Renewable Energy Legal Survey: Can Turkey Hit the Targets?

Transcription

1 233 Renewable Energy Legal Survey: Can Turkey Hit the Targets? by JONATHAN W. BLYTHE, NIHAN USLU & ipek TOSUN* ABSTRACT As a candidate to join the European Union, Turkey is still working to comply with the EU requirements. Energy is one of the most crucial chapters in the EU acquis, therefore, with the support of the European Bank for Reconstruction and Development (EBRD), the Turkish Ministry of Energy and Natural Resources (MENR) has developed Turkey s first National Renewable Energy Action Plan (NREAP) for the period of in line with the EU s Renewable Energy Directives. In parallel, the MENR is seeking to improve the attractiveness of the electricity market from an investor s perspective and establish a more liberalized market structure. This article aims to review the legal steps necessary to meet 2023 targets set forth by the NREAP as well as analyse the current status of the incentives for renewable energy sources and considers what needs to be done to improve investor attractiveness. I. INTRODUCTION The Turkish economy has experienced remarkable growth in the last decade. As a result the demand of industry and households for energy has increased rapidly. 1 Domestic hydro-carbon production has remained low due to lack of resources, while energy imports have soared. Presently the Turkish economy imports 98% of its oil and gas requirements, and local energy production is still mainly based on fossil fuels. In order to mitigate its dependency on imported fossil fuels, there has been an effort to develop other sources and attain a sustainable energy model. Within the scope of the NREAP, 2 the MENR has determined targets and entered into certain commitments in relation to the usage and promotion of renewable energy sources. This article reviews the legal framework of this initiative. In line with many continental jurisdictions, the legal basis for all electricity production is found in the relevant electricity market laws and is license based. Licenses * Jonathan W. Blythe is a Partner in Senguler Law Firm. He has been involved in the Turkish energy sector for many years advising both State and private sector players. Nihan Uslu is an associate at Senguler Law Firm, a graduate of Istanbul University Law School and obtained her LL.M. degree from Brunel University. She is qualified in Turkey. Ipek Tosun Olgac is an associate at Senguler Law Firm, a graduate of Maltepe University and obtained her LLM degree from Marmara University. She is qualified in Turkey. 1 According to the World Bank Group the energy demand of Turkey increased by nearly 60% between 2002 and 2010 (< 2 < Turkey.PDF> TURKISH COMMERCIAL LAW REVIEW, Vol. 1, No. 3, October 2015

2 234 The Turkish Commercial Law Review Volume 1 Issue 3 October 2015 need to be obtained by suitably qualified entities from the industry regulator, the Energy Markets Regulatory Authority (EMRA). II TARGETS AND CURRENT POSITION A Snapshot of Proposed Renewable Energy Production: According to the NREAP, Turkey plans to generate 30% (127.3 Terawatt Hours (TWh)) of its generated electricity from renewable sources by Turkey further aims to have 10% of its transport sector energy requirements come from renewable energy sources. 3 In 2013, the renewable energy share of electricity production was 29%, however by 2014 this amount decreased to 21%. This was mainly due to a lack of rainfall which affected hydro energy production. Electricity demand in Turkey is expected to increase significantly as a result of anticipated economic development. According to the NREAP electricity consumption was 194 TWh in Consumption increased to 246 TWh in 2013 and 262 TWh in 2014, and is forecast to reach 424 TWh by 2023 a 72% increase compared to the figures for Target production figures for 2023 published by the NREAP are set out below with a comparison against 2013 figures: 4 Technology Installed capacity (MW) Electricity generation (GWh) Increase (%) Increase (%) Hydro 22,289 34, ,420 91, Wind 2,759 20, ,558 50, Geothermal 310 1, ,364 5, Solar 0 5, ,000 - Biomass 224 1, ,171 4, National Renewable Energy Action Plan for Turkey, Turkish Ministry of Energy and Natural Resources, December 2014, page 8. 4 NREAP, page 18.

