The future of solar PPAs in Turkey

Three workshops were planned by TurSEFF (Turkey Sustainable Energy Financing Facility) and Solarbaba (a social enterprise in solar sector) for 2020 in Turkey, with the main theme of “PPAs as a model to create new renewable energy installed capacity”. The purpose of these workshops was to brainstorm together with different parties, present the ideas and open the subject to wider public discussion. Each workshop was designed to focus on a different key aspect of renewable PPAs (power purchase agreements).

The first workshop took place on February 22, 2020, together with the participation of energy companies which are currently working on this issue. It focused on “electricity generation and trading”.

Local financial institutions, energy companies and corporate consumers participated in the second workshop, on June 18, 2020, which focused on “finance“. The final workshop will be held in October 2020 and will address the “consumer” aspect with the participation of more corporate electricity consumers from different sectors.

Insights from the first two workshops are provided in this article from the perspectives of three parties involved in Turkey’s solar PPA market: (i) energy companies (electricity producer/seller) who are the IPPs (Independent Power Producers) and investors of renewable energy projects; (ii) corporate electricity consumers (buyers) who purchase clean energy to be generated from these power plants in the long term; and (iii) financial institutions which will finance the projects.

Electricity producer (seller) perspective

According to the energy companies, there are several options for solar PPAs to become a viable alternative business model in the Turkish energy market as of 2021.

In the self-consumption model on the unlicensed side, electricity cannot be sold according to the current legislation. In this model, investors can invest in solar on their own rooftops and consume the electricity they generate. If electricity generated by unlicensed power plants may be sold on the regulated market through EXIST (Energy Exchange Istanbul), and a collateral structure can be established in this regard, energy companies may invest in factory rooftops, install RSPVs (Rooftop Solar PV) and sell the electricity to factory owners.

This will pave the way for Energy Service Company (ESCO) or Build-Operate-Transfer (BOT) models in the sector. This would not contradict the self-consumption principle; rather it would be financing within the self-consumption model. This would accelerate the implementation of self-consumption RSPV projects. Both industrial and energy companies would win.

On the licensed side, the YEKDEM structure is coming to an end and a new mini-YEKA (Renewable Energy Resource Area) model has been introduced. The current energy market legislation does not pose an obstacle for the implementation of the renewable PPA model in licensed power plants. However, compared to YEKDEM, which was a 10-year public electricity purchase guarantee (feed-in-tariff), PPAs were not an attractive commercial model. However, it is predicted that it may become attractive for solar PV power starting from 2021.

Although there are energy companies that will make the investments, consumer(s) who buy the electricity, and financial institutions that provide financing, under the current situation, it is very difficult to create new licensed solar capacity, due to grid connection capacity limits and long lasting application and tendering processes. In the case where the electricity producer, consumer, and financier sign a solar PPA, defining the methodology of the grid connection capacity allocation to develop the PPA structure, alternative to the mini-YEKA model, would be useful.

Another option is to issue a new regulation specific to renewable PPAs that covers renewable energy investments of all sizes, without making any distinction, such as unlicensed or licensed. For example, an industrialist may install 2 MW on their rooftop, buy the equivalent in generated electricity from a 20 MW power plant, or become a 2 MW shareholder of a 20 MW power plant and receive the energy. On the other hand, it is very important to include smaller scale (unlicensed) energy generation facilities in the market regulated by EXIST.

Electricity consumer (buyer) perspective

The European Green Deal is a forthcoming subject and brings noticeable opportunities and risks. There are substantial opportunities particularly in terms of new renewable energy capacity increases and decarbonization of the industrial infrastructure in Turkey. With good governance of the process, it is possible to transform the potential risks into opportunities.

The most critical heading in the European Green Deal for electricity consumer industrial companies in Turkey is “Border Carbon Adjustment” related to “Carbon Leakage”, because Turkey is among the largest suppliers of the European Union and the majority of Turkish products are exported to the EU countries (41.1%, according to the Jan – May 2020 data from the Turkish Ministry of Commerce).

