PROJECT INFORMATION DOCUMENT (PID) CONCEPT STAGE Public Disclosure Copy Report No.: PIDC496 Project Name EU/IPA Energy Sector Technical Assistance Project (P131921) Region EUROPE AND CENTRAL ASIA Country Turkey Sector(s) General energy sector (55%), Oil and gas (24%), Other Renewable Energy (21%) Lending Instrument Technical Assistance Loan Project ID P131921 Borrower(s) Republic of Turkey Implementing Agency Ministry of Energy and Natural Resources, Ministry of Energy and Natural Resources Environmental C-Not Required Category Date PID Prepared 19-Jul-2012 Estimated Date of 07-Nov-2012 Appraisal Completion Estimated Date of 15-May-2013 Board Approval Concept Review Track II - The review did authorize the preparation to continue Decision Public Disclosure Copy I. Introduction and Context Country Context Turkey recovered from the 2009 recession quickly, with a GDP growth of about 9.0 percent in 2010 and 8.5 percent in 2011. The strong growth was facilitated by rapid credit growth and high capital inflows (supported global liquidity and healthy Turkish balance sheets). Growth is expected to slow down significantly in 2012, to about three percent, before recovering to about five percent per annum in the medium-term. This growth path is predicated on continued progress on Turkey's unfinished structural reform agenda. Such reforms include the implementation of the new commercial code and code of obligations, the labor market reform, and measures to bolster long- term fiscal savings and reduce the dependency on imports of fuel through an expansion of renewable energy use in electricity generation and improvements in energy efficiency. Turkey remains vulnerable to a slowdown of capital inflows due to its high reliance on external financing. Turkey's key structural strengths, primarily its resilient banking sector, dynamic private sector and favorable public and external debt dynamics mitigate risks to the economy and suggest a favorable medium-term outlook for Turkey's growth performance. Contingent on future progress in the structural reform agenda and strong macroeconomic and fiscal management, Turkey is likely to be able to realize growth rates around its potential. Page 1 of 6 Turkey is a candidate country for EU membership. Accession negotiations started in October 2005. Since then the EU has closed provisionally one chapter (Science and Research) and opened negotiations on 12 other chapters. Turkey views the accession process as her own, fundamental Public Disclosure Copy "modernization project", and after the June 2011 elections, the Government upgraded the institution overseeing EU accession matters into a new Ministry for EU Affairs (MfEU). A new "Positive Agenda" intended to bring fresh dynamics into the EU-Turkey relations was launched by Commissioner for Enlargement and European Neighbourhood Policy Stefan Füle and the Turkish Minister for European Affairs and Chief EU negotiator Egemen Bai in Ankara in June 2012. The stated aim of this Positive Agenda process is to "keep the accession process of Turkey alive and put it properly back on track after a period of stagnation". Although the energy chapter has not been opened for negotiations, energy is a topic of key interest in EU-Turkey relations and as discussed below, enhanced EU-Turkey energy cooperation is an integral part of the Positive Agenda. Sectoral and Institutional Context Securing an adequate and reliable energy supply for Turkey's growing economy, efficiently and in an environmentally sustainable manner, is a major challenge. Turkey has recovered from the global economic crisis; growth has resumed and the medium-term economic outlook is broadly favorable. After a temporary slowdown, the demand for energy is again growing rapidly, especially electricity at about 7% so far in 2012. Future demand growth is projected to be around 6.5-7.5% per annum, which could lead to supply shortages if generation investments fall behind load growth. Gas import is another potential bottleneck, in terms of both volume and price. Ensuring the most competitive prices is critical, as energy imports (mostly oil and gas) account for over 20% of Turkey's imports and about 50% of the current account deficit. Building on successful fundamental energy sector reforms over the last decade, Turkey is moving decisively to develop an increasingly reliable and efficient energy supply, while also mitigating climate change. Turkey's energy strategy is line with best international practice. Implementation is the key challenge, from legal and regulatory measures to attracting investment in energy supply and promoting the efficient use of energy. Public Disclosure Copy Energy is a topic of key interest in EU-Turkey relations and enhanced energy cooperation is an integral part of the Positive Agenda: (a) Turkey's further development as an energy bridge and potential energy hub will benefit both Turkey and the EU; (b) In view of their