Turkey may suffer from recent global market turbulence, because the EU is Turkey’s largest export and import partner, and in September the International Monetary Fund lowered its estimate for Turkish GDP growth in 2011 to 6.6%, and its outlook for 2012 to 2.2%.

Nevertheless, most market participants expect power demand to continue to grow at a sufficient rate to support prices for at least the short to medium term, providing crucial support to projects that sell power into the whole­sale market. Gas-fired plants represent around half of the Turkish generation fleet, and more large-scale projects are closing this year, so the price of gas will play an important role in the market’s development.

The power price projections are by no means simple, because GDP fore­casts are subject to revision, a healthy project finance market is feeding impressive increases in supply, and Turkey’s gradual privatisation of its electricity industry, including generation assets, could influence prices as the competitive power market takes shape. The slow pace of privatisation, highlighted by the cancellation of the 1,120MW Hamitabat sale, cautious against hasty assumptions.

Domestic banks continue to dominate greenfield project finance, but their cost of funding has risen on the back of global banks’ funding problems and the Turkish central bank’s increase in reserve requirements. Lenders say domestic pricing on power projects has risen by almost 200bp in the last 12 months. “If we are talking about door-to-door ten-year debt with a grace period of 2 years and an average maturity of 5 or 6 years, we are talking about 600-650bp over Libor,” says one. But lender ap­petite remains strong, as does appetite for 100% merchant risk, an aspect with which many international lenders struggle to get comfortable.

Gebze & Co

The deal that highlights this rising comfort with merchant risk is Yeni Elektrik Üretim’s $1 billion 865MW Gebze combined cycle gas turbine project, which reached financial close in July.

Unit Investment owns 60% of the project company while Ansaldo owns 40%. The $700 million in domestically sourc­ed debt is limited recourse during the merchant operational phase, setting a new benchmark for Turkish gas-fired power.

The debt was split between four Turkish banks, Yapi Kredi, Is Bank, Garanti Bank and Vakif Bank. They also together supplied a further $80 million in guarantee letters of credit. The debt has a tenor of 14 years door-to-door, and completion of the plant is expect­ed by the end of 2013.

The project company has a lump-sum turnkey engineer­ing, procurement and con­struction contract with Ansaldo, and therefore benefits from support from Italian conglomerate Finmeccanica, the majority shareholder of Ansaldo. The EPC contractor takes delivery risk and provides performance and availability guarantees, while there was also some sponsor support for other risks during the construction phase.

As is common in Turkish power, there was no gas supply agreement at signing. With the expectation that state-con­trolled Botas’ dominant share of the Turkish gas supply market will decrease through the national privatisation plan, the project has the right to enter into gas supply agreements with alternative suppliers. These could be of different lengths and cover different volumes, depending on the market conditions. Gas supply prices are hedged through a market-linked mechanism, since Botas’ gas prices are passed through to the power market.

Sponsors will also be liable to meet cashflow shortfalls, with their obligations linked to the financing’s debt service coverage ratio. The level of this operational support is intended to decrease over time as the gas and power markets mature. One banker says that for projects with highly credit-worthy sponsors, some lenders are willing to structure a release mechanism on the sponsor support, which is trig­gered when projects reach DCSR levels of around 1.3x. “Achieving 30% upside is not very easy,” he notes.

There are several other large-scale gas plants in development. Garanti, Yapi Kredi and Vakif are work­ing towards financial close in October on Akernerji’s 900MW Egemer gas-fired project, in Hatay, southern Turkey. Czech utility CEZ is the largest shareholder in Akernerji, with a 27.4% stake. The project is expected to have a standard debt to equity ratio, with all of the debt financing provided by the three banks, and comprehensive support from the sponsor both pre-and post-completion. The plant is scheduled to be commissioned in 2014.

Eser Holding and Acwa Power are expected to launch a request for proposals to the wider bank market later this year for the debt financing of their 800MW CCGT project in the Yahsiyan district of Kirikkale in Central Anatolia.The merchant plant is expected to cost around $800 million with a debt-to-equity ratio of around 80-20. The plant would be fully merchant and operational by 2014. ACWA Power owns 70% of special purpose company Farcan Enerji and Eser Holding owns the rest.

The balance of the project funding will come from equity and shareholder loans, combined with ECA and commercial bank debt. The sponsors mandated the European Bank for Reconstruction and Development and Garanti Bank as structuring banks. The EBRD is con­sidering providing up to $200 million of senior debt for the plant. This is expected to be through a pari passu senior loan rather than an A/B struc­ture, although negotiations over the term sheet and the tenor are in early stages. Financial close is scheduled for the end of this year or first quarter of 2012.

