Renewable energy in Turkey as a moment of the EU-China competition-collaboration nexus in green markets

The European Union (EU) and China are among the global actors that have a say in the future of renewable energy and sustainable industrial production. Renewable energy is seen by both as an important pillar of their respective climate agendas and as one of the strategies to help both, with their emerging technologies and financial markets, out of the economic downturn. As they strive for leadership in climate governance, advancement in green technologies and environmental standardization will be fundamental for both the evolution of EU-China relations and decarbonising their economies.

China is relatively new in the renewables markets compared to the EU. However, the former has quickly surpassed the latter. Green Belt and Road Initiative (BRI) projects overseen by the Chinese state have amplified China’s share in global renewable energy markets. China’s investments in the production side of overseas renewable markets are largely dominated by state-owned enterprises (SOEs) within the Green BRI framework[1]. European countries, on the one hand, tend to integrate their supply chains with those of China to benefit from China’s significantly lower production costs. On the other hand, European countries aim to prevent their long-term customers in neighbouring regions from closely engaging with Chinese green markets through the Green BRI projects and deals.

Green BRI also incorporates climate finance provided by Chinese investors, primarily China’s state-owned policy banks, to overseas wind and solar projects. From the early 2000s to the mid-2010s, Chinese state-owned banks’ overseas energy finance investments tended towards non-fossil energy projects, away from coal, oil and gas, in developing countries. However, relative to non-Chinese funding sources for renewables, such as the European Investment Bank and World Bank Group, Chinese policy bank lending to developing countries remains significantly low. Chinese policy bank lending mainly targets solar and wind investments on the condition that developing countries provide concrete policy incentives as well as a stable policy infrastructure[2]. When finance for projects is secured, it often comes with Chinese-based engineering, procurement, and construction contractors as package deals.

EU-China relations are sometimes portrayed in the mainstream media as a polarised global trade war. However, their green markets are intertwined, and their relationship is multifaceted, with episodes and sectors of collaboration overlaying episodes and sectors of competition. As such, the competition-collaboration nexus[3] is helpful in understanding the various ways in which the two actors are entangled in the green transformation. Both the EU and China have converging and diverging interests towards green markets. The converging interests are mainly in ambitions to dominate markets, providing energy security (more so for the EU in the aftermath of the onset of the war in Ukraine), and advances in industrialization and high technology development. For China,  participation in green markets and investment in overseas energy production is a form of soft power, especially through BRI. For the EU, it is a form of normative power; the power to set the global normative agenda in response to climate change. For both, green policies have international links, while also taking into account development and security interests.

Turkey, as a major country in the EU neighbourhood, highly relevant to EU-China green relations. Renewable energy is at the centre of how the EU-China competition-collaboration nexus unfolds in Turkey, and is directly affected by the country’s macroeconomic and political dynamics. Turkey’s early exposure to inward foreign investment for renewable energy was from Europe, a result of its geographical proximity and existing history of economic relations. The growth of the renewables markets in Turkey, however, coincides with the launching of the BRI in the early 2010s.. Although Turkey has multiple engagements with the BRI in infrastructure, finance, energy, technology and health sectors, renewable energy is particularly significant and represents the dynamism of Turkey-China relations in the Green BRI framework. 

Political economic circumstances in Turkey stimulate competition between European and Chinese actors over renewable investments. Relations among various state and non-state actors have an impact on Turkey’s policies regarding the expansion of renewable infrastructure, the desired centrality of domestic businesses in supply chains, and geo-economic power competition in Turkey’s immediate neighbourhood. Major European and Chinese players began to compete for large-scale wind and solar plant construction in public bids after Turkey completed its environmental regulations in the second half of the 2010s. Competition continues as the most of these projects have not been finalized. Turkey’s ratification of the Paris Climate Accords in 2021 further opened its markets to foreign renewable investments. Local business actors in Turkey have expressed their desire to work with international suppliers, due to the inadequacy of domestic knowledge and investment, to facilitate increasing the required capacity and technology diversification in both solar and wind markets.  

State of renewable energy in Turkey

Turkey has significant potential in renewable energies. Its climate and topography contain natural resources suitable for renewables energies such as wind and solar. However, like many countries of the Global South, Turkey has not been able to afford to develop renewable energies, and has mainly used non-renewable energy sources, such as coal and natural gas. In the 21^st century, Turkey attempted to adapt to renewables, including by reorganizing its legal framework and through proclamations of political will towards the transition. However, these changes have not resulted in a significant transition from coal and natural gas to renewable energies.

The 2010 Renewable Energy Law was promulgated at a time when China and the EU, the two main technology providers for Turkey's renewable energy sector, had already dominated global markets. In 2014, Turkey introduced a National Renewable Energy Action Plan, which aimed for renewable energies covering 30% of the total energy supply[4]. In 2021, Turkey ratified the Paris Accords and established a target to achieve net-zero emissions by 2053. In order to reach this target, Turkey should follow a decarbonisation path that shifts from fossil fuels to renewable energy, and increases energy efficiency and electrification in related sectors. In January 2022, Turkey’s electricity production from fossil fuels was as high as 67.3%, while it was only 10.9% from wind and 5.0% from solar . In December 2022, the share of electricity production from wind was 11.3%, while solar slightly rose to 9.4% . In the field of renewable energy, an average of 1 GW solar and 1 GW of wind installed energy capacity should be every year in order to achieve 35 GW of wind and solar energy by 2030 [5].

