Reorganising Turkey’s electricity market

Author: | Published: 24 Apr 2013
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Ozan Karaduman and Tugçe Avcisert of Mehmet Gün & Partners explore the likely impact of a new law on the Turkish electricity market, and the effect on the use of renewable energy

A new law regulating the Turkish electricity market – Electricity Market Law No 6446 (EML) – was enacted on March 14 2013. The new EML repeals and replaces all provisions of the previous EML, Electricity Market Law No 4628 of March 3 2001.

The primary objective of the new EML is to establish a financially robust, stable, competitive and transparent electricity energy market as well as an independent regulatory and auditing mechanism.

The Turkish Minister of Energy and Natural Resources, Taner Yildiz, underlined his aim to increase the private sector's share in the electricity market to 75%; this compares to a decade ago when the private sector represented a mere 38% of the electricity market. This has since increased to 61%.

"The concept of carbon credits will be introduced to the Turkish public"

The Minister's declaration is a reflection of the important role that the electricity market plays in realising the government's objective to make Turkey one of the world's top 10 economies by 2023. It is a fact that Turkey will need to increase its industrial output dramatically to achieve this goal. This will require a significant increase in electricity generation.

Turkey will need to boost its electricity generation in order to develop its economy and respond to the increasing needs of households. There is no doubt that the new EML is expected to create a thriving environment which attracts investment into electricity generation.

This article explains the most important aspects of the new EML and its anticipated impact on the Turkish electricity market with a special focus on renewable energy.

More functional market operation

In order to conduct market operating activities in a more effective way, a new corporation, the Energy Markets Operating Corporation (Epias), has been introduced under the new law, with operations due to commence on September 30 2013. The new corporation has been welcomed by the sector and is considered a step forward for the liberalisation of the market. Epias will establish a stock exchange where a reference price may be determined, the generators foresee the prices for a longer term, and electricity will be bought and sold. The market also expects Epias to pave the path for the issuance of derivatives depending on power purchase contracts.

Epias will also manage the organised wholesale electricity market, which is now the duty of the Turkish Electricity Transmission Joint Stock Company. As a result of this change, the Company will focus its efforts on regulating and developing the country's electricity system and improving interconnection with the transmission structures of neighbouring countries. In contrast, Epias will be in charge of the financial settlement of operations conducted in the markets.

Under the new regulations:

  • Epias will conduct studies regarding the establishment of new markets within organised wholesale electricity markets towards the growth of the market. These studies will be presented to the Energy Market Regulatory Authority (EPDK).
  • Epias will also be required to perform activities to establish new markets in the organised wholesale markets.
  • In cases that are deemed appropriate by the Ministry of Energy and Natural Resources, Epias may attend as a party or associate or become a member of the international electricity markets especially constituted for the operation of the organised wholesale electricity markets.
  • Epias will determine the market operating tariffs within the framework of the procedures and principles specified by the EPDK.
  • Where the EPDK requires it, Epias may conduct studies for the establishment of the organised wholesale markets directed towards the energy markets, other than the electricity market, and upon the authorisation of the EPDK. As a result, Epias will create a stock exchange not only concerning the electricity market, but also concerning other markets such as natural gas and oil.
  • One of the key questions arising from the introduction of the Epias was whether the energy stock exchange would be an independent institution or a structure of the Istanbul Stock Exchange (BIST). According to the new EML, the direct and indirect share capital of public institutions ,and companies with public capital will not exceed 15% within the Epias, excluding the BIST. However, the Board of Ministers will be entitled to increase such rates to 30%. Some authorities claim that Epias will be independent, with the BIST as a significant shareholder; however Epias is expected to involve public and private companies as shareholders.
  • Epias is also expected to operate an emissions trading platform which, if realised, would be an incentive for the establishment of generation facilities using renewable energy resources. Establishing this platform will introduce the concept of carbon credits to the Turkish public, which will eventually increase public awareness of the effects of carbon emissions to global warming.

