To achieve a fully liberal electricity market is not an easy task to complete because of the specific features of the electricity such as non-storable characteristic of the electricity and time-sensitive characteristic of the electricity demand.
Turkey started a restructuring process in its electricity sector with the introduction of the Electricity Market Law (EML) in 2001 as part of the efforts to harmonise with the EU. The aim was to create a fully liberal, competitive market.
Before 2001
Although certain steps were taken towards restructuring before 2001, the legal and regulatory arrangements were far from creating a competitive market. Until the eighties the Turkish electricity sector was dominated by public through state agencies and municipalities except three concession companies; Kayseri Elektrik, Cukurova Elektrik and Kepez Elektrik. The Turkish Electricity Authority (TEK) was established in 1970 as a vertically integrated and state owned enterprise. It controlled all generation, transmission and distribution activities, except certain municipal facilities and the above mentioned concession companies. In 1982, the electricity facilities of municipalities were transferred to TEK.
In 1984, by the adoption of Law 3096, TEK's monopoly for electricity activities was weakened and private parties were given opportunities to operate in the market under (i) the BOT model (built-operate-transfer); (ii) the TOOR model (transfer of operation rights); and (iii) auto-producer system introduced for companies who wish to produce their own electricity.
TEK was unbundled into two state owned enterprises in 1994: one for generation and transmission (Turkish Electricity and Transmission Company or TEAS) and the other for distribution (Turkish Electricity Distribution Company or TEDAS).
In 1997 the BOO (built-operate-own) model was also introduced. Under the BOO model different than BOTs and TOORs the ownership of the generation facilities remains with the investor at the end of the contract term. While BOTs and TOORs are granted as concession contracts, BOOs are granted under a permission system.
The state granted long term power purchase contracts and treasury guarantees under BOT, TOOR and BOO models. However, there was no competition in the market. The risk of investment was with the state, not with the private investors.
EML launch
In 2001, the EML was issued as part of the efforts to harmonise with the EU. The aim was to initiate competition in generation and retail while the transmission and distribution segments are regulated. The main elements of the market design originally envisaged in the EML were as follows:
The EML established an independent regulatory authority, the Electricity Market Regulatory Authority (EMRA). EMRA was authorised to regulate and supervise the market.
The law also unbundled vertically integrated state owned TEAS into three state owned companies, one for generation (Turkish Electricity Generation Company or EUAS), one for transmission (Turkish Electricity Transmission Company or TEIAS) and one for the wholesale activity (Turkish Electricity Wholesale Company or TETAS).
TETAS was established as a transitional entity that would take over the existing contracts under BOTs, BOOs or TOORs and would also purchase the electricity produced by EUAS for a transitional period. The aim was to mix the cost of the existing contracts and the cheap electricity of EUAS. The EML prevented the state from granting long-term purchase guarantees. TETAS was able to make purchase contracts only within the following limits: (i) the electricity to be purchased shall be limited with its energy sale undertakings to TEDAS arising out of the existing contracts; (ii) there should be no more economical supply source; (iii) it should purchase first from EUAS and if there is still a deficit, it may make purchase contracts; (iv) duration of the purchase contracts could not be more than 1 year; and (v) the purchase contracts should be approved by EMRA.
Market activities were defined as transmission, distribution, wholesale, generation, retail, export and import. Transmission activity would be performed by TEIAS, as a state monopoly. Distribution activity would be carried out by TEDAS and private companies that would be created through privatisation. Generation activity was envisaged as open to competitive market. EUAS and private generation companies would operate in the generation market. Wholesale activity would be performed by TETAS and private wholesale companies. Retail would be performed by retail companies and distribution companies holding a retail license. Export and import would be carried out by TETAS, private wholesale companies, distribution companies holding a retail license and retail companies.
A licensing system was also adopted. Market participants were obliged to obtain licenses in order to operate in the market. Each market activity and each plant was subject to separate licenses.
The EML also saw an accounting separation principle created. Market participants were obliged to keep separate accounts for each market activity and plant.
In addition, transmission and distribution companies would ensure a non-discriminatory third party access to the transmission and distribution network.
Eligible consumer definition was stipulated by the EML. A consumer that has the liberty to choose its supplier, due to its consumption of electricity more than the limits set by EMRA or its direct connection to the transmission system was defined as an eligible consumer. The EML provided an eligibility threshold of nine gigawatt hours per year and authorised EMRA to determine the eligibility limits at the beginning of each year.
