ENERGY TRANSITION IN TURKEY
Opportunities and Challenges in Renewable Energy
Turkey still needs to set a long-term energy policy agenda in order to reduce dependency on imported energy sources such as natural gas and oils. This dependency leaves Turkish Economy increasing volatility in oil and gas prices.
Over the past ten years, Turkish Economy has grown at an average rate of 5%. There is an important part of this rate is reached by a contribution of energy investments. Today, with a development of gas research in Mediterranean Sea and effect of decrease in global liquefied natural gas prices, Turkey now has an opportunity to build a competitive gas market, while being one step closer to create regional gas hub. If Turkey uses this opportunity, the country would have reduced its single supplier dependence as well.
In the last decade, Turkey’s energy reforms have resisted on private investments which fostered economic growth and energy access. According to International Energy Agency, regional gas and electricity trade framework and integration of Turkey into these are important steps moving forward to new Energy Investments projects and create new strategies in the future.
International Energy Agency advice Turkey to complete the liberalization of its electricity and gas markets in order to attract critically needed investments in contrast with opposing view. Also, the Agency recommends Turkey setting up independent transmission system operators, competitive wholesale markets, and fostering resilient and modern gas and electricity infrastructure.
1. Attractiveness to Invest in Turkish Renewable Energy Plants
Turkish Energy Market came to be more attractive with designing incentive mechanism. Beside these, for the renewable energy investments; VAT, custom duty and stamp duty exemption, and Corporate Tax Reduction are applicable. Turkish Renewable Energy Investments have been based on Renewable Energy Source Zone (“YEKA”) and The Renewable Energy Support Scheme (“YEKDEM”) mechanism so far. The requirements of YEKA tenders are specified in each tender announcement. To understand the content of these requirements, YEKA tenders held in 2017 and 2019 may be given as an example.
Turkey has made Renewable Energy Source Zone (RESZ) tenders for both solar power and onshore wind power technologies with a capacity of 1000 MW for each in 2017. In 2019, YEKA RES-2 (wind power) and YEKA GES-2 (solar power) tenders had been announced. However, the tenders for solar power had been cancelled.
In this part of the article, we would be sharing detailed information for YEKA-1 tenders regarding the solar and wind power and its conditions announced in 2017. However, we would be touching upon YEKA-2 tenders very shortly with regards to the share status and locally manufactured technologies.
1.1. YEKA RES-1 in 2017
According to announcement made in Official Gazette dated 13 April 2017, Legal entities or Business Partnerships and Consortiums formed by more than one legal entity may apply for the tender regardless of whether or not their capital based on local or foreign sources. There is no condition limiting the share status of ownership by rates and nationality of shareholders under this announcement. 
One of the conditions announced was that the applicants must provide work experience document showing production of nacelle main constituent of Wind Turbine with a minimum power of 2,000 MWe between 01/01/2014 and 31/12/2016.
Fee of list of conditions was TL-20.000,00-.
Definite letter of guarantee, fully and partially convertible to cash having value of USD- 10 million with a duration of 1 year shall be presented to the Administration at the application stage.
In case that the tender is won, letter of guarantee having value of USD 50 million in total, with a duration of 20 years, shall be presented to the Administration at the latest one day before the date of signature of the Contract. This letter should be submitted with a content including conditions stated in list of conditions. If content of the letter is found appropriate to the list of conditions, then previous letter of guarantee submitted at first stage will be returned to the investor.
In this tender, initial price cap was: USD 7.00/kWh.
Power purchase period was designed for 15 years commencing from the date of contract signing between the winner and administration.
Winner was expected to construct a factory producing wind turbine. This wind turbines must be produced by using local components having certificate proving indigenousness and components having min. 65% total locality which may be produced or supplied in accordance with the domestic participation rates announced by the administration. The factory should start production in 21 months. It should have capacity to produce 150 pieces/year turbine or 400 MW/year at one shift. According to list of conditions, winner must establish an R&D (“Research&Development”) center in 21 months and carry out R&D services for 10 years. 
