ARTICLE
12 March 2012

Cross-Border Energy Trading Legislation Further Liberalized

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Herguner Bilgen Ucer Attorney Partnership

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The past decade has witnessed a giant leap forward in the Turkish energy sector since the 2001 enactment of the Energy Market Law.
Turkey Energy and Natural Resources

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 introduced 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 have come to fruition in 2011.

Along with this flurry of activity in the national market, the EMRA has also upgraded the energy import and export legislation. Many local and foreign energy traders have been waiting for legislative changes that would allow them to trade electricity across Turkish borders at more competitive prices.

Legislative Limitations on Cross-Border Trade

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 capacity by each respective right-holder. If the EMRA decides that a 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.

The EMRA, together with the Turkish grid operator, Türkiye Elektrik İletim A.Ş. ("TEİAŞ"), follow up the ongoing collaboration efforts 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 an hourly and daily basis. To this end, on 18 September 2010, TEİAŞ and ENTSO-E started test transmissions over existing lines in Bulgaria and Greece.

New Electricity Export Import Regulation

In an effort to provide a legal basis for the campaign for synchronization with the ENTSO-E, as of 01 June 2011, the EMRA renewed the governing regulation piece on cross-border energy trading, namely, the Electricity Market Export and Import Regulation (the "New Ex-Im Regulation"), annulling the Previous Ex-Im Regulation, identically named, dated 07 September 2005 (the "Previous Ex-Im Regulation").

The New Ex-Im Regulation does not directly pave the way for spot transactions, as the addressed transmission method applies to long-term capacity allocations. As was the case in the Previous Ex-Im Regulation, the New Ex-Im Regulation foresees that prospective import-export license-holders will be granted 1-year reserved capacities.

European and Non-European Connections

The New Ex-Im Regulation, as it was in the Previous Ex-Im Regulation, classifies cross-border electricity trade under two headings: (i) sales made over synchronous lines and (ii) sales made over asynchronous lines. What is referred to as a synchronous line practically addresses connections established with the ENTSO-E grid ("European Connections") and as ENTSO-E is currently the only synchronous line TEİAŞ has with its neighboring grid operators. What the New Ex-Im Regulation classifies as asynchronous lines refers to all cross-border connections other than ENTSO-E connections in place with Greece and Bulgaria ("Non-European Connections").

TEİAŞ is aiming to operate a synchronous grid using the ENTSO-E system. While much of the limitations imposed by the Previous Ex-Im Regulation still apply to sales on Non-European Connections, provisions applying to sales on European Connections have been further liberated.

Below are some points that are detailed for comparison purposes.

Right to Sell in Secondary Markets

Perhaps the foremost privilege granted by the New Ex-Im Regulation to traders on European Connections is the right to re-sell the allocated electricity capacities to third parties. Article 17 of the New Ex-Im Regulation 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). This right was not granted under the Previous Ex- Im Regulation, and still is not granted to traders operating under Non-European Connections.

Apart from the New Ex-Im Regulation, the EMRA issued another set of rules to help clarify the transfer procedures to secondary markets on 17 June 2011, namely the Electricity Market Export and Import Regulation Rules on Capacity Allocations and Secondary Commercial Transmission Right Market (the "Secondary Market Rules").

Transfers Exclusive to License-Holders

In the Secondary Market Rules, secondary markets are defi ned under the term "Secondary Commercial Transmission Right Market", that is stated as being mechanisms which allow for transfer of the commercial transmission rights (capacity allocations) of a license-holder to other wholesalers.

As a set-back, however, the New Ex-Im Regulation, together with the Secondary Market Rules, although having introduced a secondary market sale option, still require that the transferring wholesalers be EMRA-licensed wholesalers. Secondary Market Rules Article 10 states that a "Commercial Transmission Right" (a "CTR") may only be transferred to another licensed market participant.

Despite its novelties, the new legislation did not change the existing framework of the physical energy trade, where such physical delivery undertakings are still exclusive to the EMRA license-holders (and to eligible consumers). Furthermore, this transfer is subject to the prior approval of the system operator (system operator being understood to be TEİAŞ or the bordering distribution license-holder).

Spot Sales Not Yet Addressed

Under the New Ex-Im Regulation, the interconnection lines are still made available to applicants as long term capacity allocations, meaning that the transfer of this capacity to third parties may only be made similarly through long-term capacity transfers. Legal framework still does not address cross-border spot sales transfers.

No Physical Delivery Obligation

Sales conducted over European Connections are no longer required to fully exhaust their allocated capacity. Unlike the Previous Ex-Im Regulation that obliged the cross-border energy sales parties to honor their physical delivery obligations, the New Ex-Im Regulation appears to have created legal space for option sales for the parties. Parties of the sale are allowed to not fulfill their physical delivery commitments, should they reach an agreement to do so.

Article 11 of the Secondary Market Rules specifically outlines that the CTR holders who do not fully use their allocated capacities will not be charged any fines or penalties. The Previous Ex- Im Regulation foresaw that license-holders for all cross-border connections both for European and Non-European Connections were expected to fully honor their physical delivery obligations, and were subject to cancellation of their import-export license if their cross-border trade fell below 60% of their monthly commitments, or under 70% of their quarterly commitments.

Article 20 of the new Export Import Regulation grants a favorable exception to European Connections, imposing the above-stated commitment threshold only on license-holders operating on Non-European Connections.

Free Contract Terms

Another difficulty facing cross-border traders under the Previous Ex-Im Regulation was that the EMRA had the authority to intervene in all energy import export contracts. Import-export contracts had to be fully disclosed to the EMRA together with all of their annexes. Any amendment to the terms of the contract was also subject to the EMRA' s approval. As the term, capacity and transmission methods were stated on the license of the import-export license-holder, any amendments and changes to these figures would also trigger amendment of the license. This is no longer the case for sales conducted on the European Connections under the New Ex-Im Regulation. CTR holders are not obliged to disclose their agreements, nor are those contracts subject to the EMRA' s approval.

Derivatives Contract for Non-Physical Electricity Exchange

Besides the changes introduced through the Export and Import Regulation, the Turkish energy market saw another development in 2011, namely, the initiation of non-physical electricity exchange. The Turkish Derivatives Exchange (the "TDE"), in collaboration with the EMRA, and with the approval of the Capital Markets Board, issued a form contract for "Base Load Electricity" Derivatives Sales, numbered 601-613 (the "TDE Contract") dated 22 July 2001. As of 26 September 2011, market players are entitled to buy-sell electricity according to the terms of the TDE Contract.

The TDE Contract currently allows only for non-physical electricity sales. More accurately, the contracting parties position themselves for assuming buy-and-sell options fixed on index electricity prices that are calculated over the monthly average on the planning figures of the day ahead as defined in the Electricity Market Balancing and Settlement Regulation. So to speak, a transaction that is based on a TDE Contract will not affect the amount of electricity exchanged through the national grid or cross-border grids. Therefore, the current legislation allows all investors and traders to be a party to the TDE Contract, even if they are not EMRA licensed market players.

The TDE Contract may provide to interested parties, what the Export and Import Regulation lacks in defining secondary electricity markets: The transactional ability to freely exchange derivatized electricity across national borders between all interested parties, without requiring any permits or licenses to do so. However, one should remember that as of now, this ability is still limited to non-physical deliveries.

We are hopeful that the EMRA, with its current praiseworthy momentum, will continue to create more legal space to the liberalized energy market.

Footnotes

1 Before granting 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.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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