Financing Structures for Renewable Energy Projects

1- An Overview of Renewable Energy Market in Turkey

In the last decade, Turkey has seen a great increase in energy investments. In a period of 10 years, installed electricity capacity in Turkey has increased from around 40 GW to above 87 GW by the end of June 2018.[1] This figure includes, electricity obtained through wind, solar, hydraulic and other non-renewable resources such as coal and gas. The installed capacity of hydroelectric power, solar, wind and geothermal are 28 GW, 27 GW, 6.6 GW and 1 GW, respectively, which consists of In the National Renewable Energy Action Plan[2] issued by the Republic of Turkey Ministry of Energy and Natural Resources (“the Ministry of Energy”), the Ministry of Energy sets out a goal of 120 GW electricity generation in which the share of power generated from renewable energy accounts for 30%. In order for Turkey to achieve this goal, both the incentives and the project financing structures are of great importance.

2- The Legal Framework for Renewable Energy Incentives

The Law on Utilization of Renewable Energy Resources for the Purpose of Generating Electrical Energy (“the Renewable Energy Law”) and the Regulation on Certification and Support of Renewable Energy Sources are main pieces of legislations regulating incentives to renewable energy investors. Recently, on October 2016, the Regulation on Renewable Energy Source Areas, a regulation implementing a new incentive program, (“the RESA”) came into force to establish energy resource areas and bidding process to boost renewable energy investments. Also, there are grant mechanisms available to investors supported by Regional Development Agencies (“the RDAs”).

Under the Electrical Energy Law and the Electricity Energy Regulation, the renewable energy resources supported through the Feed-in Tariff (“the FIT”) are defined as wind, solar, geothermal, biomass, biogas, wave, current and tidal energy. The electricity generators who obtained the Renewable Energy Resources Certificate (“the YEK Certificate”) from the Energy Market Regulatory Authority (“the EMRA”) are guaranteed a specified amount of money for electricity they have generated. The FIT is guaranteed for a period of 10 years which in turn enables investors to obtain funding through project financing. What is important is that the tariffs differ for different resources. For instance, while the FIT for electricity generated utilizing solar energy is USD 13,3 cent/kWh, this amount stands at USD 7,3 cent/kWh for electricity generation from hydroelectric energy. In addition to the FIT, the investors are granted a premium amount for the electricity they have generated by using local mechanical products, i.e. the panel parts manifactured in Turkey.

The FIT seem not to have met investors’ appetite though. With an eye to attracting investors, the RESA came into force to allocate lands to renewable energy investments. By entering the bidding, the investors obtain the right to use the RESAs in return for them manufacturing local equipment and generating electricity from renewable energy resources by using the local products. In September 2015, the Ministry of Energy announced a RESA located in the city of Konya with an area of 27.180.031 m2, after which the bidding offers were accepted by 12th of December 2016. The tenders were to be held on December 15, 2016 with a ceiling price of USD 8/kWh. The Ministry of Energy will grant 15 years purchase guarantee to winners of bidding.[3]

In addition to the FIT and the RESAs, there are grants given by the RDAs, established in 2006 with the Law on Establishment, Coordination and Missions of Development Agencies. There are currently 26 RDAs located across the country. These grants are mostly intended for facilities aiming to meet their energy requirements through renewable energy resources. According to Günder, TRY 101.500.000 is granted by RDAs in 2015 in order to support renewable energy projects.[4] Thus, this is one of the options available to local investors.

• Financing Structures

Renewable energy investments require great amount of capital. Thus, investors need to obtain fund in order to carry out the project through various financing structures, which are unlimited and vary depending on the needs of both the borrower and lenders. Commercial loan financing, lease financing, equity financing and bond financing are among the structures frequently used in practice. In Turkey, however, commercial loan financing, bond financing and equity financing are the mostly used structures.

Debt Financing

Debt financing is a way of obtaining finance through borrowing from a commercial or a development bank. The projects are funded either through commercial loan financing or bond financing. Commercial loan financing has long been one of the mostly used financing structures in practice, and mostly supported by the European Bank for Reconstruction and Development (“the EBRD”) through certain financing program. Bond financing is a new trend whereby project sponsors raise capital through public or private placement.