1.2. YEKA GES in 2017 
This tender is also known as Karapinar Renewable Energy Source Zone Tender. It had a connection capacity of 1000 MWe in return for domestic production. Winner was expected to construct PV solar module production factory integrated into list of condition with capacity of 500 MWp/year and establish R&D center beside solar power production facility with capacity of 1000 MWe.
Installation of the factory and the R&D center must be completed in 18 months following the date of signature of the contract. Construction of the Solar Power Plant must be completed in 36 months.
As one of the conditions to participate into tender is showing background experience. According to PV solar module production technology, participant must have produced 3000 MWp PV solar module between 01/01/2014 - 30/06/2016 by integrating slicing, cell, and module production stages / processes, excluding ingot production.
Consortiums may not bid in this tender. However, it is open to the joint ventures with domestic and foreign partners in which the shares of Turkish citizens may not be less than 25% in each.
Letter of guarantee, definite, unlimited in time, fully and/or partially convertible to cash, without limitations, with an amount of USD 50 million must be submitted to Administration.
In this tender, initial price cap is USD 8.00/kWh.
Power purchase period is designed for 15 years commencing from the date of contract signing between the winner and administration.
1.3. YEKA Regulation and Tenders in General
According to YEKA Regulation enforced in Turkey, the Investors are expected to ensure the usage of local equipment generally. This obligation came to enforce in 2016. So that, between the 2017 and 2019 YEKA tenders, there is no difference in terms of the main condition regarding the usage of domestic equipment. As it is seen, in each tender, applicants must provide a commitment regarding the rate of usage of the domestic equipment, but the rate of domestic production is determined and announced in the list of conditions being published later on.
Contrary to YEKA 2017, in 2019 tenders, there was no limitation regarding the share status or rates and nationality of shareholders under the list of conditions. In addition, there was no obligation to build a factory and R&D center.
YEKA for wind energy, which is called as YEKA RES-2 tender (wind energy source areas are Balikesir, Mugla, Canakkale, Aydin provinces, capacity is 250 MWe for each) had been made in 30.05.2019. The winner was expected to use local equipment which is determined for tower as 65%, for the blades as 60%, for the other equipment as 51%.
For the solar power projects tenders which were known as YEKA GES-2, there was a condition to use local solar modules with certificates proving domestic product. Under the list of conditions, there was no explanation about indigenousness of solar cells. However, this tender cannot be realized in 2019. As it is known that the tender has been realized in 19-23 October 2020.
Pursuant to a recent amendment to the Law on Use of Renewable Energy Source Areas for Power Generation numbered 5346, all new YEKAs will be tendered as Turkish Lira being the currency of the tender and the power purchase agreement. The ceiling price will be announced in Turkish Lira and the bids will be collected in Turkish Lira. This is a major change from previous USD based YEKAs and industry players are concerned particularly on how the escalation mechanism will work, which has not been made clear so far.
1.4. The Prime but Forgotten: Biomass-Fueled Plants?
Under the website of related ministry and interviews being made by the minister and the board members of leading energy companies reflected in the press regarding the future of energy investments, there is not any approach to provide YEKA tenders for another renewable energy sources such as biomass-fuel. However, when the YEKA first came to force in 2011, the most expensive purchase price among the renewable energy sources was belonging to biomass by the price of USD 13,3/kWh. Purchase period was designed for 10 years. 
Even if there are unrivalled advantages of biomass against other energy sources in energy production, it is yet became the popular one. Biomass fuel is the only energy source that reduces greenhouse gas emissions and slows down climate change. It is also providing soil protection, securing water, energy, and food production, creating landscape value. In the countries where the energy production based on biomass fueled plants at the rate of 18 %- %20 such as Finland, Sweden, it is creating permanent employment opportunities at high rates. It provides economic and political advantages to the state.
