TURKISH MARKET ASSESSMENT & PROMOTION DRAFT, OCTOBER 19, 2011

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TURKISH MARKET ASSESSMENT & PROMOTION

USAID HYDROPOWER INVESTMENT PROMOTION PROJECT (HIPP) CONTRACT NUMBER: EEM-I-00-07-00005-0 DELOITTE CONSULTING LLP IN COLLABORATION WITH BLACK & VEATCH AND PIERCE ATWOOD LLC. USAID/CAUCASUS OFFICE OF ENERGY AND ENVIRONMENT THURSDAY, JANUARY 10, 2013

DISCLAIMER: The author’s views expressed in this publication do not necessarily reflect the views of the United States Agency for International Development or the United States Government.

This document was prepared by:

Authors

Organization

Contact Details

Anıl Savaş Kılıç

Deloitte Danismanlik A.S.

[email protected] +90 (212)366 6000

T. Sherwood

Deloitte Consulting LLP

[email protected] +420-603-575-886

Reviewer

Organization

Contact Details

J. Delphia

Deloitte Consulting LLP

[email protected] +995-571-506-287

EXECUTIVE SUMMARY Background: The attached report contains a summary of the meetings held in Istanbul in early October 2011, made pursuant to USAID’s authorization to conduct a combined Market Assessment & Promotion, the objective of which was to provide an up-to-date assessment of the Turkish power market as it pertains to hydro power investment opportunities in Georgia. In addition to identifying and assessing potential investor interest (and providing interested parties with a complete package of prefeasibility studies) the team from HIPP established channels to promote further dialogue where interest was evident. The HIPP team also reviewed technical, legal, regulatory and financial developments in the market that may affect investor appetite going forward. It is expected that subsequent additional meetings will be held in Ankara with Government stakeholders and additional companies, which were not contacted on this visit. Findings: As provided in more detail in the attached, the findings were threefold: 1. Turkish investors are prepared to invest significant amounts of money in the hydropower sector in Georgia1; some are prepared to do so by levering their own balance sheets; others evidenced a wish to obtain limited recourse financing (project finance). 2. The biggest worry for the potential investors was the lack of clarity on the allocation of transmission capacity on the Black Sea Transmission Line. Subsidiary worries were the lack of GoG credit support for GSE and ESCO, respectively the owner and the operator of the lines. Should transmission capacity be interrupted, what is the capacity of the responsible party on the Georgian side to provide compensation? 3. Wholesalers want to buy Georgian power and are prepared to enter into any duration of power purchase contracts with suppliers, long or short term2. Wholesalers and developers both believe that the availability of power from Georgia coincides with the period of maximum Turkish demand, and hence highest prices, so they see the provision of the timing of available power from Georgia as “ideal”.3

One interesting comment was made, however, that tempered enthusiasm. One company, EnerjiSA, stated that because lots of MoUs had been signed, the company had “decreased interest because of the allocation issue”. By this they meant that they failed to see how all the power could eventually be evacuated, and they consequently worried about where they would stand in the hierarchy of companies to receive an allocation were they to sign a MoU now. 2 According to Alpiq, the pricing of power in Turkey may, however, become more complicated, as the plan is to divide the country into four separate pricing zones. The expectation is that power in the eastern part of the country will become less expensive in order to foster industrial growth. 3 One company struck a more cautious note and stated that it was unsure that the demand for imported power in Turkey would remain as robust as it was currently, and that Turkey might even become a net exporter within five years. 1

HIPP meetings in Turkey Meeting notes, conclusions, and next steps HIPP Turkey Meetings Companies - willing & available

Companies - willing & not available

1. 2. 3. 4. 5.

15. Enprode Yapım Sanayi ve Dış Ticaret Ltd. Şti. 16. Limak Yatırım Enerji Üretim İşletme Hizmetleri ve İnşaat A.Ş 17. Çalık Enerji Sanayi ve Ticaret A.Ş. 18. Kolin İnşaat Turizm Sanayi ve Ticaret A.Ş. 19. IFC

6. 7. 8. 9. 10. 11. 12. 13. 14.