geographic proximity, a further market integration would be in the interest of both sides; and (c) Turkey and the EU have many challenges in common in their endeavors to secure sustainable energy supplies and to ensure competitive energy markets. Within the framework of the Positive Agenda coordinated by the European Commission on the EU side and the Ministry for EU Affairs on the Turkish side, implementing activities will be defined by the European Commission's DG-Energy and the Turkish Ministry of Energy and Natural Resources (MENR). Five areas have been confirmed: (1) Long- term perspectives on energy scenarios and energy mix; (2) Electricity and gas market integration and development of infrastructures of common interest; (3) Global and regional energy cooperation; (4) Promotion of renewable energy, energy efficiency and clean energy technologies; and (5) Nuclear safety and radiation protection. The MENR and the MfEU are collaborating closely on the preparation of the proposed technical assistance program for the enhancement of Turkey's energy sector in line with the EU energy priorities and strategies. As discussed below, the program is initially - under the IPA 2012 - focused on gas market, renewable energy and energy efficiency. Deepening and expansion to other areas including electricity market and energy infrastructure is envisioned under IPA 2013 and beyond in the 2014-2020 IPA2 period. IPA stands for the EU's Instrument for Pre-Accession Assistance. Relationship to CAS Page 2 of 6 A new Country Partnership Strategy (CPS) for the FY12-15 period was approved by the World Bank's Executive Board on March 27, 2012. The new CPS has three main strategic objectives and Public Disclosure Copy pillars: Strategic Objective 1 - enhanced competitiveness and employment;Strategic Objective 2 - improved equity and public services; and Strategic Objective 3 - deepened sustainable development. Activities planned under the Deepened Sustainable Development are: (a) policy advice and financing to address energy, environmental and climate change challenges in an integrated manner, (b) support for the completion of a water basin management strategy, and (c) supporting the Sustainable Cities Program by using the Integrated Urban Development Strategy and Action Plan 2010-2023 through AAA and investment financing including IFC. The provision of the CPS Objective 3(a), policy advice and financing to address energy, environmental and climate change challenges, has already started: (a) The Third Programmatic Environmental Sustainability and the Energy Sector Development Policy Loan (ESES DPL3), US$ 600 million, was approved on March 27, 2012. ESES DPL3 aims to help: (i) enhance energy security by promoting private sector clean technology investments and operations; (ii) integrate principles of environmental sustainability, including climate change considerations, in key sectoral policies and programs; and (iii) improve the effectiveness and efficiency of environmental management processes; and (b) A US$500 million additional financing was approved in November 2011 to expand the highly successful Private Sector Renewable Energy and Energy Efficiency Project that had been launched in 2009 together with the Clean Technology Fund (CTF), in support of renewable energy projects and energy efficiency in large industries. A proposed new project in support of energy efficiency in small and medium-sized enterprises (SMEs) is under preparation (Turkey SME Energy Efficiency, P122178) together with a related proposed GEF grant. Turkey joined the Bank-administered Partnership for (carbon) Market Readiness (PMR) in 2011 and project preparation is underway to start a multi-year engagement. New policy-based and investment lending operations are also envisioned in the CPS. The European Commission and the World Bank launched in December 2010 a new initiative Public Disclosure Copy seeking to increase opportunities for synergies in working with the Turkish authorities. Areas for collaboration include energy sector reforms, food safety, and public administrative reform. In October 2011, the Ministry for EU Affairs submitted a proposal to the Commission to include under EU's IPA program for Turkey the first installment of an envisioned large multi-year EU/IPA- financed World Bank-managed MENR-executed programmatic technical assistance program for the energy sector. The 2012 IPA energy sector TA program proposal was endorsed by the EU-wide IPA Committee in April 2012. Euro 11.8 million allocation has been included to start the program under Turkey's 2012 IPA program, for which the Financing Agreement is expected to be finalized in the fall of 2012 and become effective by early 2013. The Bank has been providing technical assistance through advisory activities and under investment operations. The proposed IPA program and the complementary GEF and PMR grants will enable the Bank to continue and substantially