1. Estimating the cost of capital for wind energy investments in Turkey
Gustav Fredriksson, Simone Tagliapietra & Georg Zachmann
Istanbul, January 2019

2. Introduction
Promoting wind power investment will be crucial to realizing Turkey’s energy strategy
Turkey has a target of 20 GW installed capacity of wind power by 2023
More wind power would contribute to:
Meeting Turkey’s rapidly growing electricity demand;
Reducing Turkey’s dependence on foreign energy; and
Decarbonising the Turkish electricity sector
High technical potential of wind power in Turkey (114 GW)

3. Energy demand and imports
Source: Authors based on BP Statistical Review of World Energy 2017 and Eurostat

4. Electricity consumption
385 TWh expected by Turkey’s Ministry of Energy and Natural Resources
Source: Authors based on EPDK (2018), Electricity Market Development Report 2017

5. Generation mix (2017)
Source: Authors based on EPDK (2018), Electricity Market Development Report 2017

6. Installed wind power capacity over time
Source: Authors based on Turkish Wind Energy Association (2018), Turkish Wind Energy Statistics Report 2018

7. Turkey’s energy strategy
Turkey’s 2023 energy strategy consists of:
Strengthening security of supply to meet demand and reduce import dependence;
Giving due consideration to environmental concerns throughout the energy chain;
Increasing efficiency and productivity, establishing transparent and competitive market conditions through reform and liberalization; and
Promoting R&D in energy technologies
To realize these aims and to meet the 2023 wind power capacity target of 20 GW, attracting and retaining investment in wind power will be crucial
In this context, there is a need to assess the investment climate in the Turkish wind power sector, including investment risk and RE support

8. Our study
Main aim: Estimate the cost of capital for wind power investments in Turkey
The cost of capital  A crucial element in wind power investment decisions
Due to the large upfront capital cost of wind power plants, a high cost of capital substantially increases costs, which can deter investment
Second aim: Calculate the total cost of the renewable energy support scheme YEKDEM
High inflation and depreciation of the Turkish Lira have increased FIT costs
This should be taken into account when assessing the investment climate, especially given the risk that insufficient support is given to wind producers in the future

9. Literature - cost of capital of wind projects
Importance of WACC for RE investment is widely recognized in the literature (e.g. Hirth & Steckel, 2016; Steckel & Jakob, 2018; Steffen, 2018)
Diacore (2016) estimates the weighted average cost of capital (WACC) for onshore wind projects in EU Member States
Finds a range of 3.5% (Germany) to 12% (Greece) in 2014
Ecofys (2017) updates the analysis for south eastern EU Member States for and finds a WACC range of 5% (Slovakia) to 13.7% (Greece)
Few studies have analyzed the cost of capital for wind power projects in Turkey
The most similar study to ours - Ertürk (2012) - finds a WACC of 9.4% for onshore wind energy in Turkey
However, as will be discussed, our methodology differs from Ertürk (2012)

10. Renewable support schemes in Turkey
YEKDEM
Guarantees a feed-in-tariff (FIT) of $0.073/kWh for the first 10 years of operation
Local content bonus ($0.006-$0.037 per kWh) added to FIT during the first five years if plant components are produced domestically
Producers must apply for YEKDEM prior to 2020
YEKA
Offers a ‘renewable energy resource zone’ and electrical connection capacity to firms investing in local R&D, buy domestically produced equipment and employ a large share of domestic workers

11. Challenges in estimating the cost of capital
Typically, the cost of capital is calculated using a weighted average of the cost of equity and debt:
𝑊𝐴𝐶𝐶= 𝐷 𝐷+𝐸 ∗𝑐𝑜𝑠𝑡 𝑜𝑓 𝑑𝑒𝑏𝑡∗ 1−𝑡𝑎𝑥 𝑟𝑎𝑡𝑒 + 𝐸 𝐷+𝐸 ∗𝑐𝑜𝑠𝑡 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦
Where:
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑑𝑒𝑏𝑡= 𝑟 𝑓 +risk premium
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦= 𝑟 𝑓 + 𝛽( 𝑟 𝑚 − 𝑟 𝑓 )
We abstain from this approach because:
Reliably estimating most parameters is difficult
β requires information on the riskiness of wind power projects in Turkey relative to the market
Lack of data on the risk premium for wind power producers in Turkey
Information on the market value of debt (D) and equity (E) is confidential and difficult to obtain
Typically relies on subjective interviews with experts and self-reported estimates from stakeholders

