During the last decade, all we heard was ambitious goals in terms of climate change at the national, international, and supranational levels. Impediments to a sustainable future, namely the greenhouse gas emissions and dependency on fossil fuels, resulted in the policymakers working for a greener world. In this context, renewable energy investments gained global momentum. Nevertheless, acceleration in renewable energy development necessitates hefty investments1. Therefore, most of the jurisdictions provide numerous incentives, such as feed-in tariffs, tax credits, grants, and loan programs for renewable energy investments2. Accordingly, in Turkey, Renewable Energy Law entered into force in 2005 to provide several incentives. The main ones are feed-in tariffs, exemption from the service fees, various incentives for power generation facilities and R&D investments, discounts on taxes, and land use fees.
Renewable Energy Law aims not only to bring renewable energy resources to the market in a reliable, economical, and high-quality manner but also to increase the diversity of resources, to evaluate waste, to protect the environment3. However, investment in renewable energy sources remained limited between 2005 and 2010 due to the absence of secondary legislation and relatively low feed-in tariffs4. Nevertheless, with the amendments made in December 2010, higher feed-in tariffs to be applied for ten years and monetary/non-monetary incentives were introduced for non-fossil energy resources such as hydraulic, wind, solar, geothermal, biomass, biomass gas, wave, current energy, and tides, and since then renewable energy market was seen to become more active. Turkey has risen to 5th place in Europe and 12th in the world in terms of installed power in renewable energy. As of the beginning of 2021, 52% of the installed power in Turkey consists of renewable resources5.
Turkey attaches great importance to the development of renewable energy sources. In line with the National Energy Policy adopted in 2017, increasing the use of domestic and renewable energy resources is among the main priorities. Pursuant to domestic and national energy policy, incentives for domestic components to be used in renewable energy facilities were introduced. However, domestic component incentives have brought along a number of legal problems due to the uncertainty about who will benefit from these incentives, what will be considered as domestic components, and how the incentives will be calculated. In this article, we will examine the incentives provided for domestic components in renewable energy facilities within Turkish legislation.
The Use of Renewable Energy Sources for Electric Energy Generation Law Numbered 5346, ("Renewable Energy Law") has entered into force in 2005. Since then, the share of renewable energy sources in the total installed power has increased. The share of power plants producing electricity from renewable energy sources, which was 33% in 2005, increased to 49.1% in 20196. Within the framework of the Renewable Energy Law, Renewable Energy Resource Support Mechanism ("YEKDEM") was introduced, which provides purchase guarantee for wind, solar, geothermal, biomass, wave, and hydroelectric power plants with canal or river or reservoir area less than fifteen square kilometers. With the effect of the purchase guarantees and the increase in the exchange rate, the number of renewable energy power plants that want to benefit from YEKDEM has increased. In this context, the number of power plants that benefitted from YEKDEM in 2020 had increased to 817, and the total installed power had risen to 21,860 MW7.
Two issues, namely to benefit from renewable energy resources in the most efficient way and to build the power plants with domestic components, have always remained on the agenda in Turkey's renewable energy policy. Building power plants, which have high initial installation costs, entirely outsourced is similar to purchasing a natural gas power plant of the same size with its fuel enough for a couple of years8. Within the scope of YEKDEM, the Regulation on Supporting Domestic Components Used in Facilities Generating Electricity from Renewable Energy Sources was published in 2016 in order to incentivize the use of domestic components. As of 28th of May, The Regulation on Supporting Domestic Components Used in Facilities Generating Electricity from Renewable Energy Resources has been repealed by The Regulation on Domestic Component ("Regulation"). In this context, the Regulation sets forth the procedures and principles regarding the domestic component contribution prices (the domestic component contribution prices ("YADF") to be applied to the components used in the said facilities. The domestic components listed in the Regulation include, inter alia, turbines, generators, power electronics, wings, sun tracking system, and inventor. The reason behind this incentive is to promote not only the use of renewable energy resources but also to ensure the development of the relevant industry in Turkey.
What is a Domestic Component?
The issue that created serious discussions in practice regarding domestic components was that the procedures and principles regarding their definition, standard, certification, and inspection were not regulated. With the amendments made in December 2020 in Renewable Energy Law, we observe that these regulations will be made by the regulation to be issued by the Ministry of Energy and Natural Resources ("Ministry"). We evaluate it as an extremely positive development in terms of eliminating uncertainties in practice.