Yüksel Enerji Enerjisa Enerji Üretim A.Ş. Özaltın Enerji Üretim A.Ş. Alarko Enerji Grubu Alpiq Turkey Enerji Toptan Satış Ltd Şti EFT Elektrik Enerjisi İthalat İhracat ve Toptan Satış A.Ş. Akenerji Elektrik Üretim A.Ş. Crescent Capital Soyak Enerji Fina Elektrik Enerjisi İthalat İhracat ve Toptan Satış A.Ş. Aksa Enerji Üretim A.Ş. Zorlu Enerji Elektrik Üretim A.Ş. Anadolu Enerji Grubu EGL Elektrik Toptan Ticaret A.Ş.

Companies – not willing 20. Borusan EnBW Enerji Yatırımları ve Üretim A.Ş 21. Park Toptan Elektrik Enerjisi Satış San. ve Tic. A.Ş. 22. Sanko Enerji 23. Unit Power Generation

Companies – non-respondent 24. Anadolu Grup Elektrik Enerjisi Toptan Satış A.Ş. 25. Eksim Investment Holding 26. Kalen Enerji Elektrik Üretim 27. Statkraft Elektrik Enerjisi Toptan Satış Ltd. Şti.

Notes 1 of 5 Company: Date / Time: Place: Attendees:

Yüksel Enerji (Yüksel Holding) 10th of October / 13:00 Deloitte office Yüksel / Tolga Akkaş (BD Group Manager), Kaan Sert (Partner w 2% share) | Deloitte / Tom Sherwood, Alper Günaydın, Anıl Savaş Kılıç Notes: All risks and opportunities were addressed objectively. They looked reluctant due to lack of state guarantee involved in financing. They told that their wholesale company could be interested in off-take agreements and they could direct them to us accordingly. Actions: Follow-ups should be made to get in contact and inform their wholesale company. Company: Enerjisa Enerji Üretim A.Ş. (Sabancı Holding) Date / Time: 11th of October / 09.30 Place: EnerjiSA – 4. Levent Attendees: EnerjiSA / İbrahim Erden (Manager – Strategy and BD), İhsan Erbil Bayçöl (Manager – Strategy and BD) | Deloitte / Tom Sherwood, Alper Günaydın, Anıl Savaş Kılıç Notes: A Sabancı - Verbund partnership (50% - 50%). 5,000 MW installed capacity is planned to be commisioned by 2015. The partnership covers not only Turkey but the neighbouring countries. They aren’t interested in projects under 50 MW. They have interest in Georgia and already qualified for a project. Another one is pending due to issues between the countries. Hydropower is their priority. They are focused on local projects in the short term, and told that they could have started a new project next year earliest even they had made the decision soon. Actions: They are directed to Archil Mamatelashvili (Georgia Energy Development Fund). This communication should be followed-up. They should be updated about new opportunities and got together with financiers and off-takers. Company:

Özaltın Enerji Üretim A.Ş. (Özaltın Holding)

Date / Time: 11th of October / 11:30 Place: Deloitte office Attendees: Özaltın / U. Mert Aydın | Deloitte / Tom Sherwood, Alper Günaydın, Anıl Savaş Kılıç Notes: They haven’t got Georgia experience. Five HEPs, one of which will be commisioned in 2012, are under construction in Turkey. Thet have a wholesale company that will be active soon. They operate HEPs as well, both alone and with Cengiz and Nurol. They are reluctant about operating and financing but willing to participate as a contractor. They want to be involved in a project and will look for possibilities. Mert Aydın frequently emphasized that Nuri Özaltın had the final word for any project decision. He also indicated their partnership with Kolin and

Notes 2 of 5

Nurol, and the possibility to invest in Georgia with them. Actions: They should be got together with financiers and offtakers. Company: Date / Time: Place: Attendees:

Alarko Energy Group (Alarko Holding) 11th of October / 16:00 Alarko – Ortaköy Alarko / Umit N. Yıldız (Senior VP – Financial Analysis, System & Planning), Alpaslan Serpen (Investment Planning Manager), Adnan Yağmur (Executive VP) | Deloitte / Tom Sherwood, Alper Günaydın, Anıl Savaş Kılıç Notes: Firstly, they focused on project costs. Water, transmission and environmental costs are addressed. They emphasized on the disadvantage of selling the electricity only to Turkey. Actions: We should keep in contact and make follow up communication in order to track the progress on their side. Company: Alpiq Turkey Enerji Toptan Satış Ltd Şti. Date / Time: 12th of October / 09.30 Place: Alpiq – Nişantaşı Attendees: Alpiq / Mario Diel (Market Central Europe, Turkey), Sergey Rybalchenko (Key Account Manager – Market Central Europe South, Headquarters), Ayfer Yenibayrak (Key Account Manager) | Deloitte / Tom Sherwood, Alper Günaydın, Anıl Savaş Kılıç Notes: They want to invest gradually and sign long term off-take agreements as a start. They plan to evaluate bigger investments after 5 years. They have interest in cross border trading. They emphasized that the division of Turkey into regions could lead to low prices in the neighbouring region. Actions: They should be got into contact with the investors soon. Company: EFT Elektrik Enerjisi İthalat İhracat ve Toptan Satış A.Ş. Date / Time: 12th of October / 11:30 Place: EFT – Şişli Attendees: EFT / Mustafa Karahan (co-founder & partner) | Deloitte / Tom Sherwood, George Chikovani, Alper Günaydın, Anıl Savaş Kılıç Notes: They are interested in importing energy. They have good relations with Energo Pro and Türkerler İnşaat. During summer, 500GWh of water is spilled in Georgia. Mr. Karahan thinks that the seasonality match of Turkey and Georgia is perfect and would like to sign long term PPAs. Mr. Karahan is the president of ETD (Energy Trading Society) and proposed to set a meeting where all ETD members would attend. Actions: The meeting should be set and they should be got into contact with the investors soon.

Notes 3 of 5 Company: Akenerji Elektrik Üretim A.Ş. (Akkök Holding) Date / Time: 12th of October / 14:00 Place: Akenerji – Gümüşsuyu Attendees: Akenerji / Selim Güven (Director – Strategic Planning and BD) | Deloitte / Tom Sherwood, George Chikovani, Alper Günaydın, Savaş Kılıç Notes: Akkök Holding is focused on local investments currently. Their objective is 3,000 MW of installed capacity by 2015. There is a 900 MW Natural Gas PP project in Hatay, and a 200 MW hydro project. A total of 10 hydro projects are under construction. Mr. Güven emphasized that two important issues are transmission and financing. He added that they would like to act as an off-taker in the projects. Their wholesale company managed 4 TWh of energy this year. Actions: They should be got into contact with the investors soon. Company: Crescent Capital Date / Time: 12th of October / 16:00 Place: Crescent – Teşvikiye Attendees: Crescent Capital / Aygen Yayıkoğlu (Managing Partner) | Deloitte / Tom Sherwood, George Chikovani, Anıl Savaş Kılıç Aygen Yayıkoğlu’s entire career has been on Energy Finance. They step in when the feasibility studies are finished and licences are granted. They also prefer to contribute to the project development phase. They exit when the asset is operational. They are ready to put the equity share of the finance for the projects up to eur 20M. Actions: They should be met with investors. Company: Date / Time: Place: Attendees:

Soyak Enerji (Soyak Holding) 13rd of October / 09:30 Soyak – Mecidiyeköy Soyak / Ayşen Aytekin (BD Manager), Onur Mustafaoğlu (BD specialist) | Deloitte / Tom Sherwood, George Chikovani, Anıl Savaş Kılıç Notes: The scope of the meeting was limited due to mostly technical concerns of the attendees. Trading, regulations and financing remained uncovered. Actions: Due to ongoing projects of Soyak, being in contact doesn’t need extra effort. Another meeting can be set in November with Taşkın Kızılok (Deputy GM)

Notes

4 of 5 Fina Elektrik Enerjisi İthalat İhracat ve Toptan Satış A.Ş. (Fiba Holding) Date / Time: 13rd of October / 11:30 Place: Fina – Fulya Attendees: Fina / Onur Yazgan (Ex Board Member and CEO-Cere’an), Karani Güleç (Ex Board Member – Fina Enerji), Koray Kiymaz (Ex Committee Member) | Deloitte / Tom Sherwood, George Chikovani, Anıl Savaş Kılıç Their experience is mostly on wind projects. They told that they had identified the wind potential of Georgia. They are willing to invest in other countries and the holding have investments throughout the world. Georgia is in their scope as well. They think that the transmission is an issue that will be solved somehow. Financing came up as an issue. They were happy to hear that there were companies ready to sign off-take agreements and finance the projects. They indicated that acquiring the project option and evaluating investment accordingly sounded reasonable, as it is possible to retrieve your bank guarantee if you find the project not feasible. Actions: They should be got together with financiers and off-takers. Company:

Company: Aksa Enerji Üretim A.Ş. Date / Time: 14th of October / 09:30 Place: Deloitte office Attendees: Aksa / Kaan Görenek (Deputy GM) | Deloitte / George Chikovani, Anıl Savaş Kılıç Notes: Technical issues (The distances from the project sites to the distribution lines, needs for infrastructure investments for projects, etc.) were the main subject. Mostly, feasibility studies were analyzed. They have no investments in Georgia. They have a power station in Iraq, and a distribution region in Turkey that has a border on Georgia. Actions: We should keep in contact and make follow up communication in order to track the progress on their side. Company: Zorlu Enerji Elektrik Üretim A.Ş. Date / Time: 14th of October / 11:30 Place: Deloitte office Attendees: Zorlu / Gökmen Topuz (Deputy GM - Investments), Mr. Orçun | Deloitte / George Chikovani, Anıl Savaş Kılıç Notes: They asked straight to the point questions on financing and trading, and looked interested. They were uncomfortable about why there was a small US investment in Georgia in spite of USAID support. and indicated that they would be happy to invest with a US Company. They are more willing to sign off-take agreements than investing. They prefer to sign PPAs with a US company. They are willing to go to Georgia and hold further meetings as the next step. Actions: Follow-up communication should be made in order to make sure that they go to Georgia and meet with the shareholders.

Notes

5 of 5

Company: Anadolu Enerji Grubu (Anadolu Group) Date / Time: 14th of October / 13:00 Place: Anadolu – İçerenköy Attendees: Anadolu / Kadir Okul (Energy Sector Supervisor), Yaman Akar (Yaman Enerji) | Deloitte / George Chikovani, Anıl Savaş Kılıç Notes: They are an important investor in Georgia and have lots of knowledge about the business environment. They indicated that things go smoother in Georgia than Turkey during investment process. They still have their proposal on a project and are negotiating. Actions: They are currently investing and willing to invest more. In the meantime, being in contact in order to smoothen issues of their investments as a catalyst seems sufficient. Company: EGL Elektrik Toptan Ticaret A.Ş. (Demirören Holding) Date / Time: 14th of October / 16:00 Place: Deloitte office Attendees: EGL / Serhat Uludağ (Managing Partner - EGL) | Deloitte / George Chikovani, Alper Günaydın, Anıl Savaş Kılıç They both consider investments and off-take agreements. Their wholesale company has a 2 TWh trading per year. His aim was to get an initial information. Actions: We should keep in contact and make follow up communications in order to track the progress on their side.

Conclusions and Actions After the meetings, it has appeared 1 that companies have three types of approaches: 1- Investing 2- Signing off-take agreements 3- Financing

Companies don’t have more than one approach currently. Thus, they can be separated into three groups listed in the right column and treated accordingly. Proposed Actions Investors should be gathered together with off-takers and financiers. ETD meeting should be conducted the next time the delegation is coming (in November) All the investors are invited to Georgia. They should be reminded about the invitation during follow up communication. All the investors should be kept in contact and followed up in order to track the progress on their side.

Investors 1. 2. 3. 4. 5. 6. 7. 8. 9.

Enerjisa Enerji Üretim A.Ş. Özaltın Enerji Üretim A.Ş. Alarko Enerji Grubu Crescent Capital Soyak Enerji Fina Elektrik Enerjisi İthalat İhracat ve Toptan Satış A.Ş. Aksa Enerji Üretim A.Ş. Zorlu Enerji Elektrik Üretim A.Ş. Anadolu Enerji Grubu

Off-takers 10. Yüksel Enerji 11. Alpiq Turkey Enerji Toptan Satış Ltd Şti 12. EFT Elektrik Enerjisi İthalat İhracat ve Toptan Satış A.Ş. 13. Akenerji Elektrik Üretim A.Ş. 14. EGL Elektrik Toptan Ticaret A.Ş.

Financiers 15. Crescent Capital

USAID Hydropower Investment Promotion Project (USAID-HIPP) Deloitte Consulting Overseas Projects - HIPP 17 b I. Chavchavadze avenue Tbilisi, 0105, Georgia