Turkey is revamping its renewable energy sector in the hope of reducing its growing dependency on oil imports. But Turkey’s government and its policymakers have their work cut out, writes Laura Benitez.
The Turkish government has pinned high hopes on its renewable energy sector, implementing several strategies to meet its ever-growing electricity demand, which costs the country around US$60bn in 2012.
With these strategies, the government is hoping to widen Turkey’s share of renewable energy to 30% of its total energy consumption by 2023, while increasing its installed capacity from 53,300MW to 61,600MW.
Meeting these targets may not be plain sailing, but they’re not out of reach; it is estimated that Turkey’s renewable energy resource potential is around 136,600MW, excluding hydropower and geothermal.
Ozan Akar, head of global sales and trade finance at Isbank AG believes that these energy targets can be met and that so far the government’s willingness is leading to a widespread interest in the markets. However, he adds that Turkey will need more than just dedication to the cause if it stands any chance of success as it needs to turn its attentions to promoting investor incentives.
The Turkish government has already started to make changes to its feed-in tariffs, a policy which helps drive investment in the renewable energy sector by offering long-term contracts to energy producers at a fixed rate.
Akar confirms that the government has scaled up its operating subsidies and is now offering producers US¢7.3 per KW/h for hydro, US¢7.3 per KW/h for wind, US¢10.5 per KW/h for geothermal, US¢13.3 per KW/h for solar, and US¢13.3 per KW/h for biomass, including landfill.
Additionally, if the mechanical and electro-mechanical equipment used in renewable energy facilities has started operation before December 31, 2015, an additional incentive of between 0.4 and US¢2.4 per kW/h will be provided for five years.
The government has also brought in VAT and customs duty exemptions for corporates that purchase or import renewable equipment for their facilities, as well as exemptions from other funds and surcharges.
Mike Davey, European Bank for Reconstruction and Development (EBRD’s) Turkey director, says that the government may need to do more: “The Turkish government is taking the right steps toward achieving its challenging renewable energy goals. Successfully unbundling the power value chain and creating the regulatory framework to promote sustainable energy through its 2004 renewable energy law have been key to scaling up private sector investment.
“Nevertheless, there is still a lot of work to be done to achieve the 30% renewable energy target and the 20GW wind installed capacity by 2023. Licensing problems need to be clarified and expanded for wind and solar and a clear roadmap with quantitative milestones needs to be developed.”
The EBRD has helped Turkey with these challenges by developing a renewable energy action plan (Reap) to help the country map out its objectives. The plan will be aided under the EBRD’s sustainable energy initiative (SEI), which currently accounts for almost 50% of its portfolio in the country. The bank has disbursed €1bn as part of the SEI in the last 3.5 years, and €179mn in 2012.
Since the programme was launched in 2006, the EBRD has financed €466mn for Turkey’s renewable projects and has helped to reduce 50 million tonnes of carbon dioxide emissions a year.
Additionally, the EBRD is lending further assistance with its latest sustainable energy financing facility (SEFF). The US$1bn facility was launched in 2011 for €10mn to €50mn of sub-investments in renewable energy, energy efficiency and waste to energy. So far it has lent €371mn and invested €521mn in 20 sub-projects, saving Turkey €200mn in oil imports a year.
Turkey will be relying on a host of different financing sources to support the construction of its renewable energy facilities. But capturing the attention of international investors has proven to be a sticking point.
“So far, Turkey isn’t attracting a lot of international support as there have been some problems in the past. It’s never been easy in Turkey to finance renewable energy projects, sponsors have notoriously found it difficult to obtain loans, which are normally secured and repaid by the projects,” Akar says.
However, he adds that these conditions are improving significantly and can be further developed if the government and market regulatory bodies take concrete steps in giving more confidence to investors.
“The World Bank, the IFC, the Japan Bank for International Co-operation (JBIC), US Exim and the EBRD have all provided project finance loans to renewable energy projects in Turkey, or have teamed up to provide loans via local Turkish banks, so I think we’ll continue to see newcomers in the market.”
