Climate Finance in Turkey by Public Eye

Christine Eberlein and Martina Heeb September 2011

This study by the Swiss NGO Berne Declaration assesses the World Bank Clean Technology Fund (CTF) in Turkey – a US$100 million loan program added to a US$500 million IBRD loan to promote energy efficiency and renewable energy projects in Turkey. The Berne Declaration’s research shows that the CTF Turkey achieved its objectives in the energy efficiency sector and concerning small hydropower projects. However, hydropower is already marketable and we have found no evidence that the comparatively large portion of CTF money invested in these projects has leveraged investment in other renewable energies. In addition, there are serious concerns about the environmental and social risks of hydropower projects. The CTF Turkey supported 26 energy efficiency and 30 hydropower projects but only five wind power projects and one geothermal power project, while solar and biomass energy projects were disregarded. This paper argues that persisting regulatory hurdles and the existence of long-term binding oil and gas contracts were insufficiently factored into the CTF strategy. As modest climate finance programs like the CTF can only be successful if they are scaled up by other international and local finance, the CTF Turkey clearly failed to fulfil its potential. Our research shows that without the clear political will to remove existing regulatory hurdles, such investment does not suffice to develop the market in renewable energies. The collaboration with two local banks acting as financial intermediaries was successful in terms of speedy disbursement of the CTF loans but failed to meet World Bank standards for transparency and stakeholder participation. The CTF Turkey is a compelling case for more proactive disclosure of information about projects in the CTF pipeline, especially if implemented through financial intermediaries. Based on an analysis of objectives and results, this paper provides recommendations for the strategy, planning and implementation of climate funding.

Who we are and what we do The Berne Declaration, Switzerland, is a non-governmental organization founded in 1968 which now has 21,000 members. Through research, public education and advocacy work, the Berne Declaration promotes more equitable, sustainable and democratic North–South relations. It monitors the role of Swiss corporations, banks, government agencies and the World Bank and addresses the problems of unequal international trade and financial relations, climate finance issues and unsustainable consumption patterns. Berne Declaration Dienerstrasse 12, 8026 Zürich, Switzerland Phone +41 44 2 777 000, Fax +41 44 2 777 001 www.evb.ch, info@evb.ch Imprint

Authors: Christine Eberlein manages the Berne Declaration’s international financial relations program Martina Heeb works as an independent researcher and consultant Editor: Berne Declaration Photos title page: freedigitalphotos.net Citation Berne Declaration (2011). Climate Finance in Turkey: The contribution of the World Bank Clean Technology Fund to transforming the Turkish energy sector. Zurich: Berne Declaration.

Acronyms ...................................................................................................................................... 2 Executive Summary ...................................................................................................................... 3 1 Introduction .............................................................................................................................. 5 1.1 CTF Turkey objectives .......................................................................................................................... 7 1.2 Research objectives, challenges and scope, and report structure ...................................................... 7 1.2.1 Research objectives .................................................................................................................... 7 1.2.2 Research challenges and scope .................................................................................................. 8 1.2.3 Report structure .......................................................................................................................... 9

2 Background and strategy of the Turkish CTF ........................................................................ 10 2.1 Background .........................................................................................................................................10 2.1.1 Turkey’s official engagement in fighting climate change .......................................................10 2.1.2 Potential of and barriers to the development of renewable energy and energy efficiency...................................................................................................................................11 2.2 Strategy ................................................................................................................................................15 2.2.1 Rationale for attracting multilateral climate finance ..............................................................15 2.2.2 World Bank CTF Turkey strategic decisions ...........................................................................15

3 Project assessment ................................................................................................................ 17 3.1 Achievements of the CTF Turkey ......................................................................................................17 3.1.1 Projects funded through CTF and IBRD ..................................................................................17 3.1.2 Greenhouse gas reduction through CTF ..................................................................................19 3.2 Qualitative assessment .......................................................................................................................19 3.2.1 Thematic issue: Speed versus scale, quality and depth of impact ........................................19 3.2.2 The role and implications of financial intermediaries ...........................................................21 3.2.3 Overcoming first mover hurdles ..............................................................................................23 3.2.4 Leverage and mobilizing resources .........................................................................................23

4 Big flops and small achievements: The CTF’s contribution to transformational change in the Turkish energy sector ...................................................................................... 25 4.1 Major funding achievement: Acceleration of energy efficiency projects ........................................25 4.2 Major funding flop: Insufficient support for renewable energies ....................................................25 4.3 Major criticism: Support of problematic hydropower ......................................................................25 4.4 Major challenge: Speedy disbursement or deep impact? .................................................................26 4.5 Major strategic question: Cooperation with financial intermediaries .............................................26 4.6 Major missed potential: No leveraging of additional financial resources .......................................26 4.7 Moving toward transformational change...........................................................................................26

5 Lessons learned and recommendations ............................................................................... 28 5.1 Climate funding strategy and objectives............................................................................................28 5.2 Climate funding planning and preparation of local set-up ..............................................................28 5.3 Climate funding implementation .......................................................................................................29

CIFs

Climate Investment Funds of the World Bank

CTF

Clean Technology Fund of the World Bank

DSI

Devlet Su Isleri (Government Water Works of Turkey)

EBRD

European Bank for Reconstruction and Development

EIA

Environmental Impact Assessment

EIB

European Investment Bank

EMRA

Energy Market Regulatory Authority (Turkey)

GCF

Green Climate Fund

HEPP

hydroelectric power plant

IBRD

International Bank for Reconstruction and Development (part of the World Bank Group)

IFC

International Finance Corporation (part of the World Bank Group)

KfW

Kreditanstalt f端r Wiederaufbau (Germany)

MENR

Ministry of Energy and Natural Resources (Turkey)

NGO

Non-Governmental Organization

PSREEEP

Private Sector Renewable Energy and Energy Efficiency Project (part of the World Bank CIF/CTF scheme)

SCF

Strategic Climate Fund of the World Bank

TKB

Development Bank of Turkey

TSKB

Turkish Industrial and Development Bank

UNFCCC

United Nations Framework Convention on Climate Change

Climate Finance in Turkey

This study by the Berne Declaration assesses the World Bank Clean Technology Fund (CTF) in Turkey – a US$100 million loan program added to a US$500 million IBRD loan to promote energy efficiency and renewable energy projects in Turkey. The Berne Declaration’s research investigated whether the World Bank’s low-interest CTF loans were successful in increasing privately operated renewable energy and energy efficiency production, reducing greenhouse gas emissions and ultimately contributing to the transformation of the Turkish energy sector. The World Bank Group has positioned itself as a main player in financing the fight against climate change and provides concessional finance, including the CTF, to help developing and emerging countries pilot low emissions and climate-resilient development. The Berne Declaration and other NGOs are monitoring the set-up of these funds and have voiced concern about the World Bank pushing sustainable development while at the same time being a top financier of fossil fuel energy projects. In 2009 Turkey demonstrated its readiness to fight climate change by finally signing up to the United Nations Framework Convention on Climate Change (UNFCCC), yet without stringent reduction targets. In order to diversify its heavily fossil fuel-based energy policy and to promote low-carbon development, Turkey was one of the first countries to receive CTF funds in 2009 and had allocated them by mid-2011. Due to non-disclosure policies of the financial intermediaries implementing the CTF loan and limited access to project information, this research is limited to analyzing the allocation of the CTF loan and evaluating its performance in terms of effect on the energy market and contribution to greenhouse gas reduction but cannot provide insight into the individual projects. The Berne Declaration’s research shows that the CTF Turkey achieved its objectives in the energy efficiency sector and managed to overcome first mover hurdles. According to official criteria, it also did well concerning hydropower projects. However, hydropower is already marketable and we have not found evidence that the comparatively large portion of CTF money invested in

hydropower has had a positive spillover effect and leveraged investment into other renewable energies. In addition, there are serious concerns about the environmental and social risks of hydropower projects. In stark contrast to its performance in energy efficiency investments, the CTF Turkey produced far less satisfactory results in terms of accelerating development of the renewable energy market. Despite the highly concessional CTF incentive, only five wind energy projects and one geothermal power project were supported, compared with 26 energy efficiency and 30 hydropower projects. Solar and biomass energy projects were completely disregarded. The strategic decision to commit CTF funds rapidly forced the financial intermediaries to move to sectors which are easy to finance because they already have favourable regulations and are profitable. The Berne Declaration’s analysis shows that if concessional climate finance is to be additional and remove first mover hurdles, rapid investment cannot be an objective in itself. Regarding the small proportion of renewable energies supported, our research shows that persistent regulatory hurdles were not factored into the CTF strategy. Firstly, the amendments to the Renewable Energy Law in December 2010 are too moderate to accelerate the take-off of renewable energy production and, secondly, the Turkish energy strategy relies heavily on fossil fuels and there are long-term binding oil and gas contracts. This paper suggests that the shortcomings of the CTF Turkey concerning renewable energy are mainly due to considerable political, legal and market-related hurdles. A major insight of this research is that the collaboration with two local banks acting as financial intermediaries to disburse the CTF loans was successful in terms of the speedy disbursement of the CTF loans but failed to meet expected standards in terms of transparency and stakeholder participation. The World Bank thus undermines its own ambitious safeguards and transparency policies and risks losing public confidence in the CTF program. Based on analysis of the CTF investment in Turkey, this paper suggests that collaboration with financial inter-

mediaries must always be subject to World Bank safeguards and transparency regulations. The CTF Turkey is a compelling case for more proactive disclosure of information about projects in the CTF pipeline, especially if implemented through financial intermediaries. The CTF Turkey also failed in its key promise to leverage additional local finance and thus did not manage to contribute to a fundamental change in the development of renewable energies. As modest climate finance programs like the CTF can only be successful if they are scaled up by other international and local finance, the

CTF Turkey clearly failed to fulfil its potential. Any climate financing aiming at transformational change must first ensure that sufficient additional means are available to leverage CTF loans. In order to fully exploit the added value of concessional climate finance and to ensure that supported projects contribute to building up public confidence in the potential of investments into energy efficiency and alternative renewable energies, CTF programs need to work towards shifting attitudes and building the capacity of government representatives to get climate-resilient development right.

