An Alternative Financing for Renewable Energy Project in Turkey: ESCO Financial Modelling03 December, 2013
Since the motivation of being energy hub between Middle East and Europe, energy resources diversification is adopted by Turkish policymakers. Herein, Turkish government commenced to regulate renewable energy sector with new legislations and incentives. Thus, new investment opportunities are under the spotlight along with various financing options. License exemption under 1MW renewable projects are foreseen to trigger these types of alternative financial models for small business purposes especially in wind and solar markets.
Energy Performance Contracting (EPC), which is the fundamental implementation of ESCO (Energy Service Company) financial modelling, prominently developing in emerging countries. The main purpose of these contracts is dispatching operational risk to ESCO's such as energy saving, energy auditing, technical support, monitoring and maintenance. Besides these, ESCO may became a loan provider for renewable energy projects that will also conduct all negotiations with banks for credit approvals. Albeit, ESCO financial modelling do not reach the high volumes across the world. Small scaled projects are selected as the baseline.
According to enacted Energy Efficiency Law No: 5627 which was enacted in 2007, Guaranteed Savings Contracts are anticipated to be applied as a renewable energy financial modelling tool. Other contract models such as Shared Savings Contracts shall be highlighted in potential legal framework for deepening ESCO financing in Turkey.
There are two main types of ESCO financial modelling will be analyzed since these models are mainly used in Europe.
Guaranteed Savings EPC Contracts
In a conceptual base, Guaranteed Saving EPC Contracts concentrate on increasing energy savings instead of loan application for a project. Typically, project owner applies for loan and makes periodical repayments to the financial institution. ESCO is only responsible for operational risk related to technical support, maintenance, engineering facilities. In accordance with feed in tariffs (FITs), this type of investment model will be highly demandable in renewable energy market in Turkey.
Shared Savings EPC Contracts
ESCO directly takes the credit risk and provides loan to the clients. In return for this comprehensive service, client is obliged to pay a service fee to ESCO that obtained from achieved energy savings. At the project start-up stage, clients are allowed to undertake a renewable project without any project finance or maintenance and verification (M&V) cost. This type of contract is expected to come into light after stabilized electricity market in line with new energy stock exchange "EPİAŞ" establishment in Turkey.
Potential Energy Service companies' approach for project finance may be prudent. There are significant indicators which drive long term investments in the fields of renewables such as solar, wind and hydro. Apparently, energy prices' risk is one of the most substantial issue regarding electricity market. In this regard, an independent stock exchange is a compulsory mechanism for the purpose of reliable prices. Furthermore, currency risk is another problematic drawback particularly in emerging economies which are dependent to develop economies' key data. From the much more macro perspective, inflation rate may be also a vital determinant for prospective investment decisions. As a consequence of these potential financing models, It can be stated that more steps need to be taken in a coordinated manner for development in renewable energy market. Commercial banks are most likely to be cautious on loan approvals whether an ESCO or project owner request new fund. A market awareness is required for creditworthy clients in terms of guarantees provided by energy service companies. In this regard, FITs, which are provided by government shall be considered as a main collateral from the point of commercial banks. On the other hand, ESCO's energy saving guarantees should be considered as a reliable result of comprehensive technical and financial analysis. A more balanced market with regard to ESCO's and project owners' expectations should be harmonized with government feed in tariffs and incentives in Turkish energy market.