TABLE 1: Changes in Renewable Energy Capacity in Turkey, 2011-2021 (Source: Adapted from Turkish Electricity Transmission Corporation Statistics[6] and Turkish Electricity Transmission Corporation Monthly Report for October 2022[7])

To boost local production of renewable energy, the Ministry of Energy established a new public bidding mechanism in 2011: the Renewable Energy Support Mechanism (YEKDEM). Here, the underlying logic is the state’s preference for local production. If a proposed small-scale renewable energy plant is using at least 60% locally manufactured equipment, then that plant will receive an incentive from the state. Four years later, the Ministry introduced an additional scheme, Renewable Energy Source Zones (YEKA). This scheme aimed to support power plants with a capacity of more than 1GW where equipment was manufactured in Turkey.

China and Europe in Turkey’s renewables sector

Renewable energy investments took off in the 2000s in Turkey. European and Chinese private companies entered the Turkish market under free market competition. Chinese companies enjoyed a temporary dominance of the market thanks to their lower costs, but anti-dumping duties imposed in the 2010s took away that market advantage. As a result, Turkey has become the seventh top destination for European outward foreign investment in renewables[8].

There was also a structural reason for the sea change in the renewables sector. The YEKA system envisioned large-scale power plant construction instead of small and scattered ones. The size of the required investments necessitated consortiums composed of large capital, both domestic and international. In the first two rounds of YEKA for both solar and wind power plants, the makeup of rival consortiums were very similar: partnerships between a large domestic firm and a large, experienced European or Asian company. In all YEKA bids, the Chinese-backed consortiums lost to consortiums supported by the political elite in Turkey. The political elite tended to favour European-backed consortiums[9]. Gradually, the large Chinese SOEs withdrew from the YEKA scene. Interestingly however, the winning bids were unable to finish their projects due to unrealistic budget estimates, combined with the currency crisis Turkey fell into during the pandemic. Chinese SOEs were informally invited back, but so far they have only engaged in side industries due to perceptions of high financial risk[10]. Chinese and European investors were affected by the YEKA system in different ways. Chinese-backed consortiums were side-lined in the bidding process due to the intervention by the presidential bureaucracy in Turkey. The European-backed consortiums initially won the YEKA bids, but they found it difficult to complete the projects within the proposed budget. The proposed budgets have now become unfeasible, partially because of the pandemic and the Ukraine War, and partially because they were too low to start with.

Chinese private companies, however, continue to seek trade deals with their Turkish counterparts. In 2020, China’s Talesun Solar signed a 130 MW solar PV module deal with Turkey’s Cengiz Energy, to be used in the Turkish company’s Bingöl and Konya plants[11]. In 2022, Huawei and Tosyali Group signed a solar PV rooftop power deal corresponding to a total installed capacity of 140 MW[12]. The project is due to be completed in 2023. By contrast, China’s share in the Turkish wind sector remains low with investment in only 1.21% of installed wind capacity[13]. There is demand from Turkish SMEs to work with China, while larger investors keep their options open with Chinese, other Asian, and European partners. Chinese companies remain interested in the Turkish market for its untapped potential, but given the political and administrative difficulties of Turkish markets, they shy away from committing to large-scale projects, and focus on economies of scale in the renewable energies technology market. Chinese companies are are not committing to large-scale projects but focusing on selling products to Turkey rather than investing in Turkey.

Europe’s Green Deal and Turkey

Unlike China, whose green guidelines for overseas investment are yet to take effect, there are two dimensions of Europe’s involvement in Turkey’s decarbonisation: European investments in Turkey’s renewable sector and Turkey’s adaption to Europe’s green guidelines for investment.

Turkey’s adaptation to the European Green Deal (EGD)

Turkey is an export-oriented country and most exports (54.9%) are towards the greater European area[14]. That is why EGD rules and guidelines have a transformative effect on Turkey’s industries. Besides clean energy investments, emissions-intensive trade-exposed sectors such as construction, heavy chemicals and textile manufacturing need to go through a green transformation in their production and logistics processes if they are to maintain their trade relations with countries included in the EGD.

Business associations in Turkey, such as the Turkish Enterprise and Business Confederation and the Istanbul Chamber of Trade, often voice a concern commonly shared by Turkish SMEs that the rules set by the EGD, such as the Carbon Border Adjustment Mechanism, would raise the cost of production and export logistics to such a level that Turkish companies would soon lose their market competitiveness[15]. In addition, the new green finance rules also constrain loans that Turkish companies rely on, even though the European Bank for Reconstruction and Development offers additional funds up to 50 million euros for the green transformation of Turkish industries[16].

