Thanks to its unique location and climate, Turkey enjoys diverse renewable energy resources including hydro, wind, solar, geothermal and biomass. However, despite its enormous potential, the currently-installed renewable capacity of Turkey1 is low.
Below, we set out a summary of incentives under the current legislation and the Draft Renewable Law (the Draft Law) followed by our views on Turkey's approach towards renewable energy.
1 Current renewable energy legislation
The Electricity Market Law No. 4628 sets out the general regulatory framework for electricity in the Turkish energy market. The Electricity Market Licensing Regulation (which focuses on rules and procedures relating to the licensing of these activities by the Electricity Market Regulatory Authority or EMRA) complements this law. With this in mind, the key piece of legislation about renewable energy is the Renewable Energy Law No. 5346.
1.2 Incentives under the Electricity Market Law/ Electricity Market Licensing Regulation
The legislation includes some investment incentives. These include:
- Legal entities which apply for licences to build electricity facilities using domestic natural resources and renewable energy resources currently only pay one per cent of the total licensing fee. These entities are also currently free from paying annual licence fees for the first eight years following the facility completion date.
- Renewable energy generators may buy electricity directly from private electricity wholesale companies if they do not exceed the annual average generation amounts mentioned in their licences for that calendar year.
- The state-owned electricity transmission company, TEIAS, and/or distribution licence-holding legal entities have the duty to give priority to renewable energy generators when connecting them to the grid.
- Retailer licence holders (Retailers) must give priority to energy produced through renewable energy resources. This rule applies when (i) the purchase price for electricity produced by renewable sources is equal to or lower than the sale price of TETAS (state-owned wholesaler) and (ii) there are no other cheaper supply alternatives.
1.3 Incentives under the Renewable Energy Law
The Renewable Energy Law covers certain investment incentives.2 These include:
- Fixed minimum price: The Law sets a fixed range between a minimum price of 5.0 Euro cents and a maximum price of 5.5 Euro cents for electricity produced from renewable energy sources.
- Compulsory purchase by Retailers: Legal entities holding a retail sale licence must purchase a specified amount of electrical energy from RES certified generators (RES Certified Generators) which have not yet reached a total operation period of 10 years.
- Incentives re: state-owned land: Renewable energy generators enjoy an 85 per cent discount on the rent or costs related to getting a right of access/ use on state-owned land within the first 10 years of their investment and operation.
2 Draft Law
Political discussions on the Draft Law are continuing and as a result the Turkish Parliament has not yet adopted the law (although many investors had hoped the Parliament would impose it earlier this year).
One reason behind the delay in the Draft Law's enforcement is the Turkish Treasury finds the proposed pricing incentives (based on feed-in tariff) too high. This is because state-owned entities such as TETAS and TEDAS make up most of the buyers in the electricity market.
2.2 Pricing incentives under feed-in tariff3
The feed-in tariff offers renewable energy generators favourable fixed minimum electricity sale prices. Therefore, under this system the prices of electricity produced from renewable resources will be pre-determined depending on the installed power generator. The fixed prices range from 7 to 25 Euro cents/kWh.
Solar power (both concentrated and photovoltaic) and biomass generation facilities can enjoy fixed electricity prices for their second 10 years of operation. This is unlike the ones that are using other renewable energy resources which may benefit from fixed prices for only their first 10 years.
Legal entities holding a renewable energy generation licence and wishing to benefit from this system have to pre-apply to EMRA by 31 October of the year before they wish to benefit. Generators included in the system shall remain for one year. However, following this one-year period it appears that they can then opt out and choose to sell electricity in the spot market with spot market prices.
2.3 Incentives through pooling of payments
The Draft Law provides that suppliers of electricity (as Electricity Market Law defines) must pay into a pool which PMUM (the Market Financial Settlement Centre – a division of TEIAS) manages. Renewable energy generators will be able more easily to collect their revenues from this pool.
The pool will perform to provide an effective off-take guarantee for all renewable energy generators that opt into this system since this will guarantee the sale of that renewable energy generator's electricity.
This incentive is broader than the compulsory buying incentive for Retailers under the current Renewable Energy Law (see the second bullet point under paragraph 1.3 above). This is because the term "Suppliers" (which the Draft Law refers to) is much broader than "Retailers" (which the Renewable Energy Law refers to) and includes Retailers, plus wholesalers, and generators (who sell to end-users/free consumers) etc. Therefore, eligible consumers choosing to buy electricity from sources other than Retailers (the Suppliers have a wider scope covering any such sources) will not dilute the effectiveness of the off-take guarantee in the Draft Law.
Finally, as the fixed electricity sale prices are higher than under the current legislation it is much more likely that RES Certified Generators will join in this pooling system. 2.4 Incentives due to use of components made in Turkey Certain mechanical and/or electromechanical items in the generation facilities that are using renewable energy resources are manufactured in Turkey. In that case, the Draft Law provides the relevant generation plant will benefit from further incentives as well as the fixed minimum electricity sale prices in the feed-in tariff system.
The incentives will last for five years from the date of its operation.
2.5 Other incentives
The Draft Law includes certain other incentives.
- Any legal person that has a licence and produces electricity within the scope of the Draft Law will benefit from a 90 per cent discount on the system usage tariffs for 10 years from the operation of the relevant facility.
- Certain small-scale renewable energy generation facilities, whose installed capacity is lower than 500 kWh and micro-cogeneration facilities may transfer their surplus energy to the distribution system and enjoys the pricing incentives of the RES Support Mechanism. This is true even if they have not opted in. Besides, depending on the energy transferring to the distribution system, electricity-producing facilities using photovoltaic solar energy will benefit from even more favourable prices for 15 years from the establishment of the relevant facility.
Turkey's signing the Kyoto Protocol shows Turkey's commitment to cleaner energy and highlights how important the investments in renewable energy are for Turkey. The Kyoto Protocol also enables emission trading (which is new for the Turkish market), which will strengthen the value of renewable energy investments.
Turkey's historical reliance on non-Turkish energy resources is costly to the Turkish economy and a dependency on them is risky (as political tensions can easily affect their supply). The most efficient and secure way to achieve the goal to diversify and increase internal supply is maximising domestic renewable energy resources.
The High Planning Council produced the Electricity Market and Supply Security Strategy Paper on 18 May 2009. According to this paper, Turkey targets to make the share of electricity produced by renewable resources amount to a minimum of 30 per cent of Turkey's entire electricity production. This is a figure to aim at but of course may change depending on various factors.
Clearly, Turkey cannot realise this target without further private investment. To that end, more investor-friendly laws will play a significant role in encouraging this investment and we believe that when the Turkish Parliament passes the Draft Law this will be a milestone towards that direction.
1 Electricity capacity amounting to approximately 15,000 MW (including large-scale hydro-electricity generators which are not considered as renewable energy resources under the Renewable Energy Law) out of Turkey's currently installed capacity of 44,000
2 Please note that the first two incentives below apply to facilities that start operation before 31 December 2011.
3 Please note that a combination of the incentives in the Draft Law make up what is defined in the Draft Law as the RES Support Mechanism which is (in short) a system (outside of the spot market or realms of bi-lateral agreements) that renewable energy generators can opt into so as to obtain fixed pricing/payment benefits/protections.
Guner Law Office was established in 1996 and has since grown into one of the major corporate, M&A, banking, litigation, energy and TMT practices in Turkey. Guner Law Office is headed by Ece Guner and works with international law firm Denton Wilde Sapte.
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.