impact scenarios of carbon finance on the...

DRAFT

IMPACT SCENARIOS of CARBON FINANCE on

the RENEWABLE POWER CAPACITY of TURKEY

Prepared under the Project:

Capacity Building for Climate Change Management in Turkey

Prepared by:

Ramazan Aslan (Futurecamp Turkey)

Edited by:

The Project Team and the MoEF Climate Change Department

July 2010

Capacity Building for Climate Change Management in Turkey Project

Disclaimer

The findings, opinions, interpretations and conclusions expressed in this report are entirely those of the author and should not be attributed in any manner to the Ministry of Environment and Forestry, the State Planning Organization, Turkish Industrialist’s and Businesmen’s Association(TÜSİAD) and the United Nations Development Programme.

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Table of ContentsIntroduction...........................................................................................................................................3

1. Electricity Generation Characteristics of Turkey.................................................................................5

2. Electricity Demand and Supply Projection..........................................................................................8

3. Strategy for Electricity Generation by Renewable Resources...........................................................10

4. Carbon Markets................................................................................................................................14

4.1 Market Mechanisms and Price Development.................................................................................14

4.2 Future of Carbon Markets and Alternatives for Turkish Renewable Projects..............................17

5. Carbon Finance as a Mean to Increase Renewable Electricity Generation.......................................18

5.1 Methodology and Assumptions......................................................................................................18

5.2 Results............................................................................................................................................22

6. Summary and Conclusion.................................................................................................................23

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Figures Figure 1 Share of Fossil Fuels in Electricity Generation of Turkey by Years (%)

Figure 2 Electricity Demand Development by Years

Figure 3 Installed Capacity and Shares by Sources – June 2010

Figure 4 Electricity Generation and Shares by Sources – 2008

Figure 5 Development of Cumulative GHG emissions of Turkey by Years

Figure 6 Development of Total and Electricity Generation CO2 emissions by Years

Figure 7 Electricity Supply and Demand Projection by TEİAŞ for 2009 and 2018 Period

Figure 8 Share of Sources in Electricity Generation in 2018

Figure 9 An Illustrative Cash Flow Chart for a Typical Carbon Reduction Project (Source: Worldbank)

Figure 10 Development of Carbon Prices

Figure 11 Credit Price Ranges and Averages by Project Type, OTC 2008

Figure 12 Credit Price Ranges and Averages by Project Type, OTC 2009 (US$/tCO2e)

Tables Table 1 Breakdown of Installed Capacity by Sources in 2018 (MW)

Table 2 Renewable Source Potential, Utilization by 2010 and Target for 2023

Table 3 Breakdown of Renewable Private Sector Generation Licenses by Source

Table 4 Wind Power Projects in Operation by June 2010 and Applied VER Standard

Table 5 Volumes and values of project based transactions in 2008 and 2009

Table 6 Decrease in Capital Cost by Learning Rate for each Technology Types

Table 7 Financial Assumptions used in the Modeling

Table 8 Emission Reduction Factors for each Technology Type

Table 9 Voluntary Credit Price Changes by Project Type in 2008

Table 10 Analyst Expectations for CDM/JI and EU ETS

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IntroductionThe electricity generation in Turkey is dominated by fossil fuels. As shown in Figure 13, the share of fossil fuels in total generation has been steadily increasing for last two decades and reached to the peak share of 82,5% in 2008. The 57,4% of total electricity generation in 2008 was from imported fuels (natural gas, imported coal and liquid fuels). The high level of fossil fuel dependency in the electricity generation is the major cause of increase in the national GHG emissions. Since 1990, the total GHG emission of Turkey has increased more than twofold and reached 366,5 million tons of CO2e in 2008. Within the same period, the GHG emissions generated upon the electricity generation is increased more than threefold from 30 million tons in 1990 to 101,4 million tons in 2008.

Figure 13 Share of Fossil Fuels in Electricity Generation of Turkey by Years (%)1

Being a net energy importer and high fossil fuel dependent for energy generation, Turkey is in need of decreasing its dependency on fossil fuels in order to secure energy supply as well as to decrease foreign trade deficit and to reduce carbon emissions. This can only be possible with transition to low carbon economy. The effective measures in place have been promoting increase in renewable energy capacities and end-use energy efficiency.

Turkey has significant hydro, wind, solar, biomass and geothermal power potential. Among them, only hydro potential is utilized to some extent with dam type HEPPs. There is also growing number of small-scale hydro, wind and geothermal power plant investments but their share is very small comparing potentials of these resources. On the other hand, solar and biomass power applications hardly exist.

According to the energy security strategy paper2 of the Ministry of Energy and Natural Resources, the share of Turkey’s renewable energy including the hydro power is aimed to be increased to 30% in the overall energy generation by 2023. In order to reach this target, the entire technical and economic potential of hydro and economic potential of geothermal power will be utilized, the installed wind

1 Source: TEİAŞ, http://www.teias.gov.tr/istatistik2008/33.xls 2 Approved by the High Planning Council on 18 May 2009. Issue No: 2009/11

4

http://www.teias.gov.tr/istatistik2008/33.xls


power capacity will be increased to 20.000 MW and possible potential for other sources (as biomass and solar) are also planned to be utilized till 2023.

In this study, the role of carbon finance as a mean to reach Turkey’s 2023 target is assessed and impact of this additional revenue on financial returns of projects are analyzed.

1. Electricity Generation Characteristics of Turkey

Turkey’s electricity demand is growing rapidly. The average growth rate between 1998 and 2008 was 5,9%. Exceptionally, the demand for electricity was decreased during the years when Turkey experienced severe financial crisis, (1,1% in 2001 and 2,2% in 2009 (estimated)). In overall, the increase in demand was between 3,9% and 8,8% for those years when the increase in demand continued. The average of first 5 months of 2010 also signals recovery in the electricity demand following the decrease in 2009with 6,7% increase in demand compared to the previous term back in 2009.