3 Renewable Energy Legal Survey: Can Turkey Hit the Targets? 235 According to the records of the state-owned Electricity Generation Company 5 (Elektrik Üretim Anonim Şirketi), as of 31 May 2015 the total installed capacity and total number of plants, with a breakdown showing source, are as follows: As of 31 May 2015 Type of the Source Installed Capacity (MW) Contribution (%) Number of Power Plants Fuel-Oil + Asphaltide + Diesel Oil Coal + brown coal 8, Imported Coal 6, Natural Gas + Liquidated Natural Gas 21, Hazardous waste + Pyrolytic Oil Multi Fuels (Solid and Liquid) Multi Fuels (Liquid and Gas) 4, Geothermal Hydraulic with dam 17, Hydraulic with river 7, Wind 3, Solar (without license) Total 71, ,202 As can be seen from the figures in the above table, in order to reach the targets set for renewable source generation by 2023, there should be a significant increase in production from renewable sources in the upcoming years. For these purposes several incentives are to be introduced to encourage the use of renewable sources. III. INCENTIVES AND THE RENEWABLE ENERGY SUPPORT MECHANISM An Overview of the Current Incentive Regime for Renewables The first steps were taken back in 2005 with the Law on Usage of Renewable Energy Sources in Electricity Production (Renewable Energy Law). 6 This law established the creation of a renewable energy resource certificate (RER Certificate) (YEK Belgesi). 5 < 6 Published in the Official Gazette dated 18 May 2005, Law No

4 236 The Turkish Commercial Law Review Volume 1 Issue 3 October 2015 This enables facilities which generate electricity from renewable energy resources to be granted the RER Certificate which entitles them to benefit from the incentives provided by the Renewable Energy Law (RER Support Mechanism). The companies which participate in RER Support Mechanism can benefit from the following: 7 1 Purchase Guarantee: There is an indirect obligation for electricity distribution companies to purchase electricity which is produced with the benefit of the RER Support Mechanism (RER Electricity). To be more specific, the Energy Stock Market (ESM) calculates the total amount of RER Electricity sold into the electricity distribution system (Grid) by each RER Electricity producer according to the relevant renewable energy tariffs (RER Electricity Cost). 8 The RER Electricity Cost is collected from each distribution company in proportion to the total renewable electrical energy amount sold by that company. This is then paid to each RER Electricity producer according to the amount supplied to the Grid. 2 Price Guarantee: The following tariffs shall be applicable for the renewable energy companies which commence operations before 31 December 2020: Type of generation facility producing renewable energy Prices to apply (USD cent/ kwh) a. Hydroelectric power plants 7.3 b. Wind power plants 7.3 c. Geothermal plants 10.5 d. Biomass power plants (including landfill gas) 13.3 e. Solar power plants 13.3 The guaranteed prices and the terms which will be applicable for the power plants that commence operations after 31 December 2020 shall be determined by the Decree of Council of Ministers, however such prices cannot exceed the prices stated above. 3 Incentive for Usage of Domestic Equipment: The Renewable Energy Law also provides an additional incentive for companies which commence operation before 31 December 2020 and use equipment produced in Turkey. Such additional incentives will be available for five years from the commencement date of operations and apply to payment for energy produced from renewable energy sources by adding the increments listed below to the guaranteed prices specified above. 7 Ibid. 8 See Section b). These tariffs are higher than other electricity prices.

5 Renewable Energy Legal Survey: Can Turkey Hit the Targets? 237 Type of generation plant Components produced in Turkey Additional price (USD cent/kwh) A- Hydroelectric power plants 1. Turbine Generator and power 1.0 electronics 1. Blade 0.8 B- Plant generating electricity from wind energy C- Plant generating electricity from photovoltaic (PV) solar energy 2. Generator and power 1.0 electronics 3. Turbine power Entire mechanical components 1.3 in rotor and nacelle groups (excluding payments for wing group and generator and power electronics) 1. Production of PV panel 0.8 integration and solar structural mechanics 2. PV modules Cells constituting the PV 3.5 modules 4. Inverter Material on the PV module that 0.5 focuses solar ray 1. Radiation collection tube Reflector surface sheet Solar tracing system 0.6 D- Plant generating electricity from condensed solar energy 4. Mechanical parts of the heat 1.3 storage system 5. Mechanical parts of the tower 2.4 steamer collecting solar rays 6. Stirling engine Panel integration and structural 0.6 mechanics of the solar panel