The Regulation on Domestic Component puts forward provisions on definition, standard, certification, and inspection of domestic components. In order for the components/integrating parts specified in the Regulation to be considered as domestically manufactured, the domestic contribution rate must be at least 51%. The certain parts/processes9 (e.g., rotor, stator, and body of the generator in hydroelectric generation plants) specified in the Regulation must be manufactured/performed domestically. The applicant who wishes to benefit from YADF must submit the planned manufacturing schedules of the components/integrating parts to be used in the facility to the Ministry. The Domestic Component Committee has the discretion to do inspections on the manufacturing sites of the components/integrating parts to be used. Furthermore, in cases where the domestic component rate is different in the units located in a facility, the payment can be made according to the lowest domestic component rate.
Who Can Benefit From YADF?
The Regulation on Domestic Component does not specify a range of eligible beneficiaries, but it requires the applicant to:
- be engaged in electricity generation
- use locally-produced components in the electricity generation facility.
Apart from the above conditions, there seems to be another requirement introduced by the 2020 amendment for the electricity generation facilities using domestic components to benefit from the incentive. It is alleged that the facilities can only benefit from YADF as long as they are within the scope of YEKDEM. This allegation is based on the wording of the provision that says if the components used in the generation facilities are manufactured in the country, the prices specified in List II (showing the domestic contribution prices) shall be added to the prices specified in List I (showing the feed-in tariffs used by those engaged in electricity generation activities based on renewable energy sources). With the 2020 amendment, the procedure to add the domestic contribution prices in List II to the prices in List I was not envisaged for electricity generation facilities that will be put into operation after 30/6/2021.
According to our evaluations, we interpret the provisions differently. In case an electricity generating facility is a beneficiary of YEKDEM, and it also uses domestic components, then the relevant YADF will eventually be added to its feed-in tariff in terms of mathematical terms. However, it should not be interpreted as meaning that only YEKDEM beneficiaries will be able to also benefit from domestic contribution prices. That being said, there is another controversial provision set out in Temporary Article 7 stating, "Legal entities to which capacity is allocated with zero or less than zero bid price within the scope of competitions held before the effective date of this article cannot benefit from domestic contribution prices."
In order to understand Temporary Article 7, one must first clarify what does "zero or less than zero bid price" means. To this end, it must be first stated that tenders are held for the allocation of wind power plants. In return for the license to be obtained, the project owner promises to provide the electricity to be sold at the lowest price during the first ten years of the 49-year license period. The lowest price here actually corresponds to the purchase guarantee fee; feed-in tariff provided for the electricity generation based on renewable energy resources. Those who bid a zero or less than zero price offer to sell the electricity not at a fixed price but at a price indexed to the market. In the case of those who offer a plus price, they have guaranteed to sell the electricity they will produce at a fixed price within the first ten years after the wind power plant is operational.
In light of the above, the electricity generator that gives a zero or less than zero bid price means that it cannot necessarily benefit from YEKDEM. However, it was not regulated, in the provisions on the date of the competition, that one would not benefit from the domestic contribution prices either if YEKDEM were not applicable. For the sake of clarification, the following amendment was made: Legal entities to which capacity is allocated with zero or less than zero bid price within the scope of competitions held before the effective date of this article cannot benefit from domestic contribution prices.
Finally yet importantly, it should be noted that there is no provision neither in Renewable Energy Law nor in The Regulation on Domestic Component explicitly stating that the facilities can only benefit from YADF as long as they are within the scope of YEKDEM.
Calculation of YADF
The contribution price to be paid per electricity generation facility that entered the operation before 30.6.2021 and after 30.6.2021 are calculated with the formula stated in the Regulation. The factors affecting the contribution price to be paid are the ratio of the integrating part in the component and the number of locally manufactured integrating parts in the component.
YADF is calculated separately as US Dollar cents/kWh or Turkish Lira cents/kWh for each electricity generation facility. In other words, it must be noted that the facilities that started their operations before 30.06.2021 will be paid in US Dollars, whereas the facilities that will start their operation after 30.06.2021 will be paid in Turkish Liras. The applicant will be able to benefit from the YADF, calculated in accordance with the formula demonstrated in the Regulation, for a period of 5 years from the date of the first operation of the electricity generation facility, on a calendar year basis and until the last period determined by, Energy Market Regulatory Authority ("EMRA").
