Financing Opportunities of Photovoltaic Projects in Turkey - Status and Perspectives -

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1 Financing Opportunities of Photovoltaic Projects in Turkey - Status and Perspectives - Berlin, 19 th November 2013

2 Content 1. Introduction 2. DEG at a Glance 3. Overview of DEG s Financial Products 4. General Criteria for DEG Financing 5. DEG s Commitment in Turkey 6. Framework Conditions of Photovoltaic Financing in Turkey 7. Requirements in Photovoltaic Project Financing 8. Risks and Mitigation 9. Conclusion - Turkish PV Projects in the Future 2

3 DEG at a glance Facts and Figures 2012 Established 1962 Employees 480 Head office Cologne Shareholder KfW Frankfurt Equity EUR 1.8 billion Balance sheet total EUR 4.7 billion New business EUR 1.3 billion Portfolio EUR 6.0 billion DEG is a partner for companies investing in emerging markets and developing countries. For more than 50 years, we have been successfully supporting people and markets on the spot. 3

4 A bank with a wide range of responsibilities DEG, a subsidiary of KfW Domestic Promotion International Financing We promote Germany We ensure internationalization We promote development Business area Mittelstandsbank Business area Privatkundenbank Business area Kommunalbank KfW IPEX-Bank Business area KfW Entwicklungsbank DEG Promotion SMEs, business founders, start-ups Promotion construction of new housing and modernisation as well as education Financing municipal infrastructure projects and global loans Germany agency business for Federal Government International project and export finance Developing and emerging-market countries: Financial cooperation Developing and emerging-market countries: Private sector promotion Promotion of environmental and climate protection 4

5 DEG at a glance Mandate and working method German development finance institution for the private sector Specialist for entrepreneurial development in all secotors of the economy Long-term investment capital for private enterprises Financing of investments with a positive development impact Market-oriented conditions Agribusiness, finance sector, infrastructure, manufacturing industries and services Ecological and social acceptance according to international guidelines Contributions to sustainable economic growth and proverty reduction 5

6 Harnessing opportunities in future markets: Overview of DEG's financial products Long-term loans Guarantees Mezzanine finance Equity capital Special Programmes Financings developpp Feasibility studies Accompanying measures Climate partnerships Our tailor-made finance is long-term and reliable and facilitates entrepreneurial investments. With our special programmes we support developmentally relevant measures and projects in addition to climate protection initiatives. 6

7 Scope of DEG financings 7

8 General Criteria for DEG Financing Qualified management Credit standing Proven track record Corporate Governance Environmental and social standards Developmental effects Sound business plan Investment plan Market analysis Due-diligence study Expected return Financing shares of owner and co-lenders 8

9 General Criteria for DEG Financing Integrity, transparency of shareholder Track record of shareholder (know how, finance, management) International accounting standards Transparent corporate governance Majority interest in the project company through private company and private management Adequate protection for foreign capital investment Transfer of capital must be assured Limited governmental influence on license and concession agreements (independent regulatory authority) Secured local legal framework 9

10 General Criteria for DEG Financing Financing Equity ratio of at least 25% (depending on project structure ) Adequate cash-flow oriented structure (i.e. debt service coverage, current ratio, flexible repayment structures) DEG contribution: up to 35% in greenfield projects; missing portion of debt can be arranged Amounts from DEG: between 5 and 25 million EUR Minimum environmental social standard In compliance with local, EU and World Bank requirements In compliance with international standards of the International Labour Organisation and the UN 10

11 DEG s commitment in Turkey DEG s commitment: EUR million Investment companies 20 Loans million Equity 49.4 million DEG Representative Office in Istanbul for Turkey and the Middle East since 2011 as of

12 Solar Map of Turkey Source: Länderprofil Türkei - Deutsche Energieagentur Bfai 03/

13 Attractive locations for connections of systems based on solar to the distribution system at a distance of maximal 30 km. Turkey s average annual total sunshine duration is calculated as 2,640 hours. Source: Länderprofil Türkei - Deutsche Energieagentur Bfai 03/

14 Framework conditions of PV financing in Turkey Feed-in Tarif (FiT) of 13.3 USD-Cent/kWh for 10 years; possibly more due to local content and production of components in Turkey. Solar parks must be in operation until ; otherwise the Government can change (reduce) the current FiT. FiT changed from Euro to USD; if connected to German suppliers an exchange rate risk can accure. FiT must be higher in order to run profitable PV projects in Turkey. Legal framework expected to remain stable, but yet untested. FiT valid for 10 years; market risk after FiT expiring (most probably with price lower than today s FiT from year 11 onwards). FiT comparatively low, short duration, not indexed (inflation risk). Principle interest of investors in solar PV opportunities up to acapacity of 600 MW; plans for regions Konya (92 MW) and Van (77 MW). Still unknown criteria for selection of the winning bidders: probably pressure on revenues by license fee, royalties, deadline of construction, etc. 14

15 Requirements in Photovoltaic Project Financing Construction Preferred: EPC contract on turn-key basis with completion and performance guarantees Adequate arrangements to cover cost overruns, project delays, unexpected event Operation Long term O&M contact with experienced operator Modern equipment and operating system 15

16 Requirements in Photovoltaic Project Financing Track record of module producer / EPC contractor important / proven technology. Technical and financial completion guarantees necessary. Debt sizing according to expected cash flows (assumptions for market price offer FiT important). Minimum equity 25% - 30%. Long Tenors necessary because of comparatively low FiT, rather short grace period, 1+14 years possible (advantage of locking in fixed interest). Insurances typical for project finance. Usual project finance collateral first ranking mortgage assignment of receivables share pledge, pledge of contracts All licenses in place; tenor important. Land use rights secured and grid connection (part of investment?). 16

17 Risks and Mitigation Major Risks Detail Mitigation Development Risk Contracts, Permits Developer Equity Construction Risk Completion Deadline Proven Turn-key Contractor Technology Risk Stable, consistent output Proven components Operating Risk Interruptions, Defects O & M contracts Off-take Risk Demand and payment FiT / PPA / State guarantee Country Risk Exchange Rate Risk Interest Change Risk Political, financial, regulatory Think twice acceptable country rating needed 20 year cash flow returns Currency hedging, local currency Refinancing interest higher Force Majeure Risk Hails, storms, fire, etc. Insurances Long-term fixed interest 17

18 Conclusion - Turkish PV Projects in the Future Turkey is an interesting market for investments in the renewable energy sector. Higher feed-in tariff for PV projects with a longer term would be preferable. Reliable grid connection as challenge in the country. Long-term investment security and reliable regulation could attract international banks, DFI s and investors to enter into the Turkish PV sector. Installed PV capacity in Turkey reached only around 3 MW (end 2012); not remarkable compared to hydro power plants ( MW) and wind energy projects (1.800 MW). Financing is still a challenge in new markets; profitability remains doubtful. In new markets, such as Turkey, both international players and local start-up developers will have a role to play. In the forthcoming years DEG would like to support the renewable energy sector in Turkey, including bankable PV projects. But until today, DEG did not finance any PV project in Turkey. DEG Representative Office in Istanbul has promissing PV project proposals in the pipeline. 18

19 Thank you for your kind attention! Wilhelm Icke Vice President 19