Low prices lead to investor shake-up

TURKEY: Low market prices for wind energy in Turkey could increasingly push high-return-seeking investors out of the market and encourage more investors seeking utility returns to enter, market observers believe.

"It's possible we may see other developers coming into the Turkish market, those who aren't seeking 15-20% (equity returns) but instead want 10, 11 or 12%," Adam Schwartzman, senior investment officer at the International Financial Cooperation, an investment and advisory arm of the World Bank, told the annual Turkish wind energy congress in Istanbul in September.

Schwartzman pointed out that some south-eastern European wind-energy markets like Romania have attracted utility investors. "If investors don't pay too much for licences, Turkey could do the same."

Kor Ozay, assistant general manager at Turkish developer Agaoglu Energy Group, said many investors are already planning to exit the Turkish market. "A lot of companies are putting themselves up for sale," said Ozay.

Long-term Turkish investors who can afford to lose money in the short term, many of whom have their core business in the construction sector, remain market stalwarts. With the notable exception of EDF Energies Nouvelles, big international investors have thus far shied away from Turkish wind investments.

Turkey's wind sector has shown remarkable growth in the past few years, largely supported by local banks and local developers. In September, installed wind capacity amounted to about 1.6GW and was forecast to approach 2GW by the end of 2011.

Weak support

This growth has come even though market support is generally seen as weak. While Turkish wind farms enjoy a feed-in tariff (FIT) for ten years, the $0.073/kWh tariff has never been used since market energy prices have historically been higher.

Legislation approved in late 2010 foresees a FIT as high as $0.11/kWh for projects with locally manufactured content, although market participants expect it will be difficult to satisfy the requirements.

High licence fees agreed for some recent projects also look set to cut substantially into investor returns, meaning that a portion of licenced projects are economically unfeasible and likely to never be built. One major factor driving investments in Turkey's wind sector has been expectations of higher energy market prices and subsequently higher returns for investors. Yet a weaker economic backdrop is likely to mean lower prices near term.

But Amit Bando, executive director at International Partnership for Energy Efficiency Cooperation, believes additional income from the carbon credit market could help more Turkish wind projects make economic sense.