Figure 14 Electricity Demand Development by Years3

The electricity generation resources of Turkey are dominated by fossil fuels. By June 2010, the 65% of total installed capacity is based on fossil fuels. Among them, natural gas has the largest share with 36,4% of total installed capacity. Turkey has low calorific lignite reserves and share of lignite in installed capacity is 18%. Mostly state-owned dam type hydro power plants are the main capacities from renewable sources with 28% share. Wind, geothermal, small-hydro and other renewables have 7% share in total generation. Figure 15 shows total installed capacity by sources and corresponding shares of each sources in total capacity as of June 2010.

3 Source : TEİAŞ, http://www.teias.gov.tr/istatistik2008/23.xls

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Figure 15 Installed Capacity and Shares by Sources – June 20104

When it comes to the electricity generation, dominance of fossil fuel is more apparent. By the end of 20085, the share of fossil fuel base electricity in total generation was 82,5%. Again natural gas base electricity generation got the lion’s share with almost half of total generation (49,7%). When compared with high share of natural gas and other fossil fuel base electricity generation, the low share of hydro and other renewable in electricity generation with a 17.4 % share are considered far low. However, the installed capacity of those have significant share in total installed capacities. This can be explained by low capacity factor of these renewable power plants.

Figure 16 Electricity Generation and Shares by Sources – 20086

Turkey’s high dependency on fossil fuels (mostly imported) is not sustainable. As an industrializing country, the energy supply is vital for economic growth of Turkey. Any price increase or problem in supply of oil or natural gas will have immediate negative impacts on its economy and electricity generation. The large share of fossil fuels in electricity mix is also one of the main reasons of increase

4 Source: TEİAŞ, http://www.teias.gov.tr/yukdagitim/kuruluguc.xls. Liquid+Natural Gas plants given in this link is added to the natural gas capacity considering the limited liquid fuel usage in these plant and suggestion of TEIAS: http://www.teias.gov.tr/istatistik2008/7.xls , cell B64. Similarly, solid+liquid plants are also considered in the imported and hard coal power capacity.5 Official statistics of electricity generation for 2009 has not been announced by TEIAS during report writing.6 Source: TEİAŞ, http://www.teias.gov.tr/istatistik2008/32(75-08).xls

6

http://www.teias.gov.tr/istatistik2008/32(75-08).xls


http://www.teias.gov.tr/yukdagitim/kuruluguc.xls


in GHG emission for last two decades. In order to decrease GHG emissions, the share of renewable sources in electricity generation needs to be increased.

Figure 17 Development of Cumulative GHG emissions of Turkey by Years7

Turkey’s GHG emissions were doubled by 2008 and reached to 366,5 million tons CO2e comparing 1990 level (Figure 17). In 2008, around 80% of the total emissions of Turkey were from CO 2 while one third of CO2 emissions were from electricity generation (Figure 18). In other words, more than one quarter of total emissions (27%) are due to electricity generation by fossil fuels. Other important CO 2

sources are industry, road transportation, residential and cement production.

Figure 18 Development of Total and Electricity Generation CO2 emissions by Years8

7,8 Source: TUIK, National GHG Inventory of Turkey (1990-2008) submitted to the UNFCCC in 2010.8

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2. Electricity Demand and Supply Projection

The latest published projection of TEİAŞ which is the national authority responsible for preparation of long-term electricity demand and supply projections is valid for the period of 2009-2018. The projection of TEİAŞ is based on different scenarios for demand and supply. In supply analysis; existing capacity, power plants in construction phase and projects with energy licenses are considered. Figure 19 shows the demand and supply projections for different scenarios. According to this projection, reliable generation of power plants will not be sufficient to cover electricity demand by 2015. In other words, if new capacities are not installed and operationalized in coming years, Turkey is expected to face significant electricity shortage by 2015.

Figure 19 Electricity Supply and Demand Projection by TEİAŞ for 2009 and 2018 Period9

Breakdown of installed capacity by sources and years are given in Table 7. According to the projection, installed capacity of natural gas, imported coal, and hydro and wind will increase but others are not projected to change. It is worth to mention that, compared with existing capacity, the projection can be considered as conservative, for example, the wind capacity is already reached the figure of 2018 by June 2010 (Figure 15). This is also valid for geothermal, biogas and waste. According to the projection, the share of hydro capacity will be highest with 37,4% and share of natural gas will be 32,6%.

9 TEİAŞ Capacity Projection (2009-2018), http://www.teias.gov.tr/eng/ApkProjection/CAPACITY%20PROJECTION%202009-2018.pdf

8

http://www.teias.gov.tr/eng/ApkProjection/CAPACITY%20PROJECTION%202009-2018.pdf

http://www.teias.gov.tr/eng/ApkProjection/CAPACITY%20PROJECTION%202009-2018.pdf


Table 7 Breakdown of Installed Capacity by Sources in 2018 (MW)

YEARS 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 SHARE IN 2018 (%)

