تركيا- مشروع الطاقة المتجددة,Turkey - Renewable Energy Project (Turquie - Projet d'énergie renouvelable),Turquía - Proyecto de energías renovables

Report No. PID11166 Project Name TURKEY-Renewable Energy Project (@) Region Europe and Central Asia Region Sector Renewable energy (50%); Micro- and SME finance (50%) Project ID P072480 Borrower(s) GOVERNMENT OF TURKEY Implementing Agency Address FINANCIAL INTERMEDIARIES -- TSKB AND TKB Ministry of Energy and Natural Resources [MENRI Address: Inonu Bulvari 36, ANKARA Contact Person: Mr. Budak Dilli, Deputy Director General Tel: (90-312) 222 4059 Fax: (90 312) 212 6984 Email: budakd@tedas.gov.tr Turkish Industrial Development Bank [TSKB - Turkiye Sinai Kalkinma Bankasil Address: Meclis Mebusan Caddesi No. 161, 80040 Findikli, ISTANBUL, Turkey Contact Person: Mr. Orhan Beskoc, Executive Vice-President Tel: (90-212)-334-5007 Fax: (90-212)-334-5261 Email: beskoko@tskb.com.tr Turkish Development Bank [TKB - Turkiye Kalkinma Bankasil Address: Necatibey Caddesi No.98, Bakanliklar 06100, ANKARA, Turkey Contact Person: Ms. Cansel Inankur, Deputy General Manager Tel: (90-312)-231-0062 Fax: (90-312-)-230-2394 Email: c-inankur@tkb.com.tr Environment Category F Date PID Prepared March 13, 2003 Auth Appr/Negs Date March 14, 2003 Bank Approval Date June 19, 2003 1. Country and Sector Background There are three main issues facing the power sector in Turkey: First -- to reform the sector in order to shift to a sustainable private investment approach where commercial risk is borne by the private investor. There have been several approaches employed over the last two decades to restructure the sector and obtain private investment. While private investment and ownership of generation assets has increased  sharply, these arrangements have substantially increased government liabilities by transferring much of the commercial risk for these plants to the government. Four different arrangements were used in the past to attract private investors. These are the build operate transfer (BOT) model, the Build Own Operate (BOO) model, the auto-producer model and the Transfer of Operating Rights (TOOR) model. The first three models (BOT, BOO, auto-producer) have been used to obtain private investment in new power plants. The TOOR model has been used to try and concession existing generating assets and distribution companies to private investors. The BOT and BOO approaches attracted substantial new investment in power plants -- however, the energy prices from BOT plants are extremely high, and both approaches have created huge contingent public obligations with the government covering the market risk through take-or-pay contracts. In this respect the Turkish experience is similar to the IPP programs in a number of South and East Asian countries. The auto-producer model, which is essentially a form of self-generation employed by industries who also sell surplus energy to the national grid, is in many respects the most successful as it has created a large amount of capacity without any associated public liabilities. The TOOR approach, which did get a lot of private investor interest, has been recently largely cancelled by the Government owing to the implied liabilities and the constraints it would impose on fundamental reform of the sector. In response to the need for sustainable private involvement in the sector, the Government has embarked on a far-reaching reform program that aims to establish a competitive market structure with separate generation and distribution firms that will gradually be privatized. These reforms are progressing in accordance with the principles and time frames defined in the Electricity Market Law (Law 4628) which was enacted in February, 2001. A separate regulatory institution, the Energy Market Regulatory Authority (EMRA) has also been created per the provisions of the Electricity Market Law. Second -- to overcome sectoral implementation challenges to a smooth reform transition. Although important steps have been taken to advance fundamental reforms in the Turkish power sector, several implementation challenges lie ahead -- the principal challenges are: (a) Resolving the problem of growing revenue deficits in the power sector. These revenue deficits arise in the distribution sector and have a major impact on the other upstream segments of the electricity supply chain (i.e. transmission, generation and gas supply to power plants). Basically, the distribution sector is unable to pay for all the energy it purchases due to losses, failure to pay bills and electricity that has been provided free to mosques and for street lighting. Unless these problems are corrected to a level that ensures adequate cash flow in the sector, privatization of distribution and generation will be much more difficult without substantial government backstops. (b) Dealing with the potential stranded costs that arise from the above-market price contracts signed with BOT and BOO project sponsors. Many of these