Turkey: Cross-Border Energy Trading: Will The Legal Status Quo Change In 2011?

The past decade has witnessed a giant leap forward in the Turkish energy sector since the 2001 enactment of the Energy Market Law. Both the government and the relevant supervisory authority, the Energy Market Regulatory Authority (the "EMRA"), have been actively working to find legislative methods for gradually transforming the energy sector into a more investor- and trader-friendly business environment. This is especially the case for the domestic energy trade, the latest steps of which saw the introduction of the day-ahead market, a radical decrease in eligible consumer consumption thresholds from 100,000 kW to 30,000 kW annually (with the hint of even further decreases), and retailer licenses made available to all eligible license holders (replacing the previous exclusivity for distributors). All of these are scheduled to come to fruition in 2011.

Along with this flurry of activity in the national market, the EMRA is also busy upgrading energy import and export legislation. Many local and foreign energy traders are waiting for legislative changes that would allow them to trade electricity across Turkish borders at more competitive prices. In practice, the current regulatory regime does not allow for a cross-border market. With few exceptions, every purchaser of electricity must buy from power plants located within Turkey, and every seller must sell to buyers (whether trader or consumer) within Turkey.

Why is there no market for cross-border trade?

The foremost reason for the absence of a cross-border market is that the current prevailing law, the Electricity Market Import and Export Regulation (the "Current Regulation"), is structured on the basis of long-term capacity allocations. These allocations are heavily regulated and quite limited in number, which in turn makes it impossible for applicants to develop their market behaviors.

Today, Turkey has interconnection lines installed with pre-determined transfer capacities, to Bulgaria, Azerbaijan (Nakhchivan), Iran, Georgia, Armenia, Syria, Iraq and Greece. All electricity import-export activities are currently subject to the EMRA's approval.¹ All interconnection allocations are granted for 1-year terms. As the construction of the cross-border interconnection lines is limited in nature, the EMRA closely monitors full exploitation of their capacity by their respective right-holders. If the EMRA decides that the right-holder is not using the full capacity of the interconnection lines efficiently, it revokes the capacity allocation and reallocates the usage right of the lines to other interested applicants.

Likewise, license-holders intending to terminate their contracts or abandon their allocated capacities before the expiry of the agreed term must notify the EMRA, TEİAŞ or other relevant distributors with 4 months' prior notice. The EMRA is entitled to reject the early termination request or revoke the interconnection allocation and reallocate the line to other applicant traders.

Another difficulty facing cross-border traders is the EMRA's right to intervene in all energy import-export contracts. Mandated by the Current Regulation, import-export contracts must be fully disclosed to the EMRA with all of their annexes. Any amendment to the terms of the contract is also subject to the EMRA's approval. As the term, capacity and transmission methods will be stated on the license of the import-export license-holder, any amendments and changes to these figures will also trigger amendment of the license.

New Legislation

TEİAŞ and the EMRA work in ongoing collaboration with the European Network of Transmission System Operators for Electricity (the "ENTSO-E") to interconnect and synchronize the Turkish electricity network with the ENTSO-E. Once fully implemented, a network synchronized with the ENTSO-E will enable both networks to operate as a single energy market, where spot buy-sell transactions may be conducted on a daily and hourly basis. To this end, on 18 September 2010, TEİAŞ and ENTSO-E started test transmissions over lines in Bulgaria and Greece. On the very same day that the test transmissions began, the EMRA also announced on its website a new draft regulation for energy import and export to replace the Current Regulation, in an effort to provide a legal basis for the campaign for synchronization with the ENTSO-E.

The Draft, as we see it, does not directly pave the way for spot transactions, as the addressed transmission method still appears to be for long-term capacity allocations. As was the case in the Current Regulation, the Draft foresees that prospective import-export license-holders will be granted 1-year reserved capacities, whereby the EMRA will supervise the effective use of their capacities. That being said, Article 16 of the Draft resolves that capacity holders of synchronized parallel connections, having received the approval of the system operator, will be entitled to sell their capacity to third-party import-export license-holders in "secondary markets." Secondary markets may be considered as spot markets currently available for domestic trade (in day-ahead planning and real-time balancing). There is no indication in the Draft as to whether such sale of capacity to secondary markets may be made partially or only as a whole package. A whole package requirement will definitely decrease the negotiability of the capacity, as it may be difficult for the secondary market to digest such a large volume via a spot transaction. This aspect may need to be better detailed in forthcoming revisions of the Draft.

In any event, one handicap that still remains is that the sale of capacity is subject to the approval of the system operator (i.e. TEİAŞ, or the relevant distributor if transmission is below 36 kV). The system operator may reject the capacity sale request, an action for which the Draft does not require any submission on valid grounds. Again, the EMRA may further elaborate on this aspect in the forthcoming evaluation sessions on the Draft.

The timing of the Draft's enactment is still unannounced, and neither is the final version of the Draft. The EMRA still appears confident, however, in continuing its efforts toward liberalizing the cross-border energy trade. Hopefully, it will overcome its legal setbacks in 2011.

Footnote

1. Before granting its approval, the EMRA also seeks the technical opinion of the Ministry of Energy and Natural Resources, TEİAŞ and/or other distribution license-holders. Once the approval is granted, the application is announced on the EMRA's website for other potential purchasers. If there is more than one interested party for the same interconnection line allocation, the EMRA will decide on the winning contract in consultation with TEİAŞ and other relevant distribution license holders.

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