The country seems to have all the right ingredients for a strong wind energy sector, but is still looking for the ideal recipe.
With strong wind resources, a growing economy and increasing demand for power combined with a need to cut its dependence on energy imports, Turkey has many of the right ingredients for building a strong wind energy sector. And while many western European markets have slowed down considerably, the pace of growth has accelerated in Turkey.
The country is expecting to bring up to 1GW of new capacity online this year. This will bring its total capacity to nearly 4GW, although that is still a long way off the 20GW the government is aiming for by 2023, when the Republic of Turkey celebrates its centennial. Yet there are numerous obstacles to growth, starting with a cumbersome and often inefficient permitting process.
"We see the Turkish market as having huge potential," says Cedric Le Bousse, chief technical officer at Turkish renewable-energy producer Polat Enerji, in which EDF Energies Nouvelles and the Canadian Public Sector Pension Investment Board each own 45% stakes. "There are high winds, mainly in the west, and lots of space to build profitable wind farms.
"While there are ways it could be improved, there is a legal framework to build projects," he adds. "Overall, the Turkish economy is quite dynamic compared with Europe, and the fact that there are companies wanting to invest is also supporting the market." Polat itself will have 600MW of Turkish wind capacity in early 2015 and plans to double that in the next three to five years.
Growing demand
Turkey's energy demand is growing faster than the economy is expanding, says Andi Aranitasi, a member of the power and energy team at the European Bank for Reconstruction and Development. "Turkey needs a lot of capacity and wind is one of the fastest ways to do that," he says. The government has made reducing energy imports - the main culprit for a massive current-account deficit - a priority, he says. The country is now focusing on developing indigenous sources, including renewable energy, but also lignite and nuclear power.
According to figures from the Turkish Wind Energy Association, wind capacity rose 466MW in the first half of 2014, to just over 3.4GW (see chart, above), with a further 1.2GW under construction at mid-year. "The expectation is that 800-900MW may be put into operation this year, even 1GW if we have some luck," says Ibrahim Oezarslan, managing director of turbine manufacturer Nordex's Turkish subsidiary. "The market is going really well, but it also faces certain obstacles."
Bottlenecks
Among these obstacles, Oezarslan highlights the slow permitting process. "It is one of the bottlenecks in Turkey. In 2014, the permitting process was heavily affected by local elections in March and presidential elections in August," he points out. "Next year we have elections for parliament, so again we will have four to six months when the issuing of permits will be affected."
A major focus this year has been a backlog of an estimated 6GW of licensed projects. Energy market regulator EMRA this summer started cancelling licenses for projects that had not met agreed permitting milestones by a May deadline. It is not yet clear how many projects could be affected in this weeding-out process. EMRA could cancel the lion's share of these projects or soften its stance to give developers more time.
EMRA's culling of projects could potentially free up room for others with a better chance of being built. Some license holders have been sitting on them for years, tying up land on good wind sites as they struggle to finance wind farms or seek to sell to the highest bidder. At the same time, delays in permitting are often seen as not being the fault of the developer but of slow government bureaucracy. Simply gaining permission to erect wind masts can be a challenge in Turkey.
Measuring progress
Investors have been preparing to present new projects by an April 2015 deadline for 3GW of wind capacity the government is opening up for licensing. Developers were busy putting up wind masts this spring to meet a requirement for 12 months of wind measurement by the project submission date. Judging by the estimated 1,500 wind masts that went up, competition is set to be keen. According to the terms of a 2013 law, developers are no longer assigned a license, but a pre-license, after which they are given 24 months to complete permitting.
The requirement for 12 months of wind data is one of the changes that have been introduced to avoid previous licensing excesses. A 2007 wind tender, in which very few requirements were placed on participants, remains infamous for the more than 75GW of projects that were submitted in one day.
Le Bousse of Polat Enerji welcomes the introduction of the wind measurement requirement, along with a new mechanism moving the deposit of a bank guarantee to EMRA to earlier in the development process. A grid contribution fee paid by the plant operator to transmission system operator Teias has been changed from an annual fee paid over the lifetime of projects to being paid over the first three years of plant operation. "It's different when you have to pay upfront," says Le Bousse. "We think this will make investors look more seriously at the business case for projects." At the same time, he believes still more could be done to ensure that pre-licensed projects are better screened for wind resources, zoning requirements and other factors to ensure they are feasible and have a good chance of making it through to the construction stage.
While up to 3GW of capacity could potentially be assigned, this is unlikely, largely because the overall capacity limit is broken down between different geographical areas, some of which have limited wind resources. Nordex's Oezarslan expects about half the total could actually be allocated. Capacity in areas in which requested capacity exceeds availability will be assigned through a tender process.