Once this mechanism is established, industrial companies in Turkey wishing to export their products to the European Union will have to bear an additional cost for both carbon emissions from the consumed electricity supplied by the grid and from their own processes. It would be wise for all companies to seriously consider these two aspects and start working on them. In this context, renewable PPAs may become a good option for electricity consumers to purchase electricity from renewable sources at a more affordable price.

Although the Green Tariff – an electricity tariff from renewable energy resources introduced in August 2020 by EMRA (Turkish Energy Market Regulatory Authority) is another option for this, it is observed that it brings an additional cost to the consumer. In addition, establishing a Carbon Emission Trading infrastructure and marketing it in line with renewable PPAs will be a positive development on the consumer side.

International companies with significant investments and/or supply chains in Turkey currently create substantial demand in the Turkish market for supplying their electricity consumption from renewable energy in accordance with their decarbonization goals. Likewise, many energy companies with international shareholders and which are active in the Turkish market have been working on PPAs to be able to meet the demands of the above-mentioned consumers’ international accounts for their operations in Turkey. Some of the global energy companies are waiting for the development of renewable PPA mechanisms to enter the Turkish market.

Financial institutions perspective

The financial institutions in Turkey have achieved significant growth in renewable energy financing. The key element of this growth was the YEKDEM mechanism – a feed-in-tariff scheme introduced by the Turkish Government in 2010. YEKDEM has offered elements that reduce the risk of financial institutions with a fixed price and public electricity purchase guarantee. The fact that the financing provided was mainly in US Dollars enabled financial institutions to eliminate the exchange rate risk.

The financial institutions agree that a new market may be formed after YEKDEM with renewable PPA models. The fact that financial institutions have not had much experience so far indicates the needs will be determined more clearly over time. However, all financial institutions are eager to participate in this new market.

The most critical issues are how the legal structure will be formed, what the contracts will cover and how the risks will be minimized. The involvement of financial institutions in the financing process before the contract, agreeing on pricing, maturity, payment terms and other scopes of the contract, and adjusting the financing conditions accordingly, are among the factors that will increase the accessibility of projects to finance and reduce the risk for all parties.

The outstanding terms are that: the maturity of the contract should be compatible with the payment plan/terms; the contract should be final and irrevocable with the penal sanctions for termination, which may happen under very limited circumstances; the contract price must be predictable at a fixed price with escalation if necessary; and the contract currency may be in US dollars or Turkish Lira, while prices may be indexed with a TL reference interest rate (TLREF).

Considering risks, both project risk and buyer side risk need to be addressed. There is no problem in analyzing the project risks with the experience of financial institutions in this regard. However, the buyer’s ability to pay the amount specified in the contract during the term of the contract is the most important risk for financial institutions. The financial strength of the buyer and the long-term sustainability of their business activities are other important parameters of risk measurement. New financial risk elimination mechanisms and products are needed for renewable PPAs in the Turkish market.

In Turkey, there is no sophisticated balance sheet risk assessment mechanism like in advanced economies to assess the risk of the buyer side. For this reason, long-term O&M (Operation and Maintenance) agreements with EPCs (Engineering Procurement Construction Companies), performance bonds, and construction period insurances will be the risk mitigating instruments.

Determining how the buyer’s payments will be made, monitoring the payments, and guaranteeing them to the financial institution are other important elements of risk management. Since the PPA model seems risky from the perspective of financial sector representatives, financial institutions may request additional collateral.

Conclusion

In conclusion, solar PV investments have become very attractive from the technology and costs perspective due to the decline in renewable energy costs in recent years. Moreover, it is expected that PV module efficiencies will increase, and costs will further decrease with new module technologies. The decrease in the payback period of investments will both increase the interest of investors and facilitate the work of financial institutions with shorter-term renewable PPAs. In addition, the development of storage technologies and the decrease in costs will enable new, more flexible business models in the market.

It is the right time to elaborate on solar PPA-based business and financial models in the Turkish market to create new solar energy installed capacity. The relationship between electricity consumers and producers should be improved to disseminate knowledge to all levels of consumers. Additionally, financial institutions are expected to be willing to leave their comfort zones to finance new structures and business models, such as renewable PPAs for the market, to develop the necessary financial structures to finance those models in a way that will bring the least burden to all parties.