Climate Finance in Turkey

While the world grapples with the scope of the financial and climate crises, finance mechanisms are becoming more important. Stabilizing the climate requires significant emissions reductions in both the developed and developing worlds, for which large-scale investments in energy infrastructure are needed – ones that will not contribute to greenhouse gas emissions. Finance to meet the net incremental costs need to come from a range of sources, including national governments, private sources and multilateral development banks. The World Bank has increasingly positioned itself as an important player in providing climate finance for developing and middle-income countries.1 The main pillars of this strategy are the World Bank Climate Investment Funds (CIFs), which received donor pledges of US$6.4 billion. The CIFs comprise the Clean Technology Fund (CTF) and the Strategic Climate Fund (SCF), which aim to help developing countries pilot low emissions and climate-resilient development (see Box 1). This paper focuses on the Clean Technology Fund which is designed to finance the particular transformational needs of middle-income and fast-growing developing countries. These countries undergo rapid economic growth alongside increasing greenhouse gas emissions, but may also want to follow a lower-carbon path in order to help combat climate change.

Turkey is one of the countries that has experienced rapid economic growth since the 1980s, alongside a sharp increase in greenhouse gas emissions. Although Turkey is rich in renewable energy sources, it embarked on a fossil fuel energy strategy and is tied into gas, coal and oil import contracts. In 2009 the Turkish government announced that it is ready to play a leading role in fighting climate change and develop its highly renewable energy potential. The only renewable energy source Turkey has been exploiting heavily over the last 20 years is largescale hydropower by building dams, some of which have attracted international media attention for causing unresolved negative ecological and social consequences. In January 2009 the Turkish government received concessional startup loans from the CTF. US$100 million is administered by the World Bank to promote renewable energy and energy efficiency projects. The World Bank CTF loan2 is topped up by a US$500 million World Bank (IBRD) loan; together they form the Private Sector Renewable Energy and Energy Efficiency Project (PSREEEP), implemented by local financial intermediaries.3

3 1

The term ‘climate finance’ is now widely used to describe the financial resources that will be needed to help developing countries deal adequately with climate change, in both its mitigation and adaptation dimensions.

The term CTF Turkey is used in this paper for the entire Private Sector Renewable Energy and Energy Efficiency Project. An additional CTF loan of US$150 million is administered jointly by the International Finance Corporation (IFC) and the European Bank for Reconstruction and Development (EBRD), promoting privatized electricity distribution companies and electricity transmission projects.

Box 1: The World Bank Climate Investment Funds Set up in 2008 with the support of the G8, the Climate Investment Funds (CIFs) are piloting transformations in clean technology, sustainable forest management, increased energy provision through renewable energy, and climate-resilient development.4 As of May 2011, developed country donors have pledged US$6.4 billion to the funds, of which US$322 million has been disbursed. (Switzerland pledged US$20 million.) The CIFs comprise the Clean Technology Fund (CTF) and the Strategic Climate Fund (SCF).5 The CIFs promote an innovative approach to foster cooperation among multilateral development banks to support country-driven strategies and country-coordinated programming, including partnerships with the private sector and civil society. The World Bank praises the CIFs as ‘a new model for transparency, cooperation, and scaling-up climate action’.6 NGOs, however, voice various concerns about the World Bank playing a leading role in climate finance. For one, they argue that the World Bank is not a trustworthy player in climate finance because it is also a top financier of fossil fuel energy projects which conflicts with its efforts to fight climate change. NGOs also point out that in the past the World Bank has imposed controversial reforms on countries in return for access to finance. After civil society analysis and intervention, the CIFs developed a unique governance structure, consisting of Trust Fund Committees, where decision-making is consensus-based. Developed and developing countries are equally represented on the governing bodies. Civil society, private sector, and indigenous stakeholders are allowed to participate as observers at CIF and CTF Trust Fund Committee meetings, but have no voice in decision-making.

The Clean Technology Fund7 The Clean Technology Funds (CTF) received pledges of US$4.9 billion, which is the majority of the US$6.4 billion pledged in total to the CIFs. The CTF aims to finance transformational change in 15 to 20 middle-income and fast-growing developing countries8 by promoting scaled-up financing for the demonstration, deployment and transfer of low-carbon technologies with significant potential for longterm greenhouse gas emissions savings. The World Bank is the Trustee of the CTF Trust Fund. The governance structure includes a CTF Trust Fund Committee, a Multilateral Development Bank Committee, a Partnership Forum, and an Administrative Unit. Again, NGOs are observers to the forums, but without voice.

The Green Climate Fund At the UNFCCC meeting in Cancún in December 2010, the World Bank was granted interim trusteeship of the newly established Green Climate Fund (GCF). 9 NGOs demand that the GCF incorporates lessons learned from the CIFs and in particular, the CTFs. 10

4 5

6 7

See http://www.climateinvestmentfunds.org/cif/ (accessed 11 August 2011). The second fund is the Strategic Climate Fund (SCF) which consists of three programs to pilot new approaches to climate action: the Pilot Program for Climate Resilience (PPCR), the Forest Investment Program (FIP) and the Program for Scaling Up Renewable Energy in Low Income Countries (SREP). See http://www.climateinvestmentfunds.org/cif/node/3436 (accessed 11 August 2011). See http://www.climatefundsupdate.org/listing/clean-technology-fund (accessed 11 August 2011). Eligible countries are: Colombia, Egypt, Indonesia, Kazakhstan, Mexico, Morocco, the Philippines, South Africa, Thailand, Turkey, Ukraine, Vietnam, the Middle East region and North Africa. United Nations Framework Convention on Climate Change (2010) ‘Report of the Conference of the Parties on its Sixteenth Session – Addendum – Part Two: Action Taken by the Conference of the Parties at the Sixteenth Session’, Bonn: UNFCCC, p1. Fry, T. (2011) A faulty model? What the Green Climate Fund can learn from the Climate Investment Funds, Bretton Woods Project, http://www.brettonwoodsproject.org/art-568686, p6 (accessed 9 September 2011).

Climate Finance in Turkey

1.1 CTF Turkey objectives The Turkish government claims that the US$100 million CTF concessional finance administered by the World Bank is exactly the amount of incentive needed to overcome first mover hurdles and jump-start private markets for renewable energy.11 The government hopes that embedding the CTF in multilateral donor programs will accelerate the implementation of a transformative program to overcome risks and reduce transaction costs in the entire Turkish banking and lease finance sectors.12 The CTF determines a project’s eligibility and the level of financing on the basis of whether it will have a ‘transformative’ effect by supporting programs that would not have been viable without concessional finance. One component of this approach assesses the potential impact of CTF financing on the risks and costs of deploying clean technologies. CTF programs are intended to ‘stimulate lasting changes in the structure or function of a subsector, sector or market’ and ‘demonstrate how CTF co-financing could be used, possibly in combination with revenues from emissions reductions, to make low greenhouse gas emissions investments financially attractive by improving the internal rates of return on such investments’.13 In May 2009, the Turkish government and the World Bank signed an appraisal document for the Private Sector Renewable Energy and Energy Efficiency Project which lists the following objectives:  Rapidly develop underutilized resources such as solar, geothermal, biomass and wind along with small-scale hydropower.  Support the use of emerging renewable technologies such as solar, biomass, etc.

Clean Technology Fund Investment Plan for Turkey, http://www.climateinvestmentfunds.org/files/CTF_Turke y_Investment_Plan_01_16_09_web.pdf (accessed 19 September 2011). See http://www.climateinvestmentfunds.org/cif/node/3436 (accessed 11 August 2011). http://www.climatefundsupdate.org/listing/cleantechnology-fund (accessed 9 September 2011).

