remain cautious due to the "currency mismatch" risk — the reality of servicing hard-currency debt with revenues generated in Turkish lira.

The enabling environment is being bolstered by new regulatory frameworks designed to increase transparency and alignment with international standards. The introduction of the Turkey Sustainable Reporting Standards in early 2024 has made environmental, social and governance and climate disclosures mandatory for large enterprises. Additionally, the implementation of mandatory environmental and social impact assessments provides a structured approach to project development. The government-backed renewable energy resources support mechanism in Turkey — known as Yenilenebilir Enerji Kaynaklarını Destekleme Mekanizması, or YEKDEM — has  shifted from USD-indexed to Turkish lira-based tariffs, which has reduced its attractiveness. At the same time, the country’s renewable energy resource strategy, known as Yenilenebilir Enerji Kaynak Alanları (YEKA), continues to facilitate large-scale renewable projects. While the YEKA model has enabled sizable projects like the 1.3-GW Karapınar Solar Park, administrative red tape remains a critical issue: Less than 25% of total capacity awarded in past auctions has successfully reached commercialization due to factors such as grid connection delays, slow permitting processes and strict localization mandates.

The energy transition introduces a complex set of financing implications that vary significantly across different levels of the economy.

Sovereign/macro

Türkiye’s strategic shift toward increasing renewable energy capacity presents a dual-edged fiscal and macroeconomic trajectory. While the transition poses near-term pressures on the balance of payments and external debt profiles, it offers a structural pathway to mitigate long-standing vulnerabilities related to energy import dependency and currency volatility. Indeed, the expansion of domestic renewable generation could help address core structural weaknesses, including exposure to terms-of-trade shocks, without compromising fiscal stability. Higher renewable penetration would reduce the impact of these shocks on the balance of payments, the lira exchange rate, and domestic inflation. A structurally lower energy import bill would alleviate pressure on external liquidity, and reducing reliance on hydrocarbons could help fiscal accounts by lowering the energy subsidies that have fluctuated over time.

The transition phase introduces immediate pressures that may test Türkiye’s external stability, including balance of payment pressures and external debt vulnerabilities. Due to low domestic savings rates, the renewable energy expansion will likely require significant external financing. Near-term imports of specialized equipment, storage systems and grid infrastructure are expected to widen the current account deficit, though these pressures are anticipated to reverse once domestic generation scales. The reliance on external funding may exacerbate Türkiye’s longstanding debt rollover risks. As of June 2026, the short-term external debt of all the sectors of the economy was estimated at $240 billion on a remaining maturity basis, a level that remains significantly higher than the central bank’s net international reserves.

The government’s ability to fund the energy transition will be dictated by the success of ongoing disinflationary and consolidation efforts (see Figure 9).

Financial institutions

Given Türkiye’s energy transition plans, the domestic banking sector will not be able to absorb the funding needs fully. This is mainly due to Turkish banks’ already high exposure to external funding. As of early 2026, external funding already represented approximately 30% of total loans, or roughly $177.6 billion, with a significant portion — about 60% — maturing within a 12-month window. This high level of external debt makes the sector sensitive to geopolitical developments and global liquidity shifts. As such, we see limited room to further increase recourse to external resources to fund large domestic needs. In addition, while banks are essential for channeling sustainable loans to green projects, their ability to expand credit is constrained by low affordability given the high-interest-rate environment and the historical precedent of currency-driven asset quality deterioration. Banks will likely remain selective, favoring projects with robust hedging mechanisms or those that generate hard-currency revenue.

Multilateral development banks play a role in financing emerging markets and will likely play a key role if Türkiye is to meet its transition financing needs. Türkiye is the largest market for the European Bank for Reconstruction and Development (EBRD) by annual investment volume. The EBRD invested €2.7 billion in 2025, 66% of which was allocated to supporting Türkiye’s transition, according to the bank.  Beyond direct lending, multilateral institutions could likely use their experience in these markets to standardize and scale blended fund structures. Blended finance structures incorporate credit enhancements designed to achieve investment-grade ratings for instruments financing underlying exposures in emerging markets and developing economies. (See “Blended Finance Funds: Structural Enhancements Support Credit Resilience” July 2, 2026).

Corporates

The ability of corporates to finance the transition varies, with consequences diverging significantly by sector and degree of international market exposure. While the power sector faces intense capital expenditure requirements and high barriers to entry, the stakes for the industrial sector are even higher.

Turkish industrial producers currently compare favorably to global peers, notably in steel. Around 70% of steel uses electric arc furnaces, which typically emit less carbon than more coal-dependent traditional blast furnace production. However, the industrial sector’s long-term competitiveness is inextricably linked to the evolution of the national power mix, particularly for segments with meaningful exports to Europe. For steel and cement exporters, internal efficiencies may be undermined if the national grid remains coal-heavy. Under the EU’s CBAM and potential domestic carbon pricing, these companies risk high carbon costs regardless of their own technological advancements. Consequently, the ability to secure long-term, EU-compliant renewable power purchase agreements will be a decisive factor in maintaining competitive positioning, particularly as Türkiye is the second-largest exporter of these goods to the EU (see Figure 10).

The potential impacts of Türkiye’s energy transition will be most felt by power generators and large industrial players. The near-term financial strength for those sectors is tempered by high financing costs, regulatory complexity and the significant capital outlays required to navigate the evolving global carbon landscape. Figure 11 summarizes the key challenges they face.

As the COP31 presidency seeks to shift the focus from climate pledges toward delivery, each country will need to find their own path to translating — or not — climate commitments into domestic policy frameworks, regulatory measures and investment signals. Those paths will not be uniform as countries make their own choices in balancing economic growth, energy security and sustainability goals.

Continued movement toward clean energy investments can contribute to all three goals. But as Türkiye shows, there are apparent trade-offs as the country aims to address short- and long-term priorities. To support its energy security and decarbonization initiatives, the country has started laying the foundation of policy frameworks that can support those goals and bring them closer to the important EU market. However, tensions are visible as Türkiye — like other economies — continues to exploit its own natural resources to provide domestic resilience.

Attracting finance remains critical for emerging economies. Türkiye continues to open to foreign investors, and the development of debt capital markets is becoming increasingly important as traditional bank lending faces limits. The energy transition requires substantial investments, regardless of which goals are prioritized. As a result, reliable access to cross-border funding will be key to meeting decarbonization objectives. Access to a more liquid and deeper international market, a broader investor base and reduced reliance on domestic liquidity will offer more possibilities to governments and companies alike.