Carbon border adjustment mechanism (CBAM)

CBAM is the internationalization stage of the Emissions Trading System (ETS) within the EU. The ETS was launched in 2005 to put a cap on emissions that companies produce in their energy and industrial production by requiring them to buy quotas within the EU. However, limiting emissions within the EU is not sufficient to meet the EU’s carbon emission reduction targets. Europe’s exports and imports with China and European neighbourhood counties, such as Turkey, constitute a significant portion of Europe’s carbon emissions. Therefore, in 2021, the EU started to prepare for CBAM, to be launched in 2023 and fully implemented in 2026[17]. CBAM is a step towards reducing carbon emissions globally and offsetting EU companies’ cost disadvantages vis-à-vis their international competitors who are not subject to similar restrictions[18]. Turkey has often been the recipient of ‘carbon leakage’, i.e. European companies moving their high-carbon facilities to Turkey to avoid the ETS. The introduction of CBAM will now change this situation. Initially, CBAM will cost Turkish exports around 2 billion euro annually. Before the Russia-Ukrainian war, Turkey was estimated to be the third most negatively affected country from CBAM, after Russia and Ukraine, in iron and steel, aluminium and cement and lime industries[19].Turkey’s electricity exports to Bulgaria and Greece will also face price hikes after CBAM[20]. What Turkey needs to do is develop its own ETS and plug it into the network-like structure of CBAM. This is a clear example of the increasing costs Turkey faces associated with not developing its own decarbonisation scheme[21]. Since Turkey sees decarbonisation not from an environmental, but energy security, perspective[22], it has been slow to catch up with the EGD. In the renewables sector, the ministry of energy granted subsidies within the YEKA system to help domestic SMEs keep up with the EU (and, later Chinese) green standards. However, the ongoing currency crisis has so far cancelled out the benefits, since the YEKA subsidies were paid out in the rapidly devaluating Turkish lira[23].

China will be among the least affected by CBAM, with iron and steel and aluminium being the hardest hit of its sectors. Only around 2% of China’s imports into the EU will be affected by CBAM[24]. In contrast, China’s low-carbon technologies might even benefit from CBAM, given the convergence of supply chains. China’s own ETS started at the provincial level and it only launched a national ETS in 2021. Even now, provincial ETSs vary in their carbon pricing across industries[25]. That gives China leverage in facing CBAM. Besides, being relatively equal actors in the playing field, China and the EU had a chance to link their ETSs early on[26].

Future directions in EU-China involvement in Turkey’s green transition

In brief, although China and the EU share a common environmental goal of expanding the renewables sector, the competition aspect of the collaboration-competition nexus in this field has gained prominence, especially from the 2010s onwards and in third countries in the Eastern Mediterranean such as Turkey.

The main difference between European and Chinese involvement in Turkey’s green transition is that, while both are involved in trade and investment, the former has been active in rule setting for investment and trade, while the latter is a latecomer to rule-setting. Even where China has been involved in rule-setting, it has been mostly in line with Europe’s framework. China’s involvement in Turkey’s green transition has not decreased EU involvement. On the contrary, there are clear indicators that Turkey has been left out of the bigger and more high-tech green BRI investments in the larger region. Turkey has also opted to limit Chinese investments in the nascent renewables sector, as can be seen in how Chinese-backed consortiums lost bids in the wind and solar energy sectors. This shows that Turkey demonstrates agency in the collaboration-competition nexus between the EU and China. The direction and choices of that agency is not solely determined by macro or bilateral relations. Such choices are also shaped by domestic political and economic concerns in Turkey.

Turkey’s accession process to the EU, and its shared history with the region, as well as the dominance of the EU as a destination for Turkey’s exports bind Turkey to the EU’s normative and trade agenda on decarbonisation, in contrast to Turkey’s relation with China. This produces both Turkey and the EU opportunities for financing the green transition. However, it is also costly at times, as can be clearly seen in CBAM’s impact on Turkey. Turkey still has agency in its relations with the EU on the green transition, even though it is limited in a significant way. The EU’s attempt to stop carbon leakages not just within the EU but also with its trading partners will be a factor in determining Turkey’s pace and cost of decarbonisation.

In conclusion, Turkey’s reigning domestic political and economic networks, China’s choices for the wider region and its adaptation to Turkey’s energy sector, and the EU’s regulations and policies (such as CBAM) all impact on the future of the renewables sector in Turkey. These variables will be of great importance as the financing of the green transition gathers even further pace, and as the EU and China further evaluate their entangled relations in that transition.

Abbreviations

BRI                 Green Belt and Road Initiative

CBAM            Carbon Border Adjustment Mechanism

EGD               European Green Deal

ETS                 Emissions Trading System

EU                   European Union

SMEs              Small to Medium Enterprises

SOEs              State Owned Enterprises

YEKA             Renewable Energy Source Zones

YEKDEM      Renewable Energy Support Mechanism