6 238 The Turkish Commercial Law Review Volume 1 Issue 3 October Fluid-bed steam boiler Fluid or gas-run steam boiler 0.4 E- Plant generating electricity from biomass energy 3. Gasification and gas cleaning 0.6 group 4. Steam or gas turbine Internal combustion or Stirling 0.9 engine 6. Generator and power 0.5 electronics 7. Co-generation system Steam or gas turbine 1.3 F- Plant generating electricity from geothermal energy 2. Generator and power electronics 3. Steam injector or vacuum compressor Tax Advantages: Pursuant to the Energy Markets Law 9 (EML), agreements that are executed after 26 June 2003 related to water usage and operation principles 10 and that do not require repayment of joint facility investment amounts shall be exempt from tax and duties Priority for Connection to the System: According to the EML, when there is competition among parties wishing to connect to the Grid, the Turkish Electricity Transmission Company (TEİAS) and the electricity distribution license holders must give priority to RER Electricity. In other words, where there are multiple applications from the same area seeking connection to the Grid via the same interconnector, EMRA considers the energy source and gives priority to RER Electricity. 6 License Fee Advantage: Those entities producing electricity from renewables which apply for a generation license from the Energy Market Regulatory Authority 9 Published in the Official Gazette dated 14 March 2013, Law No Water usage agreement and operation principles agreement must be signed between the hydro power producer and the State Hydraulic Works General Directorate (DSI) to determine the operation principles and the amounts to be paid to DSI. 11 The facilities which have functions in addition to electricity production (such as procurement of irrigation water or drinking water) are called joint facilities and producers of hydro power benefiting from joint facilities are obliged to pay DSI for their investment in relation to use of the joint facility for activities other than the hydro power production. The calculation method for payment of joint facility investment is regulated under the Law No

7 Renewable Energy Legal Survey: Can Turkey Hit the Targets? 239 (EMRA) are required to pay only 10% of the license fee. Furthermore, such companies are also exempt from the annual license fee for a period of eight years after the completion of the construction of their production facilities. 7 Small Scale Investment Benefits: Service fees shall not be applicable for the legal entities and real persons which construct generation facilities to meet their own energy requirements from renewable energy sources, provided these do not exceed 1000 KWs of installed capacity. The State Hydraulic Works General Directorate or Electricity Affairs General Directorate need to examine and confirm the preparation of the final project and the master plan. In addition, facilities which are established for research, development and the production of solar batteries and concentrator units may receive the same advantages at the discretion of the of Council of Ministers. 8 Utilization of Land: According to the Renewable Energy Law, where forests and lands under the ownership of the State or Treasury are used for the generation of electricity from renewable sources, such lands shall be leased to or a right of usufruct shall be granted to the relevant entities. An 85% discount shall be applicable to the rental on such land granted during the investment period for ten years after commencement of the operations provided the facilities are commissioned by the end of Where the relevant land falls within the scope of the Pasture Law, 12 the designated purpose of arable lands is changed and ownership passes to the Treasury to enable leasing or the grant of the right of usufruct to RER Certificate holders. Furthermore, electricity generation facilities based on renewable energy resources may be constructed in national parks, nature parks, natural conservation zones, protected forests, wildlife protection areas and special environmental protection areas with the approval of the relevant Ministries 13 or the relevant general directorates, as the case may be Additional Capacity Advantage: If full capacity as set out in the license is not reached due to technical constraints, RER Certificate holders are entitled to construct additional capacity provided that such additional capacity is built within the area specified in their licenses and the power transferred to the transmission system does not exceed the installed capacity granted by their main license. IV. RENEWABLE ENERGY LICENSING REQUIREMENTS The Licensing Regime Pre-production: Like all electricity generating activities in Turkey, the legal basis for renewable electricity generation is the relevant license. This must be obtained from EMRA for each generation 12 Published in the Official Gazette dated 28 February 1998, Law No The relevant ministry will depend on the designation of land to be used by the investor. e.g. if it is forestry land then the approval should come from Ministry of Forestry and Water Management. 14 The same principle in footnote 13 applies for the relevant directorates.

