Turkey Scraps Dollar-Pegged Tariffs for Renewables

The previous dollar-pegged Renewable Energy Resources Support Mechanism (YEKDEM) was instrumental in growing Turkey's renewable capacity, which reached 49,581 MW by 2020. The original scheme offered guaranteed prices between 7.3 and 13.3 US cents per kWh, depending on the technology, creating a profitable environment for investors, especially after 2015 when market electricity prices fell. This dollar-based guarantee shielded developers from currency risk and was a key driver for investment. The policy shift to a Turkish Lira (TRY) based tariff applies to all renewable projects commissioned after June 30, 2021. The new base tariffs include rates of 32 TRY kuruş/kWh for wind and solar, 40 kr/kWh for hydropower, and 54 kr/kWh for geothermal and biomethanization, all for a 10-year period. A separate bonus of 8 kr/kWh is available for five years if domestically manufactured components are used. To mitigate some of the new currency risk, the lira-based tariffs are adjusted quarterly based on a basket of economic indicators: the producer and consumer price indices, and the buying rates for the Euro and U.S. dollar. However, the government has also implemented U.S. dollar-denominated ceiling prices for these escalated tariffs, creating a cap on potential revenue. For example, the cap for wind and solar is 5.1 U.S. cents/kWh. This change is part of Turkey's broader National Energy Plan, which aims for renewables to constitute 64.7% of total installed capacity by 2035 and to reach net-zero emissions by 2053. The plan targets a significant expansion of solar and wind power, aiming for 53 GW and 30 GW of installed capacity respectively by 2035. The policy also encourages the development of projects that integrate battery storage. The move to lira-based tariffs occurred in a macroeconomic environment of high inflation and currency depreciation. The Turkish lira lost significant value against the U.S. dollar in the years leading up to and following the policy change. This economic context makes the shift from a dollar-pegged system a significant move to reduce the state's foreign currency liabilities. For investors, the new structure necessitates a greater focus on sophisticated financial hedging to manage currency volatility. The increasing cost of the previous YEKDEM scheme, which is ultimately borne by consumers, was a key factor in the government's decision to reform the mechanism. The updated policy aims to balance continued renewable energy growth with managing the economic burden of the subsidies.