 Develop energy efficiency investments in the iron, steel, cement, ceramics, chemicals and textiles sectors.  Save about 1 million tons per annum of greenhouse gas emissions.  Have a high leverage effect.  Boost other investments in clean technology and renewable energy development.14 The project appraisal documents further highlight that without CTF support:  The government’s targets for greenhouse gas emission reductions may not be achieved at the desired speed. Renewable energy development may remain restricted to a few existing large hydropower developers and perhaps some wind energy sites.  It seems unlikely that smaller hydropower and wind projects would materialize on the expected scale, or that investors would experiment with relatively newer energy technologies such as solar or biomass.  It seems unlikely that financial institutions would consider energy efficiency investments, or that industry would be attracted towards such investments.15

1.2 Research objectives, challenges and scope, and report structure 1.2.1 Research objectives

The Berne Declaration, promoting equitable, sustainable and democratic North–South relations, monitors the role of Swiss corporations, banks and government agencies in this regard. It also addresses incoherencies of the World Bank, such as its double role in promoting both finance to fight climate change and finance for extractive industries. For over 10 years, the Berne Declaration has supported local groups in Turkey fighting against large dams by promoting renewable energy alternatives. When the Berne Declaration learned in 2009 that Turkey was

World Bank Private Sector Renewable Energy and Energy Efficiency Project (PSREEEP), Project Appraisal Document, http://go.worldbank.org/M4TVT0XB70, pp8, 10–40 (accessed 15 September 2011).

op.cit., p9.

among the first countries to receive CTF finance, it started monitoring the implementation of the funds together with local civil society organizations. The Berne Declaration demands that the World Bank CIFs promote national ownership and accountability, participation of local stakeholders and transparency, and do not result in bad outcomes. Thus, the Berne Declaration started this research project in December 2010 and in May 2011, when the World Bank CTF in Turkey was almost fully committed, undertook a research trip to meet with representatives of the World Bank, the financial intermediaries, renewable energy experts and NGOs. This paper reports the results of this research and aims to draw lessons learned from a civil society perspective. Lessons from the World Bank CTF in Turkey may also provide valuable input to other CTFs, still in the process of being set up, as well as to the current design process of the Green Climate Fund. The World Bank plans to evaluate all of its CTF programs, but indicators are still being developed and no evaluation of the Turkey CTF has so far taken place. This study cannot replace a proper official evaluation of all aspects of the Turkish CTF because we do not have full access to the data. Therefore this study aims to reflect selected thematic issues which are relevant to all CTFs and discuss challenges from a civil society perspective. We based the selected issues on themes discussed in an excellent paper by Professor James Radner, ‘Looking Ahead for Lessons in the Climate Investment Funds – A Report on Emerging Themes for Learning’.16 Radner pointed out challenges for the CTFs at a global level by drawing on early lessons from the CTFs in Turkey and Bangladesh. 1.2.2 Research challenges and scope

Desk research of the CTF Turkey proved more challenging than World Bank transparency

Radner, J. (2010) ‘Looking Ahead for Lessons in the Climate Investment Funds – A Report on Emerging Themes for Learning’, consultative discussion paper, Toronto: School of Public Policy and Governance, University of Toronto.

standards promise. It was difficult to obtain specific information on the projects implemented by the private sector and their outcomes. The World Bank’s website only provides information about a fraction of the projects funded through CTF Turkey. The situation was further complicated by the fact that the CTF Turkey funds were implemented by two Turkish financial intermediaries – the private Turkish development bank TSKB in Istanbul and the public development bank TKB in Ankara. Both banks informed us that their policies did not allow them to provide information on the CTF-funded projects. In a meeting in Washington, the World Bank’s team leader for CTF Turkey officially confirmed that despite the World Bank transparency policy, information on private sector projects implemented by financial intermediaries cannot be published due to national privacy policies. During a research trip in May 2011, we were able to speak to project leaders at the World Bank and at TKB in Ankara and TSKB in Istanbul. All parties were welcoming and helpful but confirmed the privacy policy due to the reservations of private investors. In the follow-up, the financial intermediaries provided us with charts of CTF-funded projects giving information on project types (e.g. energy efficiency, hydropower) and locations but not disclosing project names, implementing firms or sub-contractors. Therefore, a detailed assessment of CTF performance was not possible. Berne Declaration researchers have traced many projects through licensing information and media research. This time-consuming process is ongoing and will continue to shed light on the financed projects and their selection criteria. For similar future projects, it would be helpful if a creative approach could be elaborated that will yield solutions to satisfy all parties. We complemented our research in Ankara and Istanbul by interviewing several energy experts and representatives of civil society organizations, which helped us to obtain a good overview of the CTF Turkey context and its inherent challenges. This allows us to point out delicate issues and to draw lessons on the structure and implementation of the funding phase.

Climate Finance in Turkey

1.2.3 Report structure

In Section 2 we provide background information on Turkey’s energy policies and analyze the potential of and barriers to the development of renewable energies. We also assess strategic decisions by the Turkish government and the World Bank regarding the design and financial structure of the CTF. It is important to understand these decisions in order to assess CTF performance in Turkey. In Section 3 we first assess what the World Bank CTF achieved. The results are then discussed within thematic streams, related to the CTF’s ambitious goals as well as issues raised by civil society organization. These involve:

(1) Speed versus scale, quality and depth of impact The Climate Investment Funds, of which the CTFs are part, seek quick impact and early applicable lessons while at the same time aiming for deep, far-reaching results. We assess if the CTF Turkey has achieved these objectives, what the challenges were and how the implementing agencies dealt with them. We also assess whether the results are in line with CTF Turkey objectives.

(2) Challenges of collaborating with financial intermediaries  The CTF Turkey was implemented by two local banks which, given their expertise, played an instrumental role in committing the CTF funds. But financial intermediaries follow strict nondisclosure policies which conflict with World Bank efforts to enhance transparency and accountability. We discuss the advantages and disadvantages of collaboration with financial intermediaries.  We assess whether stakeholders, including those from civil society and the private sector, were involved during the strategic decision-making process of the CTF and during implementation.  A further issue often raised by NGOs is the demand for government ownership and accountability. We discuss whether effective climate finance should promote country ownership at all times during the implementation process.

 Last, we discuss whether the financial intermediaries respect World Bank safeguard policies designed to ensure that the implemented projects do not have negative consequences.

(3) Overcoming first mover problems According to the CTF investment plans, CTFs are to use concessional finance to provide incentives for low-carbon development. Further CIF/CTF funding is to be additional to existing donor country funding flows and used in new ways. Thus we assess in which sectors the CTF really made a change from ‘business as usual’ projects and where the concessional CTF finance was able to spark off and scale up the development of alternative energy projects.

(4) Leverage effect of the CTF Turkey A major aim of the CIFs and CTFs is to act as catalysts and mobilize financial resources and expertise from the public and the private sectors by scaling up financing to levels considerably beyond the dollar amounts pledged to the CTF. We therefore analyze to what extent the World Bank CTF Turkey managed to scale up the US$100 million. Section 4 discusses the findings and the transformative change of the CTF. A core issue of the CIFs is to ensure that its program results are not simply an extension of ‘business as usual’, an ‘add-on’, but rather constitute a lever for transformational change. We summarize the findings and discuss them in the light of their contribution to transformational change in the Turkish energy sector. In Section 5 we conclude with lessons learned and major recommendations for other CTFs and climate funds.

This section provides background information on Turkey’s energy sector and the challenges involved in promoting renewable energy and energy efficiency in Turkey. It also considers the strategic decisions of the Turkish government and the World Bank regarding the design and financial structure of the CTF.

2.1 Background Since the 1960s Turkey has experienced strong population growth, and now has a population of 78 million. Turkey has also undergone rapid economic growth and today ranks as one of the fastest-growing energy markets in the world. Alongside this, Turkey’s total national installed energy capacity tripled from 16,000MW in 1990 to about 45,000MW by the end of 2009. As Turkey’s industries are rather energy-intensive, energy-related greenhouse gas emissions have more than doubled since 1990. 17 The vast majority of Turkey’s energy supply is from fossil fuels, leading to high C02 emissions; domestic renewable energy production such as solar, wind, geothermal and biofuel energy, accounts for only 3 percent of the total energy supply. Given the rapid economic growth, Turkey fears electricity supply-demand imbalances and the government argues that it therefore needs to continue to develop the fossil fuel strategy. According to the latest plans from 2010, with projections until 2023, the full potential of lignite, coal and hydropower for electricity production is to be exploited. The Turkish government even plans to become an energy corridor and hub for natural gas and oil trade.18 Today, 48 percent of the country’s total energy production is obtained from natural gas power plants, which heat about 90 percent of households. Turkey lacks suffi-

World Bank Private Sector Renewable Energy and Energy Efficiency Project (PSREEEP), Project Appraisal Document, http://go.worldbank.org/M4TVT0XB70, p5 (accessed 15 September 2011). Ministry of Energy and Natural Resources (MENR), Strategy Document 2010–2014, p42, Target 6 (also pp43– 45), http://www.enerji.gov.tr/yayinlar_raporlar/ETKB_2010_20 14_Stratejik_Plani.pdf (accessed 22 June 2011).

cient primary energy sources such as petroleum and natural gas and therefore currently has seven gas sale and purchase agreements and depends highly on Russia and Iran. 19 In December 1997, based on the projections of very high demand, the Turkish government signed a 19-year contract with Russian company Blue Stream to purchase natural gas and build natural gas‐fired power plants. The longest gas import constraints bind Turkey until 2029 and new coal-fired thermal power plants are being planned and built. In addition, Turkey signed an agreement with Russia to build the first nuclear power plant in southern Turkey. 2.1.1 Turkey’s official engagement in fighting climate change

Since 2009, energy and climate politics have been more dynamic than ever before in Turkey as the government made efforts to play a leading role in fighting climate change. In 2009 Turkey ratified the Kyoto Protocol and is now in the category of industrial countries but is exempt from binding measures due to ‘special circumstances’.20 Turkey declared that, despite this, it would contribute fairly to global efforts to tackle climate change.21 However, as of June 2011, there was no officially declared reduction target for greenhouse gas emissions and the action plan on climate change had not yet been presented.22 Turkey’s strategy to fight climate change is to involve the private sector, and the

Petroleum Pipeline Corporation BOTAŞ, http://www.botas.gov.tr/index.asp (accessed 15 September 2011). UNFCCC Factsheet on Kyoto Protocol (February 2011), http://unfccc.int/files/press/backgrounders/application/p df/fact_sheet_the_kyoto_protocol.pdf (accessed 6 July 2011).