Christian Johannes, general manager of Turkey-based wind consultancy Re-consult, also warns that many investors are not spending enough on wind measurement campaigns, increasing the risk of unreliable wind data, energy-yield miscalculations and overbidding for grid connection fees. This could result in projects that are not financially viable, a problem that has bedevilled past Turkish tenders.
The 2015 licensing round is supposed to inaugurate a practice of making new capacity available annually to pave the way for a more predictable and regular rollout of new wind farms. This is seen as one necessary element for picking up the pace of growth.
"If EMRA fulfils its obligations and (transmission system operator) Teias acts according to the law and actually publishes new capacities every year, then the private sector will develop projects," says Johannes. Due to cancelled licenses this year, he believes some 4-5GW of capacity could be made available in the next tender, followed by about 1-2GW in each of the following years.
Market participants agree that Turkey will have to make changes if it is serious about reaching its 20GW wind target by 2023. Assuming the country ends 2014 with 4GW installed, it would still need to add about 1.8GW every year until then. Fatma Murray, Turkey country manager for consultancy DNV GL, says 11-12GW by 2023 looks more realistic unless growth obstacles such as the drawn-out permitting process are removed.
Need for change
Le Bousse suggests one way to help the market grow faster would be to simplify the permitting system and implement a more fluid mechanism, under which projects are licensed when they are mature rather than having to wait for a new capacity licensing round. He believes that boosting the feed-in-tariff (FIT), at least by indexing it to inflation, would also make sense. Others suggest that lengthening the timeframe of the support could help. The current FIT has a base tariff of $0.073/kWh, which can be boosted by using locally produced components (see box, previous page).
"Financing is a challenge," says Dorotea Delbruck, head of sales for EMEA South at Nordex. Non-recourse project finance has not developed in Turkey, largely because the FIT is only available for ten years, and the local-content premium only for half that time, while the terms of financing on the Turkish market are 12 to 14 years, she explains. "Companies have to do balance sheet financing, which also means their balance sheets are loaded with debt and they can't take on new debt as quickly," says Delbruck. Smaller firms may have trouble receiving financing at all. This is another factor stifling capacity growth in what could potentially be a very strong market.
POLITICAL HOT SPOTS
Turkey borders on both Syria and Iraq, but its proximity to conflict zones, and the Turkish parliament's approval in October of potential military intervention in both countries, is seen as having a limited direct effect on the country's wind energy sector.
Market participants note that most of the country's best wind resources and component manufacturing facilities do not lie near its southern borders, and war is not expected to alter the fact that Turkey's energy demand is expected to grow.
However, if the Turkish government is focusing on developments in the Middle East, this could contribute to slowing the licensing process, believes Fatma Murray, Turkey country manager for DNV GL. Others say that international investors not already active in the market might see an increased risk, although the market continues to be supported largely by local developers and corporations.
LOCAL CONTENT MANUFACTURING BASE BASED ON BLADE AND TOWER PRODUCTION
Turkey's government has encouraged local turbine content by assigning a higher feed-in-tariff (FIT) to turbines for which the main components are produced locally. In addition to the base tariff of $0.073/kWh for ten years, wind-energy producers receive a premium for five years depending on the extent local components are used. If a turbine were to be 100% produced locally - something that has not yet been achieved - the FIT could reach $0.11/kWh.
Projects using locally-produced towers and blades will achieve a FIT of $0.087/kWh, and a growing number of eligible companies are opting to receive this tariff as power prices have come down amid a sharp build-up in power capacity. In the past, producers have frequently foregone the tariff, which they can opt in and out of on an annual basis, to get the higher power prices the market was offering. Towers are now routinely produced in agreements with local suppliers, while local blade production is also increasing.
Blade production
Through an agreement with US supplier TPI Composites, Nordex earlier this year began producing blades for its N117 turbine in Turkey, a move that the company allows to gain access to the higher local-content tariff but is also part of its overall supply diversification strategy. TPI also makes blades in Turkey for GE. Enercon, which like Nordex has about a 25% share of Turkey's installed wind capacity, also manufactures blades and concrete turbine towers locally.
Most manufacturing facilities are sited in and around Izmir, Turkey's third largest city, which is located in the wind-rich western part of the country. About 2,500 manufacturing jobs have been created in the Izmir area and some 500 elsewhere in Turkey, estimates Fatma Murray, Turkey country manager for DNV GL.
The Turkish market is not yet large enough to justify 100% local turbine production believes Ibrahim Oezarslan, managing director of Nordex's Turkish subsidiary. At the same time, export credit guarantees continue to be a fundamental part of financing packages for a number of Turkish wind farms, another factor preventing the balance being tipped in favour of full-scale local turbine production.
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