LIGNITE 8.260 8.260 8.260 8.260 8.260 8.260 8.260 8.260 8.260 8.260 14,7%H.COAL+ASPHAL. 555 555 555 555 555 555 555 555 555 555 1,0%IMPORTED COAL 1.838 1.838 2.248 3.464 4.678 4.678 4.678 4.678 4.678 4.678 8,3%NATURAL GAS 14.693 14.839 15.645 17.556 18.396 18.396 18.396 18.396 18.396 18.396 32,6%GEOTHERMAL 85 85 85 85 85 85 85 85 85 85 0,2%FUEL OIL 2.100 1.800 1.800 1.800 1.800 1.800 1.800 1.800 1.800 1.800 3,2%DIESEL 206 206 206 206 206 206 206 206 206 206 0,4%OTHER 251 251 251 251 251 251 251 251 251 251 0,4%THERMAL TOTAL 27.989 27.835 29.051 32.179 34.232 34.232 34.232 34.232 34.232 34.232 60,7%BIOGAS+WASTE 41 52 60 60 60 60 60 60 60 60 0,1%HYDRO 14.886 16.381 18.058 19.877 19.877 19.877 19.877 21.077 21.077 21.077 37,4%WIND 570 743 1.012 1.012 1.012 1.012 1.012 1.012 1.012 1.012 1,8%TOTAL (MW) 43.485 45.011 48.182 53.128 55.182 55.182 55.182 56.382 56.382 56.382 100,0%

The share of sources in electricity generation for 2018 is also given in Figure 20. As it can be seen in the figure, the natural gas share will be the highest with 42,7% and the share of total fossil fuel will be 75,4%.

Figure 20 Share of Sources in Electricity Generation in 2018

The projection shows that Turkey’s fossil fuel dependency will continue at least for a mid-term period. Even though the hydro capacity will increase, non-hydro renewables are expected to remain fairly low with a 1,5% share in the total generation.

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3. Strategy for Electricity Generation by Renewable Resources

The principals of electricity market restructuring and market operations given in the Electricity Energy Market and Supply Security Strategy Paper can be found below10:

Market restructuring and market operations are to be built and maintained to lead enhancing of energy security;

In order to secure a sustainable electricity market, climate change and environmental impacts of every activity of the market shall be taken into account;

Losses from electricity generation, transmission and consumption shall be decreased to minimum level, efficiency shall be increased and cost of electricity shall be decreased via competitive environment which will be reached according to resource priority of energy politics and whole gains with these measures shall be used to serve electricity with affordable prices to consumer;

In order to decrease import dependency in energy generation, new technologies shall be promoted, resource variety shall be ensured, domestic and renewable sources shall be deployed at maximum level;

Share of domestic contribution in new investments shall be increased.

The Strategy Paper also indicates the target for increased share of renewable energy resources in total electricity generation of Turkey by 2023, is central to the national energy policies. The associated overall target is to ensure share of renewable sources in the energy mix to be 30% at minimum in order to reach this target by 2023:

Entire technical and economical capacity for hydroelectricity shall be utilized; Installed capacity of wind energy shall be increased to 20.000 MW; Entire 600 MW geothermal capacity, which is the proven potential capacity for electricity

generation shall be put into operation; The target is to enable expansion of solar power utilization within the electricity production

and use the national potential at maximum level. Technological developments on electricity production from solar power will be closely followed and implemented in order to promote electricity generation from solar energy.

Based on technological developments and legislative provisions; electricity production plans will be prepared by taking into consideration of potential developments on utilization of other renewable energy resources. In the case of increased utilization of those resources, the share of fossil fuels and primarily imported resources will be reduced.

Considering the current installed capacity of renewable sourcesas of June 2010 (Figure 15), the intended targets according to the Electricity Energy Market and Supply Security Strategy Paper are considered practically ambitious. The estimated potential of renewable resources, the existing capacities and 2023 targets are given in Table 8. In order to reach these targets, additional 22.500 MW hydro, 19.000 MW wind and 420 MW geothermal capacity needs to be operationalised till 2023. Since the numerical targets for other sources (solar and biomass) are not given in the Strategy Paper, they are stated as ‘As Possible’ for the year 2023.

10 Source: Energy Ministry, http://www.enerji.gov.tr/yayinlar_raporlar/Arz_Guvenligi_Strateji_Belgesi.pdf (page 2)

10

http://www.enerji.gov.tr/yayinlar_raporlar/Arz_Guvenligi_Strateji_Belgesi.pdf


Table 8 Renewable Source Potential, Utilization by 2010 and Target for 202311

Sources Potential Utilized 2023 Target

TWh/year GW GW GW

Hydro 130 37 14,5 All potential

Wind 150 48 1 20

Geothermal 4,2 0,51 0,09 All potential

Solar 380 ? ~0 As Possible

Biomass 3,4 0,43 0,09 As Possible

Th Energy Market Regulatory Authority (EMRA) is the main body regulating activities in energy market. The EMRA has been issuing generation licenses to private sector since 2003 and the total capacity of renewable energy issued to the private sector nearly reached to 20.000 MW by October 2009. The breakdown of renewable generation licenses by resources is given in Table 9:

Table 9 Breakdown of Renewable Private Sector Generation Licenses by Source ,200912

Source Capacity (MW)

Hydro 15.978,7

Wind 3.321,3

Geothermal 103,9

Biomass 57,2

Other 86,6

Total 19.547,7

Even though the total licensed capacity will be in operation, the total renewable capacity will be much more behind 2023 targets, particularly for wind. On the other hand, there are several national 11 Source: ETKB, Mavi Kitap: http://www.enerji.gov.tr/yayinlar_raporlar/Mavi_Kitap_2009.pdf (page 9) and Worldbank Report.12 Source: EMRA, www.enerjikongresi.com/doc/2009/sunumlar/AhmetOCAK.ppt (page 7)

11

http://www.enerjikongresi.com/doc/2009/sunumlar/AhmetOCAK.ppt

http://www.enerji.gov.tr/yayinlar_raporlar/Mavi_Kitap_2009.pdf


obstacles hindering further utilization of renewable sources for electricity generation including the licensed ones. The main barrier is the lack of incentives as renewable energy investments are not adequately competitive comparing fossil fuel fired power plants in countries where reductions of carbon emissions has a price .In turkey, the main incentive for renewable investments has a range of 5 to 5,5 €c/kWh feed-in-tariff for 10 years which is insufficient to enable to promotion of renewable investments, other than large hydros.13

Due to lack of incentives on renewables, investors seek other supporting mechanisms in order to start up their investments. One of the complementary supporting mechanisms for those investments in Turkey is the voluntary carbon market. The investors of renewable electricity projects also applies for voluntary carbon standards (such as Gold Standard (GS)14, VCS15, VER+16) in order to sell issued certificates to buyers who want to offset their emissions on voluntary basis. To give an example for wind projects, as it can be seen in Table 10, the entire wind power projects excluding the small size projects also applies for VER standards in terms of generation of additional revenue by selling carbon credits.

