The weekend read: Land of the Crescent Sun

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From pv magazine, March edition

Looking at a solar radiation map of Eurasia, at a first glance Turkey can be identified as a rather intense reddish-purple spot across the region. From this it is clear that its hues are almost of the same kind of those of another country located at the same latitude – Spain – which currently hosts one of the world’s hottest PV markets.

Thanks to these strong irradiance attributes, Spain and Turkey are often being pointed out by analysts and energy experts as the future sun mines of Europe, as well as two potential energy hubs between the Old Continent and North Africa and Asia, respectively. But if in Spain the solar market has now reached full maturity in terms of costs, regulatory environment, and planned development, in Turkey a general uncertainty is reigning over the future of its promising solar clean energy landscape.

Despite its significant solar resources and the strong PV development achieved in 2017 and 2018, in which, according to data compiled by European solar association SolarPower Europe, the country deployed 2.58 GW and 1.64 GW respectively, Turkey’s current macroeconomic situation and the constant decline of the lira, together with a regulatory framework that needs to be refreshed if more growth is desired, are not fostering optimism among analysts and the sector’s operators.

Weak prospects for 2019

According to Katherine Poseidon, Policy Analyst for EMEA at BloombergNEF, only around 500 MW of PV capacity may be deployed in the country this year. “BNEF’s H2 2018 benchmark LCOE for PV without tracking in Turkey is
$98/MWh, the highest in the EMEA region,” she says to pv magazine, while also highlighting that capex required for solar project costs remain high compared to the rest of the region – due to tighter regulations on imported panels designed to incentivize local manufacturing.

Ates Ugurel, the founder of Turkish social enterprise Solarbaba, also believes that this year’s growth may range between 500 and 600 MW. “This will come mainly from the latest non-licensed SPP installations and also some licensed projects,” he tells pv magazine.

Unlicensed PV no more

At a recent conference held in Düsseldorf, Germany, the founder of Turkish consultancy Icarus Energy Ltd., Hakki Karacaoglan explained that there’s not too much time left for completing unlicensed projects with a capacity of up to
1 MW.

These projects can be combined into larger solar parks consisting of several 1 MW sub-units – the reason being that the last such projects were given permission to proceed by Turkish authorities around two years ago.

Additionally, although the program for unlicensed projects is in theory set to expire at the end of this year, there is only a limit of two years for their grid-connection.

According to Karacaoglan, projects with a total of 6.4 GW were given the green light, but about 5.1 GW of these are already online or close to completion, representing almost all of the of solar capacity already registered by the country’s grid operator TEİAŞ at the end of February. This means that only a limited portion of the remaining approximately 1.3 GW will see the light of day in the upcoming months. “But most of these projects are now garbage, with the companies behind them not even existing anymore,” Karacaoglan says.

However, for the developers that will achieve grid-connection prior to the expiry of their rights, unlicensed projects will still represent a good business, as the U.S. dollar-linked 10 year FIT is still paid at $0.133 per kWh, while the grid fee, which is charged in liras, has almost halved when compared to 2015 levels.

According to Katherine Poseidon, this generous feed-in tariff has also contributed to keeping costs higher than the rest of the region. She is also convinced that more growth may come after 2020, despite the current uncertainty, if a new stimulus is provided.

“We don’t expect support for PV to continue at the same level, but if the new mechanism offers at least some kind of price guarantee, that would insulate projects from merchant risk and may be enough for the sector to continue to grow,” Poseidon says.

“New investment in PV dropped by half from 2017 to 2018,” the Bloomberg analyst went on to say, while also stating that, although the Turkish economy does seem to be stabilizing, lenders’ appetite to get involved in the market may take some time to recover.

Unsubsidized growth?

That more growth may come in 2020 was also confirmed by Ugurel, who also stresses how solar may find its way through the country without the need of further public support.

“I don’t think we need subsidy anymore,” Ugurel asserts. “Self-consumption and renewable corporate PPAs are the future.” On the other hand, as Poseidon maintains, retail electricity tariffs increased considerably in 2018, which could incentivize uptake. “I don’t think, however, we’re at a stage yet where we could speak of big growth volumes,” she adds.

For big volumes to become possible, lower costs of financing are needed. According to Ugurel, however, currently nobody is willing to get a credit in U.S. dollar terms and the cost of financing in Turkish lira terms is still too high. “It’s more profitable to put the money into the bank instead of making a solar investment with 6-7 years payback period,” he says.

According to Ugurel, net metering rules, which the Turkish government currently plans to apply only to residential PV installations not exceeding 10 kW in size, should be applied to all PV systems for self-consumption, regardless of their capacity.