contracts embody extremely high offtake prices and volumes, that will require special administrative arrangements to absorb within the market framework. The law assigns these contract obligations to a government-owned electricity trader (TETTAS) who has to meet them by reselling the electricity to distributors. To ensure that the electricity can be sold at a price that is close to market and does not create perverse economic signals, it is necessary to moderate the cost of this - 2 -  high priced electricity with cheap hydropower (i.e. priced at close to its operating cost). The Government needs to ensure that the hydropower price is appropriate and to ensure that a clear long-term framework to recover stranded costs is in place. (c) Achieving regulatory certainty and clarity. The market structure being implemented in Turkey represents a significant shift from the present operating arrangements and requires an entirely new framework of rules, regulations and procedures, the principles for many of which have been defined in the last 12 months. Work remains to be done inter alia in developing/completing: the actual multi-year tariff setting and review methodology for each of the distribution regions; the balancing and settlement code for market operation; the methodology to determine the allowable wholesale energy price pass-through to final captive consumers. The timely completion of this work and its acceptance by the sector participants, many of whom will be private, will be central to achieving the regulatory certainty and clarity required for private investment. (d) Coordinating reform implementation across multiple agencies. The reform program requires the alignment of eight main implementing agencies behind a single coordinated strategy -- these agencies include: Ministry of Energy and Natural Resources (MENR), EMRA, Treasury, Privatization Administration (PA), the transmission company (TEIAS), the generation company (EUAS), the distribution company (TEDAS), and the trading company (TETTAS). The reform program entails changes in the roles and responsibilities of many of these agencies, some of whom are resistant to this change. Strong program management is required to ensure accountability for task completion. The Government and EMRA are aware of these issues and have been working hard to address them. A World Bank loan for reform implementation (Loan No. 4344-1) is helping the Government obtain advisory services to evaluate and determine appropriate solutions to these issues. Third, to ensure that economic renewable energy resources are adequately and safely exploited to meet domestic energy demand. Turkey is extremely well endowed with renewable energy resources, in contrast to its general lack of fossil fuels. Total potential generation from hydropower is estimated at about 164 TWh of which 112 TWh would be from large hydropower plants and 52 TWh in small plants. DSI has made considerable progress in exploiting the larger hydropower sites but relatively little progress has been made in developing the smaller hydropower sites. Currently, 88 projects, having a site capacity less than 30 MW, are in operation for a total installed capacity of 486 MW and generation potential of 1.9 TWh per year. Of this 348 MW which have been privately developed as BOT, BOO and autoproducer projects. Preliminary studies conducted by the Department of State Hydraulic Works (DSI) and the General Directorate of Electric Power Resources (EIE) for the 26 river basins in Turkey have led to the identification of 344 small hydropower projects (i.e. those less than 30 MW) with a generating capacity of 3,400 MW and potential to produce 14.1 TWh of electricity a year. Ten (10) projects are under construction with a capacity of 153 MW and generation potential of 0.6 TWh. The remaining projects are in various stages of preparation/development -- ranging from having promoters with detailed feasibility studies and resource use rights, to those at the stage of pre-feasibility analysis prepared by DSI/EIE. In addition to these projects, topographical analysis of the basins indicates that there may be as much as an additional 5,000 MW of potential small hydropower - 3 -  capacity capable of producing around 38 TWh. As mentioned above, this means that the total small hydropower potential may be as much as 52 TWh which is equivalent to about 40t of current demand. Detailed analysis of the river basins is likely to yield a substantial potential for small hydropower. Turkey is also rich in wind and geothermal resources. It is estimated that Turkey has the potential for up to 11,000 MW of wind capacity, capable of generating about 25 tWh of electricity per year. Most of this capacity is along the country's sea coasts especially along the Sea of Marmara, the Aegean and the Black Sea. However, it is not clear how much, if any, of this capacity is currently economic at the forecast wholesale electricity price of about 5.0 US cents/kWh Nevertheless as the cost of wind