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Should the political risk in Turkey deter renewables investors?

With a 1GW solar project in the early stages of procurement, and a further 1GW wind project recently announced, Turkey is taking a step-change towards achieving its upcoming renewable energy targets.

For international and local renewables players alike, these new projects offer an opportunity and challenge on a scale never previously seen in this important emerging market.

Turkey has long been a country with too much potential for international renewables companies to ignore, but the question still to be answered is whether the returns there match the risks? It’s never a simple analysis with Turkey’s unique situation and style, and the effect upon it of constantly whirling geopolitics.

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At a policy level, Turkey is unusual in that its renewable-energy goals are not materially driven by a green lobby. The need to meet burgeoning demand growth and lessen dependency on non-domestic sources of energy are considered far more important. 

That may make Turkey a more robust long-term renewables investment location than it would seem at first sight. With environmental policy not currently a material vote winner, it ought to make Turkish renewables policy less prone to the volatility of Western European markets, with all the negative impact that has caused renewables developers there in recent years.

What of the overall political risk in Turkey? That is the “go or no-go” issue boardrooms often ultimately wrestle with when deciding whether to make investments there. A pragmatic view is to focus on the actual probable effects of the risks eventuating, rather than having commercial analysis under constant distraction by the risks themselves in isolation. 

Taking the renewables feed-in tariff/feed-in premium in Turkey as one example, if the concern is, say, currency risk being increased by perceived political instability, is that not eliminated by the dollar-denominated support? Many of the local risks (eg, protectionist requirements for the new projects to manufacture locally) can also be mitigated through the right choice of local joint venture partners.

And indeed on actual economic outcomes, is Turkey really as risky as it is often perceived? By way of recent example, on the major transportation infrastructure public-private partnerships, demand guarantees have been triggered by investors and were honoured by the government. 

Turkey is certainly an enigma, but is its bark worse than its bite?

On regulatory risk, holders of existing arrangements for unlicensed small-scale renewables projects had their rights “grandfathered” under new revised legislation. Not all governments would have stood by demand guarantees, and many, as we know, disregard acquired rights of existing projects and legitimate expectations of sponsors. Turkey is certainly an enigma, but is its bark worse than its bite?

The mega-solar project has attracted a large field of interested participants, international and local. The upcoming 1GW wind project is likely to do the same. The urgent question for investors is whether, and if so, how, to embrace this major potential market. Where will the parallels be with — the UAE perhaps? And will Turkey apply the lessons learned from western European failures?

Ian McGrath is a Turkey-based partner at global law firm Dentons

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