Turkey's solar power market heats up

Author: | Published: 27 Apr 2016
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Arzu Aksac, Özgü Deniz Şahin and Yaprak Derbentli of Aksac Law Office report on recent changes to legislation in the solar power industry and explain why now is the time to invest

Aksac
www.aksac-law.com

As a country with a developing economy, Turkey has seen a rapid increase in its electricity demand. The fact that its power generation has been heavily dependent upon imported natural gas has rendered Turkey's power supply vulnerable to risks. In this regard, renewable energy resources (RES) have been designated as a means of diversifying the country's generation mix and of ensuring the security of its electricity supply. Due to its geographical location in the eastern Mediterranean, Turkey has quite a big potential for solar power and offers perfect natural conditions for electricity generation based on solar technologies.

Turkey's first legislative attempt to encourage investors in investing in RES projects was Law 5346 on the Usage of Renewable Energy Sources for the Generation of Electrical Energy (REL) that entered into force in 2005. The REL introduced a feed-in tariff (FIT) system which was, however, far from attractive, since it applied the same tariff levels to all types of RES without considering that generation costs varied depending on the RES type and associated technologies to be used. Therefore, the number of renewable energy investments remained quite low between 2005 and 2010. By means of the 2011 amendments, a different FIT rate was introduced for each RES type within the ambit of a Renewable Energy Support Mechanism (YEKDEM) which is basically a government-subsidised pricing policy that offers substantially higher tariff rates than those which are otherwise applicable to non-RES projects. Another important legislative step was taken when the new Electricity Market Law 6446 (EML) was enacted in 2013. Secondary regulations concerning unlicensed generation and YEKDEM were also put into force in the same year.

In accordance with the latest data announced by the state-owned grid operator Turkish Transmission Corporation (TEIAS), Turkey's total installed capacity was 74,039.4 MW as of the end of March 2016. In addition, in view of the latest data announced by TEIAS of the various types of RES, solar energy is the one that is particularly widely used, in the context of unlicensed generation. Accordingly, 492 out of 534 unlicensed projects that were approved by Turkish Electricity Distribution Company (TEDAS) between January 1 2012 and March 31 2016 were solar based with a total installed capacity of 357,7MW. In contrast, only 14 out of the TEDAS-approved unlicensed projects referred to above were wind power projects with a total installed capacity of 8 MW. The underlying reason for the dominance of solar power generation is generally attributed to its being relatively easier both technically and financially to develop solar power plants compared with wind power plants. The high rate of FIT offered for solar power generation is no doubt another determining factor.

As regards licensed solar power generation, only two plants with a total installed capacity of 9.9MW located in the eastern provinces of Erzurum and Elazig have been issued a generation licence so far. Six preliminary licences have also been issued to projects in Burdur, Kahramanmaras, Denizli, Sirnak and Mus. These licences will be converted to definite licences subject to the satisfaction of the applicable legal requirements. The total installed capacity of these pre-licensed projects is 40MW. It is worth mentioning that due to Turkey's energy policy requirements, a country-wide applicable cap of 600MW is foreseen under the REL for licensed-solar power plants which will connect to the transmission system until December 31 2013.

Under Turkey's National Renewable Energy Action Plan (NREAP) for the period 2013 to 2023, which was prepared in accordance with European Parliament and Council Directive 2009/28/EC of April 23 2009 on the Promotion of the Use of Energy from Renewable Sources, Turkey aims at increasing its share of RES-based power generation so as to ensure that it will cover 30% of its total electricity demand. In addition, it is envisaged that a total capacity of 5000MW for photovoltaic and concentrated solar power will be installed during the period up to 2023. Although the 600MW cap for licence-based solar power generation is still in effect, the government is expected to amend that cap and announce a new tender package for a 3GW capacity for the emerging licensed solar power market soon. Nevertheless it should be noted that until and unless the 600MW cap is increased, all pre-licence and licence applications which are presently pending are subject to the above 600MW cap along with the existing solar projects which are licensed.

Electricity generation from solar power in Turkey

Under the existing legislative framework, electricity generation based on solar energy can be carried out through either licensed or unlicensed generation. Except for certain types of unlicensed generators, such as cogeneration facilities, up to 1MW of unlicensed generation is permitted for all types of RES-based power plants. Licensed generation is subject to a 50MW upper limit per solar power plant. Further, while applications for connecting to a distribution network can be filed by unlicensed generators every month, pre-licence applications can only be filed on certain specified dates stipulated under the legislation.

