Report on the ESCO Industry in Turkey

by Larry Good, CEM, BEP, CEA, Dr. Halil Gven, Ata Osman Memik Envo Energy Services June, 2008
BACKGROUND Turkey, with a young and growing population, low per capita electricity consumption, rapid urbanization and strong economic growth, has been one of the fastest growing power markets in the world for almost three decades. Projections indicate that rapid (approximately 8% annual) growth in electricity consumption will continue until 2015. Turkey is a member of the International Energy Agency (IEA) and also signed the European Energy Agreement and Energy Efficiency Protocol. Turkey is in the process of signing and ratifying the Kyoto Protocol (expected to be finalized this month, June 2008). Starting in mid-1980s, a US based energy company, under a contract with the Turkish Electricity Authority, mapped the renewable energy power generation potential of Turkey. The company also introduced the concept of industrial energy audits to Turkey by performing a series of energy audits in several industrial facilities throughout the country. This was the first attempt at launching an ESCO in Turkey. Subsequently, these and other developments led to the recognition of the importance of energy efficiency in Turkey, which resulted in the establishment of an Energy Conservation Measures (ECM) division in the Turkish Directorate of Electrical Power Resources Survey and Development Administration (EIE), and a National Energy Conservation Center (NEEC) in the Turkish Ministry of Energy and Natural Resources. However, the ESCO attempt failed due to lack of appropriate support mechanisms in the country. In 1990s, the EIE started work, with a grant from Japan International Cooperation Agency (JICA), to develop a 10 day training course on management of energy efficiency in industrial facilities and buildings. With limited resources, NEEC tried to increase the public awareness. After 1995, EIE started training hundreds of engineers as energy managers. However, the need was too great to be met with these limited efforts, and still there were no laws and regulations to encourage conservation or support ESCOs. In 1997, the International Energy Agency (IEA), in its Turkey Review Report, recommended to the Government of Turkey to implement the following measures: Take active steps to better account for the energy savings in investment decisions and to better coordinate policies within the administration, Continue to provide public information about the benefits of increased energy efficiency and about the different measures to achieve these improvements, Take active steps to involve all large industries in the energy efficiency program and carefully assess the results of the program. In addition, encourage smaller enterprises to save energy. Simplify administrative procedures to better allow the development of cogeneration and consider encouraging district heating. Subsequently, the Turkish Government issued a decree requiring industrial facilities with a total annual energy consumption of 2,000 TEP (tons of equivalent petroleum) or more either to establish an in-house energy management unit or to employ an energy manager. Due

to lack of regulations and incentives, energy efficiency and auditing services from third parties, ESCOs, were neither viable nor available. During this period, USAID also tried to assist Turkey in developing the appropriate laws and regulations, and to provide training support to launch industrial energy audits and ESCOs. The very first ESCO of Turkey, National Britannia Energy Management Services, was established by a UK-based firm in 1999. The parent company, National Britannia, had a strong reputation for its Environmental Hygiene and Safety consultancy services in the food and health sectors as well as hotels and shopping malls. As large consumers of electricity and heat, these were potential clients for energy efficiency projects and ESCOs. This attempt lasted almost 3 years and resulted in a number of energy audits performed in several medium to large size factories, hospitals, hotels, and shopping malls. National Britannia implemented some projects in a shopping mall in Istanbul. The activity ceased in 2002 after repeated financial crises in Turkey and a lack of energy efficiency laws and regulations to support ESCO activities. In 2005 the IEA wrote: "ESCOs are not active in Turkey. The main problems appear to be a lack of appropriate regulation and Turkeys high inflation." Since then ESCO activity in Turkey has restarted. In 2006 GlobalNet Energy Services International (GESI), a branch of the American company GlobalNet Venture Partners, LLC, began probing the market with industrial energy audits. In 2007 Envo Energy Services, a branch of the Turkish company Envo Group, Ltd. (affiliated with National Britannia-Turkey), took over the GESI operation and expanded both the range of services and the market sectors. The certified professionals to introduce the first ESCO services into Turkey came from America. The lack of regulation mentioned by IEA is currently being rectified. The Government of Turkey passed an energy efficiency law (02-05-2007) which will provide the framework for ESCOs, and its regulations are expected to be finalized this year. When finished (expected July 2008), the regulations will define qualification criteria for accrediting ESCOs and certifying energy managers/auditors. Most of the support and technical input for this development came from EIE and JICA. This new law also decreased the 2,000 TEP threshold (mentioned above) down to 1,000 TEP.