Table 10 Wind Power Projects in Operation by June 2010 and Applied VER Standard17

NO. Location Company Installed Capacity

(MW)

VER Standard

1 İzmir-Çeşme Alize Enerji Elektrik Üretim A.Ş. 1,50 -

2 Çanakkale-İntepe Anemon Enerji Elektrik Üretim A.Ş. 30,40 GS

3 Manisa-Akhisar Deniz Elektrik Üretim Ltd. Şti. 10,80 VER+

4 Çanakkale-Gelibolu Doğal Enerji Elektrik Üretim A.Ş. 14,90 GS

5 Manisa-Sayalar Doğal Enerji Elektrik Üretim A.Ş. 30,60 GS

6 İstanbul-Çatalca Ertürk Elektrik Üretim A.Ş. 60,00 GS

7 İzmir-Aliağa İnnores Elektrik Üretim A.Ş. 42,50 GS

8İstanbul-Gaziosmanpaşa

Lodos Elektrik Üretim A.Ş. 24,00 GS

9 İzmir-ÇeşmeMare Manastır Rüzgar Enerjisi Santralı San. ve Tic. A.Ş.

39,20 GS

10 İstanbul-Hadımköy Sunjüt Sun’i Jüt San. ve Tic. A.Ş 1,20 -

11 İstanbul-Silivri Teperes Elektrik Üretim A.Ş. 0,85 -

13 Worldbank - Project Appraisal Document on a IBRD Loan and a Proposed Loan from Clean Technology Fund to TSKB and TKB with the Guarantee of Turkey, May 2009 (http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2009/05/11/000333037_20090511030724/Rendered/PDF/468080PAD0P112101Official0Use0Only1.pdf 14 For further information on GS Standard please refer to website: http://www.cdmgoldstandard.org/Home.80.0.html 15 For further information on GS Standard please refer to website: http://www.v-c-s.org/ 16 For further information on GS Standard please refer to website: http://www.netinform.net/KE/Beratung/Service_Ver.aspx 17 Source: EPDK, Gold Standard and VER+ Registries

12

http://www.netinform.net/KE/Beratung/Service_Ver.aspx

http://www.v-c-s.org/

http://www.cdmgoldstandard.org/Home.80.0.html

http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2009/05/11/000333037_20090511030724/Rendered/PDF/468080PAD0P112101Official0Use0Only1.pdf

http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2009/05/11/000333037_20090511030724/Rendered/PDF/468080PAD0P112101Official0Use0Only1.pdf



(MW)

VER Standard

12 Balıkesir-Bandırma Yapısan Elektrik Üretim A.Ş. 30,00 VER+

13 Balıkesir-Şamlı Baki Elektrik Üretim Ltd. Şti. 57,00 GS

14 Muğla-DatçaDares Datça Rüzgar Enerji Santralı Sanayi ve Ticaret A.Ş.

17,00 GS

15 Hatay-Samandağ Deniz Elektrik Üretim Ltd. Şti. 20,00 VER

16 Aydın-Didim Ayen Enerji A.Ş. 31,50 GS

17 Çanakkale-Ezine Alize Enerji Elektrik Üretim A.Ş. 20,80 GS

18 Balıkesir-Susurluk Alize Enerji Elektrik Üretim A.Ş. 18,90 GS

19 Osmaniye-Bahçe Rotor Elektrik Üretim A.Ş. 57,50 GS

20 İzmir-BergamaÜtopya Elektrik Üretim Sanayi ve Ticaret A.Ş.

15,00 GS

21 İzmir-ÇeşmeMazı-3 Rüzgar Enerjisi Santrali Elektrik Üretim A.Ş.

22,50 GS

22 Balıkesir-Bandırma Akenerji Elektrik Üretim A.Ş. 15,00 GS

23 Balıkesir-BandırmaBorasco Enerji ve Kimya Sanayi ve Ticaret A.Ş.

45,00 GS

24 Manisa-Soma Soma Enerji Elektrik Üretim A.Ş. 45,00 GS

25 Hatay-Belen Belen Elektrik Üretim A.Ş. 15,00 GS

26 Tekirdağ-Şarköy Alize Enerji Elektrik Üretim A.Ş. 28,80 GS

27 İzmir-UrlaKores Kocadağ Rüzgar Enerji Santralı Üretim A.Ş.

15,00 GS

28 Balıkesir-BandırmaAs Makinsan Temiz Enerji Elektrik Üretim San. ve Tic. A.Ş.

20,00 GS

29 Mersin-Mut Akdeniz Elektrik Üretim A.Ş. 33,00 GS

31 Edirne-Enez Boreas Enerji Üretim Sistemleri A.Ş. 15,00 GS

32İzmir-Bergama, Aliağa

Bergama RES Enerji Üretim A.Ş. 52,50 GS

33 Hatay-BelenBakras Enerji Elektrik Üretim ve Tic. A.Ş.

15,00 GS

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(MW)

VER Standard

34 İzmir-ÇeşmeAres Alaçatı Rüzgar Enerjisi Sant. San. ve Tic. A.Ş.