The principle of cost-based pricing was also adopted. The tariffs would be cost-based and cross-subsidies would be eliminated. Direct subsidies to consumers were possible through a Council of Ministers decision.
A balancing and settlement system was envisaged. TEIAS was responsible for balancing and settlement of demand and supply. The National Load Dispatch Center and the Market Financial Settlement Center were established within TEIAS. The balancing mechanism was launched in 2006.
The EML superseded the earlier BOT, BOO, TOOR models. The Undersecretary of Treasury was prevented from granting treasury guarantees for new power projects. The EML also prevented the state from granting long term purchase guarantees as explained above. However, the legal obligations stipulated in earlier contracts were observed.
Transmission and distribution tariffs (connection charges, use of system prices), and wholesale and retail tariffs were regulated by the EML. Retail prices for eligible consumers having direct connection to the transmission system were not regulated. Regulated tariffs would be proposed by the relevant institution (TEIAS, TEDAS, TETAS) and approved by EMRA annually.
Although no ownership separation or structural separation were provided, certain provisions were adopted to restrict monopoly:
- Total market share of generation facilities operated by a particular private sector generation company or its affiliates could not exceed % 20 of Turkey's total installed capacity.
- Generation companies may enter into affiliate relationships with distribution companies provided that they do not have control over them.
- When distribution companies are involved in generation they cannot produce more than 20% of consumption in their region and they could not purchase more than 20% of their sales in their region from their production companies.
- The total market share of any private wholesale company together with its affiliates could not exceed 10% of the total electricity consumed in the market during the preceding year.
Subsequent Legal Documents
Although the EML envisaged a liberal market structure, the subsequent documents included contradictory provisions to the EML. The Strategy Document was published as a road map of the restructuring process in 2004. The Strategy Document did not have a force of law. However, most of its provisions were reflected in the legislation with the following laws and regulations, especially with Law 5496. Following the Strategy Document, Law 5398, Law 5496 and Law 5784 introduced amendments to the EML which brought significant changes to the system.
Strategy Document
In 2004, the High Planning Council adopted the Strategy Document, which lays out the steps to be taken in order to implement the EML. Although the Strategy Document was prepared as a road map for the restructuring process, some of the provisions stipulated in it are considered as contradictory to the EML.
According to the Strategy Document the privatisation would start with the distribution assets followed by the generation assets. Under the EML, the market which was aimed to be competitive was the generation market, not the distribution. Therefore, starting the privatisation from the distribution assets has been criticised.
As explained above, the EML envisaged a cost reflective pricing principle and, if a need to provide financial assistance arises, direct subsidies to the customers. However, in contradiction with the EML, the Strategy Document stipulated a tariff equalisation scheme (national tariff) that would eliminate regional differences in non-eligible consumer tariffs, but would cause cross-subsidies from low-loss regions to high loss regions for the first five years. The ground for the national tariff system and cross subsidisation was the high level of theft or loss in certain regions of Turkey. The national tariff system has also been criticised as it contradicts with the competitive market principle.
The Strategy Document provided transitional contracts as follows:
- Transitional contracts between TETAS and EUAS hydroelectric plants and existing contract owners: For privatisation of EUAS facilities, the generation portfolio companies would be created. However, some of the hydro plants would not be included in the generation portfolio, and they would sell the electricity produced in these facilities to TETAS. TETAS would also purchase electricity under existing contracts.
- Transitional contracts between TETAS and distribution companies: TETAS would sell the electricity that it purchased from EUAS and under existing contracts to distribution companies.
- Transitional contracts between distribution companies and the generation portfolio groups to be created.
Creation of transitional contracts was also not compatible with the competitive market principle.
The Strategy Document also fixed the eligible consumer limit as 7.8 gigawatt hours until 2009, although the EML allowed the EMRA to decrease the eligibility threshold. However, this provision was not reflected in the legislation and today, the eligibility threshold is 480,000kwh.
Law 5398
As explained above, the EML originally provided certain restrictions to distribution companies regarding their involvement in the generation activity. According to the EML when distribution companies are involved in generation they cannot produce more than 20% of the consumption in their region and they cannot purchase more than 20% of their sales from their production companies. However, Law 5398 eliminated such restrictions provided in the EML. According to Law 5398, distribution companies can establish generation facilities. The only restriction is the accounting separation. They can also purchase electricity from their generation facilities provided that the price would not be higher than the average wholesale electricity price in the country.