Depending on the size of the projects, there are commercial loan financing methods available in Turkey, either through local banks or by development banks themselves. Local banks provide loan to projects through certain programs mostly supported by the EBRD. For instance, Turkey Sustainable Energy Financing Program, supported by the EBRD provides financing to Small and Medium Size Enreprises through local banks. Another financing program available to investors is Medium Size Sustainable Energy Financing Program. This program, supported by the European Investment Bank, the European Commission along with the EBRD, is intended for renewable energy investments, and industrial energy efficiency. Also, the EBRD itself provides financing to larger projects. For instance, it provided a senior secured loan of up to USD 44 million to Kremna Energy who operates hydroelectric power plants in Burdur.[5]

Project bonds, on the other hand, as the name suggests, are one of the project financing methods mostly used for much larger projects and recently used by Turkish investors. There are various reasons why project bonds have become more popular recently. In Europe, Basel 3 Requirements provide for stricter monitoring and disclosures for traditional financing. As a result of this, bond Financing has become an option for investors.

Despite the above-mentioned advantages of bond issues, there are some drawbacks of bonds. Firstly, there is limited flexibility with the terms of the bonds. Also, it is faster and cheaper to borrow through loans since disclosure documentation is extensive and costly for the companies. The capital market costs for issuing a bond might be high for energy production firms.

In Turkey, there is no specific regulation for bonds for renewable energy. The regulatory framework is regulated under the Capital Market Law.[6] The companies aiming to issue a bond needs to obtain all required approvals from the Capital Market Board (“the CMB”). Depending on whether the company is aiming to offer to public, the issuers may need to prepare offering circular to be approved by the CMB. Otherwise, an issuance certificate would be required under the capital market regulations. Turkey’s first green energy bond was issued by Turkiye Sinai Kalkinma Bankasi in May 2016. This bond issued as a medium term note worth USD 300 million with 5 years maturity aims to provide financing to private sector investments in renewable energy, energy efficiency and other areas that reduce greenhouse gas emissions.[7]

Equity Financing

Equity financing is a project financing structure whereby investors subscribe to the shares of the project sponsor in return for equity in the project sponsor. Eqity financing is known to be used in financing start-ups in digital age. This method has also been used to finance renewable energy production facilities in Turkey. For instance, on June 22, 2016, Akfen Holding signed a Shareholders Agreement with the EBRD and the IFC for an up to 16.67% stake in Akfen Renewable Energy.

In regular practice, equity financing requires a long process depending the size of financing. Firstly, a legal or financial due diligence is carried out in order to identify and mitigate any potential risks arising from the transaction. From the legal point of view, this gives an insight to the potential buyer regarding the governmental licenses, real properties owned or leased by the company and the purchase guarantee contracts with the government and other documents. Then share subscription agreement is negotiated between the subscriber and the seller, by which the subscriber undertakes to buy the shares of project company. Also, shareholders agreement determines the obligations of the shareholders to each other.

3- Conclusion

The recent developments in renewable energy incentives and financing structures in Turkey shows two major developments: (i) the RESA has the potential to boost renewable energy amid political turmoil and (ii) the bond financing methods for renewable energy investments might boost renewable energy investments. Hence, it is very likely that Turkey will be able to reach its 120 GW installed capacity goal in 2023 with the above-mentioned recent developments.

Cem Ozan Metin, LLM

[1] According to the statistics of Turkish Electricity Transmission Company, a state-owned transmission company.

[2] The National Renewable Energy Plan is prepared in accordance with The Directive 2009/28/EC of The European Parliament.

[3] http://www.investinkonya.gov.tr/en/haber.asp?HaberID=116, accessed on December 10, 2016.

[4] GUNDER, “Gunes Enerjisi Icin Finansman Modelleri”. 2016 http://gunder.org.tr/wp-content/uploads/F%C4%B1nansman-modelleri-web.pdf, accessed on December 10, 2016.

[5] http://www.ebrd.com/work-with-us/projects/psd/karacaoren-hepps.html, accessed on December 10, 2016.

[6] Law numbered 6362 published in the Public Gazette on December 30,2012

[7] Public Disclosure Announcement of TSKB dated May 18, 2016.