Gas supply cause headaches

Turkey’s gas supply arrangements attracted considerable scrutiny earlier this month, when it emerged that Botas had decided not to extend a 6 billion cubic metres per year supply agreement with Russia’s Gazprom through the Western pipeline. The Turkish government said its decision was based on Gazprom’s refusal to lower its prices suf­fi­ciently, and follows steep rises in Botas’ prices to residential and industrial customers. But it also comes at a time when Turkey is looking to introduce more competition into its gas supply market.

Botas supplies gas to around 90% of Turkish customers, and domestic projects cannot secure fixed-price long-term supply contracts. One-year contracts are the norm, and project participants have to become comfortable with the rollover risk. “For one year you can find contracts, for two years you can find a letter of intent. After two years it becomes a misery,” says one lender. Energy industry privatisation will mean Botas’ grip on gas supply will fall over the next few years, and this will present project companies more choice in terms of gas supply, potentially allowing them to buy from other suppliers.

The financing on Akenerji’s Egemer CCGT plant is expect­ed to require that the project sign a medium-term gas supply contract with a supplier that is approved by the banks. This would likely be in a few years’ time, since current market conditions are not supportive, but such moves highlight the expectation that projects will be able to win longer-term gas supply contracts, and power PPAs of similar lengths, as the market opens up to competition.

“[PPAs] are normally yearly bilateral contracts with eligible consumers, which are normally reviewed after one year ... In order to have longer contracts for gas you need to have longer contracts for selling electricity,” says one power developer. The introduction of competition into gas supply should bring about more flexible negotiations with private suppliers, with potentially more favourable conditions on nomination, take or pay, as well as price, the developer says.

But the development of competition between private generating companies could also put pressure on power prices. A large number of projects are set to come online, while more generation assets are to be sold off by the government. The rising importance of gas-fired generation has increased generators’ sensitivity to gas prices and demand growth will have to be strong to match supply growth. One lender says because of this he is wary on projects’ margins and expects tighter conditions on deals closing over the next 12 months, including more covenants relating to gas supply and power sales arrangements and lower levels of leverage.

There has been some interest from foreign banks in the larger Turkish power deals. Many struggle to get comfortable with the local environmental permitting process for small-scale renewables such as hydro plants, but there are signs European banks may soon be involved in financing merchant gas projects. At least one European bank has worked on a merchant gas deal this year, and achieved internal credit approval. In the end the bank did not lend to the deal but if foreign lenders can get comfortable with the risks specific to Turkish projects, their competitive pricing levels compared with local banks could alter the market’s dynamic.

Renewables ratchets up

Renewables are likely to increase in importance to rival gas deals, and while small-scale hydro projects have been a market feature for some time, the market expects a surge of wind projects seeking financing in 2012. This follows the introduction in January of this year of new renewables legislation including a suite of feed-in tariffs. It sets out for the first time prices by generation type is and dollar-denominated, as opposed to the previous price in Euros.

Hydro and wind facilities are to receive $0.073 per kWh, geothermal is to receive $0.105 per kWh, and solar and biomass plants $0.133 per kWh. This compares with a tariff of Eu0.05-0.055 for all types of non-fossil fuel generation in previous legislation. The tariffs apply for 10 years for complying projects, that commence operations between 2005 and 2015.

Market participants say the renewables laws in general are a positive boost for the market, but the feed-in prices themselves have been damaged by a weakening currency. The Turkish lira has fallen 23% against the dollar in the last year. This has particularly dented the attractiveness of solar projects. “Maybe in time if the investment costs go down, we will see some bankable [solar] projects,” says one lender.

Successful bidders in recent tenders for wind power pro­jects are currently preparing licence applications, and are expect­ed to tap the banking market for financing in the next year.

Developers bid a participation price per kWh, with essen­tially the highest price winning the tender. However, it is likely some of the developers have overbid, and will struggle to close on their projects, lenders say. Only wind projects with high capacity factors will be financed, one banker says, adding: “The minimum period of data we ask for is one year. We work with high probability factors like P90 also.”

With foreign developers and suppliers participating in the tender and looking to gain a foothold in the Turkish market, there could be an influx of export credit agencies and foreign banks that are already comfortable with wind. The new renewables rules also include incentives for using components made in Turkey, however. Wind power pro­jects, for example, receive the $0.08 per kWh for domestically-sourced blades, $0.01 per kWh for generator and power electronics, $0.006 per kWh for rurbine towers and $0.013 per kWh for rotor and other mechanical parts. Projects that comply and are operational before 2015 receive the supplementary payment for 5 years.

Some of the detail on this is yet to be fleshed out, but it shows government’s growing support for its renewables sector as a whole. One issue is whether components need to be 100% made in Turkey, or whether a lower percen­tage would qualify. Further legislation is expected in the months to come. ■