7,20 -

35 Çanakkale-BozcaadaBores Bozcaada Rüzgar Enj. Sant. San. ve Tic. A.Ş.

10,20 -

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4. Carbon Markets

4.1 Market Mechanisms and Price DevelopmentKyoto Protocol which came into force in 2005, has established flexible mechanisms composed of Clean Development Mechanism (CDM) and Joint Implementation (JI) and Emission Trading System(ETS). While CDM is accessible for the non-Annex Parties of the UNFCCC, JI is applicable for Annex—I parties which are subject to emission reduction targets as per the obligations of the Protocol for Annex-B Parties.

Turkey has been a Party to the United Nations Framework Convention on Climate Change (UNFCCC) since 24 May 2004 and to the Kyoto Protocol as of 26 August 2009. However, since Turkey is listed in the Annex-I of the UNFCCC and a non-Annex B Party of the Protocol, it cannot benefit from CDM or JI mechanisms yet considering the first commitment period(2008-2012) of the Kyoto Protocol.

CDM is the dominant project based mechanism in global carbon transactions. By 2009, around 75% of total project based transaction volume and 80% of total value of transactions are CDM based (Error: Reference source not found).

Table 11 Volumes and values of project based transactions in 2008 and 200918

However, Turkey is not part of the compliance regime and not able to access to the compliance markets of the Protocol, voluntary carbon markets which operates independently have been providing additional revenues for a significant number of Turkish renewable energy projects such as wind, geothermal, hydro and landfill gas. Contrary to the CDM or JI projects, emission reduction credits (VER) of these projects cannot be used in compliance markets established under the Kyoto Protocol. Rather they are purchased by corporate companies or individuals based on the purpose of offsetting their emissions.

As mentioned in the earlier sections, the low penetration rate of Turkey’s renewable energy projects to the energy market is clear and the lack of sufficient financial incentives for those relatively expensive technologies hindering the situation. Hence, the voluntary carbon market is one of the supportive mechanisms for Turkey that low carbon technology implementers can benefit by selling emission reduction certificates and create an additional revenue stream additional to electricity revenues (Figure 21).

18 State and Trend of the Carbon Market – 2010, World Bank Carbon Finance, May 2010 page 37

15


Figure 21 An Illustrative Cash Flow Chart for a Typical Carbon Reduction Project (Source: Worldbank)

Development of carbon prices between April 2008 and April 2010 is given in Figure 22. Due to the financial crisis, carbon prices had a sharp decrease during the last quarter of 2008. CER prices was around 10-13 € during the most of time of the year 2009. Starting from March 2010, there is a trend of increase in carbon prices.

Figure 22 Development of Carbon Prices19

The change in price of VERs in OTC market (largely managed by bilateral agreements) during 2008 and 2009 are depicted in Figure 23 and Figure 24 respectively. In contrary to the compliance markets, voluntary markets are more sensitive to VER project types and host country selection. This is mainly because of the motivation of buyers, who don’t only consider emission reduction, but also other social and environmental perspectives of the VER projects. The decrease in VER prices (other than solar) is mainly due to the financial crisis. In response to the global financial crisis, companies cut

19 State and Trend of the Carbon Market – 2010, World Bank Carbon Finance, May 2010 page 5

16


back on discretionary funding for corporate social responsibility initiatives, including offsetting emissions20.

Figure 23 Credit Price Ranges and Averages by Project Type, OTC 200821

Figure 24 Credit Price Ranges and Averages by Project Type, OTC 2009 (US$/tCO2e)22

20 http://www.forest-trends.org/documents/files/doc_2433.pdf page ii21 Ecosystem Marketplace, New Carbon Finance: http://www.forest-trends.org/documents/files/doc_2343.pdf 22 Ecosystem Marketplace- New Carbon Finance: http://www.forest-trends.org/documents/files/doc_2433.pdf

17

http://www.forest-trends.org/documents/files/doc_2433.pdf




4.2 Future of Carbon Markets and Alternatives for Turkish Renewable ProjectsKyoto Protocol aims to reduce emissions of developed countries below 5% of 1990 levels by regulating the first commitment period between 2008 and 2012. As approaching to the end of this period, the international climate change negotiations for the Post2012 still ongoing and large uncertainties exist. However, there are intense discussions continues in terms of reaching a legally binding agreement before 2012. Hence, huge uncertainties also exist about the future of carbon markets and even it is not certain that whether flexible mechanisms of Kyoto Protocol will continue following 2012.

On the other hand, what is certain about the future of carbon markets is the continuation of Emission Trading scheme of EU (EU ETS) which is designed to regulate emissions of EU countries even after 2012so called the EU ETS Phase III.

At present, Turkey is not a participant of any compliance market and renewable projects can only benefit from the voluntary carbon market. In recognition of the circumstances of the Post-2012 period, the following alternative scenarios are considered for Turkey in relation to the new carbon regime and markets:

Scenario-1 “No compliance, no voluntary”: Turkey will hold its current position and will not participate to any compliance market. By the time voluntary carbon market(VCM) collapse, there will not be any opportunities for VER projects to be gain additional revenues from the VCM in Turkey to generate carbon revenues which is additional to their operating revenues.

Scenario-2 “No compliance, but voluntary”: Turkey will hold its current position and will not participate to any compliance market. However, voluntary markets will retain to operate and Turkish VER projects will continue to generate carbon revenue upon selling their VER certificates.

Scenario-3 “A participant to compliance”: International negotiations will conclude with continuation of current flexible mechanisms (or similar to these mechanisms), Turkey will participate to one of them and will be a CDM or JI country. Turkish renewable projects will be eligible to generate and sell CDM or JI credits (CERs or ERUs) in the compliance market.

