Turkey bets big on renewables
Turkey’s new renewable energy framework (YEKA), launched this year, aims to establish a manufacturing supply chain across the country and deliver the first two 1GW projects over the next few years. Muren Guler, renewable energy consultant, looks at the programme in more detail.
Turkey`s renewable energy market reached a significant milestone in 2017 after two GW-scale solar and wind auctions launched in March and August 2017. The model of YEKA, or Renewable Energy Resource Areas, has been introduced and accepted as a major mechanism for utility-scale solar and wind project development. Initially, the YEKA model was discussed around solar PV investments; however, after the first round of contests for small PV capacities constituting 600MW in total across Turkey, the Ministry of Energy decided that before moving forward with solar PV investments, Turkey should have its own local panel manufacturers.
The concept of local panel manufacturing was discussed in depth and had been shaped during the discussions with interested investors and global manufacturers. The Ministry of Energy had a proactive role in defining the rules and boundaries of the concept in order to make the project attractive to global investors and manufacturers. while keeping the priority of bringing in the know-how of PV panel manufacturing to Turkey.
In the final draft, the obligation of domestic manufacturing process has been identified as phases of slicing, cell and module production, except for the production of ingot. Even this significant detail would make the GW-scale tender unique among the other tenders organised in the Middle East or different regions of the world.
Experts admit that the added value in the manufacturing chain is not in assembling but it in cell manufacturing; however, having a new manufacturing PV facility in a market other than China or its neighbouring countries is not that easy. Under the YEKA concept, the aim is not only to bring down the cost of the electricity but also to reduce energy dependency, to balance the energy trade deficit and to encourage a sustainable local manufacturing capacity that has great export potential.
The first solar PV YEKA tender in March 2017 was important due to its sending positive signals to global players and also due to the coming wind YEKA, which was organised later in July–August 2017. Even though local manufacturing conditions in solar PV YEKA were challenging for global industry players, who are used to consider only assembling facilities in local markets, one of the leading global solar PV manufacturers, Hanwha Qcell, stepped forward in order to position itself strongly in the Turkish market while realising the dream that the Turkish government has been chasing for years.
Solar PV YEKA tender
Legal entities that fulfil the requirements set out by the regulations and specifications submit applications that will earn them the right to participate in the tender. Following the tender notice, technical qualifications and financial bids must be submitted. The period between the date of notice and the submission date must not be less than 30 days. The five participants with the lowest bids will proceed to the next phase, which will be by reverse auction.
The underbidding process begins from the lowest initial bid provided by the participants, and then in turn the participants may provide lower bids than the initial bid, until the final lowest bid is given. The final step will be the approval of the Minister himself. Overall, the tender will be over after the Minister approves the outcome and the winning participant will be invited to sign the YEKA Usage Contract.
Following the signing, the winner will apply to the Energy Market Regulatory Authority (EMRA) for a pre-licence and licence for electricity generation. The winner has to apply for the pre-licence within 45 days following the signing of the contract. Following the granting of the pre-licence, if the entity fulfils the conditions set forward by the requirements of the R&D plans, the entity may apply for the generation licence.
The duration of the generation licences obtained for YEKAs will be 30 years. Pursuant to the regulations, the power plants will be commissioned within 36 months, while installation of manufacturing plant and the R&D centre will be completed within 21 months following the signing date of the agreement. If the installed capacity determined in the business plan is not fully operational, price cuts will occur from the prices predetermined in the YEKA contract; and the cuts will last until the foreseen installed capacity is achieved.
A connection capacity of 1,000MWac at Karapınar YEKA was determined on the exact coordinates as indicated by the specifications; PV solar module with 500 MWp/year capacity and R&D centre production plant, integrated as specified in the specification with a pre-condition that 80% of the engineers will be local. The initial ceiling price of the tender was 8.00 US cents/kWh based on a 15-year payment guarantee.
Kalyon-Hanwha reached US$0.0699/kWh in Round 18 and became the successful winner of the latest solar energy race, having reduced significantly tariffs from US$0.133/kWh, while increasing the local content to a higher level.
The winner plans to finish construction of the manufacturing facility and to produce the first panel by the end of 2018. The location of the plant and the R&D centre will be in Ankara, on a 25 hectare site in the Baskent Industrial Zone, and the investment is estimated to reach US$450m. The estimated number of employees of the factory will be 1,000 engineers and technicians. One hundred more engineers will be employed in the R&D centre, of whom 80 will be local engineers. The 1GW solar power plant is estimated as a US$1.3bn investment while investors may benefit from falling prices of solar panels in the coming years.
The 1GW solar PV project can easily achieve an internal rate of return of 7%–8%, assuming that low-cost, long-term financing and the incentives currently rumoured in the market are secured. Also, both companies are credible for the government and this will help the process to be adjusted if certain obstacles appear. This may include additional tax incentives, support on social tax contribution for the employees, and additional time if financial and technical delays occur.
We should keep in mind that Hanwha Q CELLS is the flagship company of Hanwha Group, a Fortune Global 500 firm, a Top 10 business enterprise in South Korea and South Korea’s second largest non-banking financial solutions provider, while Kalyon also has a strong balance sheet due to its global construction activities, including the construction of the third airport in Istanbul.
