Turkey: A Highly-Charged Sector: The Latest Regulatory Developments In Turkey’s Electricity Market

Rapid changes in the global economy combined with rising domestic demand have opened Turkey's energy sector to constant regulatory change in recent years. These developments – in conjunction with Turkey's efforts to keep up with European Union (EU) energy directives – have spurred amendments to the existing regulatory framework, and the last few months have been particularly important. Apart from the intergovernmental agreements Turkey has executed for the Nabucco pipeline project and those with Russia and Italy, Parliament and the relevant regulatory bodies have been very active lately in developing Turkey's position as a regional energy hub. This has resulted in closer official monitoring of the new, emerging regulatory regime for the electricity market.

Electricity Market

The Energy Market Regulatory Authority (EMRA) has introduced new amendments to the Electricity Market License Regulation (Regulation) to address certain problems in the electricity market, as well as to eliminate shortcomings in the Regulation itself.

  • June 2009 Amendments: The first set of amendments to the Regulation took effect upon their publication in the Official Gazette on 20 June 2009. One of the most important amendments removes the mandatory EMRA approval procedure for establishing pledges on shares in licensed companies, a requirement criticized by market participants for the additional burden it imposed on companies during the financing stage of projects. The amendment allows these companies to freely pledge their shares as security to lenders in consideration for financing. Moreover, before the June 2009 amendments, licensed companies could not assign rights under their licenses to third parties. The June 2009 amendments limit the scope of this restriction, so that licensed companies – other than companies whose tariffs are regulated by EMRA – may freely assign their rights under their licenses to the third parties. This amendment is welcome as a measure for alleviating licensed companies' financing problems. In addition, electricity wholesale companies now have the right to participate in electricity generation companies. The June 2009 amendments also limit third parties' rights to object to license applications. Previously, third parties were entitled to object to the announced licensed applications within 10 days on the grounds of "breach of their interest." The June 2009 amendments replace the word "interest" with "right," and thus third parties must now base their objections on a "breach of their rights." As the term "right" is more specific and determinable than the term "interest," EMRA has – in a sense – limited third parties' rights of objection to license applications. Finally, the June 2009 amendments provide certain clarifications with regard to spin-off procedures for generation companies, license amendments, return of bank letters of guarantee, and other procedural matters.
  • September 2009 Amendments: The second set of amendments to the Regulation became effective upon publication in the Official Gazette on 30 September 2009. With the September 2009 amendments, EMRA introduced a new condition for acquiring a license, i.e., submission of the relevant environmental impact assessment (EIA) decision for projects within the scope of the EIA Regulation. Previously, applicants could obtain their licenses and then initiate the EIA process. Now, applicant companies must obtain the relevant EIA decision after EMRA approves their application, but before they obtain their license. Applicant companies must therefore fulfill this requirement together with other requirements, such as amending their articles of association, paying the remainder of the license fee, and submitting the definite bank letter of guarantee. In order to obtain the relevant license, the other requirements must be completed within 90 days as of the notification served to the applicant company regarding approval of its license application. However, the company can submit the EIA Positive decision to EMRA within 300 days of the said notification. Moreover, this requirement also applies to license amendment applications. If a licensee company applies for an increase in its established capacity under its generation license, it will also be required to submit an EIA decision within 300 days of receiving notification that its amendment application has been approved, provided that it has applied to the MoE or the Special Provincial Directorate of the Environment and Forestry within 30 days of said notification. The September 2009 amendments also set forth certain requirements for companies that have already received their generation licenses, or whose applications have already been approved by EMRA. According to the September 2009 amendments, companies that obtained their generation licenses before 30 September 2009 must initiate the EIA procedure within 60 days of 30 September 2009, if they have not already done so. The same requirement is valid for companies whose generation license applications were approved by EMRA prior to 30 September 2009. These companies must submit their "EIA not required" decision within 90 days of 30 September 2009, provided that their activity is listed under Annex 2 of the EIA Regulation. If their activity falls within the scope of Annex 1 of the EIA Regulation, they are required to submit their "EIA Positive" decision within 300 days of 30 September 2009. However, EMRA is entitled to extend the 90-day and 300-day periods, provided that the failure to meet the deadlines was not attributable to the applicant company. On a further note, it was also expected that EMRA would extend the companies' license application period from 90 to 120 days in line with the market participants' proposal due to the global economic crisis. However, EMRA did not approve the said proposal, and the relevant period remains 90 days.

