A sun-kissed, wind-swept land criss-crossed by hundreds of rivers, Turkey is one of Europe’s most attractive sites for renewable power development. To date, red tape and underdevelopment of resources have clouded the investment landscape, but the government’s ambitious renewable energy targets may help jumpstart investor interest. Turkey is energy insecure, with almost half of its electricity generated by fossil fuels, of which more than 90% is imported. Renewable energy sources, such as wind power, solar, biomass and hydro, account for a little more than a quarter of the energy mix, and that is almost entirely accounted for by hydroelectricity, according to figures from the state-owned electricity generation firm, Elektrik Üretim.
The rise in demand for power is topping 6% a year. Turkey will have to spend $10bn a year for the next decade to double capacity, Hasan Murat Mercan, the deputy minister of energy, said at a conference in February 2013. By 2023, it wants 30% of power to come from renewable sources.
There are also environmental concerns and international obligations. Turkey must comply with EU standards on emissions to further its entry bid and is also a signatory to the UN Framework Convention on Climate Change to stabilise greenhouse gas concentrations in the atmosphere. Turkish carbon dioxide emissions were 3.9 tonnes per capita in 2009, down from a peak of 4.1 tonnes in 2007, according to World Bank data, and well below developing market peers in Europe and Central Asia, which produced an average 5.5 tonnes per capita. But a focus on renewables now means that Turkey can get ahead of the emissions curve. The government seems to be heading in the right direction. Its goal is to triple spending on research and development on renewables from 1% of GDP to exceed the OECD average of 2.5%. It has established a Clean Technologies Fund to disburse financing from institutions such as the World Bank, the International Finance Corporation, and the European Bank for Reconstruction and Development.
All That Bluster
The gusty Aegean Sea has high onshore and offshore potential for wind development. Existing farms on the coastline include General Electric’s 22.5-MW Sares wind farm near the town of Çanakkale on the Gallipoli Peninsula and the 10-MW Karadağ 350 km further south, erected at a combined cost of $72m. Local developer Ağaoğlu Group is planning to build a 600-MW farm and in 2012 signed a deal with Chinese turbine manufacturer Sinovel to supply $1bn worth of turbine towers and generators. According to a March 2012 statement by the company’s chairman, Ali Ağaoğlu, the firm holds licences that would allow it to develop up to 700 MW in wind capacity, adding that it has targeted 1000 MW by 2015.
So far, the Energy Market Regulatory Authority (EPDK) has issued a total of 264 wind licences adding up to 9300 MW, a January 2013 report by energy consultancy ICIS said. Yet the government’s mid-2014 target of 10,000 MW seems unattainable, since generation has only reached 1800 MW, according to the European Wind Energy Association, compared to 30,000 MW in Germany. Although wind energy in Turkey could theoretically produce 88,000 MW, most analysts believe the government’s capacity target of 20,000 MW by 2023 is more viable, given the national grid’s infrastructure constraints.
The path to harnessing Turkey’s wind has not been smooth, not least when permission is sought for plugging farms into the grid. A report by Turkish law firm and consultancy GSI Meridian criticises EPDK for mismanaging applications, which were sometimes made for the same site.
The report also says inherent problems with the legal framework, which has been amended more than 30 times since it came into effect, mean that there are currently 24 licences in a state of limbo awaiting permission from either EPDK or the state Turkish Electricity Transmission Company (TEİAŞ). Because of “a lack of technical and regulatory knowledge in Turkey, both the Electricity Law and the licensing regulation could not provide a sufficient and strong legal base for renewable energy investments,” wrote Hasan Okur, associate at GSI Meridian.
Some of the companies that were awarded wind licences have been traded like commodities, since trading the licence itself is illegal. Others have yet to complete basic financial and technical analyses. GSI Meridian recommends the government encourage the development of a secondary market to ensure licences end up in the hands of bona fide renewable energy providers and not as portfolio investments for holding companies.