generating equipment continues to fall, it may well become economic. Proven geothermal capacity is only about 200 MW of electricity generating capacity and about 2,250 MW of thermal ( heat generating) capacity. However, the potential for electricity generation from geothermal resources ( including proven resources) is thought to be as much as 4,500 MW. 2. Objectives The project objective is to increase privately owned and operated distributed power generation from renewable sources within the market-based framework of the new Turkish Electricity Market Law. The project aims to demonstrate the feasibility of private development of economic and financially viable renewable energy projects within a competitive market framework. This will be achieved by establishing the necessary institutional procedures and capacity, supporting regulations, and a financing mechanism to provide commercial long-term debt for renewable energy projects. 3. Rationale for Bank's Involvement The World Bank project will assist the Government of Turkey in establishing a comprehensive framework for renewables development, and a credible financial intermediation mechanism, that will enable Turkey in attracting other grant, concessional and bilateral sources of funds for renewable energy resource development. One possible source of funds is the GEF which Turkey should soon become eligible for. Turkey has recently signed the UNFCCC as an Annex I country but this signing has not yet been ratified by Parliament. There does not appear to be any significant opposition in Parliament to ratification but rather Parliament has delayed ratification because it has more urgent matters to deal with. Once the UNFCCC Agreement has been ratified, Turkey would be eligible for GEF funding for projects to reduce the impact of climate change, such as these renewable energy projects. The issue has been discussed with GEF and a proposal will be made to it after ratification, asking for funds to help implement the project or to help subsidize the development of wind power which is probably not economic currently but can probably become so. The Prototype Carbon Fund ( PCF) has also been approached but they cannot provide funding unless Turkey ratifies the Kyoto Convention which is less certain both as to whether it might occur and when. Bilateral donors have also been contacted and have shown interest including KFW. The EU might provide additional sources of funding or -4 -  technical assistance. Thus the World Bank project will play an extremely useful development role in helping Turkey mobilize such additional sources of financing and technical assistance. The Bank will also assist Turkey with the development of its renewable energy policy and coordination of this policy with energy and electricity policy in general. The Bank has considerable experience with renewable energy projects in other countries as is mentioned above and also in electricity sector restructuring. Bank involvement will increase the likelihood of the country developing an effective renewable energy policy and approach, consistent with the new competitive electricity market which is being introduced. 4. Description The project has four main components: 1. The Special Purpose Debt Facility (SPDF) for Renewable Energy Generation Financing Total investment in renewable energy generation financing under the project is expected to be around $500 Million which would include equity financing from the private sponsors, debt financing from export credit agencies, the World Bank Special Purpose Debt Facility ( SPDF) as well as commercial banks. The SPDF is a term lending facility which will be established and will be operated by the two financial intermediaries (FIs). The two FIs selected are: (a) Turkiye Sinai Kalkinma Bankasi (TSKB) -- the Turkish Industrial Development Bank ( private) (b) Turkiye Kalkinma Bankasi (TKB) -- the Turkish Development Bank Government) The World Bank loan for the SPDF will be on-lent from Treasury (the Borrower) to the FIs. The FIs will utilize the SPDF to provide long-term debt financing to private sponsors of renewable energy projects. The SPDF is intended to leverage equity investment from local private developers, export credit financing and other financing for the construction and operation of qualified renewable generation projects. The two FIs have been selected based on their financial strength, their capacity to appraise and supervise project implementation, and the ability of the Turkish Treasury to on-lend public funds to these organizations. 