UNDP Developing Turkey’s National Climate Change Action Plan Project, http://www.undp.org.tr/Gozlem2.aspx?WebSayfaNo=20 57 (accessed 6 July 2011).

UNFCCC (2009) Report of the In-depth Review of the

First National Communication of Turkey, http://maindb.unfccc.int/library/view_pdf.pl?url=http://un fccc.int/resource/docs/2009/idr/tur01.pdf, article 24, p7, (accessed 22 June 2011).

Climate Finance in Turkey

Turkish government was one of the founding members of the World Bank Partnership for Market Readiness, launched by the World Bank at the Cancún Climate Change Conference in December 2010.23 In December 2010, the Turkish government enacted an amendment to the 2005 Renewable Energy Law. Energy experts welcomed the longawaited law, including new incentives for energy projects, but expressed doubts as to whether the suggested changes would be sufficient to meet the targets. The new feed-in tariffs24 are US7.3 cents for wind and water energy, 10.5 cents for geothermal energy and 13.3 cents for solar and waste energy production.25 While the introduction of feed-in tariffs is widely supported, experts are irritated that the Turkish government has not lifted a cap which politically limits the production of certain renewable energies like wind and solar power. 26 Considering the substantial investment costs and high market barriers, the feed-in tariffs may not be enough to make these energies marketable and boost private investment. Despite Turkey’s apparent efforts to be among the leading countries tackling climate change, Turkish civil society organizations argue that the Turkish government has still not demonstrated real commitment through implementation of binding measures in Turkey.

2.1.2 Potential of and barriers to the development of renewable energy and energy efficiency

The Turkish national energy development strategy includes an energy conservation priority policy, and at the same time suggests the vigorous development of renewable energy and new energy sources. The share of electricity generated from renewable sources is to be raised from today’s 14.5 percent to 30 percent in 2023. 27 Instruments designed to reach this goal range from the Turkish Renewable Energy Law 2010 to political and financial support for the research and development of renewable energy sources. Yet, except for hydropower, which Turkey is developing heavily, the government has been comparatively slow in setting the political course for developing its wind, solar and geothermal energy potential. In Turkey, solar and geothermal technologies are still very new and carry several exploration and development risks. Both capital costs and transaction costs tend to be high as renewable energy projects are located in remote areas or need energy audits and feasibility studies. The Turkish government argues that sustainable energy is more expensive than the utilization of fossil fuels such as natural gas. These assumptions are not factoring in the costs of external spillovers because new studies based on the latest figures from Turkey reveal that the cost of traditional fossil fuel-based energy is in fact more expensive than renewable energy.28

Energy efficiency 23

World Bank, Announcement of Partnership for Market Readiness December 2010, http://climatel.iisd.org/news/world-bank-launches-partnership-formarket-readiness (accessed 20 September 2011). A feed-in tariff is a policy mechanism designed to accelerate investment in renewable energy technologies. It achieves this by offering long-term contracts to renewable energy producers, typically based on the cost of generation of each different technology. Technologies like wind power, for instance, are awarded a lower price per kWh, while technologies like solar PV and tidal power are currently offered a higher price, reflecting their higher costs. (http://en.wikipedia.org/wiki/Feedin_tariff (accessed 15 September 2011). Law No. 6095 approved by the Turkish Parliament on 29 December 2010, http://www.tbmm.gov.tr/kanunlar/k6094.html, see Chart I for Feed-in Tariffs (Sayili Cetvel) (accessed 15 September 2011). Personal notes of interview with Tanay Sidki Uyar, Professor at Marmara University and head of the Turkish branch of Eurosolar, 26 May 2011.

According to the Ministry of Energy and Natural Resources (MENR), Turkey has the potential to cut 15–20 percent of total energy consumption through conservation. But the implementation of energy-efficient projects requires various issues to be solved first. These projects demand innovations in efficient loan origination, in reliable and cost-effective technical appraisal skills, and in specific loan products and investments to achieve economies of scale. While the Energy Efficiency Law of 2007 subsidizes mainly small

Ministry of Energy and Natural Resources (MENR) (2007) Energy and Natural Resources Turkey, 2007, http://www.enerji.gov.tr (accessed 23 August 2009). Oksay, S. & E. Iseri (2011) ‘A new energy paradigm for Turkey: A political risk-inclusive cost analysis for sustainable energy’, Energy Policy 39(5): 2386–95.

energy efficiency projects, the CTF is aimed at projects with high CO2 reduction levels and was expected to be used especially in sectors such as iron and steel, cement, ceramics, chemicals and textiles. According to the World Bank, energy efficiency is relatively untested in Turkey and is therefore perceived to carry significant technical and financial risks. In addition, energy audits, feasibility studies and the necessity to change processes lead to higher transaction costs, making investment more expensive. Specific training for the banks acting as financial intermediaries for the CTF is supposed to overcome the lack of experience and familiarity and bring innovation in finance and specific loan products. 29

Hydropower Turkey’s third largest energy source after coal and natural gas is hydropower. The currently installed capacity of 13,500 MW is produced by 213 hydroelectric power plants (HEPPs) across

the country and provides 17–20 percent of Turkey’s electricity production. However, summer droughts as well as seasonal higher water flows in spring result in a fluctuation of up to 5 percent in produced electrical energy.30 Turkey has large rivers and river basins which could provide 35,000MW of hydroelectric power. The Turkish Ministry of Energy, supported by Turkish Prime Minster Erdogan (himself a trained water engineer), aims to fully exploit this potential by 2020 and plans to build 1500 new dams, mostly small and medium-sized, and supposedly financed by the private sector.31 The recent sale of new licences sparked a boom in dam building. These licences can be resold on the black market and are thus subject to speculation. A licence officially authorizes the private licensee to lease the river section for 49 years, or to sublet it and to purchase power at a rate that is usually higher than the market rate.

Clean Technology Fund Investment Plan for Turkey, http://www.climateinvestmentfunds.org/files/CTF_Turke y_Investment_Plan_01_16_09_web.pdf, p31 (accessed 19 September 2011).

Table of Turkish energy balance in 2009, http://www.enerji.gov.tr/EKLENTI_VIEW/index.php/rapo rlar/raporVeriGir/49100/2 (accessed 22 June, 2011). CTF Investment Plan, http://www.climateinvestmentfunds.org/files/CTF_Turke y_Investment_Plan_01_16_09_web.pdf, Article 15, p9 (accessed 19 September 2011).

Climate Finance in Turkey

Box 2: Negative consequences of hydropower in Turkey Although hydropower counts as a ‘clean’ source of energy production, it can have severe negative environmental and social consequences. Over the last 20 years, Turkey has built around 200 HEPPs, plus 765 large dams for irrigation and water reservoirs 32, including the Ilisu and the Atatürk dams in south-east Anatolia, which sparked international controversy by flooding ancient cultures, destroying the livelihoods of over 200,000 people and causing irreversible damage to the unique flora and fauna of these regions. The World Bank is aware of these consequences and decided that the CTF Turkey would only support dams smaller than 10MW, and the IBRD project supports only small and middle-sized dams, both of which have to be in line with World Bank safeguards for dams. The Berne Declaration and Turkish civil society organizations warn that even small dams may create large problems. 33 In fact, the release of 1500 licences for new dams resulted in a dam-building boom, without sufficient legally enforceable safeguards being in place, leaving natural ecosystems and local communities unprotected. There is a lack of proper river basin management and a lack of legislation to prevent HEPPs from being built virtually next to each other. People in the vicinity of dams, especially in the Black Sea region, report that mediumsized rivers are being completely destroyed by the construction of 20 or more consecutive dams on the same river. According to Turkish law, only HEPPs above 10MW require an Environmental Impact Assessment (EIA); these assess and mitigate environmental, social and cultural/historical impacts. Evidence from executed projects, however, indicates that the Energy Market Regulatory Authority grants licences to HEPPs without or with only rudimentary EIAs. Some of them even were even licensed to build in a natural park. Furthermore, the Turkish expropriation and resettlement laws are not up to international standards. Landowners receive very little compensation which does not allow them to start a new life somewhere else. In addition, the privatization of Turkish water resources is a highly political issue with far-reaching consequences for the local people as well as the whole Middle East. It is questionable if market-driven solutions are suitable for the sustainable development and use of Turkey’s water resources. In recent months, Turkish civil society has protested against dams with increasing intensity. Dozens of local groups have been active for many years and have run internationally supported campaigns against dam projects such as Ilisu/Hasankeyf, Allianoi or Yusufeli, but increasingly also against the building of smaller dams in the Black Sea region. Activists from all parts of the country united in May 2011 for the first time in a large campaign called ‘Anadolu vermeyecegiz’ (‘We don’t give up Anatolia’). 34 This shows that Anatolia’s citizens are not prepared to give up their access to water resources and are ready to fight against the considerable ecological and social damage caused by HEPPs. Although the World Bank argues that dams built with CTF and IBRD loans would respect high World Bank safeguards, civil society groups argue that this ultimately counts for little if the entire river has already been destroyed, fish are dead and fishermen were forced to move away. They accuse the World Bank of supporting the government’s buy-out, privatization and destruction of Turkish rivers and demand that CTF and IBRD loans be spent on other underdeveloped renewable energies.