ESCO INDUSTRY AND MARKET

The new law sets a target of 15% savings in Turkeys overall energy consumption by 2020. With current prices, the annual savings potential is approximately 4 billion USD. Initially, ESCOs may be able generate Efficiency Improvement Projects and Energy Performance Contracts to achieve 10% of the potential savings. The size of the market at this level will be 400 million USD per year. In full swing, with a fully developed ESCO industry, the market size can be much higher.

Since regulations are still under development at the time of this writing, a list of qualified and licensed ESCOs does not yet exist. Of course, many companies sell and install equipment. However, the Envo/GESI initiative is possibly the first commercial effort in Turkey to focus exclusively on the classic energy services concerning energy efficiency and renewable energy in this decade.
Some industrial automation companies also provide specific energy efficiency studies (measurements, data acquisition, controls and verification of the energy systems). Generally, these companies are competent in setting up DCS, SCADA, and PLC systems and use the

hardware from Siemens, Schneider Electric and ABB. One of the oldest is Atasel Power and Automation Systems, which is a solution partner of Siemens. There are 73 companies listed in the website of the Association of Industrial Automation Companies (www.enosad.org.tr). Presumably, these provide some form of energy consulting services too. There are also many companies selling energy efficiency equipment and products such as economizers, variable frequency drives, solar thermal, LED lights, combustion chillers, steam traps, analyzers, and VRV systems. But none of these companies are able to do an investment grade energy audit. They are mainly agent/distributor of their product and give partial energy auditing related to their areas.

FINANCING AND CONTRACTS Today the only available contracts are for energy efficiency consultancy, equipment installation, and energy production and distribution. The shared and/or guaranteed savings contracts will be due after the release of the energy efficiency by-law. Funding for consulting contracts comes from the clients. For energy production there are available bank loans and leasing of equipment. Especially in renewable energy production, the government gives a 10 year guarantee of purchasing supplied power at the average wholesale selling price of the previous year.

TYPES OF PROJECTS Currently, there is no clear definition of sector activities. The majority of ESCO projects are not based on a full, investment grade energy audit, so they only cover partial energy systems, e.g., steam systems, lighting systems, industrial and building automation, waste heat recovery, boiler efficiency, motors, HVAC, renewable energy (solar & wind), cogeneration and other energy systems. Most companies (ESCO candidates) do partial energy studies and in most cases represent a brand of equipment. Envo Energy Services is possibly the only example in the country that provides full range of classic energy audits for all energy systems, and does not represent a vendor. Some examples of the types of ESCO project studies performed by Envo are given in the case studies section.

MAJOR MARKET SEGMENTS Due to the regulatory void, currently there is no organized market activity. The ESCO industry is expected to pick up once the by-laws are released and the energy law is in full implementation. So far, the most receptive sectors have been resort hotels of Turkish ownership and multinational companies in other sectors. Resort hotels on the Mediterranean and Agean Seas generally do not have access to inexpensive natural gas, so as tariffs rise; hoteliers are paying more attention to their energy expenses. International manufacturing enterprises (in tobacco and textiles, so far), as well as international retailers, have shown a more global vision of environmental issues than Turkish

owned companies. Foreign (UK, US) headquarters impose carbon reduction requirements on their affiliates around the world, which has prompted Turkish branches to seek ESCO help.

