Wasted Licenses
Unfortunately, these "serious" players were joined in the process by ranks of speculative investors whose sole intention was to acquire a license that they could resell to a project developer. This had the effect of raising project costs and delaying development times, as construction could not begin until a genuine developer bought the license.
"A number of licenses were awarded to investors who had no intention of carrying out the project but simply wanted to make a quick profit," explained Bulent Ocel, general manager of hydro producer Arsaan Insaat. "Many of them had no detailed technical knowledge of the license that they held. They had not completed any feasibility studies and, as a result, the prices that they were demanding for the licenses were not realistic."
The situation was exacerbated by legislators’ efforts to encourage investment in energy by reducing the barriers to entry. For example, one clause in the 2001 Electricity Market Law sought to encourage the use of domestic energy resources by only requiring producers using local fuels to pay 1% of the total license fee.
EMRA responded to private sector complaints and used its statutory power to audit licensees and cancel a license if it felt the developer had failed to meet the terms of the contract. To date 15 licenses have been cancelled and the holders are banned from participating in future bidding rounds for the next three years. In 2007, EMRA also introduced bid bonds of 10,000 YTL ($6,326) for every MW of power for which a license was purchased.
"While in principle it was a good idea, the bid bonds were not high enough to stop speculative investors from applying for licenses," said Ferhat Malick, hydro energy expert at Brightwell Investments. Ironically, the most effective restriction on speculative investors has come from the global financial crisis. Energy investors and banks are increasingly selective in choosing projects and will no longer tolerate the exaggerated fees levied by speculative investors.
If that is one of the positive effects of the financial crisis for the development of Turkish hydropower, there have been many negative ones.
In general, Turkish banks are in a much healthier condition than their European counterparts, as strict reforms enforced after the Turkish economic crisis in 2001 reduced their exposure to the credit crunch. Nonetheless, they are becoming increasingly selective and have difficulty financing large syndicated projects of over $50 million. Large hydropower projects are particularly affected because, though the operation costs are low, the initial capital expenditure is relatively high.
One example of this is Arsaan Insaat. The company had planned to develop eight hydro projects this year but, due to the increasing cost of credit and the difficulties of obtaining it, it has had to cut back to four. Allen Baker, global head of energy for Société Générale, explained: "Raising international debt from banks is difficult in every circumstance. There aren’t enough banks which have the risk appetite to finance these projects. Even if Turkish banks are relatively strong, they will need the help of international banks, who may not be able to step in for a while."
One advantage for hydro, however, is that about 50% to 70% (depending on the project) of the cost is construction work that is funded and carried out locally. Although there are international banks involved in the Turkish energy sector, the vast majority of private sector hydropower plants have been financed by Turkish banks and built by Turkish companies.
TKSB is a leading Turkish financer of hydro projects, and to date it has financed 69 hydropower plants. TSKB Executive Vice-President Burak Akgoc explained why Turkish hydropower projects have been popular with investors and why they might bear less of the brunt of the financial crisis than other energy investments: "Hydro was predominant because there was more statistical information available for the investors. The DSI had data ranging back for more than 40 years with information on almost all the rivers in Turkey. This gave investors the statistical support that has been lacking with other forms of renewable energy, such as wind."
Looking for Partners
With a lack of easy credit, Turkish firms are looking for alternative ways to finance projects. One way is to attract foreign investment through a partnership or joint venture. A good example is Turkish hydropower producer Borusan Enerji, which built up an impressive portfolio of hydro licenses totaling 912 MW before selling 50% of the company to German utility EnBW (Energy Baden-Wuttenburg). The partners plan to spend $1.27 billion over the next three to four years to develop 1,000 MW of mostly hydropower projects.
"Borusan Holding is a massive company and could finance the investments itself. However, in these times of financial crisis there are advantages to splitting the investment," said Borusan Enerji General Manager Deniz Unal.
Another means of attracting investment common to the hydro industry is through Export Credit Agency (ECA) financing. This is because, although Turkish firms have experience in developing projects, nearly all of the electromechanical equipment for HEPPs has to be imported. Turkey is one of the top six most frequent users of ECA finance in the world.
This was confirmed by Société Générale’s Turkish general manager, Pierre Lebit, who said, "We are looking at the financing of a number of energy projects. However, the situation on the ground has changed. Before the crisis, the Turkish banks were very aggressive with very competitive pricing. Since the crisis, and the increased cost of funding, a number of clients have shifted to ECA financing, which I believe is more appropriate."
Yet while electromechanical equipment needs to be sourced abroad, there is a strong local service sector that can install and maintain the foreign equipment used in Turkish HEPPS. Indeed, the continued participation of foreign manufacturers in Turkey has led to a skills transfer. One example of this is Ayken Elektric, a mid-size installation service company.
"We began working as a subcontractor for Schneider Electric in small hydro projects. As we worked with them we were able to perform more tasks, and when they decided that they did not want to focus on installations, we were able to take control of more of the work," explained Ayken Elektric General Manager M. Koray Eryilmaz. "Now we are able to perform electrical engineering to international standards, but we are more competitive on price, as we lack the overheads of a multinational firm."
Paradoxically, despite often being perceived as "green energy," the most significant challenge in the development of large hydro projects in Turkey is the environment. Since 1993 hydropower projects with a reservoir capacity of more than 0.1 km 3 have needed a satisfactory environmental impact assessment before construction can begin.
Mega Hydro Project Planned
One project that has attracted fierce criticism for its negative social and environmental effects is the South-Eastern Anatolia (GAP) project. Consisting of 22 dams, including 17 hydropower projects, the GAP project is intended to double the area of Turkey’s irrigable farm land and provide 7,000 MW of power, according to the DSI. Although it will bring benefits to Turkey, there are fears that making such a radical change to the natural habitat of the area will harm biodiversity. The project will also involve flooding areas of ancient Mesopotamia and its rich archaeological sites and artifacts that reflect the mix between the Middle-Eastern and Anatolian cultures.
GAP authorities have responded to the criticism by forming schemes designed to minimize the project’s impact. An assessment of GAP’s impact on biodiversity was completed in 2004, and the wildlife project was established in 2002. Regarding cultural protection, rescue missions have begun to salvage some of the items that will be lost when the large reservoirs are created, but there are some immovable items whose existence in the future will be consigned to a photograph.
A spokesman for the DSI said, "It is a part of the GAP philosophy to consider the positive and negative impacts of project implementation and to take measures in advance to curb negative ones while reaping the maximum from the others."
In essence GAP is a multi-sector, regional development program, and its concerns transcend the power industry. However, the care that the DSI is taking to appease environmental and social objections should serve as an indicator of the levels of corporate social responsibility that investors will have to display in Turkish HEPP projects.
It remains to be seen if Turkey can achieve its ambitious target of exploiting all of its technically and economically feasible hydro potential by 2023, but it is clear that country has already taken significant steps in that direction. With many of the bureaucratic bottlenecks ironed out, a wealth of local hydro know-how, and a burgeoning service sector, there can be little doubt that hydro power will play its part in providing Turkey with a secure and emission-free source of power in the future.
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