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BRIEF May 5, 2021

Turkey: Boosting Energy Service Companies to Increase Energy Efficiency in the Public Sector


World Bank Turkey

Energy efficiency is critical to Turkey’s ability to both maintain its economic growth and meet its commitments on climate change and environmental sustainability. In 2015, the country submitted its intended Nationally Determined Contribution to the United Nations Framework Convention on Climate Change, committing to reduce its greenhouse gas emissions by up to 21 percent by 2030 by focusing on energy-efficiency improvements.

In order to create the legal and institutional framework to make this possible, Turkey adopted a National Energy Efficiency Action Plan (NEEAP) in 2018. Along with the climate benefits, Turkey expects to save close to $30.2 billion between now and 2033 as the country invests approximately $11 billion in the 2019-23 period.

Room for energy savings in government-owned buildings

Across the world today, buildings account for about 40 percent of energy use. The situation in Turkey is similar, as roughly one-third of its energy consumption is used to operate public, commercial, and residential buildings. A substantial potential for energy-efficiency improvements can be found particularly in the approximately 175,000 public buildings (central, regional, and municipal facilities) in operation around the country. Based on a World Bank assessment in 2016, the technical energy-efficiency potential in public buildings is about 10,043 GWh annually, requiring about TRY 64.5 billion ($8.6 billion) in investments.

The $200 million Energy Efficiency in Public Buildings Project, supported by the World Bank and Clean Technology Fund and implemented by Turkey’s Ministry of Environment and Urbanization (MoEU) with support from the Ministry of Energy and Natural Resources (MENR), aims to reduce energy use in central government buildings and to help develop a national program for energy efficiency in public buildings across the board. The project includes:

  1. investing in energy efficiency and renewable energy in central government buildings;
  2. piloting the use of energy service companies (ESCOs) to support public building renovations;
  3. promoting renovations in public spaces to produce near-zero energy buildings (or NZEBs).

In addition, the project includes technical assistance activities to help refine secondary legislation and build institutional and market capacity. The idea is for the government to demonstrate energy efficient designs, materials, equipment and services in order to catalyze the market for the rest of the building sector (commercial, municipal and residential), and develop local capacity to finance and deliver such services.

Although most project investments will rely on a traditional approach to implementation, with energy audits, detailed designs and construction contracts based on the lowest price and fixed payments, about US$30 million is reserved to support ESCOs and the use of energy performance contracts, which base payments on actual energy savings. Under these “design-build” contracts, the minimum energy savings is specified and the ESCOs submit their most cost-effective proposals to meet that goal. Rather than simply selecting the lowest cost, however, bids are evaluated based on the value to the government, which looks at both energy savings and investment costs.

Typically, payments to an ESCO are based entirely on the savings achieved from reduced energy bills, but since this is a pilot program, the initial contracts include a mix of fixed and performance-based payments. The advantage of such contracts is that they encourage innovation and the use of newer technologies and transfer some of the risks from the government to the service companies.

First performance-based ESCO contract in the Turkish public sector

On March 18, 2021, the MoEU’s General Directorate of Construction Affairs and a joint venture involving Turyapi Grup and EMAR signed Turkey’s first-ever competitively tendered performance-based ESCO contract in the public sector for energy-efficiency renovations in the Bursa Anatolian Girls High School for TRY 4.5 million. Energy-efficiency renovations are expected to result in energy savings of 72 percent annually, and renewable energy investments, which offer a payback period of about 12 years, in savings of 28 percent of current energy consumption.

The main investment measures include: building insulation; upgrades to the windows and boilers, and insulation of boiler room equipment; installation of thermostatic valves; automation of heating and lighting systems; upgrade of the lighting to light-emitting diodes (LEDs); installation of solar collectors for hot water and electricity; and installation of an energy monitoring system. The contractor receives 65 percent of the contract amount as fixed payments (e.g., completion of the energy audit, detailed designs, etc.), but 35 percent will be subject to confirmation of the promised energy savings, which will be verified by a performance test after the renovation work has been completed and a monitoring and verification report that covers a 365-day period. The tender followed several rounds of consultations with prospective ESCOs and related firms.

Scaling up ESCO contracting in Turkey

The MoEU plans to tender one or two additional ESCO contracts in 2021 and a total of TRY 225 million by the end of 2025 to help develop capacity and build up local ESCOs’ track record in energy-efficiency renovation. Despite the advantages of ESCO contracts - allowing bidders to suggest cost-effective energy saving alternatives and holding them accountable for the results - ESCOs in Turkey have previously had only limited success in the industrial sector, mainly with single-technology retrofits, and have not been able to penetrate the public buildings market. This has been due mainly to the more complicated work involved, insufficient data on achieved energy savings, their limited experience in monitoring and verifying energy savings and managing dispute resolution, and their relatively weak balance sheets.

The World Bank project will support MENR to address these barriers by: demonstrating the advantages of ESCO contracts for public buildings, creating case studies and credible data on the potential energy savings involved, developing and testing contract structures as well as procedures for monitoring and verification, ESCO training, and dispute resolution, and encouraging ESCOs and construction companies jointly to engage in large building renovation contracts. MENR also recently published a communique on the implementation of energy performance contracting for the public sector.

The project also supports the development of appropriate financing arrangements, such as energy service agreements, for financial institutions to use in the future, enabling the vast public building stock to be renovated by means of revolving schemes and more commercial funding sources. Eventually, private ESCOs and commercial banks should be able to finance energy-efficiency investments in public buildings across the country without the need for continued public support. This should go a long way toward helping Turkey to promote sustainable economic growth and to fulfill its climate change commitments.