BARRIERS TO ESCOs Demand side management (DSM) incentives, which had been lacking in Turkey, are coming soon from the new energy law. The impending regulations will spell out incentives, especially buying down the cost of energy studies. These are summarized in the section below. This will help move the ESCO market. Even without incentives, there are plenty of energy saving opportunities which are already feasible on a purely commercial basis, but Turkish companies are not aware of how to achieve the benefits. The barrier is fear of high initial investment without consideration of the return. An internal rate of return (IRR) of 30% or more, quite common for energy saving measures, should be attractive to any business. However, technical personnel do not know how to translate energy savings potential into financial feasibility to gain the confidence of investors. ESCOs can help here as quickly as Turkish clients understand and accept the help. Also, increasing tariffs will drive change faster.

ENABLING FACTORS The new 2007 Energy Efficiency Law of Turkey should be the biggest enabling factor for the ESCO industry. The new legislation provides a framework for the certification of the ESCO industry and the guidelines for the financing, as well as incentives (subsidies), for energy projects and EIPs. Currently, the industry is waiting for the regulations to come out. Project development and implementation is, of course, the usual business of ESCOs. In an emerging market, without the appropriate legislation in place, however, project based business can mean feast or famine. Envo Energy Services has innovated and introduced a new line of consulting service: the development of corporate personnel. As part of a comprehensive energy management package, Envo supplements the technical side by working with clients' staff. Through training and team building, Envo strives to get all employees on board, marching in step to reduce operating costs and slow global warming. With popular awareness and support, energy management moves faster toward higher goals. After class, participants say they finally understand what they have been seeing on TV. In addition to achieving more, the staff development programs are simply a good marketing tool for projects. Clients are more receptive to ESCO recommendations because training and team building teach managers how things work and what to expect. Projects will get started that otherwise would have been blocked by fear or lack of understanding. Staff development is a less expensive service than project development and management, but it helps an ESCO make payroll and it keeps operating while waiting for projects to come in the door.

2007 TURKISH ENERGY EFFICIECY LAW The regulations (by-laws) of the 2007 Turkish energy efficiency law are expected to be officially released next month (July 2008). Key features and scope of the by-laws are summarized in the sections below:
1. To become a licensed ESCO, a company should employ appropriate experienced staff and purchase equipment specified in the regulations. Authorization certificates (licences) will be issued to ESCOs by the EIE Directorate General or authorized agencies. These certificates should be renewed every three years. The authorization category (Building, Energy-intensive industrial sectors, or Heat-mechanics and electricity) will be specified by the ESCO during certification application. ESCOs shall provide the following services to industrial enterprises, building owners or managements: Energy manager training, energy study and EIP preparation, project implementation, consultancy and energy manager services for buildings, all within the framework of a service agreement. Implementation of EIP with the assurance of energy savings (performance contracts), within the framework of an implementation agreement.

2. The by-laws include: Principles and procedures applicable to authorization of relevant entities: Universities, professional associations, chambers (industry, trade, etc.), and energy efficiency consulting firms; Energy management practices; Duties and responsibilities of energy management units and energy managers; Training and certification activities relating to energy efficiency; Energy studies and efficiency improving projects (EIP); Supporting (incentives) for EIPs and voluntary agreements at industrial enterprises; Demand side management; increasing energy efficiency in electricity generation, transmission and distribution; and Administrative sanctions.
3. Efficiency Improvement Projects (EIPs) prepared by an industrial enterprise, or by an ESCO on behalf of an industrial enterprise, shall be qualified for a project subsidy. An EIP which has a recovery period of five years maximum and a project cost of 500,000 New Turkish Lira maximum shall be subsidized at 20 percent of the project cost.