8 240 The Turkish Commercial Law Review Volume 1 Issue 3 October 2015 facility pursuant to the License Regulation. 15 No activity can be carried out without the relevant license. According to the License Regulation electricity generation companies are required to obtain a pre-license from EMRA which allows time for the licensee to fulfil the following obligations: Acquiring ownership or obtaining the right of usufruct for the site where the generation plant will be installed; Obtaining environmental impact assessment (EIA) affirmative approval or, where EIA is not required, approval from the Ministry of Environment and Urban Planning; Obtaining construction permit or exemption certificate as per the Construction Law as well as approval of geotechnical and geological reports for the construction projects; 16 Applying to the Turkish Electricity Transmission Company (TEİAS) in order to sign a system connection agreement and, for wind and solar projects, signing the agreement with TEİAS regarding the contribution fee; 17 For hydro projects, signing of a water usage agreement with the State Hydraulic Works General Directorate; Obtaining approval for development plans; and Signing an agreement for the utilization of geothermal resources with MİGEM in the case of geothermal project participants. 18 In order to obtain a pre-license, the investors planning to produce electricity from solar or wind energy are required to participate in a tender initiated by the TEİAS to be entitled to connect to the system (the grid). After the pre-license application is filed, EMRA determines the solar and wind projects that are capable of being connected to the grid (in other words, projects which are entitled to participate in the tender) and announces such projects for each related grid area. The applicants submit their bids to TEİAS in the form as set out in the Regulation on the Tender for Pre-License Application to Establish Wind and Solar Power Plants in the sealed tender letter, denominating their bids in Turkish Lira. 19 The company which offers the highest price per MW in its bid gains the right to connect to the grid. The successful bidders in the tenders are granted a pre-license during the pre-construction stage, which will be replaced by a permanent license at the beginning of construction. 15 Published in the Official Gazette dated 2 November 2013, No Published in the Official Gazette dated 9 May 1985, No The contribution fee is a kind of payment to be made to the TEİAS by applicants who will invest in solar or wind projects. The contribution fee is calculated based on the MW invested and will be payable for the applicants within a maximum of three years from the date that the first unit of the project commences operations. 18 MİGEM is the General Directorate of Mining Affairs. 19 Published in the Official Gazette dated 6 December 2013, No

9 Renewable Energy Legal Survey: Can Turkey Hit the Targets? 241 A pre-license is granted by EMRA for a period up to a maximum of twenty four months. On being granted a pre-license, the successful applicant must provide a letter of guarantee to EMRA, representing a financial penalty calculated in proportion to the installed capacity of the envisaged project. This sum becomes payable by the pre-licensee in the event that it cannot fulfil the obligations to be performed during the pre-license period. Furthermore, companies applying for the pre-license are required to comply with the minimum capital requirements as set forth under the License Regulation. 20 During the pre-license period any change in the shareholding structure of the applicant company is forbidden. It is also worthwhile to note that there are no market entry barriers or restrictions on foreign investors, nor are there specific regulations that are applicable only to foreign energy companies seeking to obtain a generation license. In short, there is a level playing field. V. THE OBLIGATIONS OF PRODUCERS WITH FULL LICENSES Production Phase Points to Note: It should be noted that certain obligations apply to production companies after they obtain their full production license. Annual Fee Exemption and Reports: upon obtaining a generation license, an annual license fee is required to be paid to EMRA based on the installed capacity of the power plant. However, as stated above, RER Electricity producers are exempt from the annual license fee for a period of eight years after the completion of the construction of the production facility. Producers are also required to prepare and submit two progress reports and an annual activity report to EMRA each year. The Electricity Market Law monitors share transfers/change of control in those legal entities which obtain an electricity generation license. In this regard, the direct or indirect transfer of 10% or more shares of generation license holders is subject to the prior approval of EMRA. Furthermore, the aggregate market share of a private sector generation company together with its affiliates is limited to 20% of the total electricity generation of the previous year in Turkey. This is to prevent market domination. These controls apply to all generation companies, including RER Electricity producers. As a very recent concept, the generation license holders are required to register with the Energy Stock Market (Enerji Piyasaları Isletme AS) which replaced the Market Conciliation Centre and conducts the operation of wholesale electricity sales as well as setting the prices for the market. 20 According to the License Regulation the capital of the applicant should be at least 5% of the total investment in the proposal.