New regulations were introduced in 2012 to reduce speculative activities, but the changes are creating new problems. “Reforming licensing is crucial. Too much competition leads to speculation. Too many regulations hinder investment and cause delays. A sound balance must be struck to attract investment and encourage long-term projects,” İbrahim Özarslan, the general manager at the Turkish unit of German wind turbine maker Nordex, told OBG.
Another challenge is the low prices that producers receive. Erol Memioğlu, the president of Koç Holding Energy Group, told OBG, “Feed-in tariffs in Turkey are not high enough to generate strong investment interest in renewable energy projects. Indeed, this is especially problematic given the absence of long-term contracts in the domestic electricity market, including bilateral, spot market and vertical integration contracts. For this to happen, privatisation of state-owned power generation assets is very important.”
The feed-in tariffs for renewables set by TEİAŞ are among the lowest in the world, but consumers pay Europe’s highest electricity prices. The tariff for solar, hydro and biomass is valued at €0.10 per KWh while it is €0.56 for wind. In Germany, biomass and solar energy can fetch up to €0.25 per KWh. Although not insurmountable, these factors have combined to create an unattractive environment for foreign investors in the renewables sector.
Here Comes Sunshine
The obstacles that beset the wind-licensing process could similarly affect the 600 MW of solar licences that are up for grabs in a first licensing round in June 2013. Currently, there are 5 MW of installed photovoltaic systems generating electricity; in cloud-covered Germany, 7500 MW were installed in 2012 alone. Allocations on a scale this small threaten to reduce profitability, taking some of the shine off for major players.
“Why have the authorities limited the upcoming solar round to just 600 MW? Perhaps they have over-learned the lessons of 2007, when regulators moved too quickly in the wind segment and ended up issuing licences to speculators. This is plausible. The government is cautious and wants to move slowly to avoid further embarrassment and repeating past mistakes,” said Evren Evcit, CEO of energy company Anel Enerji, which has interests in the solar field.
That said, Turkey’s solar potential makes it an attractive investment proposition. The government’s Clean Technology Fund estimates that the country has generation capacity of about 380 TWh per year, as well as a landmass of 4600 sq km feasible for investment. If fully exploited, this is equivalent to around 56,000 MW of gas-fired capacity. All of that sunshine means that the country has the second-highest solar potential in Europe.
Investors could also benefit from changes to regulations that promote local manufacturing. The law on renewable energy, passed in 2005, promises a 50% premium on feed-in tariffs to solar energy producers that use locally produced equipment.
“The government is keen to encourage the localisation of production across the economy, especially in renewable energy,” Mete Maltepe, the general manager of GE Energy Turkey, told OBG. “This is why incentives have been established for domestic wind turbine manufacturing.”
These incentives have led to a boost in foreign investment in a nascent photovoltaic manufacturing sector. In January 2013, China Sunergy Company opened a 150-MW module production line in Istanbul’s free trade zone. The plant will soon be able to produce 200-MW modules, according to the Turkish partner Seul Energy.
A Costly Solution
Solar power is not without its critics, however. While the technology has been around for years and is becoming increasingly efficient, it is still very expensive in relative terms. In a study done by the US Energy Information Administration, solar power facilities cost about four times more per KWh produced than a conventional oil-gas combined-cycle plant. Despite improvements, solar panels still do not produce that much power. Photovoltaic cells convert sunlight into energy at around 10-20% efficiency and generate electricity costing about $0.18-0.30 per KWh. The theoretical maximum efficiency of current technology is 31%.
However, generating costs are falling as the photovoltaic market has crashed due to manufacturing overcapacity in China. The price per watt for photovoltaic modules fell from about $2.75 in 2009 to around $1.00 at the beginning of 2012, and recent spot price reports put average module prices at about $0.62 per watt. Prices are so cheap now that people are starting to talk about grid parity, the point at which a given alternative energy is as cheap as energy from conventional sources.
