Turkey’s Green Bond Potential

Turkey’s Green Bond Potential: Filling the Energy Transition Investment Gap

Selin Kumbaraci

Turkey’s green bond potential is nascent but growing (Getty Images, 2021)

Turkey has a high potential for green bonds when viewed in the context of its ambitious energy transition targets. Although the total number of current green bond issuance is not high, there has been rapid development and successful examples in the private sector. Moreover, the first sovereign green bond was issued on April 5, 2023. Below, Turkey’s potential for green bond issuance and the use of these proceeds to further its clean energy transition is being explored, taking into account its external financing needs. Turkey’s green bond potential has been evaluated in three main segments: fiscal readiness, clean energy potential, and energy sector investment needs.

While there are concerns regarding the instability of the monetary system in Turkey, the fiscal situation does not raise concerns to the same extent. The current ratio of debt to GDP, as shown in the graph below, can be examined to get a sense of the state of the government’s debt management. Government debt as a percentage of GDP is approximately 35%, which is a positive indicator of the government’s ability to service its debts. While this figure is projected to rise in the coming years, it would still remain at a reasonable level. The current account deficit, which as a percentage of GDP is just under -4%, demonstrates a need for foreign exchange. While the deficit is expected to narrow moving forward, this need for foreign exchange is unlikely to decline and could be met with USD and Euro denominated green bonds.

As of the end of 2021, approximately 60% of the public sector’s long-term external debt consisted of bonds. Based on general expectations in the international bond market, it is assumed that 10% of this amount can be converted into green bonds during the 2022-2030 period, according to analysis by the SHURA Energy Transition Center. There are promising developments to support this projection, particularly with the issuance of the first sovereign green bond on April 5, 2023 and the interest it received from international investors.

Code 
# Create a line graph of the general government gross debt
ggplot(data, aes(x = year, y = general_govt_debt, linetype = ifelse(year > 2023, "Estimates", "Actuals"))) +
  geom_line(aes(color = "General government gross debt"), linewidth = 0.8) +
  scale_color_manual(values = c("General government gross debt" = "coral2")) +
  scale_linetype_manual(values = c("Actuals" = "solid", "Estimates" = "dotted")) +
  labs(title = "General government gross debt as percentage of GDP",
       x = "",
       y = "Percentage (%)",
       color = "Variable",
       linetype = "Values") +
  scale_x_continuous(breaks = seq(2000, 2028, by = 4), expand = c(0, 0, 0, 0.1)) +
  theme_minimal()

Source: IMF World Economic Outlook (2022)

Code 
# Create a line graph of the current account balance
ggplot(data, aes(x = year, y = current_account_balance, linetype = ifelse(year > 2023, "Estimates", "Actuals"))) +
  geom_line(aes(color = "Current account balance"), linewidth = 0.8) +
  scale_color_manual(values = c("Current account balance" = "cornflowerblue")) +
  scale_linetype_manual(values = c("Actuals" = "solid", "Estimates" = "dotted")) +
  labs(title = "Current account balance as percentage of GDP",
       x = "",
       y = "Percentage (%)",
       color = "Variable",
       linetype = "Values") +
  scale_x_continuous(breaks = seq(2000, 2028, by = 4), expand = c(0, 0, 0, 0.1)) +
  theme_minimal()

Source: IMF World Economic Outlook (2022)

Turkey has a high green transition potential given its ambitious climate targets, including its net-zero target by 2053, as well as its current level of renewable energy generation and potential moving forward. Turkey currently has a high degree of renewable energy deployment (including hydro-power, wind, and solar). Strategic planning conducted by the Ministry of Energy and Natural Resources under the National Energy Plan projects that the additional power generation capacity needed to meet Turkey’s electrification and climate targets by 2035 is 96.9 GW. The plan aims for 74.3% of this additional capacity to come from renewable energy sources, most notably solar and wind. Specifically, the Plan projects that, in 2035, installed renewable energy capacity will increase to:

  • 29.6 GW (24.6 GW onshore, 5 GW offshore) in wind power,

  • 52.9 GW in solar power,

  • 35.1 GW in hydroelectric power plants, and

  • 5.1 GW in geothermal and biomass power plants.

A key consideration is that the majority of the installed capacity increases are projected to be in solar power. This has key implications for regional development due to the high solar power potential of areas in South and Southeastern Turkey. Regional solar power potential has been visualized on the map below.