2. Project Pipeline Development Capacity: For the immediate to medium-term (next 2-3 years) there is a substantial potential pipeline of projects which are at an advanced stage of development by private sponsors. The potential pipeline of projects for the immediate-term are listed in Annex 2. Some were developed originally as autoproducer projects and have been granted resource use rights (i.e. water-use rights), and others are BOT projects with signed implementation agreements which are not going to receive Treasury Guarantees. In order to sustain the pipeline of potential projects into the longer-term, institutional strengthening and capacity building is needed to enable MENR and its supporting agencies (DSI and EIE) to collect, evaluate and disseminate technical data and information about potential sites to prospective private sector developers. This project component will provide project implementation support by: - Improving the methodologies and analytic tools used to evaluate, analyze - 5-  and screen renewable energy projects. - Implementing improved river basin modeling approaches that incorporate environmental and social criteria within the context of integrated river basin development plans. - Developing a Wind Energy Atlas to better determine wind sites that are suitable for economic power generation - Undertaking additional feasibility studies on Turkey's renewable energy potential -- particularly geothermal resources. - Assisting with the implementation of improved web-based procedures for project status tracking and public notification. 3. Legislation for Renewable Energy Resource Development: Apart from the Electricity Market Law ( EML) and the MENR-DSI Regulation on Principles and Procedures for Obtaining a Water-Use Rights Agreement, Turkey does not have a specific and comprehensive law for renewable energy resource development. Although the EML and associated secondary regulations do define generation from renewable energy sources and provide for limited market-based incentives for their development, there remains a need for the Government to establish its long-term objectives for renewable energy development and clarify an appropriate legal basis for this purpose. This project component is intended to assist MENR in the preparation of a Renewable Energy Law, as well as define the required changes and modifications to related legislation such as the EML( Law 4628) , Law No. 3154 on the Organization and Duties of the Ministry of Energy and Natural Resources, and Law No. 6200 on the Organization and Duties of the General Directorate of DSI. These changes are needed because of the changing policy and regulatory roles of MENR and DSI as the private sector begins to play a more significant role in developing and operating renewable energy project. 4. Project Implementation and Monitoring Support: The roles and responsibilities of MENR, DSI, and EIE will change as the Electricity Market Law is implemented and the competitive market structure (with privately owned generation and distribution entities) emerges. The responsibility for developing generation capacity, including renewable generation, will shift to the private sector. The implications of this change will be most significant for hydro-electric power generation which has been close to a Government monopoly but where the role of the private sector will rapidly increase. This project component would assist in developing revised procedures for the regulation of design, construction and operation of renewable energy projects, particularly hydro, to ensure that the resource development does not endanger public safety; nor negatively impact other users; and, is in accordance with environmental and social protection rules and regulations. This elements of this work will include: - Clarifying the dam safety regulations and supervision roles of DSI - Develop responsibilities and procedures for water resource development planning in the context of a particular basin taking into account the intent of the Dublin principles. [ Three fundamental principles (known as "the Dublin Principles") for modern water resources management were defined during the Rio Earth Summit. These are (a) the ecological principle, which argues for coordinated management of water resources, the river basin becoming the unit of analysis, land and water resources being managed together, and much greater attention paid to the environment.; (2) the institutional principle, which argues that water resources management - 6 -  is best done when all stakeholders participate; (3) the instrument principle, which argues that water is a scarce resource, and that greater use needs to be made of incentives and economic principles in improving allocation and enhancing quality. - Develop responsibilities and procedures for allocation of water, contracting of water rights and the supervision of water usage; 5. Financing Total ( US$m) BORROWER $0.00 IBRD $205.00 IDA LOCAL SOURCES OF BORROWING COUNTRY $50.00 SUB-BORROWER(S) $150.00 BILATERAL AGENCIES (UNIDENTIFIED) $3.00 EXPORT CREDIT (UNIDENTIFIED) $100.00 Total Project Cost $508.00 6. Implementation Figure 1. below outlines the institutional and implementation arrangements for the project. Special Purpose Debt Facility: The Borrower will be the Government of Turkey, specifically the Undersecretariat of Treasury. Treasury will on-lend the IBRD loan to the two financial intermediaries, TSKB