In October this year, Isbank and JBIC signed an 18-year US$60mn export credit loan to export Japanese equipment for Turkey’s geothermal, wind, biomass and solar industries. The credit line, which is JBIC’s first loan for exports of renewable energy machinery to Turkey, will provide medium and long-term loans in yen or US dollars. The facility totals US$100mn and is co-financed by private financial institutions and backed by Nippon Export and Investment Insurance (Nexi).
Isbank also signed two other loan agreements in November 2012 with the European Investment Bank and the EBRD for €75mn and €50mn respectively as a part of a securitisation facility amounting to US$225mn to support Turkish SMEs in the renewable sector, Ozan confirms.
The EBRD’s Davey believes that the government’s steps in liberalising the energy market will attract more local and international attention.
He adds: “Uncertainties still exist regarding global energy prices, particularly for gas, and their impact on renewable energy project profitability. Nevertheless, both local and international investors and financial institutions perceive renewable energy as a high potential sector.”
Alper Hakan Yuksel, executive vice-president for corporate banking at Akbank agrees, saying that renewable energy projects within the total energy investment volume will continue to keep its attraction for both investors and lenders.
“Feed-in tariff mechanisms, the absence of market risk and additional incentives for local equipment will definitely have a positive impact on long-term financing options for renewable energy investments. However, it should be noted that banks will need to attain detailed environmental and social impact assessments and due-diligence reports before considering the projects for financing,” he explains.
Aside from government and development bank aid, Turkey’s renewable sector cannot flourish without the help of export credit agency (ECA) involvement.
The EBRD’s Davey says: “With the current stringent lending conditions and high cost of funding for the local banks, ECA financing has become a major driver for renewable energy project development, particularly for wind, where western equipment providers are suffering increasing competition from Chinese manufacturers. The trend will possibly continue and will expand to technologies such as solar.”
Denmark’s export credit agency, Eksport Kredit Fonden (EKF), has been a well-known player in Turkey’s renewable sector, and has picked up its involvement over the last few years.
EKF’s chief underwriter, Anna Marie Owie says: “Right now we are guaranteeing more than 30 projects in Turkey ranging from small to large. The majority of those − at least three-quarters − are within energy, both renewable and traditional. In terms of financing, we’ve been involved in financing a total of more than 10 renewable energy projects in Turkey, all with different structures of financing, but most of them have been agreed with corporate loans with varying tenors.”
Owie adds that over the last year, EKF has seen the financing structure for Turkish renewable projects become more advanced; where it was once mainly straightforward bank guarantee deals and corporate loans, it is now “getting closer to a clean project finance structure”.
EKF is currently working on onshore wind farms Samli (which has a capacity of 150MW) with Turkish sponsor Aksa Energy, and Catalca (with a 60MW capacity), just outside Istanbul, with Turkish sponsor Sanko Group. Financing agreements for these projects were signed as GTR went to press, and will be funded through a combination of equity contribution from the Turkish sponsors and corporate loans from international banks. Another ECA taking a large piece of the action is Germany’s Euler Hermes, which is especially active in wind farm projects. The ECA also has plans in the pipeline for biomass and geothermal energy projects.
Jörn Grabowski, head of unit underwriting for Euler Hermes, Asia, Middle East and UAE, comments: “The covered volume of each project totals between €20mn and €50mn, and are either expansions of existing wind farms or newly-erected ones. In 2011 wind energy projects covered with export credit guarantees reached an all-time high, especially in Turkey. After a little decrease in the first half of 2012 we are now seeing high demand.”
However, Grabowski adds that the financing conditions for these projects are still challenging, and that ECA involvement is becoming less of an option for Turkish corporates and more of a necessity.
“Currently you can see two different developments: first of all the risk-awareness is still high in the market, so companies ask for cover more frequently than before the financial crisis. On the other hand it is often difficult to bring projects, investors and the financing together. Without ECA cover for wind farm projects corporates are unlikely to secure loans from international banks. Local banks may be able to step in but it would have to be financed on different terms.”
Isbank’s Akar agrees, saying that Turkey’s energy goals will be completely dependent on ECA cover, and will also be the key to opening up foreign investment. He expects that with the help of better regulations in the renewable energy market more ECAs will join the sector soon.