Scenario-4 “Benefits from NAMAs”: Turkey will benefit from Nationally Appropriate Mitigation Actions (NAMAs) which are still under negotiation and subject to approval by parties in upcoming COP16 or subsequent conferences.

Even though Turkey is a candidate member of the European Union, and finally will be member of the EU, since renewable power projects are not included the EU ETS scheme23, Turkish renewable projects will not be eligible to benefit from the EU ETS scheme in terms of selling carbon reduction certificates. On the other hand, being the largest multi-national carbon scheme in the world and covering more than 10.000 installations24, price forecast on European Allowance Units (EUA) for Phase III are more credible and can be used to analyze the impact

23 See EU Directive: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2009:140:0063:0087:EN:PDF24 See: http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/08/35&format=HTML&aged=0&language=EN&guiLanguage=en

18

http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/08/35&format=HTML&aged=0&language=EN&guiLanguage=en

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2009:140:0063:0087:EN:PDF


carbon prices as an upper limit, in any kind of future mechanisms for Turkish renewable projects. In this analysis, price forecasts for EUAs are used as indicative prices for renewable projects in case of NAMA(s) applications.

5. Carbon Finance as a Mean to Increase Renewable Electricity Generation

This section provides a forecast analysis on the impact of carbon finance with respect to its contribution in addressing Turkey’s ambitious target for increased share of renewables by 2023.

As the international negotiations for reaching a legally binding agreement for the Post-2012 still continues, any change in Turkey’s position under the carbon markets before 2015 is not seen possible. This is mainly due to long process for international treaties before coming into force as they are subject to approval of parties’ following adoption of the new treaties by their parliaments. Hence, in this study, the investment analysis and impact of carbon finance on financial returns are conducted for renewable power plants based on the assumption that those are to be operationalized by the year of 2015.

5.1 Methodology and AssumptionsIn order to analyze the impact of future carbon reduction prices on renewable investments; the financial return of renewable projects with or without carbon revenue is calculated based on capital and investment costs, Operations and Maintenance(O&M) costs and price projections for carbon reduction certificates according to the different carbon mechanism scenarios.

Current feed-in-tariff (55 €/MWh) is used as selling price of electricity generation from these plants.

Capital Costs of Technologies

In terms of selection of the capital costs of renewable technologies by 2015; the Worldbank Study 25, the market analysis and data tables of NREL26 and EU Commission Staff Working Document27 are benefited from.

The projection for capital cost of technologies by 2015 is also available in the Worldbank Study. Since these projections are based on 2005 prices, these are converted to 2015 prices using CPI deflator28.

NREL market analysis doesn’t provide projections for capital cost of technologies but rather provides the status of 2007 and 2008 (in 2006 prices). These prices are also converted to 2015 prices with CPI deflator. The calculated prices are adjusted for the year 2015 by learning rates for each technology. The learning rates are the decrease in cost of technologies for each doubling of capacity due to

25 Technical and Economic Assessment of Off-Grid, Mini Grid and Grid Electrification Technologies, The Worldbank Group, September 2006.26 See NREL for data on Energy Tech. Cost: http://www.nrel.gov./analysis/docs/re_costs_20090806.xls 27 See: http://ec.europa.eu/energy/strategies/2008/doc/2008_11_ser2/strategic_energy_review_wd_cost_performance.pdf 28 US CPI between 2005-2010 is 12%. See: http://data.bls.gov/cgi-bin/cpicalc.pl. It is assumed that same CPI will be realized between 2010-2015. Hence price deflator is set to be 1,2544 (1,12^2) for converting 2005 prices to 2015 prices.

19

http://data.bls.gov/cgi-bin/cpicalc.pl

http://ec.europa.eu/energy/strategies/2008/doc/2008_11_ser2/strategic_energy_review_wd_cost_performance.pdf

http://www.nrel.gov./analysis/docs/re_costs_20090806.xls


technological and operational improvements in these kind of technologies. The formula used to calculate the future cost of technology is given below29:

The learning rates for each technology type and estimated 2015 capacities for each technology are taken from the EU Commission Staff Working Document30. The calculated decrease by 2015 for capital cost of each technology types are given in Table 12.

Table 12 Decrease in Capital Cost by Learning Rate for each Technology Types

Electricity Generation Technology Learning Rates Capital Cost Decrease Rate from 2007 to 2015

PV 23% 15%Wind - Onshore (Good Wind) 8% 16%Wind - Onshore (Moderate Wind) 8% 16%Wind – Offshore 8% 21%Solar thermal (with thermal storage) 10% 15%Geothermal 10% 10%Biomass Gasifier 5% 10%MSW/Landfill Gas 11% 8%Biogas 12,5% 9%Mini Hydro - 5%

Average of 2015 capital costs which are based on studies of the Worldbank Report and NREL Analysis are taken into account for the investment analysis. Capital costs for each technology types by 2015 can be seen in Table .

O&M Cost

Operation and Maintenance (annual fixed and variable Costs) for each technology types are taken directly from the Worldbank Report providing the prices of 2005. It is assumed that, deflator to convert the O&M costs to 2015 prices and decrease in O&M costs due to learning rate offsets each other.

29 Ref 22, page 11. 30 Ref 25, page 16. For Mini Hydro projects, since hydro power technology is already matured and construction cost has the largest share in total cost for this technology, an indicative decrease rate ie. 5% is applied to reflect learning rate.

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Financial Assumptions

The financial assumptions which are used in finance model are given in Table 7. The construction periods are also given in Table .