In its decision of July 2005, the Competition Board explained that the legal separation between the distribution activity and other electricity market activities until the end of transition period is a must in order for it to give permission to the privatisation of distribution companies.
Law 5496
With Law 5496 the cost-based price system of the EML was removed and a price equalisation mechanism which allows to cross subsidies was adopted for a transitional period which would end on December 31 2010 in line with the Strategy Document.
The transitional contracts provided in the Strategy Document were inserted into the legislation with Law 5496. Accordingly, transitional contracts would be signed between TETAS, EUAS and distribution companies holding retail license with duration of no more than five years.
Supply deficit problem (Law 5784)
In 2008, the Turkish electricity sector was still far from liberalisation. There was no competition in generation and retail, the prices were not determined in the competitive market, vertical separation of the electricity market activities was not yet realised and Turkey faced with a supply deficit problem.
Supply deficit was the main reason behind the 2008 amendments to the EML by Law 5784. The legislative body explains in the reasoning of this law that the EML was insufficient to ensure supply security. Therefore, the Law 5784 provides new measures in order to prevent supply deficit. While providing measures to prevent supply deficit, the Law brings provisions which are not compatible with the competitive market principle.
It increased the powers of the public authorities such as the Ministry of Energy and Natural Resources (the Ministry) and TEIAS in the market. Under the Law, as one of the measures to prevent supply deficit, the Ministry is authorised to take measures to secure the supply. The Ministry shall prepare a report on electricity supply security each year, ending at December 31. TEIAS is authorised to secure the system's reliability. It was also responsible for projection of generation capacity and preparation of Long Term (20 years) Electricity Energy Production Development Plan. It can also open bids to have new energy plants established or to rent capacity from existing generation plants under the auxiliary services agreements in order to meet the regional system needs.
The Law provided a tender system in addition to the licensing system adopted in the EML on the ground of supply deficit. The Council of Ministers may announce a tender if the energy investments are not sufficient to meet the demand.
If the Ministry determines that a tender process is not sufficient to meet the energy demand, the Council of Ministers may authorise the public generation companies (EUAS) to establish electricity generation plants. Therefore, if the private-sector investments are not sufficient, the public itself can make investments in electricity generation.
The Law extended the transitional period during which the price equalisation mechanism would apply until December 31 2012.
Transitional contracts provided in the Strategy Document and in Law 5496 may be extended for two more years with an EMRA decision which would be given upon the Ministry's opinion.
The legal separation of distribution, generation and retail sale would only be implemented after January 1 2013.
The EML originally provided TETAS as a transitional entity to take over the existing contracts and to act as the single buyer of the electricity purchased by EUAS. The EML also prevented the state to grant long-term purchase guarantees. As explained above, TETAS was able to make purchase contracts only up to one year and also it was restricted with various conditions. Under Law 5784, TETAS is not only the single buyer of the electricity produced by EUAS, but also of the electricity produced by private sector companies. It can make electricity purchase contracts with a tender process. The term of the purchase contracts cannot go beyond December 31 2012. Also, TETAS will sell the electricity to the distribution companies having a retail licence under the transitional contracts.
The EML aimed to bring competition in the generation segment and to establish a cost-based pricing system. The amendments to the EML brought significant changes in the EML. There are different reasons of the changes either related with the specific conditions of Turkey such as existing contracts, high level of theft or loss and increasing supply deficit or related with the global conditions.
| Author biographies |
Deger Boden
Boden Law Office
Deger Boden is the founder of Boden Law Office. She specialises in international project finance, all types of energy projects, international mergers and acquisitions as well as international arbitration. She has extensive experience working on project development and finance transactions in the areas of power, ports, metals and mining and general infrastructure. She gives regulatory advice on energy.
She was admitted to the Istanbul Bar in 2001. She is a graduate of Galatasaray University School of Law (2000) and holds an LLM degree in International Business Law from the University of Minnesota, School of Law (2005). She also obtained an LLM degree in Law of Economics from Istanbul Bilgi University, School of Law (2004). She is fluent in English and French. |
| Boden Law Office |
Boden Law Office
Boden Law Office is a boutique law firm based in Istanbul. The Firm advises leading domestic corporations, state owned enterprises and multilateral corporations.
The Firm’s principal focus areas are as follows:
Corporate Legal Advisory
Project Development and Finance
Mergers & Acquisitions, Joint Ventures, Alliances
Dispute Resolution
Restructuring & Creditor Rights
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