Mapping Turkey’s Regional Solar Power Potential

South and Southeastern provinces have a substantially higher potential for solar power, as demonstrated by solar radiation value, which expresses power generation over a geographical area and time (KWh/m2/year).

Code 
#plot map
tm_shape(dat_map) + 
  tm_fill("Solar Radiation Value",
          palette = "Reds",
          id="province",
          popup.vars=c("Solar Radiation Value")
          ) + 
    tm_legend(outside=TRUE) +
  tm_layout(frame = FALSE)

Source: Erciyes University

Turkey has a USD 16 billion green bond potential for the 2022-2030 period, based on projections made by the SHURA Energy Transition Center. Turkey’s energy transition investment needs for the 2022-2030 period are estimated at USD 135 billion, and its financing needs at USD 107 billion. These estimates are based on the strategic planning conducted by MENR as well as SHURA assumptions regarding energy investment and the rate of using green bond issuance as a financing source. As can be seen below, of the sectors considered in Turkey’s energy transition potential, renewable energy has the largest investment potential.

Code 
# Create data frame
category <- c("Renewable Energy", "Energy Efficiency", "Storage", "Electrification", "Grid", "Hydrogen")
total_need <- c(47, 27.9, 24.1, 22.8, 5, 8.2)
international_sources <- c(37.6, 18.1, 19.3, 20.5, 4.5, 7.4)

df <- data.frame(category, total_need, international_sources)

# Calculate percentages
df$percentages <- df$international_sources / df$total_need * 100

# Create stacked bar chart with percentages
library(ggplot2)

ggplot(df, aes(x = category)) +
  geom_bar(aes(y = total_need, fill = "Total Need"), stat = "identity", color = "lightblue4") +
  geom_bar(aes(y = international_sources, fill = "Foreign Investment"), stat = "identity", color = "lightblue") +
  scale_fill_manual(values = c("lightblue", "lightblue4")) +  # Change colors of bars
  labs(title = "Energy Transition Investment Need: Role of Foreign Investment (Billions USD)",
       x = "", y = "Billions USD", fill = "") +
  theme_minimal() +
  geom_text(aes(y = total_need + international_sources + 1.5, label = paste(round(percentages, 1), "%")),
            position = position_stack(vjust = 0.2), size = 3.5, color = "grey50") +  # Change position, font size and color of percentages
  theme(text = element_text(size = 9))  # Change font size of axis labels and title

Source: SHURA Energy Transition Center (2023)

Foreign investment will play a critical role in meeting Turkey’s energy transition investment needs. SHURA estimates that 15% of Turkey’s energy transition financing needs could be met through green bond issuance. There are electricity generation companies with large portfolios consisting mainly of renewable energy investments and with continued investment appetite, which are also expected to invest in complementary areas. Stakeholders such as electricity distribution companies and supply companies are seen to develop business and financing models in areas such as distributed energy investments, energy efficiency investments, and investments in the electric vehicle ecosystem. This could further increase the green bond potential of energy sector companies, including electricity generation and distribution.

Concretely, the above analysis unveils a particularly high-potential application for green bonds: a green recovery from the February 2023 earthquakes. Given that renewables have the highest investment potential, and within renewables themselves it is solar power that is projected to grow the most, bonds with proceeds directed at projects in the solar power sector may prove to be particularly effective. Considering the regional potential for solar power in the South, green bonds whose proceeds are earmarked for projects supporting a green recovery in the Southeastern provinces affected by the February 2023 earthquake should be seriously considered. Investors have expressed interest in ESG bonds that are directed towards these twin goals of earthquake recovery and green transition acceleration.

Conclusion

The dynamics discussed above are a positive signal for the potential of green bond development in Turkey, especially in the context of bolstering its clean energy transition. Appropriate debt management metrics and the increasing role of renewable energy are both promising indicators, with the SHURA Energy Transition Center projecting that 15% of Turkey’s estimated USD 107 billion energy transition financing needs could be met through green bond issuance. This opportunity should be taken advantage of to accelerate Turkey’s decarbonization. Further analysis into other high-potential sectors and actors which were not covered in this analysis for the sake of brevity should be conducted. Notably, the Turkish financial sector’s high awareness of and adaptability to green financing is an important advantage. Additionally, local governments are another important segment have not been included in the financial projections mentioned above. The potential for bonds at the local level is high, especially for metropolitan municipalities.