Table 7 Financial Assumptions used in the Model

Interest Rate 7%Equity Share31 20% or 30%Loan Repayment Period 10 yrCorporate Tax 20%Carbon Crediting Period 20 yrEUR/USD 1,3

Emission Reduction Factors based on Technology Types

In Turkey, there are certified emission reduction projects based on wind, hydro, landfill and geothermal resources32. The emission reduction factors for these technologies are obtained from the most recent registered Gold Standard PDDs33. For biogas projects, the factor for landfill is used in order to simplify the study while the factor is cross-checked by an Indian biogas project34. The emission factor for biogas gasifier is to be the similar with the grid connected renewable sources (other than solar and wind) as this kind of technology leads to CO2 emission reduction but not lead to methane reduction. It is assumed that, whole land fill and biogas projects will reduce methane emissions comparing baseline.

Table 8 Emission Reduction Factors for each Technology Type

Electricity Generation Technology Emission Reduction Factor (tCO2e/MWh)

PV 0,60Wind – Onshore 0,60Wind – Offshore 0,60Solar thermal (with thermal storage) 0,60Geothermal 0,55Biomass Gasifier 0,55MSW/Landfill Gas 3,00Biogas 3,00Mini Hydro 0,55

31 For technology types having 2-yrs long construction period, the equity share is set to be 30%, and for others 20%.32 For registered Gold Standard projects from Turkey see: https://gs1.apx.com/myModule/rpt/myrpt.asp 33 See emission factor calculation given in PDD of wind project with registry no. GS 653: https://gs1.apx.com/mymodule/ProjectDoc/EditProjectDoc.asp?id1=653. Emission factor for geothermal, biomass gasifier and mini hydro projects are calculated with average of BM and OM factor stated in this PDD as per the rule of the emission factor calculation tool of UNFCCC: http://cdm.unfccc.int/methodologies/PAmethodologies/tools/am-tool-07-v2.pdf (page 16).34 See: http://siteresources.worldbank.org/EXTECAREGTOPENVIRONMENT/Resources/511432-1179513928596/Animal_Manure_Management.ppt

21

http://siteresources.worldbank.org/EXTECAREGTOPENVIRONMENT/Resources/511432-1179513928596/Animal_Manure_Management.ppt

http://siteresources.worldbank.org/EXTECAREGTOPENVIRONMENT/Resources/511432-1179513928596/Animal_Manure_Management.ppt

http://cdm.unfccc.int/methodologies/PAmethodologies/tools/am-tool-07-v2.pdf

https://gs1.apx.com/mymodule/ProjectDoc/EditProjectDoc.asp?id1=653

https://gs1.apx.com/myModule/rpt/myrpt.asp


Carbon Reduction Prices

There are only a few credible studies on future carbon price forecasts. It is assumed that 2008 prices for each generation types which are also given in Table 9 will be applicable in 2015 for voluntary market prices. As given in Table 1010, -the price projections of some analysts for Phase III period of EU ETS (2013-2020) are used for the CDM/JI and EU ETS prices in 2015.The single projected price of CDM/JI which is 20 €/tCO2e (26 USD/ tCO2e) as given in this table, is taken as it is while the average estimation of three different prices(35, 48 and 30,10) presented is taken as a reference for EU ETS price forecast which is 37,7 €/tCO2e (49 USD/ tCO2e)..

Table 9 Voluntary Credit Price Changes by Project Type in 200835

Project Type Price (USD/tCO2e)PV 21,98Wind - Onshore (Good Wind) 12,60Wind - Onshore (Moderate Wind) 12,60Wind – Offshore 12,60Solar thermal (with thermal storage) 21,98Geothermal 18,00Biomass Gasifier 16,80MSW/Landfill Gas 16,80Biogas 16,80Mini Hydro 5,20

Table 10 Analyst Expectations for CDM/JI and EU ETS36

As stated in Table 8, wind energy potential of Turkey is 48.000 MW. But according to the State Generation Co. (EÜAŞ)37, only 8.000 MW of these potential has high level wind speed (ie. capacity factor is >= 35%). The entire 40.000 MW potential have a moderate wind speed (ie. capacity factor is 25%-30%). Since wind energy is the most critical energy source as a non-hydro renewable energy source of Turkey, it is analyzed in three sub groups which are given in Table .

35 Fortifying the Foundation – State of the Voluntary Carbon Markets 2009: http://www.forest-trends.org/documents/index.php?pubID=2343 ( page 9) – Prices are converted to 2015 prices with 1,2544 CPI deflator. 36 State and Trends of Carbon Markets, Carbon Finance, World Bank, May 2010 (page 58) – Prices are converted to 2015 prices.37 See: http://www.euas.gov.tr/_EUAS/Images/Birimler/apk/EUAS-Sektor_Raporu2009.pdf (page 8)

22

http://www.euas.gov.tr/_EUAS/Images/Birimler/apk/EUAS-Sektor_Raporu2009.pdf


Table 11 Technical and Economical Assumptions for Different Electricity Generation Technology in 2015

Electricity Generation Technology

Capacity (MW)

Operating Years

Capacity Factor38

Capacity Cost in 2015

(USD/kW)

Generation Cost in 2015 (USDc/kWh)

Construction Period (yr)

PV 5 25 20% 6.330 1,21 1

Wind – Onshore (Good wind) 100 20 35% 1.459 1,69 1Wind – Onshore (Moderate wind) 100 20 30% 1.459 1,95 1

Wind – Offshore 100 20 39% 2.858 1,69 2Solar thermal (with thermal storage) 30 40 41% 4.746 2,27 2

Geothermal 20 30 85% 4.090 1,70 2

Biomass Gasifier 20 25 85% 2.874 3,93 1

MSW/Landfill Gas 5 25 75% 2.924 1,54 1

Biogas 0,06 25 85% 3.252 2,98 1

Mini Hydro 5 50 50% 2.764 1,09 2

5.2 ResultsThe result of financial analysis according to different technologies and carbon prices is given in

2. Threshold IRR is the expected equity IRR by investors in Turkey which are derived from the World Bank study39. Threshold IRRs for offshore wind, land fill and biomass gasifier technologies are not stated in this study. Since there is no operational offshore wind power plant in Turkey, expected equity IRR for this kind of investments is assumed to be 20%. For biomass gasifier and landfill gas technologies same IRR expectation for biogas is used. It is assumed that, geothermal plants will collect CO2 from brine and transfer for industrial usage without additional revenue.Hence, no project emission will generate. The possible additional revenue from selling of byproducts of biomass technologies (i.e. fertilizers) are not also taken into account.