Improvement of the YEKA mechanism is still possible and is expected in the second YEKA tender.
There is also a room to improve the solar YEKA mechanism when it is compared with other successful global tenders, including recent ones in Saudi Arabia and Mexico, where US$0.0179/kWh and then US$0.0177/kWh was achieved with only one month’s difference.
The tender requirements should be very simple and plain in order to eliminate the additional margins companies are adding to their bids when the requirements are not so clear. A reasonable time-frame should be considered for the preparation of tenders as it becomes challenging when there are only a few weeks to participate in a tender and the requirements are heavy and commitments significant. Direct invitations to worldwide companies can also attract more bidders to the programme.
Financing risks can be reduced as well with a method similar to the IFC`s Scaling Solar programme, where a proposal for low-cost, long-term financing is included in the tender documents in the form of a term sheet and pushes companies to consider those competitive offers as a ceiling condition. Since lower electricity prices are a public benefit, the incentive of a low corporate tax rate can be offered clearly at the bidding stage, which in the end will have a direct impact on the profitability and competitiveness of a project.
However, since the government is also insisting on pre-requesting a higher local content for production, clear and significant renewable energy targets should be announced before the tender and these targets should be backed by yearly tender commitments where the potential of the market can be visible to all technology providers. In the absence of such a clear roadmap, discussions will focus mostly on market risk rather than project risk. Despite such bottlenecks, I strongly believe that the next YEKA tender will be simpler and attract more global players than the first one.
In terms of financing, the project would be divided into two, the construction of the factory and the project itself, which will make lenders happier. I am not sure if the total amount can be financed based on the project finance; however a limited project finance option should be possible where some corporate guarantees can be involved. However, having a 15-year payment guarantee can strengthen the consortia’s position during negotiations with institutions since they are used to financing projects with exposed market risk beyond 10 years.
I strongly believe that at least one local EPC company will become a regional player if the project is subcontracted fully or partially. The record of doing such a project can put the EPC company in a strong position to qualify in other utility-scale tenders, especially in the Middle East.
The success story of solar PV YEKA encouraged the Ministry of Energy to go ahead with the next GW-scale tender, which was the wind YEKA. Applications were accepted until July 27 2017 and the tender held was on August 3 2017.
Wind YEKA tender
The winner will build a wind turbine factory in Turkey with the capacity of at least 150 units of 2.3MW per year up to 21 months after the contract is signed. An overall 1GW needs to be ready in the subsequent 36 months after the licence is granted. The required quota for domestically sourced production is 65%, alongside 90% of employment in the construction and operation of the factory.
The winner will also establish an R&D centre within 21 months following the agreement that will perform R&D activities for at least 10 years and cover at least 80% of expenses for research and development (R&D) within the country. R&D activities will be carried out with 50 technical staff consisting of 80% Turkish engineers, while the company will allocate US$5m for these activities every year.
The tender was held in a reverse auction to achieve the lowest price. The ceiling price has been set at US$0.07/kWh and the power purchase agreement (PPA) will last 15 years. The wind YEKA attracted more global players than Solar PV as eight wind turbine manufacturers, which have 90% of the global market share, applied to the tender. Among the eight consortia, Siemens/Türkerler/Kalyon secured a 1GW wind YEKA contract in Round 30 with a bid of US$0.0348/kWh.
The result is again impressive compared with the current feed-in tariff for wind energy at a level of US$0.103/kWh and also other global tenders.
The winning consortium will invest over US$1bn in wind facilities. It will also carry out R&D activities with 50 technical staff, with 80% of them being Turkish engineers, for a total of five years in at least three fields of wind-and-generator design, material technology and production techniques, as well as software and innovative gear-boxes, and will dedicate US$5m to these activities every year. The installation and operation of the plant and the wind power plants, along with the R&D activities, will provide jobs for approximately 3,750 people.
The 1GW wind project could reach an internal rate of return of 7%–8%, assuming that low-cost and long-term financing is secured. Since Siemens is proposing Gamesa turbines, the company is capable of securing low-cost and long-term financing from various sources, including CESCE, the Spanish export credit agency (ECA), which may be at the level of 5%.
However, I am not sure if the project can be financed from one source, since it includes local manufacturing and additional project finance. Therefore, the winner should consider a mix of global and local financing options, which would deal with the most important bottleneck of the project.
If we compare both YEKAs, the participation was significant in wind energy since the bidders were the companies that control 90% of the global market. Moreover, the result was impressive in terms of both price reduction and technology transfer.
On the other hand, solar PV YEKA was successful as well despite relatively lower participation. As a result, the tariff has been reduced to a significant level and the technology transfer will be done by one of the leading global solar PV manufacturers.
It seems that the YEKA model has been accepted as the main mechanism by the Turkish government and most probably new GW-scale tender capacities will be announced yearly. We all need to see the end-result of the first tenders in a few years in order to assess the mechanism; however, it is obvious that Turkey is moving forward boldly to become the new renewable energy manufacturing hub of the region.