Obligations of the Applicant in case of a Modification in the Electricity Generator Facility
Whenever a modernization, renewal, or replacement process happens in the facility, there is a notification burden on the applicant, who is benefiting from YADF. The applicant must notify the Ministry about the manufacturing process of the component/integrating part and its assembly into the facility at the initial stage. Otherwise, the applicant will not benefit from YADF for the relevant component/integrating part. Furthermore, EMRA is notified in order to take action and to repay the paid amounts with interest.
Application and Evaluation of YADF
The applicant who wants to benefit from YADF in the next calendar year for the specified components must submit the application until 1 December of the current year to the Ministry. Within ten days at the latest from the date of submission of the correct documents, after the examination made by the Ministry, YADF is sent to the applicant's registered e-mail address and EMRA.
Within 180 days from the date of submission to EMRA, the first inspection on-site of the electricity generation facility is carried out. If the component/integrating part is not assembled in the power generation facility, the report is drawn up negatively. In case of a negative assessment, the applicant does not benefit from YADF for the relevant component/integrating part. The Ministry, both at the component/integrating part manufacturer and at the electricity generation facility, can carry out inspections during the period of benefiting from the YADF.
With the amendments made in December 2020 in Renewable Energy Law, a provision that has a retrospective nature was introduced. Accordingly, legal entities to which capacity is allocated with zero or less than zero bid price within the scope of tenders held before the effective date of the article cannot benefit from domestic contribution prices.
The Relationship between the International Trade Rules and Incentives10
The international trade system prohibits the states from discriminating between imported and local products. Whenever government incentives are evaluated, it is impossible not to mention the General Agreement on Tariffs and Trade ("GATT"), which is considered to be the heart of the World Trade Organization ("WTO") and restricts member states' capacity to limit imports11. On the one hand, GATT aims to liberalize trade, but on the other hand, it also leaves possibilities for states to implement the domestic incentive regimes they desire. In this regard Article III/4 states that the imported products shall be accorded the same treatment with the like products of national origin in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use.
In light of their internal policies, governments are willingly creating funds for the development of certain sectors via tax deductions, incentives, or direct/indirect transfer of resources to companies. Although each sovereign state has the power to determine its own public policy, WTO member states limit this sovereignty by the agreement they sign, namely the Agreement on Subsidies and Countervailing Measures ("SCM"). SCM aims to prevent damaging trade dynamics by refraining WTO members from diverting their own resources to companies. As per Article 3 of the SCM, two types of incentives are prohibited in any form:
- subsidies contingent upon export performance
- subsidies contingent upon the use of domestic over imported goods.
If an incentive is given that includes the obligation to export or use domestic products, the incentive may be considered contrary to SCM without any further evaluation. In line with the WTO's promotion of free trade between its members, the goal of the SCM is to deter subsidies, which undermines foreign competitors. Therefore, it should be noted that there is a risk the incentives given to domestic components used in renewable energy power plants may be in violation of the international trade system. WTO's Dispute Settlement Body works as trade dispute panel between states, therefore the trend seen in decisions in relation to local measures supporting renewable energy has significant importance in this paper12. In line with the global progress towards low carbon energy generation, governments embrace "trade restrictive measures", especially domestic content conditions and subsidies in order to support a local renewable energy sector13. Although WTO law does not particularly focused on energy sector, WTO Dispute Settlement Body have hosted legal challenges against these provisions and restrictive measures.
Within the meaning of subsidiaries, there are three fundamental categories:
- investment support
- price support
Feed-in tariffs which provides minimum guaranteed price for electricity generated in renewable energy facilities are considered within the scope of price support. The local content requirements, mentioned in this paper as domestic components, promoting domestic competition necessitates certain percentage of domestically manufactured components to be used in the facilities in order to be eligible for public incentives. In US — Renewable Energy14 case it was decided that "all of the measures15 at issue are inconsistent with Article III/4 of the GATT because they provide an advantage for the use of domestic products, which amounts to less favorable treatment for like imported products."16
In relation to an older case, namely Canada – Renewable Energy17 Japan complained about "Canada's measures relating to domestic content requirements in the feed-in tariff program"18. Japan claimed that, inter alia, the measures in question "accord less favorable treatment to imported equipment than that accorded to like products originating in Ontario"19, therefore are inconsistent with the obligations under Article III/4 of the GATT. Japan also put forward that a subsidy granted under the measures appears to be provided "contingent ... upon the use of domestic over imported goods", which is prohibited under Articles 3 of the SCM. WTO Dispute Settlement Body (the Panel) upheld Japan's claims under Article III/4 of the GATT. As per subsidy claims under Articles 3 of the SCM, there was no consensus within the Panel but the majority agreed on the fact that the complainant had failed to establish the existence of a subsidy.