The main result of YEKDEM mechanism has been a significant increase in the renewable energy investments. YEKDEM providing the investors and the financial institutions with predictability has simplified finance ability of investments. In this regard, it becomes the most important effect leading the growth in energy sector. 40 billion of 70-billion-dollar loan provided to the energy sector is granted to power plants installed within the YEKDEM. 
After 2015, spot prices of electricity market were lower than the YEKDEM price. Interest of the player in this sector to YEKDEM has been increased because of the effect of volatility in exchange rate and the existence of the price and exchange risks. This situation, combined with the increased generation capacity in renewable energy, brought a huge increase in YEKDEM costs to the end users.
As it is understood during the article, YEKDEM was the main factor behind the rapid growth in renewable energy investments in Turkey, is still considered important by the investors. The existence and continuity of YEKA tenders is also having a great importance in this respect.
The common view and desire in the industry is that YEKDEM will continue after 2020. With this regard, at the beginning of 2020, Mr. Fatih Donmez, Minister of Energy and Natural Resources made explanations about new YEKDEM mechanism would be launched with renewed conditions. Many investors expect purchase guarantee to cover a longer period, at least 15 years as fixed term. However, the Minister stated that they are working on a new draft YEKDEM mechanism, which may provide 10 years purchase guarantee. Also, the above-mentioned amendment made to the law no 5346 with respect to the currency of YEKA tenders almost certainly indicates that the new YEKDEM mechanism will also use Turkish Lira as the currency. In his speech reflected in the press, Mr. Donmez gave some clue regarding their perspective on the usage of domestic components and local production in energy investments as well. According to his explanations, new YEKDEM may continue with domestic components and local production obligation at certain rates, but he added that this is not precise for now and they would be evaluating the needs of the sector.
Current economic circumstances and regulatory frame in Turkey present opportunities and challenges renewable energy investment in general.
The regulatory frame reflecting the new mindset of the policy maker tells us that foreign currency indexed feed-in-tariff will no longer be available for any type of renewable projects. This is already set forth for YEKA model and the future YEKA tenders for wind and solar. The ceiling price announced for October YEKA tender also indicates the price we should expect for future projects that are awarded under either YEKA or YEKDEM model.
The problem here is that the policy maker assumes that the investors will be able to invest with prices at grid parity provide the decrease in the cost of wind and solar equipment; however, ignores the importance of financial atmosphere which is in fact as important as the cost of equipment. Low price ceilings in tenders combined with the absence of USD or EUR indexed feed-in-tariff, and high finance costs of Turkish Lira borrowing will create a challenging environment for projects to be developed under new YEKA tenders or YEKDEM mechanism.
On the other hand, projects that started generation within the last 2 or 3 years and the projects that will start generation within the next 1-year present attractive opportunities for investors who are interested in acquiring operational assets. All these projects benefit from the current YEKDEM mechanism in USD, financed with either USD or EUR denominated loans with relatively lower costs, and with a further chance of refinancing. Most of them enjoy a final guaranteed purchase price of 7-8 USD cent/kWh for 10 years. From this perspective Turkish renewable energy market still presents opportunities with the country’s solid track record of non-default on its obligations relative to feed-in-tariff payments.
Even if transition to Turkish Lira based feed-in-tariff will make financing more complicated and therefore will negatively affect the new investments, to balance this affect, it would be expected from the policy makers that a reasonable price escalation formula to be in place so that the investors could be at least protected against devaluation of Turkish Lira.
On the other hand, Turkish wind market presents quite attractive M&A opportunities for acquisition of operational wind assets and in any case have very fast and attractive dispute resolution mechanism presented by Istanbul Arbitration Centre since 2014.
Ilke Boyacioglu, LL.M
Attorney at Law
4. https://dergipark.org.tr/en/download/article-file/297590 (Biyokutlenin Turkiye’de Enerji Uretiminde Degerlendirilmesi)