Ethem Kutucular and Orçun Makal, Ernst and Young
December 27, 2013 | 2 Comments
As the renewable energy market shifts and evolves each year, industry experts need to know where the next hot region will be in order to keep up with the changing tides.
Luckily, global consultancy Ernst & Young has released its Country Attractiveness Indices each year since 2003, which gives a numerical ranking to 30 global renewable energy markets by scoring renewable energy investment strategies and resource availability. The indices are updated on a quarterly basis and the most recent report can be found here.
Here is the firm’s assessment of Turkey:
Keen to go green. It seems that political unrest earlier in the year and challenging macroeconomic conditions have done little to dampen interest in Turkey’s renewables sector, which is continuing to gain momentum as Government support grows and project activity picks up. Its ideal geographic location vetween flailing Europe, a burgeoning Middle East and an aggressively expanding Asia is also helping to position Turkey as a serious contender in the renewables race.
Electricity price challenges FITs. The government remains committed to its 2009 pledge to generate 30 percent of power from renewables by 2023, up from less than 10 percent currently, requiring around 20 GW of renewable capacity over the next decade. The introduction of FITs in 2011 helped to create a large project pipeline, but the interesting dynamics of Turkey’s power market means the tariffs are actually more of a "safety net." The FIT for wind and hydro of US$0.073/kWh, for example, compares with a market power price of around US$0.09/kWh, resulting in power often being sold through bilateral contracts or in the open market.
Revisions signal efficiencies. More recently, the government also enacted a new energy law, which pledged to bolster competition by increasing the private sector share of investment in the electricity market to 75 percent from just one-third a decade ago. The legislative revisions in March 2013 also saw an increase in the threshold over which projects require licenses from 500 kW to 1 MW and a new 24-month time limit on pre-construction licenses in response to the hoarding of licenses by companies investing in renewables only to diversify without any strategic interest in the sector.
Turning up the power. One of the key drivers of the government’s ambitions to diversify the power mix is rapidly increasing electricity consumption, combined with an overreliance on the import of oil, natural gas and coal to meet this demand. Estimates of projected electricity demand of around 6–8 percent per annum compare with an average of less than 1 percent across Europe, while fossil fuel imports account for 71.8 percent of Turkey’s energy needs. In early 2013, the Deputy Energy Minister claimed the country would need to spend US$10 billion per annum on new power generation until 2023 to double capacity from the current 55 GW, with renewables to be one of the most important aspects of supporting economic growth.
Gigawatts, gigawatts and more gigawatts. This is not surprising given the abundant untapped resources. According to the country’s Energy Market Regulatory Authority (EMRA), Turkey has 45 GW of hydropower potential, 48 GW of wind potential and 600 MW of geothermal power potential (although geothermal direct use potential has been estimated at 31.5 GW thermal). Meanwhile, the Turkish Solar Energy Industry Association puts total feasible PV power at 450 MW–500 MW peak. This is in the context of total installed renewables capacity of around 3GW at the end of 2012.
Wind starts the race. The Government has historically expected wind to be the main driver in meeting its 2023 target, after a 2007 wind tender resulted in 750 applications totaling 78 GW of capacity, of which 350 were taken through to evaluation. Around 11 GW of projects are already licensed according to the government, with actual installed wind capacity of just over 2 GW at the end of 2012.
But will solar overtake? But after a slow start, it seems solar is finally picking up the pace to challenge its turbine rival. With less than 30 MW of solar capacity at the end of 2012, the government initiated the first round of bidding for 600 MW of solar licenses in June this year, receiving alomost 9 GW of applications within the five-day submission period. EMRA will greant licenses in the first half of 2014 based on specific sites defined in 2011, and further tenders are expected to follow given the government’s goal to install 3 GW of solar by 2023. It is also expected that the market for self-generation by corporates with large rooftops will be opened up by the new 1-MW threshold below which licenses are not required, with companies now looking for savings on energy bills rather than FITs.
Geothermal coming up behind. Turkey also has high hopes for its geothermal sector given the 600 MW of electricity potential and significant thermal potential. At the end of August, Zorlu Energy successfully commissioned the first 60-MW phase of tis Kizildere II project, while a tender for three-year exploration licenses for nine geothermal sites across the Kutahya region was announced in September 2013. Earlier this year it was revealed that Munich Re and the International Finance Corporation, will cooperate on developing and piloting geothermal exploration risk insurance in Turkey.
Supply chain incentives. This growing project pipeline has also created demand for local manufacturing capabilities, largely driven by the local content bonus payments attached to the FIT scheme. These additional premiums can increase overall payments by between 32 percent and 146 percent depending on the technology. Turkey’s geographic position also makes it a potential supply hub for neighboring regions and therefore particularly attractive to foreign manufacturers. China Sunergy Co., for example, began output at its 300-MW solar panel production line in May 2013, from where it hopes to better serve Europe and the domestic market.
Funding favorite. Turkey has continued to receive significant financial support for large-scale renewables projects froma range of International Finance Institutions (IFIs). Notably, both the EBRD and World Bank have €1 billion (US$1.3 billion) loan programs in place for clean energy projects in Turkey. It also became the EBRD’s second largest country of operations in 2012, and around half of the €3 billion (US$4 billion) invested in Turkey since 2009 has been for sustainable energy and energy efficiency, including direct funding for the country’s two largest wind farms.
Private participation. However, it is not sustainable — nor desirable — for the sector to rely on IFI funding indefinitely. More private sector investment, both domestic and foreign, will be required to help make the market more competitive and self-sufficient. According to BNEF, there are around 4GW of wind projects that have obtained their licenses but are still looking for providers of debt finance. There is plenty of funding available from local banks, typically offering 12-year tenors; however, heavy reliance on international credit has made rates relatively expensive. But this has the potential to change as economic conditions improve, and significant IFI investment to date signals the opportunities are there.
Jewel in the crown. Turkey is by no means a perfect market. The repercussions of political unrest earlier this year may yet be felt, and the devaluation of the Turkish Iira could to make project financing more expensive. More also needs to be done to address a heavily regulated energy sector, although March’s pledge to increase private sector participation is encouraging. But there is little doubt that the country’s renewables sector is a diamond in the rough that will continue to attract increasing attention from all corners of the globe in the months and years ahead.
Lead image: Istanbul, Turkey via Shutterstock