In this article, we tried to shed light on the incentives for the use of domestic components in energy generation. It is obvious that the public policies developed in the energy sector in Turkey, as in the rest of the world, are trying to accustom to the global shifts. We see that the legal infrastructure and regulations have been subject to structural changes, not only to protect the investment environment and but also to strengthen energy independence.
Electricity generation from renewable energy sources is encouraged in many countries in terms of reducing foreign dependency and being sustainable with own resources. In this context, important changes were made by the introduction of the Regulation on Domestic Component in Turkish renewable energy policy. It is critical for Turkey, which is a crucial trade partner for the EU and a WTO member, to reduce its carbon emissions and turn to renewable energy. However, while supporting the use of domestic components in the construction of renewable energy production facilities, the international trade rules must be kept in mind!
1. Vision 2050 The Future of Canada's Electricity System, Canadian Electiricity Association, p. 25, https://electricity.ca/wp-content/uploads/2014/03/Vision2050.pdf , accessed on 16.06.2021
2. https://www.eia.gov/energyexplained/renewable-sources/incentives.php , accessed on 16.06.2021
3. İpek Günüşen Varlık, Ahmet Yılmaz, Türkiye Ekonomisinde Yenilenebilir Enerji Projelerinin Gerçekleştirilmesinde Sorunlar ve Çözüm Önerileri, Finans Politik & Ekonomik Yorumlar, 2017, V. 54, N. 623, 51-62, p. 56
4. Olay Yılmaz, Hakan Hotunluoğlu, Yenilenebilir Enerjiye Yönelik Teşvikler ve Türkiye (Incentives for Renewable Energy and Turkey), Adnan Menderes Üniversitesi Sosyal Bilimler Enstitüsü Dergisi, 2015, Vol. 2, No. 2, pp. 74-97, p. 78.
5. https://www.mfa.gov.tr/turkiye_nin-enerji-stratejisi.tr.mfa, accessed on 16.06.2021
6. Türkiye Sınai Kalkınma Bankası, Enerji Görünümü 2020, p. 14, https://www.tskb.com.tr/i/assets/document/pdf/enerji-sektor-gorunumu-2020.pdf accessed on 02.09.2021
7. Türkiye Sınai Kalkınma Bankası, Enerji Görünümü 2020, p. 30, https://www.tskb.com.tr/i/assets/document/pdf/enerji-sektor-gorunumu-2020.pdf accessed on 02.09.2021
9. Please see "other conditions column" in Annex-2 of the Regulation for the aforementioned certain parts/processes, https://www.resmigazete.gov.tr/eskiler/2021/05/20210528-1-1.pdf, accessed on 02.09.2021.
10. The relationship between the subsidies and WTO law will not be discussed in detail it deserves within the scope of this study due to limited space but the paper would be missing if it were not pointed out.
11. Virginia R. Hildreth, Renewable Energy Subsidies and the GATT, Chicago Journal of International Law, 2014, p. 709, https://chicagounbound.uchicago.edu/cgi/viewcontent.cgi?article=1395&context=cjil, accessed on 02.09.2021.
12. Angelica Rutherford, The Applicability of the Law of the WTO to Green Energy Security in Energy Security and Green Energy, International Law and Economics, pp 103-139.
14. DS510: United States — Certain Measures Relating to the Renewable Energy Sector
15. Financial incentives granted under
various renewable energy programs in several States (Washington,
California, Montana, Connecticut, Michigan, Delaware and Minnesota)
for the purchase, installation, and use of
"made-in-state" renewable energy systems and related
https://www.wto.org/english/tratop_e/dispu_e/cases_e/1pagesum_e/ds510sum_e.pdf, accessed on 28.09.2021.
16. https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds510_e.htm, accessed on 09.09.2021.
17. DS412: Canada — Certain Measures Affecting the Renewable Energy Generation Sector
18. https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds412_e.htm, accessed on 28.09.2021.
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.