Report On The Energy Sector And Challenges It Is Facing

The last quarter of 2006 and the first half of 2007 set the scene for a number of developments in the energy sector, including the initiation and then cancellation of the privatization process concerning the electricity distribution companies and electricity generation facilities. This time frame also encompassed legislative developments concerning renewable energy as well as new steps towards the establishment of the first nuclear power plant in Turkey.

The privatization process for the State-owned electricity distribution companies was initiated by the Privatization Authority (the "PA") in August 2006. Accordingly, the subsidiaries of TEDAS, responsible for the distribution of electricity to various geographic territories, were planned to be privatized in groups. Although the bidding date for the first three distribution companies was set as 19 January 2007, the government decided to stop the procedure and postponed the privatization process to an unknown date, fearing its effects on the general elections. It was discussed among the sector’s players as well as commentators that the reason behind this decision was the potential backlash of price adjustments required to reflect the cost of electricity in full.

The privatization of certain State-owned electricity generation facilities included in the privatization program announced by the PA, which was planned to take place following the privatization of the distribution companies, was also postponed until after the elections or even after the privatization of the distribution companies. The Prime Minister declared the new target date for the privatization of distribution facilities, after certain reorganization of the assets of these companies, will be 2009.

The Electricity Market Balancing and Settlement Regulation (the "Balancing Regulation") came into effect in November 2004, with the main objective of balancing the formation of prices as well as the supply and demand in the electricity market. The Balancing Regulation foresees a "pool" mechanism operating through agreements between actors in the electricity market with excess generation and those in deficit which are both public and private entities. A few years following the application of the Balancing Regulation, the Energy Market Regulatory Authority (the "EMRA") introduced a set of draft amendments providing some fine-tuning to the Balancing Regulation in light of the practical feedback it has received. The EMRA also issued some explanations as to the methodology to be used in the application of the Balancing Regulation.

Electricity Deficit

According to sources within the electricity sector and relevant publications, the electricity generation market in Turkey has grown by 8% each year for the last three years¹. Due to this growth, Turkey is expected to experience an electricity deficit within the next few years. As per the figures provided by the World Bank, with delays in additional supply to the market, Turkey is doomed to suffer from energy shortages in 2008². Accordingly, the total electricity consumption for the year 2006 was approximately 171 billion kWh, whereas this amount is expected to be between 217 billion and 242 billion kWh for the year 2010, and between 295 and 356 for the year 2015. These statistics require urgent measures to be taken for new investment in the energy sector within the near future. The potential future bottleneck in the energy sector has inspired the government to seek alternative solutions, including those powered by renewable energy resources. On the other hand, high level State authorities have made similar declarations at different conferences stating that no serious electricity deficit is expected soon.

Following the enactment of Law No. 5346 on the Use of Renewable Energy Sources for Generation of Electrical Energy (the "Renewable Energy Law") in May 2005, investor interest in the renewable energy sector has risen distinctively, especially in relation to generation of electricity through hydro plants and wind farms. Accordingly, electricity generation through wind projects rose from 8.70 MW in 1998, and is expected to reach 206.95 MW by the end of 2007. This amount is expected to increase to 742.11 MW by the end of 2009³. Despite the rise in the numbers, the interest in renewable energy projects was hindered by the reluctance on the side of the lenders caused by uncertainty in the purchase guarantee provided by the State under the Renewable Energy Law. As a result, the government introduced a number of amendments which were enacted by Parliament on 18 April 2007.

Under the Renewable Energy Law, a Renewable Energy Certificate (the "RE Certificate") is to be granted to each party holding a generation license in relation to a renewable energy source. As a result of the recent amendments in the Renewable Energy Law, owners of retail electricity distribution licenses are obliged to purchase a percentage of their total uptake from licensed generation companies holding an RE Certificate, which were established prior to 31 December 2011 and which have been in the sector for less than ten years. The percentage of the total uptake of retail electricity distribution to be purchased from companies with an RE Certificate should be calculated considering the proportion of the energy they have sold within the previous calendar year against the total electrical energy amount which all legal entities holding retail electricity distribution licenses offered for sale in Turkey in such year.

According to the revised Renewable Energy Law, the price for electricity to be purchased under this law will be determined each year by the EMRA, based on the previous year’s average wholesale price in Turkey, which will not be less than 5 Euro Cent/kWh and more than 5.5 Euro Cent/kWh. However, in the event the electricity energy generated through renewable energy sources can be sold for a higher price in the market, the relevant company will be allowed to sell for a higher price as well. As another amendment, facilities commencing their operations prior to 2011 will benefit from a discount of 85% of the fees for the rental or use of State-owned lands for the purpose of generation facilities and grid connection for a term of ten years.

Given the possibility that the operations may be located in places with no readily-established inter-connection facilities, one of the main points of concern among the investors is the question of how the grid connections of newly-established renewable energy power plants will be ensured. As per the legislation, depending on the voltage of the electricity to be transmitted via the grid connections, the establishment of such connections is the responsibility of the State-owned electricity transmission company TEIAS or TEDAS. However, in practice, due to the time-consuming and highly bureaucratic nature of the process in establishing the necessary connections, the investors will build the grid connections themselves on behalf of the TEIAS or TEDAS under a construction contract, the consideration of which is set off against the yearly system usage fee to be paid by the investor for using the connection.

With regard to the wind-powered energy-generation plants, EMRA had set 1 March 2007 as the application deadline for all generation licenses. However, this date was later postponed to 1 October 2007⁴. It is understood that by postponing this deadline EMRA aimed to have the opportunity to evaluate the existing projects that the generation licenses have already been obtained for, to urge the owners of the already obtained licenses to action, and to see the effects of the amendments in the Renewable Energy Law.

The Turkish Parliament recently enacted Law No. 5686 on Geothermal Sources and Natural Mineral Waters (the "Geothermal Law"), which was published in the Official Gazette and came into force on 13 June 2007. The Geothermal Law mainly aims to regulate the search for, and operation of, geothermal and natural mineral water sources and the acquiring, transfer and protection of rights to be established over them. According to this law, all geothermal and mineral water sources are subject to State ownership. However, usage and operation rights may be granted to private parties upon the issuance of the relevant licenses in relation to search for sources as well as their operation. As geothermal sources are listed among the renewable energy resources under the Renewable Energy Law, obtaining one or more of these licenses constitutes another step to be fulfilled in the process of establishing a power generation plant using these sources.

Another legislative development concerning the electricity market is the Law on Establishment and Operation of Nuclear Power Plants (the "Nuclear Energy Law"), which was enacted by the Turkish Parliament on 8 May 2007, regulating the establishment of nuclear power plants and certain incentives to be granted to them. However, on 25 May 2007, the President vetoed certain articles of the Nuclear Energy Law, stating that the provisions of this law concerning the construction of nuclear power plants by private entities, and the lack of clarity on the auditing of this procedure on behalf of the Turkish Parliament, violated the Constitution.

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