Renewable Power in Türkiye – A Brief Overview

Türkiye’s renewable energy market has experienced substantial growth with renewable electricity generation nearly tripling in the last decade. Turkish Electricity Transmission Co. (TEİAŞ) General Directorate data shows that as of September 2022, energy from renewable energy sources (i.e., biomass, geothermal, hydro, solar, and wind) accounted for almost 55% of the installed power in Türkiye. The Turkish government has made it a strategic priority to promote the expansion of renewable energy resources.

The government aims to increase Türkiye’s installed wind capacity to 17 gigawatts (GW) (currently at 10.7 GW) and solar capacity to 16 GW (currently at 7.8 GW) by 2027. The government also aims to reduce greenhouse gas emissions by 41% and, according to the Turkish Ministry of Energy and Natural Resources, to increase the share of nuclear energy in electricity generation to 10% by 2030.

Revenue Models

There are different types of feed-in tariffs (FiT) available in the Turkish market, summarized in the table below. It is also commonplace for developers to enter into bilateral power purchase agreements with corporate purchasers of electricity. In addition, Borsa Istanbul operates a derivatives market for the nonphysical electricity market.

Criteria	Unlicensed Generation	Licensed Generation
		YEKDEM		YEKA
License	Unlicensed up to 5 MW installed capacity with integration of consumption unit, located anywhere		Preliminary License and Final License	Preliminary License and Final License
Auction	No auction		In principle – No auction In practice for WPP and GPP—auction for each new capacity	Dutch auction Application as JV is possible
Sale of Electricity	Sale of electricity is limited with the total consumption amount Excess generation is delivered free of charge Local component incentive payment under YEKDEM mechanism		Sale to YEKDEM mechanism for 10 years USD or TRY payments depending on the commissioning date Local component incentive payment under YEKDEM mechanism	Sale to YEKDEM mechanism for the licensed period USD or TRY purchase price depending on particular YEKA Local component is not incentivized, but may be required

 

The YEKDEM Model

Under the Renewable Energy Support Mechanism (YEKDEM), renewable power plants commissioned between July 1, 2021, and December 31, 2025, will benefit from guaranteed price support by way of the following:

1. A 10-year FiT based on Turkish lira (TRY) denominated prices that are subject to inflation and foreign exchange indexation on a quarterly basis by reference to an indexation formula. We note, however, that FiT prices quoted in Turkish lira cannot at any time be higher than the price caps expressed in Turkish lira based on the average of the monthly average USD/TRY foreign exchange rates, which are in turn based on the foreign exchange rates announced by the Central Bank of Türkiye, for the three months that are two, three, and four months prior to the first month of the current tariff period.
2. An additional five-year incentive for domestic production to foster the local manufacture of plant components. This is paid on top of the amounts described in paragraph (1) above, subject to an independent board of auditors confirming that at least 51% of components in the plant are domestically manufactured.

The YEKA Model

The YEKA investment model involves a public tender process to procure the right to develop a renewable energy power plant in a government-designated “renewable energy resource area” in Türkiye and entry into a long-term (15-year) power purchase agreement with the Turkish Ministry of Energy and Natural Resources.

A number of large-scale YEKA investment tenders have already been awarded by the Ministry of Energy and Natural Resources: a 1 GW solar power plant and a 1 GW onshore wind power plant as first-generation YEKA investments and two 500 MW onshore wind power plants as second-generation YEKA investments. The first- and second-generation YEKA investments were primarily aimed at large-scale renewable energy projects and, in the case of the first-generation YEKA investments, ancillary manufacturing facilities with research and development capabilities to meet statutory local content requirements. The Turkish government recently announced the results of mini-YEKA auctions for wind and solar projects with production capacities between 10 and 100 MW, and with a weighted average of TRY 0,597 per kWh for the latest round of solar YEKA investment tenders completed in June 2022.

Observations on Types of Financing Available for Renewable Projects

Türkiye’s renewable energy project pipeline will require significant debt financing to support its development, but the depreciation of the Turkish lira over the last year has posed a serious challenge for developers to obtain foreign currency financing for renewable energy projects in Türkiye. Developers frequently require foreign currency debt because a considerable portion of the cost of developing and constructing the projects is payable in foreign currency. As more components are manufactured locally, this requirement should diminish.

Furthermore, the recent requirement by the Central Bank of Türkiye for commercial banks in Türkiye to set aside as regulatory capital an increasing percentage of their debt exposure has raised questions about Turkish commercial banks’ ability to continue lending in this sector.

International financial institutions and multilateral agencies continue to play an important role in the Turkish renewable energy market, with institutions such as the European Bank for Reconstruction and Development increasingly providing not just foreign currency loans but also Turkish lira denominated loans. But several of such institutions have policies prohibiting them from funding projects that impose a local content requirement (which is the case for all the YEKA projects).

In our experience of working on financings of Turkish projects in the energy sector, we have seen a marked increase in support being provided by export credit agencies (ECAs) with ECAs such as Euler Hermes and the UK Export Finance playing an increasingly active role in  funding, or guaranteeing the debt incurred for, the development and construction of these renewable projects. This is perhaps not surprising since the majority of these greenfield projects still import a considerable proportion of their equipment and services from outside Türkiye and the ECAs are eager to support exports from their home countries.

Concluding Thoughts

Investors and financiers interested in the Turkish market will follow closely the developments leading up to the upcoming general elections in the first half of 2023. Given the important role that renewable energy will play in Türkiye’s goal to reach net zero by 2053, it is imperative for renewable projects to be able to attract funding from both domestic and international financiers. We expect to see more financings of renewable energy projects in Türkiye benefiting from ECA-backed financings.

At the time of this writing, a number of amendments have been made to the Türkiye Electricity Markets Law and applicable regulations to allow existing licence holders of wind and solar power plants to establish electricity storage units within their generation facilities, and for investors to apply for preliminary licenses to establish new wind and solar power plants with storage units. This will further pave the way for new solar and wind power plant developments to be attractive to investors and financiers, thereby incentivizing investment in renewable power generation in Türkiye.