Renewable Energy

As Turkey has abundant reserves of renewable energy, it is currently seeking to boost green energy as a way of reducing energy imports and dependence on other countries. Upon its enactment in 2005, the Law on the Use of Renewable Energy Resources for Electricity Production (RES Law) received a positive reaction and led to a sharp increase in the number of license applications for facilities using RES. However, the RES Law made a limited impact on promoting renewable energy investment due to the unduly modest and, thus, uncompetitive financial incentives it offered.

In an effort to overcome the shortcomings of the current regulatory regime, the Turkish Government has taken a further step, introducing a bill amending the RES Law. By providing higher feed-in tariffs, the RES Law amendments were expected to offer greater price advantages for RES-generated electricity. Announcement of the bill regarding the RES Law amendments attracted positive attention from investors, and additional incentives offered for investments using "Made in Turkey" technologies have enticed those intending to produce the materials required for wind and solar power plants.

Although their enactment was expected in June 2009, the RES Law amendments were removed from Parliament's agenda. The Government and all political parties fully supported renewable energy investment in Turkey, but the Undersecretariat of the Treasury reportedly disapproved of extending such high financial incentives to RES investments due to the high financial costs thereof, viewing perks for the use of Turkish technology as contrary to agreements concluded with the World Trade Organization and EU. However, with the reopening of the Turkish Parliament, the RES Law amendments will once again be on the parliamentary agenda, and market players expect enactment in the next 6 months.

Apart from working on the RES Law, the relevant governmental and regulatory authorities are also preparing secondary legislation to regulate "newcomer" renewable energy resources such as wind and solar energy. Although the development of wind and solar energy has been a priority item on the agendas of the Ministry of Energy and Natural Resources (MENR) and EMRA for a considerable time, regulatory obstacles have prevented an increase in investments in these sectors. On 4 October 2007, EMRA declared that it would receive license applications for wind and solar power plants on 1 November 2007. Yet no applications were made for solar power plants, presumably because the incentives provided under the RES Law were so paltry. This has left solar power an untouched energy area in Turkey. By contrast, over 700 applications were submitted for wind power plants. Unfortunately, the potential benefits of this impressive volume were offset by the fact that EMRA could not grant any licenses pertaining to locations for which more than one application was made. Therefore, as a result of the applications on 1 November 2007, only a small portion could obtain licenses and commence their investment. Nevertheless, the regulatory bodies have been working together to increase the number of wind and solar power plants, and a resolution of the problems associated with these applications is expected in the near future:

  • Wind Energy: EMRA has already processed the wind energy license applications for locations for which only one application was made. On 4 October 2009, EMRA announced that the regulations governing competition between private-sector wind power plant applications pertaining to the same location were complete. The initially-required changes in the Electricity Market License Regulation had already been made by the time of the June 2009 amendments. Now, the regulations include a new technical provision prepared jointly by EMRA and TEİAŞ (Turkish Electricity Transmission Corporation). According to the declarations of the President of EMRA, Mr. Köktaş, there are currently 682 pending license applications and EMRA expects that more than 600 applicants will compete to obtain a generation license by offering the highest contribution fees. Publication of the recent regulatory changes and novelties in the Official Gazette is expected in coming days.
  • Solar Energy: As no applications for solar energy were received on 1 November 2007, there are currently no companies in receipt of a license to generate electricity using solar power. However, the relevant public authorities have determined the reasons for such failure and are working to correct the problems pertaining thereto. In light of Turkey's great solar energy potential and the recent experience it has gained from multiple wind power plant applications, all of the regulatory and public authorities – including EMRA, MENR, TEİAŞ and EİE (Electricity Works Administration) – are reportedly working on ensuring that all the regulations necessary for processing solar power plant applications are ready prior to receipt of such applications. According to the MENR's roadmap, EMRA will receive no solar power plant applications until the enactment of the RES Law amendments. Therefore, market actors await enactment of the RES Law amendments primarily for the anticipated increase in incentives for solar energy investment, and the encouragement to solar energy investors to apply for generation licenses in the next round. Then the relevant regulations for technical assessment of applications and the rules applicable in the event of multiple applications will be prepared (presumably parallel to the rules determined for multiple wind power plant applications). As a result, a recurrence of the problems encountered during the license-granting process for wind power plants is not foreseen for solar power plant licensing. On a further note, it is reportedly indicated that the Ministry of Agriculture and Rural Affairs is working on a regulation to determine the agricultural land on which solar power plants cannot be legally established. Given the difficulties encountered by current investments due to the previous qualification of their land as agricultural land, preparation of such a regulation in advance of investments is considered as a positive step.

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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