Costs may have come down, but other criticisms remain. The very nature of solar energy makes it problematic. Unlike a conventional power source, the output cannot be adjusted depending on demand, so the utility has to have oil or gas generators at the ready should production fall too low. Excess energy also needs to be stored. Batteries are inefficient, expensive and usually toxic. Other solutions might be clean, but they also expensive, hard to adjust and often unworkable in certain environments, such as hydro storage in the desert.
In a way, clean energy is not all that clean either. The batteries usually contain lead, and the cells themselves can contain arsenic, cadmium, hexafluoroethane, lead and polyvinyl fluoride, many of which can find their way into the environment during manufacturing and disposal. Solar panels could be the world’s next great toxic waste problem.
Rivers Run Through It
While solar is still relatively undeveloped in Turkey, the country has made greater strides in the field of hydropower, although mainly in small-scale developments. Still, Turkey has 1% of the world’s hydropower potential, and 16% of Europe’s. That translates into 128bn KWh annually in Turkey, the government says. In capacity terms, the country’s potential stands at about 35,000 MW; just 15% of this figure is installed at present.
Hydropower stirs mixed feelings in both investors and locals whose lives are affected by the damming of rivers. While hydroelectric plants generate almost no carbon emissions, this is offset by damage to biodiversity and the surrounding environment. Memioğlu said, “Better planning is needed to coordinate and license hydroelectric projects, particularly those operating on the same basin. Requiring environmental impact reports is also essential.”
Environmentalists cheered when the Council of State, Turkey’s top administrative court, in January 2013 ruled that the Ilisu dam could not be built without an environmental impact report, from which the government had exempted the project.
The government has licensed thousands of smaller hydropower projects, such as run-of-the-river hydroelectricity. Although less disruptive to ecosystems, these face opposition from farmers who are afraid they harm irrigation systems and from conservation groups because they threaten biodiversity. Moreover, smaller projects may not make sense from an investor’s viewpoint. “The hydropower market in Turkey is fragmented; there are too many small-scale projects that only produce energy in the range of 5-10 MW. What the segment really needs is consolidation, big investors and economies of scale,” said Celal Metin, the chairman of MET Group, an energy generation investment.
Public opposition to plants, mainly in the hills above the Black Sea and Mediterranean, has undermined political support. Projects that were licensed years ago languish due to court cases or because companies want to hold on to them for portfolio purposes, as with wind. These factors make the state’s goal of realising 100% hydropower potential by 2023, from less than half now, unlikely.
Widespread hydrothermal occurrences indicate that Turkey has significant geothermal resources. The country has nearly 1500 thermal and mineral water springs and more than 170 geothermal fields, with temperatures ranging up to 242°C, according to the EU-funded GEOFAR project, which deals with the application and promotion of geothermal energy in Europe. Turkey’s geothermal energy potential capacity, estimated at 30,000 MW, ranks it seventh worldwide. Proven reserves are 4000 MW, although just 2.5% of that was installed in 2011. The Turkish Geothermal Association projects that 500 MW will be on-line by 2015. The government is allocating new surface and deep exploration licences for private firms, and foreign investors are beginning to explore. In January 2011 Enel, Italy’s biggest utility and a veteran geothermal player, signed a joint venture with local partner Uzun, which holds 142 exploration permits in western Turkey.
Legislative, commercial and social challenges to green energy still persist. The absence of a local manufacturing base, including no wind turbine production, also undermines the sector, as does a lack of research and development. “The key to ensuring that the renewable energy sector continues to grow is, without a doubt, knowledge and technology transfer in order to stimulate innovation and high-value-added activities,” said Nordex’s Özarslan.
Financing is another problem, as Turkish banks still see green energy development as too risky and seem worried about the long-term turnaround on their investments. The government, too, appears to favour strategic resource purchases and keeps feed-in tariffs low. To fulfil its renewable target, Turkey must encourage transparent investment opportunities. Otherwise, its lofty targets are so much hot air.
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