In August, Bilgin Energy raised a Eu90 million ($131 million) project loan from Garanti Bank for its Eu114 million 90MW Soma wind plant. The deal is one of few to reach financial close in the Turkish wind market. However, key changes to Turkey's new renewable energy law – to be ratified by the Turkish parliament when it reconvenes in September – look set to catalyze the wind sector, which has lagged behind hydro and even geothermal in terms of project financing.

The new law – a revision of the Renewable Energy Law 5346 in 2005, which was made with the best intentions but was not good on specifics – has been long anticipated by potential wind sponsors in a market that has been unable to deliver the expected and necessary growth in project volume because of too little price support.

According to the Turkish Ministry of Energy and Natural Resources, 40,000MW of new generation needs to be installed by 2020 to meet Turkey's increasing power demand. But despite having the fifth highest wind power reserves in Europe, and paying a heavy price for imported feedstock for traditional energy plants, Turkey has only around 450MW of wind power in operation, and lies 20th in the global table of wind power development.

Ironically it was a condition of IMF assistance in 2001 that Turkey scrap sovereign guarantees to generation investments which led to planned renewable projects being pulled – the lack of a bank guarantee frightened many renewable investors away, leading to a five-year dry spell without any major renewable plants coming online until a year after the 2005 renewables law.

New renewables law and licensing

The change in law will be concurrent with a new licensing round – to be held before the end of 2009 – with the aim of boosting Turkey's wind power capacity to 11,600MW by 2013. Most of that new capacity will come from the 700-plus project applications totalling 78,000MW made in an open tender in 2007. Many of those projects are competing applications for the same sites and will not be built – but consensus is that around 15,000MW is feasible in the medium term given current projections for demand growth.

The 2005 law aimed to encourage investment in renewable technologies by guaranteeing projects a seven-year (updated to 10 years by Energy Productivity Law 5627) feed-in tariff of 5.5 eurocents/kWh, a 99% discount on the license fee and a free annual license fee for the first eight years following completion. Renewable projects were also offered an 85% discount on the purchase of government land and priority connection to the transmission grid.

The sticking point for sponsors and lenders has been the tariff – not surprising given the open market rate has been averaging 8 eurocents/kWh. The price support was too low to enable many sponsors to get projects banked with anything less than 40% equity, which in turn restricted the spread of the equity pot for new projects.

Furthermore, because of the low tariff, Turkish renewables sponsors have been unwilling to sign long-term power purchase agreements while the price of power has been climbing, and that lack of security of long-term offtake has also made projects very difficult to bank.

Under the revised law, the 5.5 eurocent/kWh for all renewable projects has been upped and each sector of the renewable market has been given a specific rate in line with production costs. Consequently, the rate for onshore wind will be increased to 8 eurocent/kWh; 7 eurocent/kWh for hydro and 9 eurocent/kWh for geothermal. The offtake will be valid for the first 10 years of operation.

Photovoltaic solar energy projects have been given completely different terms of support because of their much higher costs: The price will be 25 eurocent/kWh for the first 10 years and 20 eurocent/kWh for the second 10 years. The offtake guarantee will apply for projects that are commissioned on or before 31 December 2015.

In addition to guaranteed prices, the draft law contains a domestic share support incentive for projects using mechanical and electro-mechanical equipment that has been produced in Turkey. For example, for wind energy projects domestic share support is 0.6 eurocent/kWh for a wing, 0.8 eurocent for a generator, 0.5 eurocent for a turbine and 1 eurocent for all mechanical equipment on the rotor and nacelle.

Whether the equipment subsidy will remain in the ratified law is uncertain – the subsidy may be in breach of EU law and although Turkey's EU accession ambitions appear to be mired in EU political infighting, there is still expectation that accession will eventually take place.

Bringing in international lenders

The new law should have a significant impact on Turkish wind project deal volume – both domestically and internationally financed.

To date, the problems associated with the market have kept international lenders out – even pre-liquidity crisis. Zorlu raised the first international financing for a wind farm project in Turkey earlier in the year – a Eu130 million facility for the Eu220 million 135MW Rotor Elektrik project in Osmaniye. But the deal was heavily multilateral-backed with debt from the EBRD (Eu45 million), EIB (Eu30 million) and IFC (Eu55 million), although the EIB tranche was guaranteed by commercial banks led by DenizBank and HSBC.