DSI, hydraulic structures in Turkey, http://www2.dsi.gov.tr/english/topraksue.htm (information on website is from 2005 (accessed 18 September 2011). Turkish Water Assembly (2011) ‘HEPP’s, Dams and the Status of Nature in Turkey’, http://vermeyoz.net/dosyalar/hepp_report_web.pdf (accessed 11 August 2011). See http://www.vermeyoz.net/ (accessed 12 August 2011).

Wind energy

Geothermal energy

According to the Turkish Wind Energy Potential Atlas, Turkey has an estimated potential of 90,000MW in wind energy, of which only 1026MW had been supplied by May 2010. The government’s plan is to reach 20,000MW capacity by 2023.35 The 2010 amendment to the Renewable Energy Law aims to accelerate wind power development with a new feed-in tariff of US7.3 cents per kilowatt hour, hoping to promote further investment in wind projects. Greenpeace Turkey criticizes the government for having failed to capitalize on the country’s wind energy opportunities and not having even resolved licensing issues. In 2008 the Energy Market Regulatory Authority (EMRA) invited interested parties to buy licences and received applications for almost 78,000MW of projects, yet many overlapped at a handful of grid connection points.36 After granting licences for 4000MW, the process was halted and EMRA promised to resolve the issue, but by June 2011 this had not yet been done. Licences are attractive as they can be acquired with no intention of building or investing and are thus, as with hydropower concessions, often resold and are subject to black market speculation. A further hurdle slowing down the development of wind power is the lack of a grid system over and above existing networks in order to feed in wind power. In addition, rapid development of more efficient wind power technology makes developers and the Turkish government question when best to enter the market. These unresolved issues hold back the wind industry and therefore the market for wind energy is growing too slowly given the existing demand and availability.

The development of geothermal energies is a similar scenario to wind power. Turkey has huge potential for geothermal power: 31,500MW thermal and 2000MW electrical geothermal potential.37 In fact, Turkey is the seventh richest country in the world in geothermal potential for both direct use and electricity generation.38 Experts estimate that 5 percent of electricity production and 30 percent of heating could be met with geothermal resources. Between 2000 and 2008, the total capacity was increased to 1385MW thermal power and 77MW electrical power, which is a very low ratio of exploitation compared to the potential. Yet again, the 2023 energy strategy does not indicate a specific target for geothermal energy. As the exploration costs for geothermal energy are considerably higher than for other renewable energies, private finance is not available.

Solar power The potential to exploit solar energy in Turkey is very high due to the country’s climate and geography. Yet solar energy is currently mainly used for domestic water heating (the existing installed solar panels cover only a third of the total potential of 12 million m 2) and hardly at all for energy production.39 The 2023 energy strategy does not contain any indicators for increasing solar energy production apart from the very general statement that solar energy applications for electricity production should be promoted. Despite experiences in other countries where government subsidies and incentives have created a strong solar market, the Turkish government has not so far invested in solar energy. On the contrary, the government set a cap on the total production of solar energy until the

Ministry of Energy and Natural Resources http://www.enerji.gov.tr/index.php?dil=en&sf=webpage s&b=ruzgar_EN&bn=231&hn=&nm=40717&id=40734, accessed 22.6.2011. Julia Harte, Green Prophet http://www.greenprophet.com/2011/05/hidden-costs-ofconstructing-wind-farms-in-turkey-include-many-newroads, accessed 30.6.2011.

Ministry of Energy and Natural Resources, http://www.enerji.gov.tr/index.php?dil=en&sf=webpage s&b=jeotermal_EN&bn=234&hn=&nm=40717&id=40735 (accessed 22 June 2011). Cicek, N., M. Ozturk and N. Ozek (2009) ‘Renewable Energy Market Conditions and Barriers in Turkey’, Renewable and Sustainable Energy Reviews, Vol 13: 1428– 36. Survey on solar energy in Turkey by the General Directorate of Electrical Power Resources http://www.eie.gov.tr/english/solar/solarTurkey_e.html

Climate Finance in Turkey

end of 2013. The only sign for change is the new feed-in tariff of the 2010 Renewable Energy Law, granting a base feed-in tariff of US13.3 cents, but experts believe it will not be enough to even cover costs in a solar energy project. 40 Due to these uncertainties, banks and investors in Turkey perceive solar energy as high risk.

Biomass energy A further source of renewable energy is the production of biogas and biofuel, of which at least 80 percent of the content (in volume) must be obtained from living organisms. It is used in biodiesel, bio-ethanol, biogas, and biomass fuels. Adequate and proper infrastructure for biodiesel production is available in Turkey, particularly following the support provided for canola and soybean cultivation. Biomass energy has not been analyzed in CTF project documents although it is listed as an objective to be promoted.

2.2 Strategy 2.2.1 Rationale for attracting multilateral climate finance

One might wonder why Turkey, a country with a rapidly growing economy, needs and receives concessional multilateral climate finance such as the World Bank CTF loans with favourable conditions in order to support the development of its renewable energy and energy efficiency sector. One reason lies in the economic crisis of 2008, which hit Turkey quite hard. In December 2008 exports were down by 21 percent compared to a year earlier and in March 2009 Turkey faced a record GDP low of -7.57 percent.41 At that time, the World Bank expected a long and severe recession alongside a severe energy crisis, which then only lasted a very short time. In January 2009, when Turkey applied for CTF finance, the Turkish government argued that the much-needed long-term financing required for renewable energy and energy efficiency projects

was in very short supply in Turkey. Hitherto, climate finance has mostly been available from multilateral agencies like the IBRD, IFC, EBRD, EIB and KfW on concessional terms.42 The Turkish government claimed that CTF concessional financing, mixed with other multilateral climate finance and Turkey’s own resources, would make investments financially attractive, create a highly leveraged impact in the energy sector and support Turkey’s efforts to reduce greenhouse gas emissions.43 2.2.2 World Bank CTF Turkey strategic decisions

In order to obtain the CTF funds, the Turkish government needed to prepare a CTF Investment Plan. This process was based on the Turkish government’s existing national strategy to tackle climate change and was pushed strongly by the Treasury. In order to generate Turkish political support for the CTF structure and program, the Treasury acted as a focal point and coordinated across ministries and development partners. The application process was supported by the World Bank’s office in Ankara, which runs four-year US$8 billion loan programs in Turkey, providing a mix of policy dialogue, investment lending and technical assistance to the Turkish government. Based on lessons from a 2004 five-year World Bank loan of US$202.3 million for renewable energy projects (mostly small hydropower, wind and landfill gas), 44 the World Bank and the Treasury decided that the CTF Turkey would support both renewable energy and energy efficiency projects and should receive significant technical assistance to help them take off. To scale up the rather limited US$100 million of CTF finance, the CTF loan was embedded into the World Bank IBRD Private Sector Renewable Energy and Energy Efficiency Project.

43 40

Personal note of meeting between Professor Tanay Sidki Uyar and Berne Declaration, 26 May 2011. See http://www.tradingeconomics.com/turkey/gdpgrowth (accessed 12 August 2011).

World Bank Private Sector Renewable Energy and Energy Efficiency Project (PSREEEP), http://go.worldbank.org/M4TVT0XB70 pp5–21 (accessed 15 September 2011). CTF Investment Plan, http://www.climateinvestmentfunds.org/files/CTF_Turke y_Investment_Plan_01_16_09_web.pdf, Article 29, p14 (accessed 19 September 2011).

op.cit., p14.

The World Bank and the Turkish government decided that the CTF and IBRD loan agreements would not be signed with the Turkish government, but directly between the World Bank and two local financial intermediaries – the stateowned Development Bank TKB and the private Turkish Industrial and Development Bank (TSKB) – with the loans guaranteed by the government. TSKB is one of the leading Turkish investment and development banks with considerable success in sustainable development. TSKB was allocated US$70 million of the Clean Technology Fund and US$350 million of IBRD investment. TKB received US$30 million from the CTF and US$150 million from IBRD. Compared to the IBRD loan, the CTF loan has more generous concessional terms (20 years with a grace period of 10 years), higher performance standards and a 10MW limit on the size of hydropower projects. According to the World Bank project leaders in Ankara, both banks are longterm and well-trained partners of the World Bank with good relations within the renewable energy market and a good track record in im-

plementing similar energy projects. In line with the regulations for all Clean Investment Funds, CTF financing was limited to 20 percent of the total project costs. In January 2009, the CTF Trust Fund Committee endorsed the Turkish CTF Investment Plan and in May 2009, an appraisal document for the Private Sector Renewable Energy and Energy Efficiency Project was signed between the World Bank’s project team leaders and representatives of TKB and TSKB. Overall ownership of the CTF implementation was then transferred back to the World Bank’s country manager for Turkey in Washington, assisted by staff from the office in Ankara. World Bank staff regularly provide training to TSKB and TKB, including on World Bank safeguards. The World Bank country manager in Washington regularly screens selected projects and checks during field missions that the World Bank safeguards are being appropriately implemented, but reports on these evaluations are not publicly available.