12. Methodology
In view of the shortcomings, we calculate the internal rate of return (IRR) of wind projects in Turkey, and use the IRR as an upper bound for the cost of capital
The IRR is the discount rate that sets the net present value (NPV) of a project’s cash flows (CF) equal to zero:
𝑁𝑃𝑉=0= 𝑡=0 𝑛 𝐶𝐹 𝑡 (1+𝐼𝑅𝑅) 𝑡
IRR > Cost of capital  Positive excess returns
IRR < Cost of capital  Negative excess returns
Assuming the average wind power producer in Turkey generates a positive return, we can deduce a plausible range for the cost of capital from the IRR

13. Methodology
𝑁𝑃𝑉=0=− 𝐼 0 + 𝑡=1 𝑛 𝑅 𝑡 − 𝑂&𝑀 𝑡 − 𝑇 𝑡 (1+𝐼𝑅𝑅) 𝑡 + 𝑆𝑉 𝑛 (1+𝐼𝑅𝑅) 𝑛 Revenues 𝑅 𝑡 - Revenues from electricity sales 𝑆𝑉 𝑛 - Salvage value Costs 𝐼 0 - One-time capital cost for setting up the project 𝑂&𝑀 𝑡 - Operations and maintenance costs 𝑇 𝑡 - Taxes

14. Data - Revenue
Dataset from the Energy Market Regulatory Authority of Turkey (EPDK)
Covers all (136) wind installations that participated in YEKDEM and produced output in 2017
Plant-level data on:
Feed-in tariff rates (USD/MWh)
Yearly production volumes (MWh)
Production capacities (MW)
Maximum yearly production volume guaranteed to be remunerated under YEKDEM (MWh)
We focus on projects under YEKDEM because the scheme:
Covered 136 wind power plants with positive output in 2017 (while YEKA covers only one)
Supports wind projects of various scale (while YEKA focuses on more large scale projects)

15. Data - Costs Capital costs
Dataset on 21 wind power projects in Turkey partially financed by the Turkish Mid-size Sustainable Energy Financing Facility (MidSEFF)
Use total project cost and capacity to calculate the mean project cost per MW for wind installations in Turkey
O&M costs
Estimates from IEA & NEA (2015)

16. Overview of data Input Value Data source Costs
Capital cost (2017 $/MW)
1,416,250
MidSEFF (2018)
O&M costs (2017 $/MWh)
22.49
IEA & NEA (2015), IMF (2018)
Revenue
Average FIT (2017 $/MWh)
77.07
EPDK (2018b)
Market price (2017 $/MWh)
44.93
Energy Exchange Istanbul (2018), OECD (2018c)
Further assumptions
Tax rate
20%
OECD (2018b)
Depreciation rule
Linear
Economic Lifetime
25 years
IEA & NEA (2015), IEA (2010), Diaf et al. (2008), Ozerdem et al. (2006)
Salvage rate
IEA & NEA (2015)
Change in US inflation ( )
5.19%
IMF (2018)

17. Results – IRR (2017) Total production (MWh) 14,745,046
Total capacity (MW)
5,130
Revenue (million 2017 $)
Annual revenue (years 1-5)
1,136
Annual revenue (years 6-10)
1,076
Annual revenue (years >10)
663
Costs (million 2017 $)
Total capital costs
7,265
Total O&M costs
332
Taxation expense (million 2017 $)
Annual taxation expense (years 1-5)
114
Annual taxation expense (years 6-10)
102
Annual taxation expense (years >10) 20
Profit after tax (million 2017 $)
Annual profit after tax (years 1-5)
690
Annual profit after tax (years 6-10)
642
Annual profit after tax (years >10)
311
IRR
5.45%

18. Sensitivity analysis Parameter changed Alternative parameter value
IRR under 2017 production
IRR under max production
Higher capital costs (IEA & NEA, 2015)
1,507,671 $/MW
4.85%
 8.64%
Lower O&M costs (Irena, 2018)
20 $/MWh
5.45%
9.49%
Market price + 25%
56.2 $/MWh
6.59%
10.61%
Market price - 25%
33.7 $/MWh
4.04%
8.10%
Higher tax rate
30%
4.71%
8.21%
Lower tax rate
10%
6.21%
10.79%
Higher salvage value
5.61%
9.52%

19. Distribution of IRRs

20. Results - Total compensation under YEKDEM

21. Share of different technologies in total compensation and production under YEKDEM (2017)

22. Conclusions & policy implications
We estimate an average IRR of around 5%
This suggests the cost of capital in Turkey is not higher than in southern Europe
Continued support for YEKDEM will be crucial to attract and retain investment
As the FIT rate is denominated in USD, the depreciation of the Turkish Lira means the increased cost of YEKDEM is borne by electricity consumers
Crucially important is not to make retrospective reductions in the FIT rates as this would erode investor credibility in YEKDEM and possibly even YEKA. This would, in turn, deter wind power investment and finally impede Turkey’s ability to realize its 2023 energy strategy