The pre-licence system

Another significant concept brought in by the new EML is the pre-licence mechanism: a two-tier system established to facilitate all administrative and bureaucratic requirements. Under the previous EML, in order to make certain applications, companies were required to wait until generation licences were granted to them by the EPDK, ultimately delaying the process for generator companies to become operative. The pre-licence procedure has been introduced to solve this problem. When a company applies for a licence, it will first be granted a pre-licence with a maximum period of 24 months. With this pre-licence, the applicant company will have the right to make applications for various administrative permits, licences and related documents as well as to acquire the property rights and usage rights on the land plot where the facility will be built. If the necessary permits cannot be obtained over a period of 24 months, or the obligations specified by the EPDK cannot be fulfilled, the applicant will not be granted an electricity generation licence. The EPDK has the right to extend the pre-licence period by half. In the event of force majeure, the period of the pre-licence will also be extended.

"The 24-month pre-licence period has been criticised by the market"

Although the 24-month pre-licence period has been criticised by the market for being too short, the law has not been amended to reflect this view. This demonstrates the enthusiasm of the government for new electricity generation projects to be realised as quickly and efficiently as possible. The same enthusiasm must be felt by the administrative bodies who will provide the permits required for the completion of a generation facility in order for the pre-licence holders to obtain all the required permits in the given time.

Another highly debated provision is the prohibition of share transfers from applicant companies during the pre-licence period. Except in cases of succession or bankruptcy, any transaction which would result in a change in the shareholding structure of a pre-licence holder will cause the pre-licence to be nullified. The main purpose of this restriction is to prevent any kind of licence trading which, up until now, has been a serious problem in the development of generation facility projects.

Types of licence

Under the new EML, wholesale and retail sale licences have been combined under one licence type known as supply licences. Wholesale and retail companies will be granted supply licences by the EPDK at no charge.

Supply companies will be permitted to sell electricity to eligible consumers regardless of the place of domicile of the consumer. Considering that the government is said to have plans to make every consumer eligible, this mechanism sounds very promising in terms of liberalising the market. If the government's plans are realised, a regular consumer in Istanbul will have the opportunity to purchase electricity from a supply licence company in Izmir or any other place in Turkey. This would ultimately increase competition in the marketplace and trigger a decrease in electricity prices. The introduction of supply licences has created some concerns among distribution companies, who believe that supply companies making retail sales will tend to enter into a cherry picking process by targeting the areas where demand is higher and payment track records are better. This would consequently lead to the supply companies established by the distribution companies (last source suppliers or assigned suppliers as explained below) being forced to deal with areas where illegal use of electricity (using electricity without making a payment) are higher and demand rates are lower.

The companies that obtain supply licences will be able to import and export electricity with countries that have fulfilled the international interconnection condition for wholesale and/or retail sale. The sanction of the Ministry of Energy and Natural Resources and approval from the EPDK must be obtained in order for supply companies to enter into an import or export deal.

Another new concept, the last source supplier, which was initially discussed as an incentive for the natural gas market, has also been adopted for the electricity market. Last source suppliers are supply companies that have been established with the same shareholding structure as authorised distributor companies. For each distribution zone, there will be a last source supplier who will be obliged to supply electricity to those eligible consumers who do not obtain electricity from another source. The last source suppliers will also be obliged to sell electricity to non-eligible consumers in their areas.

Tariffs for electricity provided by the last source supplier will be determined by the EPDK.

The new EML revoked the so-called auto producer licence and there can be no further applications for auto producer licences. Any applications made for such purposes will be evaluated as generation licences.

Amendments specific to renewable energy

An important change for the renewable energy sector is the use of contest principles when there is more than one application for the same area in the wind and solar energy licensing process. As per the new EML, the applicant who offers the highest contribution per kWh for a period of 20 years will win the contest. The law aims to grant licences to the applicants who can invest the maximum amount, and encourage applicants to use their land productively. The new EML changed the contest type foreseen for solar energy under Law on Renewable Energy No 5346, which set out a mechanism where the winner of the contest was the applicant who accepted the lowest price for the electricity it generated.

The applicant company which obtains the licence will be able to make the contribution payment within three years. This brings about the question of whether the payment can be made in instalments, but it will be regulated by secondary legislation to be issued by the EPDK.

One of the most welcomed amendments brought about by the new EML relates to unlicensed power generation. Under the previous EML, power plants using renewable energy resources with a maximum capacity of 500KW could generate electricity without obtaining a licence. The maximum limit was constantly criticised for being extremely low. The new EML responded to the feedback from the market and increased the maximum capacity to 1MW. The Board of Ministers is entitled to increase the maximum capacity up to 5MW depending on the type of renewable energy resource. This will enable the Board of Ministers to set different maximum capacities for different renewable energy resources and give further incentives for the use of a specific renewable energy resource if the need arises.