4. For small and medium scale enterprises, the Directorate of Small and Medium Scale Industry Development and Support Administration shall subsidize energy efficiency training, audit and consulting services. Regulations for this are being prepared jointly with the Ministry of Energy and the Ministry of Industry and Commerce. The regulations are expected to come out soon. 5. Twenty percent of the annual energy costs of an industrial enterprise (up to a maximum of 100,000 New Turkish Lira) shall be paid by the Directorate General (DG) of EIE if the company enters into a voluntary agreement with the DG committing to reduce its energy intensity (by at least 10%) within a three year period. 6. The Turkish Scientific and Technological Research Institution (TBTAK) shall give priority to, and subsidize research and development projects for energy efficiency projects and projects utilizing new and renewable energy.

FUTURE EXPECTATIONS
Turkey is going through an era of rapid economic growth. Accordingly, energy demand is growing at a very high rate (8-9% per year). Turkeys generation capacity from existing facilities can no longer meet the demands of the economic growth. Turkey is considering the nuclear energy option. However, this will take time. In the short run, Turkey is focusing on energy savings. If Turkey can launch an effective ESCO industry, savings of 8-9% per year can be found in Turkeys annual overall energy consumption to defer capacity needs. In addition to lack of awareness by the public at large and a lack of effective industrial energy efficiency measures, currently Turkey looses close to 20% in power transmission. Therefore, there are plenty of opportunities for ESCOs in Turkey. It is very likely that Turkey can generate energy from 8-9% energy savings for a number of years to meet the needs of its economic growth. In February, 2008, the government declared 2008 as the ENERGY EFFICIENCY YEAR with the goal of achieving energy supply security by improving energy efficiency and increasing public awareness of energy conservation. Also, the by-laws of the 2007 energy law are expected to be finalized with implementation starting in 2008. With this, the energy market and the ESCO industry are expected to grow rapidly in the next 3 to 5 years. As many as 25-50 ESCOs may be formed and licensed in this period.

FACTORS AFFECTING ESCO DEVELOPMENT The energy supply security problem in Turkey is a deciding factor in some projects. Turkey's natural gas comes from Russia, an unpredictable supplier. Many countries in the region wish they did not have to depend so much on Russia. Much LNG comes from Iran. Since natural gas only reaches a few key areas of Turkey, everyone else is forced to rely on LNG or the even more expensive alternative, LPG. This year there was a sudden LNG supply interruption from Iran. It sent unprepared customers scrambling for fuel. In critical operations, electricity interruptions, even short ones, can become very expensive. Electric power is much more reliable in Turkey than in most countries, but not yet at the level of Western Europe. Many manufacturing processes are ruined by unexpected loss of power, therefore many companies are motivated to bring power generation inside the fence to gain more control. In summary, Turkey is beginning to consider load reduction, supply diversity, self generation and renewable energy resources as energy security measures. CASE STUDIES The embryonic Turkish ESCO market is just on the threshold of implementing ESCO projects. Until now, the ESCO work has been only studies and audits. Envo/GESI has performed the following full energy audits, one of which included a cogeneration feasibility study:

Factory, steel fabrication Factory, pharmaceutical Factory, cigarette Hotel-1, resort Hotel-2 resort Overall

Energy cost reduction (1000 ) 35 163 92 121 60 471

Relative energy cost reduction 4.8 % 22.4 % 15.8 % 19.5 % 8.3 % 13.9 %

Simple payback (yr) 2.7 2.7 17.0 2.2 1.8 5.2

Required GWP investment reduction (1000 ) (TCO2e/yr) 93 636 435 3,629 1,565 4,023 267 2,005 110 823 2,470 11,116

These are the potential savings if clients invest in all recommended measures. The simple payback for the cigarette factory is exceptionally long because the client requested introduction of 40% renewable energy resources, which have very expensive investments. From time to time, companies in Turkey have taken on energy efficiency, self generation and renewable energy projects on their own, but largely without the benefit of professional guidance and feasibility analysis. By the end of 2008, the first ESCO-implemented project case studies can be written for Turkey.