Licensed generation

In accordance with the Electricity Market Licence Regulation (Licensing Regulation), generation licences are issued in respect of each power plant for a term of 10 to 49 years. Therefore, in cases where a sponsor invests in more than one solar power plant, a separate generation licence must be obtained for each plant.

Investors interested in obtaining a licence for solar power plants should first apply for a pre-licence. However, it is also permissible to apply for a generation licence direct if the requirements foreseen for the pre-licence period have already been met. By means of the latest amendments made to the Licensing Regulation on December 23 2015, pre-licence applications for solar power plants should be filed within the first five business days of November each year. Furthermore, TEIAS will announce the available transmission capacity of the grid for solar power plants by May 1 each year.

There are several regulatory requirements which must be fulfilled before making a pre-licence application. First of all, applicants must be organised in the form of either a joint stock or a limited company established in accordance with the Turkish Commercial Code numbered 6102. They must have a minimum share capital that exceeds five percent of the total investment amount and applications will be determined by the energy market regulatory authority (EMRA). In addition, applicants are required to arrange for solar radiation measurements to be carried out for a period of at least one year within the previous three years before the application date. These measurements should have been carried out and registered on site for at least six months. A bank letter of guarantee in an amount which will be determined by EMRA in reference to the installed capacity must be submitted. In cases where the applicant is the owner of the land where the facility will be established, documents evidencing title to the land must also be submitted. Unless there is a force majeure event or their term is extended by EMRA, pre-licences are granted for a maximum period of 24 months.

In situations where multiple pre-licence applications are submitted for building solar power plants in the same region, TEIAS will organise a tender to designate the successful bidder. The bidder who offers the highest price per MW for the first three years after the commencement of commercial operations will win the tender. In cases where more than one pre-licence application is made for building power plants based on different RESs but in the same region, EMRA will issue pre-licences in the following priority order: i) geothermal power plants, ii) hydroelectric power plants, iii) wind power plants, and, iv) solar power plants. In addition, owners of land who apply for a pre-licence will have priority over third-party non-land-owner applicants in respect of wind and solar power investments.

During the pre-licence term, pre-licence holders must satisfy several requirements. Accordingly, they will: i) secure property ownership and/or long-term servitude rights over the site; ii) acquire the required construction licences and other permits; iii) file a connection application with TEIAS or the licensed distribution company operating in the region, as appropriate; and, iv) execute an agreement with TEIAS for the payment of the contribution fee. In addition, within the first 90 days of the pre-licence term, pre-licence holders are to consult with, and obtain confirmation of, the authorities as to whether the planned project triggers the requirement for the commissioning of an environmental impact assessment (EIA) report in accordance with the applicable environmental laws and regulations.

On the condition that the obligations for the pre-licence term as summarised above are duly fulfilled, pre-licence holders will qualify for applying for a definite generation licence before the expiry of the pre-licence term. Under the Licensing Regulation, generation licence applicants are required to: i) increase their share capital by such an amount as will correspond to 20% of the total investment amount; ii) submit a new letter of guarantee, the value of which will not exceed 10% of the total investment amount when considered together with the value of the letter of guarantee that was submitted in the context of the pre-licensing; and, iii) provide a detailed work schedule concerning the completion of the construction of the facility. EMRA will examine licence applications within a period of 45 days. If all requirements have been duly met, a definite generation licence will be issued to the applicant. Once the generation licence is obtained, the licence holder is required to complete the construction of the power plant and commission it within the time limits specified in the licence issued, failing which the letter of guarantee submitted to EMRA will be recorded as revenue.

Unlicensed generation

In accordance with the Regulation on Unlicensed Power Generation (Unlicensed Generation Regulation), real and legal persons may licence-free generate electricity from any RES type, provided that the installed capacity of their plant will not exceed 1MW. Unlicensed generators are also exempt from the obligation to organise in the form of a capital company. Notwithstanding the above, some types of unlicensed generators may exceed the 1MW limit if they were to use the energy that they generated towards meeting their own electricity needs. In cases where the operator of a power plant based on RES consumes all of the generated energy itself without using the transmission network (that is, investors whose generation and consumption points are situated in the same location), and also cogeneration power plants with more than 80% total efficiency can be given as examples of unlicensed generators entitled to operate with an installed capacity exceeding 1MW.