More recently, Akenerji secured a Eu19.5 million ($27.8 million) 10-year loan from HSBC for its Ayyildiz wind farm near Bandirma, western Turkey. But again the loan is guaranteed by Danish export credit agency EKF and is linked to Vestas turbine supplies.

With the new tariff system in place, more international lenders are likely to look at the market – particularly given the high debt margins. The Turkish banks have been hit by higher cost of funds and pricing for power projects has risen above 400bp to 500-650bp for 10-year loans. Given the proliferation of 8-10 year miniperms across the European project market and the lower margins available elsewhere, international lenders, many of which have Turkish subsidiary banks or long-term relationships with local lenders, are certain to find their appetite.

In addition to a boost to renewables development Turkey is moving forward with its distribution grid privatization and upgrade programme. The distribution system is as important to the development of Turkish renewables as the energy law revisions. Turkey's antiquated grid has problems coping with the variable generation produced by wind farms and is only capable of handling around 11,000MW of wind power in its current state.

Incorporating wind or small hydropower into any grid is difficult because it is not a baseload power source. Small hydro also provides variable power, especially in Turkey, where rivers are particularly irregular owing to the country's climate and topography. Turkey's grid therefore needs to be upgraded to cope with the fluctuating power from renewable technology.

Distribution privatization

The privatization of the distribution network is expected to go some way to achieving that. The state-owned electricity distribution company TEDAS, which in 2007 had a 98% market share across Turkey, has been broken up into 21 companies, each corresponding to different regions, which are gradually being auctioned off as 40-year Transfer of Operating Rights concessions under which the winning bidders are expected to invest large sums to upgrade the existing system to increase capacity.

The Baskent EDAS (BEDAS) power grid, Sakarya EDAS (SEDAS) and Meram Elektrik Dagitim (MEDAS) grids were successfully auctioned and the first two short-term financed via letters of guarantee in 2008.

All three sales have been similarly structured to overcome lack of bank liquidity. For example the sale of the $1.23 billion BEDAS grid to Verbund and Sabanci involved an initial $650 million direct payment from the sponsors to the government and a further two later payments (up to $670 million in total depending on the non-fixed margin of libor-plus 250bp) guaranteed by Akbank, Garanti, Yapi Kredi, Isbank and Finansbank.

The first two deals are now looking for long-term take-outs. Unicredit, Akbank and Isbank are refinancing Akenerji and CEZ's $600 million acquisition of SEDAS (the original deal involved $300 million paid upfront to the government). Verbund and Sabanci are looking for a similar deal with Unicredit.

Alsim-Alarko are still looking to finance the $440million MEDAS acquisition after Cengiz Holding joined as a partner. Like the other two concession half the $440 million will be paid upfront and the rest by bank guaranteed future payments. However, unlike the other concessions, the interest rate – difficult for the banks to predict on the other two deals given the floating rate – paid to the state on these payments is a fixed 9%.

The auction continues to progress. Tenders for three new distribution projects – the Eskisehir electricity distribution grid, Samsun grid and Trabzon grid – will be held in October. But the sales are going slower than expected and not attracting the volume of foreign investors that the Turkish government was probably hoping for. Most recently 13 bidders prequalified for the Coruh Elekrik Dagitim grid, 22 for the Osmangazi grid and 17 for the Yesilirmak grid. But of those bidders only Turkish companies have been publicly linked with the tenders.

The same was true of the first round when although both winning consortia included foreign investors, there was disappointment that they were the only foreign companies bidding. Eight had pre-qualified for privatization in 2006 (the sales were initially planned for 2007 but were delayed by the elections), including the energy majors AES, E.ON, Enel, Iberdrola and Suez-Tractebel.

Although the pace of power liberalization and renewable development has not met expectations, Turkey's latest attempt at an overhaul of its energy supply is the most radical to date. And given its addiction to imported gas, the impact of fossil fuel volatility on its economy and lack of security of supply, the overhaul needs to be radical.

But the timing could be better. Turkish energy needs both foreign equity and debt, and although international lending margins are levelling out, liquidity is still not easy to come by. Similarly, the price of local debt is high and will continue to be so until Turkish bank's cost of funds comes down. That puts pressure on sponsors' development costs.

Whether the increase in renewables subsidy and the relatively cheap sale of distribution grids will be enough to offset the high cost of debt and bring in significant investment will be measured by the volume of deals in 2010.