This year, the Turkey Sustainable Energy Financing Facility (TurSEFF) and social enterprise Solarbaba planned three workshops focused on the theme of “PPAs as a model to create new renewable energy installed capacity.” The workshops were designed to focus on different aspects of renewable power purchase agreements (PPAs).
The first, “Electricity generation and trading,” took place on Feb. 22 with the participation of interested energy companies. Local financial institutions, energy companies, and corporate consumers participated in the second “Finance” workshop on June 18. At the time of going to print, the final workshop was scheduled to be held at some point in October and was set to address “Consumers.”
Insights from the first two workshops are provided here, from the perspectives of three parties involved in Turkey’s solar PPA market: (i) energy companies (sellers); (ii) corporate electricity consumers (buyers); and (iii) financial institutions.
There are several options for solar PPAs to become a viable alternative business model in the 2021 Turkish energy market. With a self-consumption model on the unlicensed side, electricity cannot be sold under current legislation. In this model, investors may invest in solar on their own rooftops and consume the generated electricity. If electricity generated by unlicensed power plants is sold on the regulated market through Energy Exchange Istanbul (EXIST), and a collateral structure can be established, energy companies may invest in factory rooftops, install rooftop 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 and would not contradict the self-consumption model. Instead it would be considered financing within the model. This would accelerate the implementation of self-consumption rooftop projects, and both industrial and energy companies would win.
On the licensed side, Turkey’s local 10-year FIT regime, YEKDEM, was introduced by the government in 2010. It 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 implementing a viable renewable PPA model in licensed power plants.
Under the current situation, it is difficult to create new licensed solar capacity due to grid connection capacity limits, and lengthy application and tendering processes, despite the willingness of energy companies to invest, the interest of consumers to buy the electricity, and financial institutions providing financing. In the case where the electricity producer, consumer and financier sign a PPA, defining the grid connection capacity allocation methodology to develop the PPA structure, alternative to the mini-YEKA model, would be useful.
A new regulation specific to PPAs covering renewable energy investments of all sizes, without making distinctions like unlicensed or licensed, would be another potential option.
The proposed European Green Deal presents opportunities, particularly for new renewables capacity and the decarbonization of Turkish industrial infrastructure.
Risks do exist, however. The most critical for Turkish industrial companies is the “border carbon adjustment” related to “carbon leakage,” because Turkey is among the largest suppliers of the European Union. The majority of Turkish products are exported to EU countries, at 41.1%, according to the January-May 2020 figures released by the Ministry of Commerce in Turkey.
Once this mechanism is established, industrial companies in Turkey exporting products to the EU will bear an additional cost for both carbon emissions from the consumed electricity supplied by the grid and their processes. In this context, PPAs may become a strong option for electricity consumers to purchase renewable electricity at a more affordable price.
Although the Green Tariff – an electricity tariff from renewable energy resources introduced in August 2020 by the Turkish Energy Market Regulatory Authority (EMRA) – is another option for this, it raises additional costs for consumers. Establishing carbon emissions trading infrastructure and marketing it in line with renewable PPAs will be a positive development on the consumer side.
Turkish financial institutions have achieved significant growth in green financing. The key element of this was the YEKDEM model, which reduced the risk for financial institutions via a fixed price and public electricity purchase guarantee. Meanwhile, the fact that the financing was mainly provided in U.S. dollars enabled financial institutions to eliminate the exchange-rate risk.
A new market may be formed after YEKDEM with PPA models. The most critical issues are the formation of the legal structure, what contracts will cover, and how 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 risks.
Overall, both project risk and buyer side risk must be addressed. The buyer’s ability to pay the amount specified in the contract during the term of the contract is the most important point for financial institutions, although the buyer’s financial strength and the long-term sustainability of their business activities are other key parameters. New financial risk elimination mechanisms and products are needed for renewable PPAs in the Turkish market.
There is no sophisticated balance sheet risk assessment mechanism in Turkey to assess the risk of the buyer side. For this reason, long-term O&M agreements with EPCs, performance bonds, and construction period insurances will be the risk mitigating instruments.
Determining how the buyer’s payments will be made, monitoring payments, and guaranteeing them to the financial institution are other important risk management elements. Since the PPA model seems risky from the perspective of financial sector representatives, financial institutions may request additional collateral.
Selen İnal, Koray Göytan & Alican Özden
About the authors
Selen İnal has worked as Turkey Sustainable Energy Financing Facility (TurSEFF) business development manager at Stantec Turkey, a global strategic consulting firm, since November 2019. She has more than 18 years of experience in a range of energy-business segments, including power plant investments, electricity trading, renewable energy, electricity markets, and engineering and design. Previously, she managed the development process of a high-efficiency integrated PV panel manufacturing plant.
Koray Göytan has been involved in the project management, project design, design coordination, sustainability consultancy, and commissioning authority stages of commercial building projects for nearly 10 years. In the third phase of TurSEFF, he joined the group as deputy team leader. Since April 2018, he has been working as team leader.
Alican Özden studied electrical engineering, with a focus on renewable energy systems, and has completed an MSc in renewable energy. He later worked at an EPC company where his focus was on rooftop PV installations. He undertook roles in sales, sourcing, engineering, and installation, before shifting to regulatory licensing of multiple solar power projects. He has worked at Stantec since 2016 as an energy engineer. He has supported local and international experts during many projects for international clients such as the EU, World Bank, and EBRD. Since 2008, he has been working as the deputy team leader of TurSEFF.
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