Until the amendments that were made to the Unlicensed Generation Regulation on March 23 2016, it was not clear whether any given unlicensed generator was allowed to develop within the same region multiple power plants each having an installed capacity up to 1MW. This has been criticised as a reason for circumventing the rules concerning licensing requirements. After the amendments, regardless of the number of consumption units there may exist in the region of any given substation, a maximum 1MW capacity can be allocated to investors (be they real persons or legal entities) of wind and solar power plants, including any legal entities in which such investors are direct or indirect shareholders, and any legal entities that are under the control of those investors. The only exception to the previously-mentioned rule will be the rooftop implementations.

Investors interested in generating electricity from RES without a licence must satisfy the conditions stipulated under the EML. Accordingly, unlicensed generators must first apply to connect to the transmission or distribution system, as appropriate, depending on the installed capacity of their planned project, and the following documents must be submitted along with the application: i) documents evidencing the property or land usage rights over the project site; ii) a single line diagram describing the technical specifications of the facility; iii) a technical evaluation report to be prepared by the General Directorate of Renewable Energy (GDRE); iv) a coordinated application diagram; and, v) provided that the applicant is a legal entity, information regarding its shareholding structure, its direct/indirect shareholders, and confirmation whether there is any controlling relationship.

On the condition that the connection application is approved and the technical evaluation report of the GDRE is favourable, applicants are sent a call letter by the related network operator to execute a connection agreement subject to the project approval decision of the legal entity authorised by the ministry. The authorised legal entity either approves or rejects the planned project within 180 days as from the date of receipt of the call letter by the applicant. After the issuance of the decision concerning the project approval, a connection agreement will be executed between the related network operator and the applicant within 30 days. Thereafter, the generation facility must be constructed within a specified term starting from the execution date of the connection agreement which is determined based on the location of the connection point to the transmission/distribution system.

Important rules concerning applications for licensed and unlicensed generation in the same 'project land' have been introduced by means of the recent amendments made to the Licensing Regulation and the Unlicensed Generation Regulation referred to above. Accordingly, unlicensed generation will be no longer permitted on any land for which there is already a pending pre-licence or licence application in place. In cases of sites for which there is already a validly issued generation licence, the owner of the subject site will have exclusivity for applying for unlicensed generation, provided that: i) its planned unlicensed power generation investment is found by the GDRE appropriate from a technical point of view; and, ii) it does not create any negative impact on other licensed projects existing on the subject site. Moreover, in cases where a pre-licence application for solar power generation is made in respect of any given piece of land for which a connection application concerning unlicensed generation already exists, the pre-licence application will be prioritised over unlicensed generation, provided that the applicant for unlicensed generation does not qualify for a call letter from the relevant network operator concerning its connection application and the technical evaluation report of the GDRE states that the application will have a negative impact on the pending pre-licence application.

Apart from this, in the event that multiple unlicensed generators apply for connection within the same area and the planned generation facilities which are the subject matter of the applications are located on the same piece of land as the consumption units, the particular applicant to which the consumption unit with the highest connection power is associated will be, as effective from March 23 2016, prioritised over other applicants.

Share transfers were not restricted for unlicensed generators before the latest amendments. However, to be effective from March 23 2016, except for the share transfers made due to inheritance, any share transfers to be made between the date of connection application and the provisional acceptance of the facilities are forbidden for solar-power-based unlicensed generators.

Incentives for generators from solar power

So that they benefit from the incentives foreseen under the REL, licensed generators are to be issued a Renewable Energy Resource Certificate (RES Certificate) by EMRA. The RES Certificate basically identifies the type of the renewable resource to be used in power generation and enables EMRA to monitor the sale and purchase of the energy generated from the renewable energy resource concerned.

Under the legislation presently in force, a variety of incentives can be enjoyed both by licensed and unlicensed generators. By way of example, a reduced generation licence fee which is charged as 10% of the total investment amount is charged to the licence holders participating in YEKDEM. Further, an exemption from the annual licence fee to be valid for eight years after the completion of construction of the power plant is available.

