In 2009, the Turkish government decided to facilitate a renewable energy investment programme1 for the period 2010 to 2023 funded with private capital, with the aim of reaching generation capacity of 56,000 megawatts (MW) of which 20,000MW is to be wind and 36,000MW hydro1. The purpose of the programme is to match demand increase and reduce the country’s dependency on imported gas and coal. As we write this commentary, 17,400MW of wind2 and 14,900MW of hydro remains to be built by 2023.
At the same time, the government introduced a support tariff to give investors and bankers downside protection. The support tariff is denominated in US dollars, and allows investors the opportunity to opt in or out once a year for the first 10 years of the asset’s lifetime. The tariff ranges from 7.30-9.60 US cents/kWh for hydro plants to 7.30-11.00 US cents/kWh for wind farms subject to local content. Meanwhile, electricity spot prices have been 15 percent to 20 percent higher than the support tariff over the past two years. The authorities have, and continue to, liberalise the energy market. There is a 5 percent withholding tax on dividends remitted to foreign investors, as against 15 percent for Turkish investors.
A market with growth potential
Turkey’s GDP per capita was one-third of that of EU-27 region in 20124 and has grown from $4,600 per capita in 2003 to $10,7005 in 2012. The population count is 77 million, making it the third-largest country in Europe, and has grown 8 percent from 2007 to 2012. The young (0-14 years) account for one-quarter of the population6. The government subsidises the third child in a family to stimulate further population increase. The annual growth in electricity demand is projected to be 6.5 percent to 7.6 percent for the next eight years7.
Turkey is a hub for manufacturing companies serving the Turkish market and exporting to Europe, the Middle East and North Africa. The country’s main industries are agriculture, textiles, ships, cars, construction materials and consumer electronics. The government has put in place a public-private infrastructure programme of $2 trillion8 to be completed by 2023.
The main drivers for operational renewable energy asset prices are electricity price and supply and demand. Natural gas is all imported and accounts for 44 percent of electricity generation. The government wishes to reduce reliance on imports.
Asset prices and financing
Asset owners are becoming more realistic since the euphoric days of 2011, when electricity expectations exceeded 10 US cents/kwh. Since then the average market spot price has moved from 8.0 to around 8.6 US cents/kwh and expectations have come down, so buyers and sellers of operational wind and hydro assets have found more common ground. As we write this commentary, there is a stronger appetite for wind than hydro construction projects. Operational hydro and wind asset equity returns are in the low teens, and brownfield assets in the high teens.
Today Turkey has the healthiest banks in Europe,9 governed by a modern regulatory regime. As a consequence of strict capital requirements, project finance is not offered by Turkish banks for brownfield projects. The banks offer structured finance solutions, which create hurdles for investors not prepared to offer additional security. Operational asset loans have short tenors not suited for the lifetime of the assets. The solution is to combine operational assets with projects, which enables local banks to take commercial risk.
Turkey wants and needs foreign direct investment to further build the country’s infrastructure. The people want more air conditioners, washing machines, iPads, houses, bridges, roads, hospitals and cafés. Investors want decent, long-term, stable returns. We firmly believe renewable energy investments in Turkey represent the perfect equilibrium.
1Electricity Energy Market and Supply Security Strategy Paper
2Energy Market Regulatory Authority
3Turkish Electricity Transmission Company
4, 5World Bank and Europstat (EU)
6Turkish Statistical Institute
7Turkish Electricity Transmission Company
8Magazine “Turkish Perspective”, August 2013
9The Economist, 18 May 2013, “The Lure of Bosphorus”
Børge Tvorg is the Oslo-based chief executive officer of MiklaGard Energy Management, an asset management company with offices in Norway and Turkey