The new EML also introduced a new provision concerning unlicensed power generation. Regardless of capacity, if a power plant generating electricity from renewable energy resources is isolated from the transmission and distribution grid, it will be exempt from the requirement of obtaining a production licence. This will enable industrial facilities to establish renewable energy power plants with a capacity of more than 1 megawatt, without going through the licence procedure, and to procure their own electricity through that power plant.

The new EML allows several separate buildings to unify themselves and obtain a single generation licence for the production facilities installed on top of buildings if those production facilities use renewable energy resources, and the type of the renewable energy resource used by all buildings is the same. This new provision is in parallel with the previous declarations by the government and the EPDK, that all buildings in the available areas in Turkey must have solar panels on their roofs. This will encourage groups of households to unify and make agreements with renewable energy equipment companies for the installation of production facilities on the rooftops of their buildings. Those agreements, will of course, have better conditions than those offered to single households, and indeed may make installation of renewable energy production facilities a viable and productive option for households to procure the electricity they need and to sell the additional electricity they produce. If realised, this will increase the electricity supply and will consequently lead to a decrease in Turkey's dependency on foreign imports of fossil fuels to generate its electricity.

Incentives under the law

Under the New EML, the period of certain incentives has been extended and new incentives have been presented to legal entities holding generation licences, which will begin operating for the first time until the end of 2015.

The incentive period related to the system utilisation fee has also been extended until the end of 2015. This fee for electricity generation facilities will be reduced by 50% for a period of five years starting from the date the facility starts operating.

"The new law will play a key role in the next decade for investors in Turkey"

Another extension has been granted in relation to the stamp tax incentive. Transactions conducted and papers prepared regarding generation facilities will be exempt from stamp tax within the investment period. This regulation is expected to facilitate the necessary supply capacity in the short term.

An incentive which was foreseen for generation facilities using renewable resources has been extended to generation facilities using coal and lignite coal. The new EML makes it easier for those facilities to obtain rights of use for land where the transmission lines will be installed even if the land is forest or green land belonging to the State. Moreover, a reduction of 85% will be applied to the fees to be paid by those facilities to the State for the rights of use over the relevant land plots.

Furthermore, revenue accruing from any mergers, acquisitions or de-mergers concluded before December 31 2017 and within the scope of privatisation of electricity distribution companies and generation facilities and/or companies, will be exempt from corporation tax. In addition, price equalisation mechanisms have been extended until the end of 2015.

A final word

The previous EML was drafted to start the liberalisation process of the Turkish electricity market and, although it was often criticised, it served to fulfil its purpose. The new EML intends to bring the semi-liberalised Turkish electricity market to a fully-liberalised status. As the most significant legislative document regulating one of the most important sectors in Turkey, the new EML will surely play a key role in the next decade for investors in Turkey. The new EML is already being criticised as not being investor-friendly enough; this is to be expected, as the law also protects the rights of the end-consumers. That being said, it is certainly a huge step forward for the Turkish electricity market.

A Ozan Karaduman

Mehmet Gün & Partners

Esentepe Mah. Kore Sehitleri Cad.
No:17 Sisli 34394 Istanbul

T: +90 212 354 00 00
F: +90 212 274 20 95

A Ozan Karaduman is a senior associate in the corporate and commercial department of Mehmet Gün & Partners. He has been with the firm since 2007 and his practice focuses on M&A and preparation and negotiation of contracts, as well as telecommunication and energy law projects. He is a graduate of Galatasaray University in Istanbul and speaks English and French. Karaduman is a member of the Audit Board of the Galatasaray University Alumni Association.

Tugçe Avcisert

Mehmet Gün & Partners

Esentepe Mah. Kore Sehitleri Cad.
No:17 Sisli 34394 Istanbul

T: +90 212 354 00 00
F: +90 212 274 20 95

Tugçe Avcisert is an associate in the IP department, life sciences practice group under the regulated markets department and energy practice group under the corporate and commercial department of Mehmet Gün and Partners. She has been involved in many projects on general corporate and commercial law matters, trade mark and patent law disputes. She provides services to corporate clients in a variety of sectors, in particular pharmaceuticals and energy. Avcisert graduated from Österreichisches St Georgs-Kolleg, Istanbul, in 2006 and Koç University Faculty of Law in 2011 with a dean's honour degree, and she speaks English and German.

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