Turkey: Is A New Era Evolving In The Unlicensed Electricity Generation?

As a result of the assessment of the previous practices in the unlicensed electricity generation, it is expected that the Regulation on the Unlicensed Electricity Generation in the Electricity Market (published in the Official Gazette dated October 2, 2013 and numbered 28783) ("Regulation") will be amended. To this end, Energy Market Regulatory Authority ("EMRA") has concluded a new draft ("Draft") which sets forth substantial potential amendments to the Regulation.

Pursuant to this Draft, it is foreseen that certain new clauses will be added into Article No. 6 titled "Connection Principles" and Article No. 31 titled "Other Provisions" of the Regulation. The Draft published by EMRA only sets forth some of the amendments to be implemented and other amendments may also be in the EMRA's agenda.

The new clause added into Article No. 6 titled "Connection Principles" sets forth that in each substantion center, notwithstanding the number of consumption facilities, a maximum of 1 megawatt ("MW") capacity for the generation facilities based on renewable energy resources can be allocated to any natural or legal entity and to the legal entities in which such relevant persons are directly or indirectly holding shares.,.

Therefore, possibility of investments by the same natural or legal entity in the electricity generation projects within the same substation is eliminated (e.g. collective unlicensed generation projects such as 1 MW x 5, 1 MW x 10). In this context, the amendments appear to be to the detriment of investors. On the other hand, it may be concluded that the amendments appear to be compromise with the initial essence of the unlicensed electricity generation (i.e. the principle of meeting the electricity needs of the users in 1MW capacity and below). Indeed as illustrated here, there has been widespread practice whereby requirements for licensed electricity generation are sort of by-passed through allocation of a large number of unlicensed electricity generation projects to the same substation.

The first clause added into Article No. 31 titled "Other Provisions" sets forth that the shares of the applicant legal entity cannot be transferred from the date of application for the planned generation facility to the date of temporary acceptance of the all of the generation facilities within the application; the relevant network operator shall be notified before the aforementioned share transfers take place; and upon the completion of the transfer of shares, the relevant legal entity shall submit the data and documentation indicating the final shareholding structure subsequent to the share transfers. Accordingly, a new share transfer ban is projected under the Article 31 of the Regulation in addition to the already existing ban on the transfer of the generation facilities prior to the acceptance as specified under the Article 29 of the Regulation. Accordingly, transfer of the projects before the temporary acceptance will be prohibited under any circumstances, and the title to the project (shares of the company and the facility itself) would belong to no other parties than the applicant. In the practice in Turkey, projects were used to be assigned to third parties by way of transferring the relevant project company (special purpose vehicle – SPV) due to the existing facility transfer ban. With the share transfer ban imposed by the Draft, it is expected that this practice will be terminated. Furthermore, it is considered that transparency is aimed in respect to the project ownership on the side of network operator by imposing of the notification obligations regarding share transfer transactions.

Second clause added into the Article No. 31 titled "Other Provisions" imposes bans on the unlicensed generation activities by the (i) direct or indirect shareholders of the distribution and commissioned supply companies, (ii) distribution and commissioned supply companies as well as persons directly or indirectly employed by these legal entities, and (iii) legal entities that are directly or indirectly holding shares in the natural and legal entities specified under points (i) and (ii). What has been taken into account hereby has been the consideration that the unlicensed electrical generation investments by the prohibited entities through use of their influential positions in the market may potentially be leading to unfair and non-competitive consequences. In the decision of the Competition Council dated 12.2.2015 and numbered 15-07/89-34, which has been delivered as a result of an examination in connection with a distribution company, the Council raised the possibility that the abuse of dominant position and discrimination between equivalent parties may be possible in such case and specified that it would not be in compliance with the competition law. This arrangement is considered aim for prevention of the possibility that investors and system operator or final beneficiaries of the investment are the same persons and of creation of an unfair advantage, thereby establishing a fair and competitive setting.

As a result of these amendments in the Draft, it is expected to have a fair, clear, transparent and competitive setting established in a more healthy manner in accordance with the notification obligations and bans on the unlicensed generation activities.

On the other hand, with the ban on the share transfer prior to the temporary acceptance, it is considered that the practices corresponding to sale of a project, which does not actually exist, on a "to be-completed" basis are aimed to be obstructed.. Due to such practices which are widespread lately, many transactions are carried out solely by receiving call letters through project companies and subsequently completing the sales of these project companies to the investors. In this context, as the transfer of multiple MW unlicensed electricity generation projects is prohibited both through share and facility transfer, investors applying for call letters will have to keep up with the same project until the temporary acceptance of the generation facility.

Conclusively, although the Draft would negatively influence certain players in the unlicensed electricity market, it can be concluded that its main objectives are to re-shape a regulated industry along with its legal necessities, to ensure sustainability, to prevent non-competitive practices and to eliminate actual implementations that result in by-passing of the conditions of the licensed electricity generation market (from standpoints of application, process, legal obligations, audit, etc.).

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