Turkey: Pitfalls In Financing The Renewable Investments In Turkey

Last Updated: 1 October 2014
Article by Safak Herdem

In 2012, OECD has reported that economy-wide transformation will require cumulative investment in green infrastructure in the range of USD 36-42 trillion between 2012 and 2030, i.e. approximately USD 2 trillion or 2% of global GDP per year. Today more less is being invested annually. Therefore, a remarkable investment gaps exist that needs to be addressed.

This basically shows that the barriers to finance the renewable projects are global blocking out to consider the subset of investments as project finance. Even the key elements of business modeling in renewables shows similarity with ordinary project finance initiatives, there are more unforeseen problems not figured out in securitization and risk mitigation. That said, the regulatory issues from government perspective still remain uncertain for institutional financers. However in a world that the use of energy is expected to increase 80% by 2050, there is no other choice than institutionalizing the investment in renewables.

In Turkey, the applications for unlicensed electricity generation of solar projects have been exceeded 2.000 that basically show stand-alone cumulative potential for investors. In recent months, the Minister of Energy and Natural Resources, Taner Yıldız told that Turkey needs USD 6 billion investment for MW 3000 solar potential. In comparison between the installed capacity and the potential as per 2014, it is obviously seen that the figures are expected to provoke the financial investors. Notwithstanding, Turkey has MW 36.000 potential with MW 23.000 installed capacity in hydro, MW 48.000 potential with MW 2900 in wind, MWe 2.000 potential with MW 311 installed capacity in geothermal, mtoe 8,6 biomass potential with MW 241 in biomass and kwh 380 billion potential without any installed capacity (licensed) in solar.

The risk-adjusted returns on basis of power generation might be shown risky as it depends to the data assessment, policy changes and regulatory issues, satisfactory rating of parties involved to the project and lack of insurance instruments covering all processes. However, Turkey has to find a bankable solution.

Specific Risks Related to Renewables in Turkey

Whether you are a module (PV and inverters) producer, EPC, project owner and the project manager the noninstitutionalized approach in project management is commonly observed in Turkey. Due to barriers to reach the financial resources for funding the project, the project owner requires to ensure the most cost-effective business plan for their projects that obstructs them during exits.

Alike in many sectors, the circular issued in 2012 by Prime Ministry that requires permission for any kind of disposal of public lands belong to Treasury and State Economic Enterprises is an unforeseen risk especially for solar and wind projects. Since the circular does not define any criteria which are not compliant with the principle of transparency, project owners have concerns about the determination criteria of the prime ministry in projects they intend to use any public land. Even though this has not been resulted with number of court cases yet, unlike other sectors such of mining and aviation, it definitely constitutes cause of actions in renewables.

From financial perspective, it seems that the credit allocation departments of the financial institutions including but not limited to the banks have concerns more about securitization. This definitely arises out the lack of the satisfactory rating of EPCs and the proper insurance mechanism in renewables. Since a typical renewable investment is mostly far away from project finance implications, the number of the noninstitutionalized projects increases day by date. This unfortunately causes spot market in financing, land allocation and license trading and recently resulted with the license cancellations by Energy Market Regulatory Authority.

Moreover, the lack of proper insurance products appears on the back of the medallion as the core problem for financing. The insurance problem arises in modules. In Turkey, the supply resources of modules vary from countries to countries and the local production is not satisfactory even many incentives have been granted to encourage the domestic production. Nevertheless, the warranties given by the manufacturers is not either realized in case of non-performance or become a part of the insurance tool to be covered by local insurance companies. One of the other pitfalls against executing the warranties of modules is the existence of the different suppliers from different jurisdictions for the separate components for the same project. These lead insurance companies to think more about how manufacturers stand behind the modules warranty and the EPC's roles in cases where they purchased the modules for the projects.

Surely, the insurance problem is not limited to the clearance of warranties for modules. The EPCs and installers are also not subject to any rating system or obliged to fulfill any program for credential. Moreover many of them are not aware of professional liability insurance as they have not been asked for years. Whereas this has been requested by the project owners it would be much easier to assign the rights to an insurance company aiming to fill the deficiency in financing.

Business corruption and reduced yield remain as two major issues to be determined by insurance companies. These surely directly relate to the impact of the climate change. Indeed, there is a growing concern that the mainstream forecasts should be taken account as there was no frequent storm or heavy aches in the past.

SPV is the Solution

The key players of an energy financing project can be count as project owner (project company), EPC, lender, power purchaser, equipment supplier, operator, and the sponsor. In Turkey, many times the project owners are also the operators and the sponsors as in contradistinction from worldwide project finance implementations.

Since it is uncommon in renewables to establish a special purpose ("SPV") vehicle that limits the liabilities, the corporate guarantees are requested from the project owner that means also from the operator and the sponsor. Instead of undertaking all liabilities the project owner are suggested to establish an SPV with the sponsors, those who gets in contract with power purchasers and the shareholders of the SPV. If this is a single company led project then the shareholders of the project company are suggested to set up new companies for development and operating as the developer will also be the shareholder of the SPV.

This will spread risk for corporations and facilitate to insure the limited liabilities for a backstop facility.

In respect of securing the EPC and installers commitment the developers are suggested to overtake the risk and provide back to back guarantee to financial institutions, including the warranty clauses in cases where EPCs or installers supply the modules.

As an overall analysis, establishing a SPV having responsibilities against the finance parties, covered by insurance policies at each process of the work that will be facilitated for a consortium between the EPC and developer is the proper model for financing the mitigated risk. This will enable the lenders to fund each certain phase or player of the project rather than offering for 100% of the project.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Safak Herdem
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