Climate Finance in Turkey

3.1 Achievements of the CTF Turkey The following section reports the Berne Declaration’s research findings and assesses to what extent the Turkish CTF achieved its objectives. It first takes a quantitative look at the funding strategy adopted by both financial intermediaries and the CTF allocation. The results are then discussed in the light of the CTF’s overarching objectives, including ‘speed versus depth’, the challenges of collaborating with financial intermediaries, the leverage effect, scaling up and the additionality of CTF resources.

of projects financed per energy type and the level of CO2 savings but does not disclose concrete project information and location. Based on this information, we provide an overview of the different sectors and funding sources. By May 2011, TSKB had disbursed over 85 percent of US$70 million to 19 projects. TKB had already approved and disbursed most of US$30 million to 10 projects. In total, 29 projects profited from the World Bank US$100 million CTF loan and 33 projects from the US$500 million IBRD grant. Table 1 shows the investments by energy sector. The data displayed is aggregated from the raw data provided by TKB and TSKB.

3.1.1 Projects funded through CTF and IBRD

Due to privacy regulations, the financial intermediaries TSKB and TKB only provided data after several inquiries by the Berne Declaration. The data contained information on the number

Table 1: Projects funded through CTF and IBRD according to energy type

Projects CTF

CTF US$

Projects IBRD

IBRD US$

Total Projects

Total US$

50.3

118.5

168.8

Hydropower

11.6

328.0

339.6

Wind

19.7

3.5

23.2

Geothermal

9.1

0.0

9.1

Solar

0.0

Biomass

0.0

Subtotal*

90.7

450.0

540.7

Energy type Energy efficiency

TOTAL Loan (US$ million)

100.0

500.0

600.0

Loan amounts in Euros (TSKB) calculated at a rate of US$1.43 as some projects were disbursed in Euros. * TKB figures as of May 2011, TSKB figures as of June 2011.

The IBRD loan supported a different scenario. The IBRD funding was committed to 33 projects. The supported projects were 21 hydropower projects, accounting for 73 percent of the total IBRD loan, one wind project (less than 1 percent) and 11 energy efficiency projects (26 percent).

Figure 1: Percentage of CTF projects per sector

The supported projects include nine hydropower projects which account for only 13 percent of the total CTF loan, four wind projects (22 percent), one geothermal energy project (10 percent), no solar energy or biomass energy projects, and 15 energy efficiency projects, comprising 55 percent of the CTF investment. This shows that a mixed investment scenario was chosen, in line with the CTF Turkeyâ&#x20AC;&#x2122;s objectives to support renewable energies and energy efficiency and contribute to the reduction of CO2 emissions.

Figure 3: Total of private sector renewable energy and energy efficiency projects per sector

Of the total CTF and IBRD funds, 63 percent were invested in hydropower, 31 percent in energy efficiency, 4 percent in wind energy and less than 2 percent in geothermal energy. No funds were granted to solar energy projects or biomass/waste energy projects from either the CTF or the IBRD credit lines.

Figure 2: Percentage of IBRD projects financed per sector

Climate Finance in Turkey

3.1.2 Greenhouse gas reduction through CTF

3.2 Qualitative assessment 3.2.1 Thematic issue: Speed versus scale, quality and depth of impact

Figure 4: CO2 savings per sector achieved by CTF (US$100 million)

The Climate Investment Funds, of which the CTFs form a part, seek quick impact and rapidly applicable lessons while at the same time aiming for deep, far-reaching results. This is an inherent challenge which the independent analyst Radner calls the ‘speed versus depth spectrum’.46 The tension between speed and depth involves the challenge ‘to do new, big things quickly, at high quality’.47 This paper examines to what extent the CTF Turkey achieved this challenging objective, how the financial intermediaries dealt with the speed and depth requirement and which factors determined their implementation strategy.

The World Bank CTF aims to achieve a CO 245 reduction of roughly 1 million tons per US$1 million invested. TKB and TSKB provided a breakdown of the CO2 reduction potential of each CTF-funded project providing the following information:  The 19 CTF projects funded by TSKB (US$70 million) saved a total of 695,000 tons of CO2 per year.  The 10 CTF projects financed by TKB (US$30 million) saved a total of 615,000 tons of CO2.

The quantitative assessment shows that CTF Turkey succeeded in committing the loans within only two years, between May 2009 and July 2011. It also reached its target for CO2 reductions, with a CO2 reduction of 1.3 million tons/year for US$1 million. However, the investment plans also show that funds were mainly allocated to two sectors, namely energy efficiency and hydropower where, even according to the financial intermediaries, results were much easier and quicker to achieve than in other renewable energy sectors.

The distribution between project types shows that a rating of the CTF funding allocation naturally differs with regards to the specific objectives. If the objective is a high CO 2 reduction, then energy efficiency projects are the best choice.  TKB’s single energy efficiency project accounts for 50 percent of their CO2 reduction potential through the CTF funds.  TSKB supported 14 energy efficiency projects with a CO2-saving potential of 80 percent of the total amount of all projects (see Figure 4).

Energy efficiency

The data provided by the banks use CO2 emission reductions as an indicator, but we wonder whether these should really be termed greenhouse gas reductions.

TSKB in particular readily and quickly supported 14 energy efficiency projects from the CTF loan (69 percent of their CTF resources) as well as nine projects from the IBRD loan (34 percent of IBRD resources). This was rated internally as a big success, as most Turkish entrepreneurs are not yet ready to invest in costly new machines with a lower CO2 output. TSKB explained that they worked hard to convince entrepreneurs that an investment in energy efficiency now will pay off later and represent a saving in all respects.48 TSKB’s energy portfolio manager fur-

Radner (2010), op.cit., p8.

Personal notes of meeting between the Berne Declaration and TSKB (Hülya Kurt, Coskun Kanberoglu), Istan-

ther stressed that the relatively high rate of energy-efficient projects funded in a short time was also the result of close collaboration with the entrepreneurs, which was based on already existing mutual connections and trust. TKB supported one energy efficiency project (27 percent) through the CTF and two (10 percent) through IBRD loans but was not able to share more insight on the status of the energy efficiency market.49

Hydropower Both banks reported that it was quick and easy to provide financial support to hydropower projects because there is an existing market. The government guarantees an attractive fixed price of US7.3 cents/MW for the electricity produced, which makes private investment in small and medium-size hydropower projects popular, having lower investment levels and higher returns than other renewable energies. The World Bank supports the building of small and medium-size dams as an effective way to increase energy supply. Representatives of the World Bank office in Ankara added that support given to small and medium hydropower projects may serve to pave the way for other renewable energies in Turkey. Also, both financial intermediaries support the government’s expansive hydropower strategy. TKB allocated 21 percent of CTF and an overwhelming 90 percent of IBRD money to hydropower projects. TSKB was slightly more restrictive, allocating less than 1 percent of CTF but still 65 percent of IBRD resources to hydropower. Yet no civil society or private expert we spoke to could find evidence that small hydropower will accelerate the development of other renewable energy sources. Further, they reiterated that hydropower in Turkey has severe negative environmental and social consequences. Although the manager of the environmental department at TKB confirmed the importance of respecting World Bank standards within the CTF, our discussions with the

bul, 26 May 2011. All further information relating to TSKB in this section was obtained at the same meeting. 49 Personal notes of meeting between the Berne Declaration and TKB (Ender Dinçer, Sati Balci), Ankara, 24 May 2011. All further information relating to TKB in this section refers was obtained at the same meeting.

representatives showed that there is low awareness of the problematic issues associated with hydropower.

Wind energy The promotion of wind energy has clearly not made the predicted huge step forward in developing the wind energy market. TKB disbursed 21 percent of CTF and no IBRD resources to wind power, while TSKB managed to allocate 22 percent of CTF and 1 percent of IBRD resources to wind energy projects. Various reasons and problems were mentioned by TKB and TSKB, mostly related to market barriers. TKB pointed out that Turkey still lacks the necessary specialized grids to feed in wind energy. Further, it was unfortunate that the change in feedin tariffs of the new Renewable Energy Law came into effect only in December 2010, when a large proportion of the CTF Turkey loans had already been committed.

Geothermal energy With respect to geothermal energy projects, the only project funded was through TKB, absorbing 31 percent of CTF funds. TKB staff pointed out that the funding of this geothermal project can be considered a success in this sector because geothermal energy is still in the exploration stage and involves substantial technical and financial risks. TSKB considered the technical obstacles too challenging and therefore didn’t invest in any geothermal energy projects.

Solar and biomass energy No loan was granted to solar energy projects or biomass/waste energy projects from either the CTF or the IBRD credit lines. TSKB pointed out that the fixed investment cost (machinery, equipment) is very high for solar energy and that the return on investment could not satisfy any bank at present. TKB representatives added that the solar and biomass markets are not yet ready for investment. Solar energy is almost twice as expensive as hydroelectric energy. It seems that not even the most favourable conditions of the CTF managed to leverage a single solar energy project.

Climate Finance in Turkey

Fossil fuel dependence may hinder renewable energy take-off Representatives of Turkish civil society speculate that another reason why the Turkish government may not fully embark on developing renewable energies is that Turkey is both locked into contracts to import natural gas from Russia, as well as coal and oil from various other countries, and needs to distribute these electricity capacities. Hydropower is an exception because developers with close ties to the government dominate the hydropower market. In contrast, operators and builders of wind, solar, biomass and geothermal energy projects are mostly small and medium entrepreneurs not affiliated with the government.