According to the result of financial analysis, none of the listed renewable electricity generation technology will be financially attractive without additional carbon finance in 2015. Onshore wind plants in the areas with high level wind speed, landfill gas and biogas power plants will be attractive if they secure emission reduction certification and sell those certificates in the voluntary markets based on the price assumptions listed in Table 9. However, the wind projects having smaller capacity factor (moderate wind speed) and geothermal projects can be financially attractive if they can secure additional carbon finance with EUA prices. Mini hydro power plants are also expected to get closed to achieve threshold IRRs when they also secure carbon revenue with EUA prices. However, PV, solar thermal and offshore wind projects cannot be financially attractive under any carbon finance scheme

38 Most of capacity Factors are taken from EU Commission Document (Ref:22). Considering high solar irradiation rate of Turkey, factor for PV stated in this document (11%) is assessed low, hence, capacity factor from ‘PV Roadmap’ of IEA is used, please see: http://interenerstat.org/papers/2010/pv_roadmap.pdf (Page 22, Figure 11). With similar approach, 50% of capacity factor stated in Worldbank Study (Ref.20) is used for Mini Hydro.39 World Bank, Loan Appraisal Document, March 2009.

23

http://interenerstat.org/papers/2010/pv_roadmap.pdf


in case electricity feed-in – tariff prices would be increased to 71,5 USD/MWh40. The carbon prices which promote these technologies financially attractive are given in the last column of

. It is clear that, other than price for mini hydro, at least till 2015, none of this prices are realistic, hence these technologies shall have higher feed-in-tariffs to be more attractive by private investors.

Table 13 The Result of Financial Analysis (Equity IRR) for each Electricity Gen. Technologies and Carbon Finance Scenarios

Electricity Gen. Technology

Threshold IRR

IRR w/oVER

IRR With VER

IRR With CER

IRR With EUA

Difference(Max - Min IRR)

ER Price to Reach Threshold

(USD/tCO2e)

PV 25% Neg. Neg. Neg. Neg. N/A 991Wind – Onshore (Good Wind) 15% 11,6% 15,4% 19,8% 28,4% 16,8% -Wind – Onshore (Moderate Wind) 15% 7,1% 10,1% 13,5% 19,9% 12,7% -

Wind - Offshore 20% 3,3% 5,6% 8,1% 12,4% 9,1% 96Solar thermal (with thermal storage) 25% Neg. Neg. Neg. 3,2% N/A 399

Geothermal 15% 8,8% 11,3% 12,5% 16,1% 7,3% -

Biomass Gasifier 20% 7,1% 11,5% 14,2% 22,4% 15,3% -

MSW/Landfill Gas 20% 14,5% 50,4% 76,3% 144,5% 130,0% -

Biogas 20% 8,9% 40,7% 66,1% 135,2% 126,3% -

Mini Hydro 15% 8,7% 9,2% 11,4% 14,2% 5,5% 62

6. Summary and Conclusion

In this study, the effect of carbon finance as an additional revenue to the renewable electricity generation is analyzed. The renewable electricity generation technologies analyzed are listed below:

PV Wind Solar thermal (with thermal storage) Geothermal Biomass gasifier MSW/Landfill Gas Biogas Mini Hydro

According to the result of financial analysis based on the current VCM conditions, carbon finance opportunities for Turkish renewable projects under the voluntary market would be limited to wind power projects with high speed wind potential and also limited to landfill and biogas projects with

40 Converted to 2015 prices with 1,12 CPI deflator.

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financial viability. PV, solar thermal, wind projects with moderate or lower wind speed potential, geothermal, biomass gasifier and mini hydro projects are not projected to be financially attractive even with additional VER revenues based on the VER prices of 2015. If any new carbon scheme or NAMAs will lead carbon prices around estimated EUA prices in Phase III, wind projects with moderate speed can be financially attractive. The potential electricity generation through those projects is estimated to be around 40.000 MW. The national target for installed capacity for wind projects by 2023 is 20.000 MW but, if the current feed-in-tariff prices are not to be increased, the highest available carbon prices in voluntary market will not be sufficient to enable investments of the wind projects with low speed potential. Hence, the investments would be limited to the 8.000 MW wind power projects which are financially attractive based on their high speed wind potential. The additional 12.000 MW wind capacity are projected to be utilized if CDM/JI or EU ETS like carbon scheme will be applicable by 2015, will result additional reduction of 18,9 million tCO 2e emissions41 considering baseline emissions.

In addition to the wind, the entire geothermal energy potential for electricity generation (510 MW) and biomass gasifier as well as most of mini hydro (<= 5 MW) potentials can be utilized with any carbon scheme leading emission reduction prices around EUA price forecasts by 2015.

41 Annual electricity generation with additional wind PPs = 12,000 MW x 8760 hr * 30% capacity factor =31.536.000 MWh. Multiplying with Emission Factor = 0,6 tCO2e, emission reduction amount becomes 18,9216 million tCO2e/year.

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