and TKB. The two financial intermediaries will operate the Special Purpose Debt Facility and provide long-term debt for eligible renewable energy project investments. The operation of the Special Purpose Debt Facility shall be in accordance with an "Operations Manual" prepared by each FI and agreed with the World Bank. The Operations Manual details the: (a) The procedures for the operating the SPDF between FI, Treasury and World Bank. (b) On-lending terms and conditions between Treasury and the FI, (c) Sub-project eligibility criteria for financing by the SPDF. (d) Lending terms and conditions for sub-projects -- agreements between the FI and the private renewable energy sponsors. (e) Project evaluation guidelines. (f) Environmental and resettlement review procedures including dam safety and riparian issues; (g) Procurement processes and applicable limits for commercial practice (h) Disbursement procedures. The FIs will bear the credit-risk on the SPDF funds that they provide for eligible private sector renewable energy projects -- and for assessing the commercial risk of the renewable energy projects. The lending spreads on these loans will be based on the creditworthiness of the borrowers. The FIs will only provide long-term debt financing to local private developers who submit proposals which, inter alia, have fulfilled all necessary licensing requirements of the Electricity Market Regulatory Authority (EMRA). Project Processing -- MENR, DSI, EIE and EMRA -7 -  DSI and EIE shall maintain a database of identified renewable energy project opportunities. The identified project opportunities are at different stages of development -- ranging from reconnaissance study reports to feasibility study reports prepared by DSI/EIE. In addition, for the immediate-term, there are about 400 MW of hydro electric projects, an additional 161 MW of wind energy projects and one geothermal project (25 MW) which are fairly far advanced and supported by individual private sector sponsors. These developers already have the resource rights and feasibility studies approved and could move for implementation provided they obtain a license from EMRA. To obtain a license from EMRA all projects would have to conform to the requirements of the Licensing Regulation and the principles of the Electricity Market Law. The Regulation (to be) issued by MENR and implemented by DSI that relates to renewable energy development from hydro-resources covers the following steps: (a) Procedures for the preparation, public announcement, and updating of the list of potential hydro-electric projects (b) Procedures for private sponsors to register their project application, and then advance through the stages of feasibility report preparation, submission, and evaluation. Multiple applications for a specific project are possible, and DSI shall review them based on technical feasibility, safety, and optimal resource utilization. (c) Provision of conditional water-use-rights to sponsors whose feasibility studies are found to be acceptable by DSI. The sponsor(s) for the project can then apply to EMRA for a license -- once again there can be multiple license applications for a single project. EMRA will select between competing license applications for a single project based on criteria that include: increasing competition; level of sponsor preparedness and experience; local participation; as well as preference to those who sell directly to eligible consumers (rather than requiring EMRA to oblige retailers/ distributors to purchase the power) (d) Issuance of final water-use rights. A model Water-Use Agreement is attached to the Regulation, which will be the basis for negotiation and finalization of the water-use-right between DSI and the sponsor. For the case of wind energy projects the sponsor has his feasibility study reviewed by EIE which issues a no-objection and then the sponsor proceeds directly to EMRA to obtain a license. 7. Sustainability The project is highly sustainable especially the hydropower plants. These plants once built last for a long period ( often sixty years or more) and the cash flow should be more than sufficient to operate and maintain them (since this is very low cost) and to replace them at the end of the period. Wind plants once built are also quite sustainable though they do not last as long as hydropower plants. 