Summary: Performance of CTF considering speed of investment and depth of impact Assessing the performance of the CTF Turkey in terms of speed of investment and depth of impact, it becomes clear that the objective was reached only in energy efficiency and hydropower projects but not at all in other renewable energy projects. It is fair to assume that if the financial intermediaries had supported wind energy, geothermal, solar and biomass projects, the CTF funds could not have been committed at the speed they were. Consequently, the CTF has only achieved its objective to disburse funds quickly by giving up on its overarching goal to promote other renewable energies and has thus failed on the ‘depth of impact’ objective. Thus, it is evident that the objective of the CIFs to quickly disburse funds does not necessarily produce good results if the appropriate policies are not in place and the government is not fully behind the promotion of sustainable forms of energy production. 3.2.2 The role and implications of financial intermediaries

CTF programs in general favour collaboration with financial intermediaries because they are closely associated with the private sector and are assumed to understand its needs. In addition, World Bank staff in Ankara and Washington argue that the rapid disbursement of CTF funds in Turkey was only possible thanks to the

effective use of financial intermediaries since neither the Turkish government nor the World Bank have sufficient staff skilled in developing renewable energies and energy efficiency. Yet civil society groups, among them the Berne Declaration, continuously criticize this collaboration for transparency and governance reasons. This is why this study paid particular attention to the CTF Turkey’s implementation by two local banks.

Lack of public disclosure and transparency The Turkish financial intermediaries to the CTF – TSKB and TKB – are strictly bound to respect national bank privacy policies in the interests of business confidentiality. This implies that the public is not informed about the projects supported by the CTF Turkey – a clear breach of World Bank policies on transparency and access to information. The Berne Declaration and many other NGOs argue that transparency is essential to building and maintaining public dialogue and increasing public awareness about the World Bank’s development role and that this mission requires full and open project information. A mechanism is therefore needed that allows the status and results of implemented projects to be monitored.

Lack of stakeholder participation In addition to the lack of transparency, there is a notable lack of civil society stakeholder involvement. From a civil society perspective, multi-stakeholder engagement, including civil society participation and consultation, is key to a widely supported and successful transition to a climate-friendly energy policy. Civil society demands full transparency and full stakeholder engagement as, after all, World Bank climate finance comes from public money. Further engaging with people likely to be affected by projects needs to be a priority. Although governments and certainly the World Bank are required to engage in public dialogue and offer stakeholder information and participation at all levels of the project, it is questionable whether the Turkish government could and would have been held accountable any more than TSKB and TKB were. For the Berne Declaration it is clear, however, that the World Bank needs to make sure that accountability and transparency are

achieved. Both banks informed us that they had conducted stakeholder meetings with people affected by small hydropower projects. As the Berne Declaration was denied access to project information and only very little World Bank evaluation material is available, we were not able to verify this claim. Quite contrary to the banksâ&#x20AC;&#x2122; view, private and civil society stakeholders complained during our research that they had been left out of any discussions regarding the strategy or implementation of the CTF in Turkey: they had not been invited to comment on the CTF Investment Plan and later were not informed about loans. In addition, there was no public promotion of the CTF funds, apart from initial press releases announcing the start of the project in May 2009. Therefore, entrepreneurs who were not customers of TKB or TSKB had very little opportunity to learn about the availability of concessional CTF funds. Neither TKB nor TSKB regarded this as a problem because the available CTF money was limited and their networks allowed them to handpick clients. Although stakeholder involvement is not a mandatory CTF requirement, we believe that in the case of Turkey, broader civil society participation would have provided better outcomes. For example, a discussion of the different CTF funding scenarios with civil society stakeholders would have shown that there is no need for concessional CTF finance for small and medium hydropower projects, as both are already marketable, and would also have shown what kind of negative consequences they imply. Discussions could have demonstrated upfront that, without the elimination of existing political hurdles hindering the development of wind, solar or biomass energy, it makes little sense for the CTF to support these sectors.

Lack of government accountability and ownership Collaboration with financial intermediaries raises the question of ownership and accountability. The World Bank CIFs stipulate that responsibility for preparing and submitting the investment plans lies with the respective governments, and program implementation is to remain with the multilateral development

banks. These two parts should complement each other, not compete with each other. Effective climate financing needs to be promoted throughout by strong country ownership. After the first phase of firm ownership through the Turkish Treasury, the CTF Turkey was delegated to the financial intermediaries through the World Bank. This strategy left the two banks TKB and TSKB as the only key players with information policy, capacity building and project implementation handed over. The Turkish government officially takes up the cause of climate change but at the same time avoids building up internal capacity. Resources and knowhow are a major prerequisite for a stable and long-term policy on implementing renewable energy and energy efficiency projects. Interestingly, government capacity is not outsourced when it comes to implementing hydropower projects. The Turkish Ministry of Energy even has its own large sub-division for water power, the Government Water Works (Devlet Su Isleri, DSI). This observation may explain but not justify the lack of government ownership of renewable energies.

Meeting World Bank safeguards The World Bank CTF project documents emphasize that, even if collaborating with financial intermediaries, the CTF will meet World Bank safeguards, which were set up to mitigate the environmental, cultural and social consequences of World Bank-financed projects. Both financial intermediaries reported that they had received intensive World Bank training to this end and would diligently respect the safeguards. TSKB prides itself in being the most environmental Turkish bank and indeed demonstrates a comparatively impressive portfolio and track record of environmental management and standards higher than those required by law. Concerning the CTF loans TSKB confirmed that the approval process is strict, that they checked criteria meticulously for all 39 projects and declared that none of their projects is involved in legal proceedings or has in fact met any problems or resistance at all. TSKB allegedly even rejected a hydropower project that met all the criteria but was located near a national park on the Black Sea and was therefore judged unsuitable for CTF money. TSKB made an explicit ef-

Climate Finance in Turkey

fort to support renewable energy projects that would not normally qualify for bank finance.50 TKB instead reported that although a supported hydropower dam needed to relocate affected people, no problems or resistance were encountered.51 We have not been able to verify this information as there are no public records. However, the Berne Declaration research provides evidence that TSKB is co-financing the Kozdere hydropower project on the Alakir river in Antalya province with money from the IBRD part of the Renewable Energy and Energy Efficiency Project. Given the severe environmental impact of six cumulative dam projects on the same river, located near a national park, the local population and environmental organizations have started resistance against the development, complaining that the projects were accepted by the regulator despite insufficient environmental assessments52. A lawsuit was filed against six projects in the Alakir valley, four of which are in the planning phase and two are in construction, among them Kozdere HEPP. This case casts some doubt on due diligence in the application of World Bank safeguards. It also shows that it does not help if World Bank safeguards are applied to one project while consecutive dams on the same river do not comply with international best practice. It reveals rather that World Bank loans cannot guarantee better outcomes for neighbouring projects. As the lack of information regarding financial intermediary projects and private sector projects can breed mistrust, civil society representatives demand full disclosure of all projects financed by the CTF Turkey. Generally, improved reporting and communication should be seen as an intrinsic part of building confidence in the CTF,

Personal notes of meeting between the Berne Declaration and TSKB (Hülya Kurt, Coskun Kanberoglu), Istanbul, 26 May 2011. Personal notes of meeting between the Berne Declaration and TKB (Ender Dinçer, Sati Balci), Ankara, 24 May 2011. Website Alakir Nehri, http://www.alakirnehri.org (accessed 26 August 2011) and Facebook Group of the Alakir River Brotherhood, http://www.facebook.com/groups/alakirnehri/

and ensuring accountability for putting public funds to good use. 3.2.3 Overcoming first mover hurdles

According to the CTF investment plans, CTFs are to overcome typical ‘first mover hurdles’ within low-carbon development. Concessional finance is to provide incentives for investors and cover the viability gap of other sources of financing. Therefore we assess whether the CTF Turkey managed to support first movers with the right incentives from CTF funding. A further main objective of the CTF funding is to provide additional finance and thus represent a change from ‘business as usual’, rather than simply a ‘sweetener’ for projects that would have gone forward anyway. Our assessment shows that mainly in the energy efficiency sector, CTF concessional finance helped private ‘first movers’ to realize projects. In particular, the geothermal energy project would have not taken off without CTF seed money from TKB. We can safely assume that these projects were additional and would have not been undertaken without CTF finance. Yet the Berne Declaration’s research shows that for all other renewable energy sectors, the CTF did not contribute much to overcoming first mover hurdles. Hydropower projects do not need a ‘sweetener’ to take off because local banks provide loans to investors of small and medium-size dams. And the reason wind power doesn’t take off is due to restrictive political and financial problems in this sector, not because of a lack of additional ‘sweet’ finance. The same applies to solar and biomass projects which are not presently marketable in Turkey, so it is not the lack of concessional finance but the existing political and regulatory barriers that hinder the large-scale development of these energy sectors. 3.2.4 Leverage and mobilizing resources

CTF loans are designed to act as catalysts to mobilize other financial resources. Given that the highly concessional portion is rather modest, CTF resources need to be leveraged with considerably larger sums from the public and

private sectors to make sure they actually have an impact. This involves the leveraging of knowledge and the engagement of a wide range of players in climate finance. The CIF Turkey Investment Plan states that Turkey seeks US$400 million of CTF financing, representing about 10 percent of the overall US$3,850 million financing, which should leverage US$1,900 million in multilateral support and US$1,550 million from Turkey.53 However, this high objective was already downgraded in the CTF Turkey project appraisal document of May 2009, according to which the CTF cofinancing of US$100 million is expected to leverage about US$400 million from domestic financial institutions, bilateral donors and project sponsors.

However, during our research we could not find evidence of a larger scaling up of the World Bank CTF funds over and above the US$500 million embedded in an IBRD project. The Turkish government did not provide the promised funds and we were informed that the CTF has not managed to leverage the promised US$1,900 million. Interestingly, the Turkish government has not even applied for a second phase of the CTF. Thus, the CTF Turkey failed to keep its key promise to leverage additional money and to contribute to a scaled-up development of renewable energies.