The FIT of $0.133 per kWh is provided under the REL both for licensed and unlicensed solar power plants for the first 10 years of their commercial operation. Licensed generators holding an RES Certificate and participating in YEKDEM can benefit from this FIT, provided that they commence operation before December 31 2020. On the other hand, unlicensed generators willing to sell any excess power which they generate can enjoy the purchase guarantee of the distribution companies at this same FIT rate. Moreover, the amount of the above-stated FIT can be increased by up to $0.20 per kWh for the first five years of the operation, provided that at least 55% of the equipment used in the construction will be of local origin.

An incentive in the form of an 85% discount on permission, rent and land usage fees is also available for the first 10 years of commercial operation in respect of the plants established on public land.

Apart from this, several tax incentives are provided for generators from RES. Transaction documents related to the power plants concluded throughout the investment period are exempt from stamp taxes and duties. Furthermore, as per the General Investment Incentive Plan that has been in effect since January 1 2012, solar-energy-based renewable investments are provided with VAT and customs duty exemptions for the purchase and/or import of investment equipment. An exemption from other funds and surcharges and a customs duty exemption from other funds and surcharges can also be enjoyed.

Outlook

Turkey with its unique location, growing population and developing economy is a promising jurisdiction for successful development of solar power investments. The legal framework that provides incentives for both licensed and unlicensed solar power investments has gradually developed since the entry into force of the REL. By virtue of the new tenders, which are yet to be announced by the TEIAS, licensed solar power generation is expected to gain momentum in the near future. Taking into account the targets designated by the government for solar power generation, the Turkish solar power market is definitely a sector for both international and local sponsors and financiers to watch closely.

About the author
Aksac  

Arzu Aksaç
Founding partner, Aksac Law Office

Istanbul, Turkey
T: +90 212 270 79 81; +90 212 270 7982 and +90 212 270 79 83
E: arzuaksac@aksac-law.com
W: www.aksac-law.com

Founding partner, Arzu Aksac, with her 25-years of professional experience is an internationally recognised lawyer. She founded the firm in September 2010 after having worked for nine years as partner at an Istanbul-based Turkish law firm with an international practice. She worked as overseas legal counsel in the banking department at Allen & Overy, London (1998 to 2001). She has wide experience in major projects and complex financial work, M&As, and corporate and commercial work. She also has substantial experience in oil, gas and power, as well as mining law. She holds an LLB from Dokuz Eylul University, Faculty of Law, (1990) and an LLM in US legal studies from the University of Connecticut, School of Law (1995). She is fluent in English and German.


About the author
Sahin  

Özgü Deniz Şahin
Associate attorney, Aksac Law Office

Istanbul, Turkey
T: +90 212 270 79 81; +90 212 270 7982 and +90 212 270 79 83
E: denizsahin@aksac-law.com
W: www.aksac-law.com

Özgü Deniz Şahin, associate attorney at Aksac Law Office, is a Turkish qualified lawyer. She was initially registered with the Ankara Bar Association in January 2013, and has been a member of the Istanbul Bar since 2015. She advises clients on energy law, in particular, renewable energy law, corporate and commercial law, capital markets law, insurance law, regulatory matters, intellectual property law and healthcare law. She holds an LLB from Marmara University School of Law, Istanbul (2009) and an LLM in international commercial law from the University of Dundee in the UK (2011). She participated in the Energy Law Certificate Programme organised by Bahcesehir University in November 2014. She is fluent in English.


About the author
Derbentli  

Yaprak Derbentli
Associate attorney, Aksac Law Office

Istanbul, Turkey
T: +90 212 270 79 81; +90 212 270 7982 and +90 212 270 79 83
E: yaprakderbentli@aksac-law.com
W: www.aksac-law.com

Yaprak Derbentli, an associate attorney at Aksac Law Office, is a Turkish qualified lawyer registered at the Istanbul Bar Association since 2011. She is involved in energy law, including, in particular, renewable energy law, corporate and commercial law, property law, competition law, employment law, regulatory matters and litigation. Derbentli advises Turkish and foreign corporates from various sectors, mainly energy, healthcare, construction, real estate and FMCG on their local and cross-border transactions, with regards to both the Turkish and international law aspects. She graduated from Bahcesehir University Faculty of Law in 2010 with a dean's honours degree and holds an LLM from the University of Kadir Has (2015). She is fluent in English.