The promised enabling self-consumption regulations are still missing. The necessity of clear net metering regulations was also stressed by the BloombergNEF analyst, as these, combined with rising retail tariffs and the country’s good solar resources, could sustain further development. However, currency volatility and import tariffs are also taking their toll in this regard.

Missing YEKA

Turkey’s Renewable Energy Resources Area Project (YEKA) tender scheme for large-scale solar projects has so far delivered poor results. This scheme, in theory, has the advantage, compared to that for unlicensed projects, in that projects do not have to be split into 1 MW component parts.

Additionally, licensed projects are entitled to receive a fixed tariff over the PPA period, and are also allowed to sell power to the spot market after the PPA expires. This possibility is denied by current regulations to all unlicensed projects, which means their future after the FIT contract will depend on future regulatory changes.

“Some of these unlicensed projects are now six years old,” stresses Icarus Energy’s Karacaoglan, “and nobody knows now what will happen after the end of the 10 year period.” According to him, this might be a good opportunity for deploying storage, which may be supported through a dedicated regulation that is now under discussion.

Despite this strategic advantage, only
82 MW of licensed projects selected in the first tenders held between 2014 and 2015, in which around 600 MW of solar capacity was allocated, are currently operational. Most of these projects are entitled to a FIT of $0.133/kWh for 10 years, plus five year premiums for components manufactured in Turkey.

As for the YEKA tender held in March 2017, the 1 GW project in Konya awarded to Souh Korean module manufacturer Hanwha Q Cells and its Turkish partner Kalyon Enerji is now in doubt – as the government has recently approved the decision of the two companies to go separate ways. According to Karacaoglan, the construction of the 500 MW module factory in Ankara, which was part of the consortium’s bid in compliance with local content requirements embedded in the tender, was halted by the South Korean company last year.

“The split between the consortium partners that won the first tender was a blow to the credibility of the YEKA mechanism, but with Hanwha Q Cells now out of the picture Kalyon may be able to find a new partner,” says Bloomberg’s Poseidon. “This would be a positive development, as Kalyon does not have the experience to bring 1 GW of PV plus manufacturing capacity online on its own,” she explains.

According to Ugurel, forcing a module manufacturer and an EPC company under the umbrella of a single company was a mistake. “These are separate roles and should remain so,” he says. “And no module or cell manufacturer will realize technology transfer for just a 500 MW production line,” he continues.

In the second 1 GW YEKA tender scrapped in January, local content requirements were raised even further with developers being requested to use domestically-produced modules for at least 60% of the modules. “The cancellation of the second YEKA tender for PV was not a major surprise, as the first tender held in 2017 had only attracted four bids,” Poseidon highlights.

Ugurel says, however, that the second YEKA will be relaunched soon, and that it was delayed at the request of the majority of the companies that were participating. The request is understood to be due to difficulties in raising financing. Additionally, it is thought that the new tender will also include a storage component, and will come in the form of some twenty 50 MW projects, instead of larger plants.

Local manufacturing

As the local solar module industry seems unable to move forward at the same pace of the global PV industry, lower levels of domestic content requirements are recommendable, especially if bigger volumes of deployed solar power are desired. According to Ugurel, only a few of the Turkish panel makers will be able to survive: those with financial strength and cash flow from solar power project development and EPC business.

“It’s said that there are more than 45 local manufacturers with a total annual production capacity of between 5 GW and 6 GW,” he says. According to Ugurel, however, these manufacturers will not be able to export much of their products to European or MENA markets, as those are dominated by cheaper Chinese products. “The main cost is the import of the solar cell and it’s in USD terms. Therefore, the lira fall has almost no effect,” he clarifies. “Turkey has the largest module manufacturing capacity in Europe, and almost no [end] market for 2019 and 2020,” Karacaoglan adds.

A promising market despite current challenges

Although the short-term prospects for the Turkish PV market are not very sunny, at least for this and next year, and it is difficult to predict what could happen beyond 2021, the fundamentals of the country’s solar energy landscape remain good. If regulations for net metering and storage are introduced and tenders adapted more to international standards, growth in these two segments is very likely.

Besides politics and regulation, the Turkish renewable energy sector now has to enter into the era of unsubsidized PV. As Spain and other southern European markets have shown in recent years, the first step in this direction is the most difficult. After the first PPAs were signed in these countries, a wave of “subsidy-free” projects, now under development and construction, came as a natural consequence.

Turkey has all it needs to make unsubsidized PV happen: rising electricity prices, very good solar irradiation, and a solar sector that is striving to reduce costs and improve quality. If the macroeconomic picture also improves, there is no doubt we will hear more about “grid parity” solar from the land of the Crescent Moon.