scale up its technical assistance support for energy and climate change mitigation. II. Proposed Development Objective(s) Proposed Development Objective(s) (From PCN) The development objective of the envisioned large multi-year EU/IPA-financed World Bank- managed MENR-executed programmatic technical assistance program is the enhancement of Turkey's energy sector in line with the energy priorities and strategies of the European Union (EU). [This objective statement has been agreed between the European Commission and the Government]. Page 3 of 6 For the 2012 IPA energy sector TA program - the first installment of the multi-year program - a more narrow development objective is proposed: Enhancement of the Turkish energy sector in line with the EU Energy priorities and strategies in energy efficiency, renewable energy, and the natural Public Disclosure Copy gas market. Key Results (From PCN) The realization of the development objective of the 2012 IPA program is proposed to be measured through the achievement of the following key results: (1) the MENR adopts a program for the enhancement of the Turkish energy sector in line with the EU energy priorities and strategies, based on a review and regulatory impact assessment of alignment of Turkey's legal and institutional framework for electricity, natural gas, energy efficiency and renewable energy with the EU's energy acquis, (2) gas company BOTAS and energy regulator EMRA adopt a design and regulations, respectively, for a mechanism for the wholesale trading of natural gas, (3) the MENR adopts a plan for the acceleration of renewable energy development including the improvement of power system flexibility to integrate a larger share of renewable electricity, and (4) Turkish financial institutions receive and review financing applications for energy efficiency projects for small and medium-scale industries and buildings. The program, design, regulations and project proposals mentioned in points (1)-(4) above would be prepared under the proposed 2012 IPA TA program together with capacity building for MENR, BOTAS, EMRA and participating financial institutions. III. Preliminary Description Concept Description The proposed TA program supports and accelerates the implementation of the Government's strategy to reform Turkey's energy sector in line with the EU energy strategies and priorities. The following components are proposed in the IPA 2012 program: (1) MENR - (a)institutional review and capacity building of MENR and (b) review of Turkey's alignment with the EU energy acquis, (2) Renewable Energy - (a) review of current situation, barriers and road map, and (b) renewable energy grid integration to distribution and transmission systems, (3) Natural Gas - (a) support for Public Disclosure Copy the unbundling of the national gas supply and transmission company BOTAS and (b) implementation plan for a gas trading platform and effective gas market opening, (4) Energy Efficiency - (a) market development in the industrial and building sectors including the formulation of energy efficiency projects for small and medium-sized industries (SMEs) and buildings, and (b) capacity building for commercial energy efficiency lending market, and (5) Visibility and Public Awareness. These components cover several key areas of Turkey's energy sector: gas, renewable energy and energy efficiency. The program is expected to be expanded into the electricity market area and substantially scaled up in the energy efficiency and renewable energy areas in IPA 2013. IV. Safeguard Policies that might apply Safeguard Policies Triggered by the Project Yes No TBD Environmental Assessment OP/BP 4.01 Natural Habitats OP/BP 4.04 Forests OP/BP 4.36 Pest Management OP 4.09 Physical Cultural Resources OP/BP 4.11 Indigenous Peoples OP/BP 4.10 Page 4 of 6 Involuntary Resettlement OP/BP 4.12 Safety of Dams OP/BP 4.37 Public Disclosure Copy Projects on International Waterways OP/BP 7.50 Projects in Disputed Areas OP/BP 7.60 V. Tentative financing Financing Source Amount Borrower 0.55 Free-standing TFs for ECA SD Sector Unit 14.32 Total 14.87 VI. Contact point World Bank Contact: Kari J. Nyman Title: Lead Specialist Tel: 458-1469 Email: knyman@worldbank.org Borrower/Client/Recipient Name: Republic of Turkey Contact: Title: Tel: (90-312) 204-6000 Public Disclosure Copy Email: Implementing Agencies Name: Ministry of Energy and Natural Resources Contact: Murat Becerikli Title: Head, EU Affairs and IFIs Department Tel: 90-312-213-1124 Email: mbecerikli@enerji.gov.tr Name: Ministry of Energy and Natural Resources Contact: Sefa Sadik Aytekin Title: Deputy Undersecretary Tel: 90-312-213-7524 Email: ssaytekin@enerji.gov.tr VII. For more information contact: The InfoShop The World Bank Page 5 of 6 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-4500 Public Disclosure Copy Fax: (202) 522-1500 Web: http://www.worldbank.org/infoshop Public Disclosure Copy Page 6 of 6