Clean Technology Fund Investment Plan for Turkey, http://www.climateinvestmentfunds.org/files/CTF_Turke y_Investment_Plan_01_16_09_web.pdf, p22 (accessed 19 September 2011).

Climate Finance in Turkey

4.1 Major funding achievement: Acceleration of energy efficiency projects The CTF Turkey’s biggest achievement is the support of energy efficiency investments. Half of CTF loans and a third of the entire available project funds were invested in energy efficiency projects. Given the lack of concessional finance for energy efficiency in Turkey and a lack of knowledge among entrepreneurs regarding the benefits of investments in this field, CTF finance was both rapid and additional and managed to work as an incentive. It was different from the ‘business as usual’ approach and helped to overcome first mover hurdles. The projects financed in the energy efficiency sector have achieved the CTF’s targets relating to a reduction in CO2 emissions. This achievement is insufficient to call the impact ‘transformational change’, but the concessional CTF loans did in fact trigger some Turkish entrepreneurs to take loans with the financial intermediaries for energy efficiency investments.

4.2 Major funding flop: Insufficient support for renewable energies The CTF Turkey clearly missed its objective of accelerating the development of underfinanced renewable energy technologies such as solar, wind, geothermal and biomass energy. Only 3 percent of the entire project loans were allocated to support one geothermal and four wind energy projects and no money was allocated to solar and biomass energy projects. Despite the Turkish government’s avowed intention to become a leader in fighting climate change and its declared willingness to promote renewable energies, there are still considerable political, legal and market-related hurdles hindering the development of wind, geothermal, solar and biomass energy. These include a cap on solar energy production, a lack of grid technology and severe licensing issues for wind and biomass energy.

Although numerous investors with potential renewable energy projects exist in Turkey, they are hindered by political and regulatory barriers. The revised feed-in tariffs of the 2010 Turkish Renewable Energy Law are still not high enough for investors in solar, wind, geothermal and biomass energy projects to break even and to make the investments financially costeffective. The government’s legal obligations to buy gas and coal from Russia for several more years and to build nuclear power plants are most certainly a reason for the slow pace in removing political and legal constraints in the renewable energy sector.

4.3 Major criticism: Support of problematic hydropower Both financial intermediaries invested the major part (12 percent of CTF and 62 percent of the total combined financing) into hydropower projects. However, hydropower is clearly the only type of renewable energy in Turkey that is already readily marketable, and therefore not in need of additional concessional funding. In addition, large hydroelectric power plants, but also a cascade of small hydropower projects on one river, result in severe negative environmental and social consequences. This is the case especially in several areas of the Turkish Black Sea region, most dramatically for instance in the Loç Valley. By promoting small hydropower projects, the World Bank CTF Turkey supports a highly problematic development. Many of the 1500 small dams being planned and built in Turkey cause severe environmental and social consequences and Turkey’s dam building regulations are not yet in line with international best practice.

4.4 Major challenge: Speedy disbursement or deep impact? According to its strategy, the CTF needs to disburse funds quickly in order to achieve rapid impact. At the same time, it is supposed to aim for deep, far-reaching results. In this inherent challenge, the CTF Turkey did not manage to bridge the gap between speed and depth. The only two sectors where CTF finance can be spent rapidly in Turkey are energy efficiency and hydropower. Both sectors have received a comparatively large amount of CTF support. Given the requirement to disburse funds rapidly, the implementing agencies sacrificed the second goal of the CTF Turkey – to invest funds in the development of renewable energies. To obtain good results (‘depth’) in this field would have needed much more time, greater financial resources and the clearing of regulatory barriers.

4.5 Major strategic question: Cooperation with financial intermediaries A fundamental question in international climate financing is who is best suited to allocate and distribute funds and implement climate-related projects. We have assessed the challenges inherent in reduced government accountability and knowledge in the case of the CTF Turkey. As in many other cases, the strategic decision of working with financial intermediaries implies certain problems.  Lack of transparency Non-disclosure policies of financial intermediaries for reasons of business confidentiality contradict the World Bank’s policies on access to information. In Turkey, this was a major hindrance to accessing project information for evaluation or monitoring purposes.  Lack of civil society participation Turkish civil society stakeholders were not involved in CTF decision-making or implementation processes, apart from consultation with some people directly affected by hydropower projects. The Berne Declaration showed that early involvement of civil society representatives may have provided better strategic outcomes.

 Lack of government accountability and own-

ership Collaboration with financial intermediaries reduces the access of government actors to the knowledge and skills required to implement renewable energy and energy efficiency projects. Reliance on private financial intermediaries risks reducing government accountability and limits public scrutiny of implemented projects.  Lack of control of World Bank safeguards

through financial intermediaries Although in Turkey both financial intermediaries agreed to apply World Bank standards, implementation is not monitored publicly. The Berne Declaration has traced one IBRD-financed hydropower project in Turkey which is involved in a court case, accused of violating Turkish environmental legislation. Therefore, public access to project information and monitoring reports is essential.

4.6 Major missed potential: No leveraging of additional financial resources CTF contributions are usually very modest and can only have an impact if they are leveraged by other financial means. The CTF Turkey failed in its key promise to leverage additional money and thus contribute to scaled-up development of renewable energies. Apart from integration into the World Bank’s own Renewable Energy and Energy Efficiency Project, the CTF Turkey did not manage to leverage the promised US$1,900 million in multilateral support during two phases, nor a further expected US$1,500 million from the Turkish government. The US$600 million was clearly insufficient to achieve the desired transformational impact.

4.7 Moving toward transformational change Considering all the points raised above and given the loan’s very modest size, we conclude that the CTF Turkey was not able to contribute much to transformational change in the Turkish energy sector. Real transformation needs a much broader approach, including a national dialogue on Turkey’s energy strategy, involving all mem-

Climate Finance in Turkey

bers of society, as well as clearly demonstrated national ownership by the Turkish government through removing regulatory hurdles and injecting massive financial investment to promote other renewable energies besides hydropower. We believe that well-executed and successful projects can contribute to building the confidence of government representatives and show that investments in energy efficiency and alternative renewable energies have great potential.

ÂŠ EvB, 2011

In order to avoid CTF programs remaining a drop in the ocean and to ensure their demonstration value, the programs also need to help shift attitudes and develop the capacities of government representatives in developing countries to get low-carbon, climate-resilient development right.

The following lessons learned from the CTF Turkey show which elements need to be taken into account when setting up similar structured climate funds. Although these issues are raised in the context of the CTF Turkey, it is likely that many of them will be increasingly relevant to other climate funds as they move into the implementation phase. We summarize them on three levels, with regard to strategy, planning and implementation.

5.1 Climate funding strategy and objectives  The objective to commit CTF funds rapidly forces implementing agencies to move to sectors which are easy to finance. These sectors (like hydropower in Turkey) are often already marketable and financing from commercial banks is available. If climate finance is to be additional and to remove first mover hurdles, rapid investment must not be an objective in itself.  CTF funds are targeted to accelerate the development of renewable energy projects and have transformational impact on the energy markets. For this to work, the implementing country needs to provide a framework of governmental subsidies or other supporting schemes for the development of renewable energies, political will to clear regulatory hurdles and guarantees to leverage CTF finance with other funds.

5.2 Climate funding planning and preparation of local set-up  CTF objectives need to take into account the local energy market situation and legal framework.  CTF programs need to be enthusiastically initiated and firmly guided by host government agencies and linked to the host government’s policies, plans and processes that guide decisions on how to transform key sectors. Governments need to take ownership and build knowledge and capacities.

 Political will needs to be demonstrated by appropriate government policies, which should already be in place and not merely in the planning stage. Only a stable and supportive legal and institutional framework enables markets to be created for renewable energy sources and energy efficiency investments.  If regulatory hurdles persist, CTF investment is likely to be ineffective. CTF money in Turkey has proven to be too little to remove the political and regulatory barriers to renewable energies.  It takes large-scale finance, networking and the creation of confidence among high-level government representatives to make investments in energy efficiency and renewable energies cost-effective.  The decision to invest in different renewable energies needs to be balanced carefully as the development of one renewable energy sector does not necessarily trigger the development of another renewable energy sector. During the preparation of Climate Fund investment plans, governments need to prepare realistic investment scenarios. In the case of the CTF Turkey, decision-makers initially provided several funding scenarios but ultimately followed an investment scenario which was in line with CTF objectives but could only partially be achieved due to regulatory barriers.  Sectors which are to receive CTF finance need to have demonstrated absorptive capacity. Demand should not be calculated on a theoretical basis, as was the case in Turkey, but on a realistic market basis, taking all risk factors into account. The risk analysis must include a government’s engagement in extractive energies and long-term contracts which may limit the government’s financial capacity and political will to invest in renewable energy sectors.  Monitoring and evaluation reports must be publicly available.

Climate Finance in Turkey

5.3 Climate funding implementation  Risk analysis and funding scenarios need to involve experts from civil society and the private sector, to help make transparent the potential barriers that may hinder the effective use of climate finance.

avoid unwise investment decisions and result in better outcomes.  Civil society participation is required to monitor project implementation and the application of World Bank safeguards in order to avoid negative project consequences.

 Early involvement of civil society representatives in strategy discussions and research can