8. Lessons learned from past operations in the country/sector 1. Lessons from Renewable Energy Development Projects The proposed Renewable Energy Project takes into account the lessons learned from the implementation of similar IDA and IBRD financed renewable power generation projects in Indonesia, Sri Lanka and India (Indonesia Renewable Energy Small Power Project, Sri Lanka Energy Services Delivery - 8-  Project, India Renewable Resources Development Project). The main lesson are: (a) Governments need to set up and transparently apply a set of clear policies and regulations that would provide predictability on tariff-setting for power supply transactions between local distribution utilities and private power developers. (b) To move beyond "one-of-a-kind" demonstration projects and/or pilot projects for grid-connected renewable power generation projects, it is prudent to provide support to countries through a strategic mix of investment and TA instruments, focusing on the financial intermediation for private developers but also on local capacity building and pre-investment activities to ensure sustainability of developmental outcomes. (c) Timely development of a pipeline of prospective renewable power generation projects (i.e., identification and pre-feasibility studies) facilitates implementation efforts by financial intermediaries and sustains the interest of private developers who might otherwise opt to pursue alternative investment opportunities. (d) The interest of local financial institutions to serve as promoters and intermediaries to retail IDA and IBRD financing can best be sustained if commercial business practices are adopted for procurement and the processes adopted for disbursement of funds is streamlined to the extent feasible. (e) Long-term commitment by financial intermediaries, the Government and regulatory entities is required to sustain the interest of private power developers and thereby mainstream renewable power generation initiatives, as compared to conventional options. 2. Lessons from Financial Intermediation Projects The proposed Renewable Energy Project design takes into account lessons learnt in financial intermediation operations -- both in renewable energy and for other forms of financial intermediation projects. The main lessons are that: (a) It is far from ideal to have a government entity act as in an "apex" capacity, as such entities generally do not have the skills, in-house systems (financial, accounting, etc) and -- most importantly -- financial incentives to proactively pursue successful project implementation. (b) The design should be kept as flexible as possible, with a minimum number of, or no restrictions, in terms of minimum loan or sub-loan size, maturity, currency denomination, cofinancing requirements, etc. The was clear from the experience with the Turkey - Industrial Export Development Project, and the Turkey Second Small/Medium Industry Project. (c) Only strong and committed local financial institutions should be selected to participate in the project. (d) It is necessary to ensure quality at entry and closely monitor the performance of private developers in the Bank supported portfolio ; and (e) Private power developers should be required to put up a significant amount of equity towards each proposal to be supported by Bank funds. 9. Environment Aspects (including any public consultation) Issues The subject project has been classified as FI. In accordance with World Bank procedures the Operations Manual will contain a section on Environmental Review Procedures that would describe documentation, -9-  consultation and disclosure requirements. This section has been prepared and agreed upon by the FIs and the World Bank. All sub-loans to be financed under the "Renewable Energy Loan (REL) will be subject to an environmental and resettlement review process. These process and requirements incorporate the Republic of Turkey's regulatory requirements for Environmental Review (Regulation on of Environmental Impact Assessment (EIA) published in Official Gazette No: 24777 and dated June 6th, 2002, as supplemented by Article 10 of Environmental Act No: 2872 dated August 9th, 1983) and World Bank safeguard policies. In particular, the policies on Environmental Assessment (OP 4.01) and Resettlement (OP/BP 4.12). Since it is an FI loan, specific environmental issues are not known a priori, but are generally believed to be small, as related to small facilities that are built as "run-of-river" facilities or schemes that utilize existing hydraulic facilities (irrigation canals, existing dams). Stakeholder will be consulted in a manner consistent with World Bank policies and Turkish regulations and is described fully in the environmental section of the Operations Manual. Stakeholders will be consulted during the environmental assessments of the individual projects. The Ministry of Environment is charged with this responsibility. This Environmental Review Procedures Section of the Operations Manual will be delivered to the Infoshop prior by March 10th, 2003, prior to the departure of the appraisal mission. 10. Contact Point: Task Manager Ranjit Lamech The World Bank 1818 H Street, NW Washington D.C. 20433 Telephone: (202) 473-3282 Fax: (202) 614-1582 11. For information on other project related documents contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-5454 Fax: (202) 522-1500 Web: http:// www.worldbank.org/infoshop Note: This is information on an evolving project. Certain components may not be necessarily included in the final project. This PID was processed by the InfoShop during the week ending March 28, 2002. - 10 -