10 242 The Turkish Commercial Law Review Volume 1 Issue 3 October 2015 Unlicensed Generation: VI. OPPORTUNITY TO GENERATE ELECTRICITY WITHOUT A LICENSE According to the Regulation on Electricity Generation without a License, electricity generation facilities with an installed capacity lower than 1 MW are exempt from the requirement to obtain a license from EMRA. 21 The Council of Ministers has the authority to increase this capacity limit. Furthermore, unlike the licensed production facilities, there is no requirement of company formation for license exempt generation facilities. Moreover, in case license exempt generation facilities produce more electricity than their requirements, provided the total generation is less than 1 MW per annum then they can sell to third parties. In this case such unlicensed electricity generation facilities will benefit from the tariffs stated above at III (b) and the incentives granted for usage of domestic equipment stated at III (c). It is interesting to note that as of September 2015, approximately 1285 KW electricity was produced by producers without a license and a significant amount of that production came from solar power producers. 22 VII. ISSUES NEEDING RESOLUTION TO INCREASE THE ATTRACTIVENESS OF THE RENEWABLE ENERGY MARKET Outstanding Issues Despite the legal reforms and the incentives set out above, the generation of electricity from renewable sources has not yet demonstrated the growth as a sector in Turkey that was previously hoped for. Whilst there are laws and regulations in place, there is a lack of coordination among state institutions coupled with a lack of transparency in the process. Added to this is the long and complicated bureaucratic procedure encountered when seeking to obtain licenses and the inappropriate amount of discretion given to some officials is amongst the clearly identifiable obstacles preventing rapid development of the renewable energy market. 23 Obtaining a generation license, especially for solar and wind projects, takes far too long and requires the approval of several administrative bodies, some of which are subject to political manipulation. Land allocation sometimes requires expropriation which is a complicated process and creates uncertainty regarding the estimated project costs and duration of the investment. 24 We are of the opinion that 21 Published in the Official Gazette dated 21 June 2011, No Approved Projects List dated 7 September 2015, published by Turkey Electricity Distribution Joint Stock Company (< 23 In addition to EMRA, several ministries and other governmental authorities (such as Ministry of Energy, Ministry of Forestry, General Directorate of Meteorological Works, General Directorate of State Hydraulic Works, Secretary General of Special Provincial Administration) are involved in the license process. 24 There is often a requirement for the State to raise a court action to acquire land. This can take years. However in some sectors such as energy pipelines the State can use accelerated processes to acquire land and thus bypass potential problems.

11 Renewable Energy Legal Survey: Can Turkey Hit the Targets? 243 centralization of the authority for granting the key license is essential for ease of process for the investors. 25 In addition, many industry observers suggest that the incentives granted to renewable energy sourced electricity production are not sufficient in comparison with those offered by neighbouring, competing countries. It should be noted that the current tariffs under the Renewable Law are criticized as being much lower than those found in EU member states. If Turkey truly wants to attract investment then it must at least meet that standard. Another criticism regards the provision which provides incentives for the use of domestically manufactured equipment. Whilst the incentive promotes usage of domestically manufactured equipment, the State does not provide any support to the manufacturers of this equipment, many components of which come from outside Turkey. R&D support is urgently needed to assist the local industry. One of the obstacles that solar and wind power investors face is the requirement they participating in a tender for connecting to the Grid and obtaining a pre-license. Following the tender, the company which offers the highest price per MW gains the right to connect to the Grid, but this merely makes the economics of the project more difficult and increases the per unit cost of electricity production. The tender process on a price basis should be replaced by assessment according to different criteria, for example based on reliability and sustainability factors. Furthermore, one of the most supportive actions that could be taken by the government would be to reduce Value Added Tax, at least for a certain period. This has been done for oil and gas exploration, which is fully exempt. There has been no such exemption for renewable energy equipment such as solar panels. Implementing this would make it more likely that RER Electricity production hits the 2023 targets. Finally, frequent changes in energy related legislation have decreased market predictability for investors and the period of twenty-four months for the pre-license period is too short to complete the obligations required. VIII. CONCLUSION Turkey has managed to take some steps towards developing a renewable energy sector, but there is some way to go before the sector can be described as attractive to foreign investment. With such a high reliance on imported fossil fuel sourced energy it is a no brainer to suggest that Turkey should be addressing the issues which have been identified as hindrances to effective growth. Whilst on the face of it there is a reasonable regulatory framework, the implementation lacks efficiency or transparency and needs to be staffed by personnel who know the sector and can provide coordinated solutions to the problems faced by investors. In addition the current incentives need to be made more attractive and the process of land acquisition or transfer needs to meet the industry s needs more effectively. 25 It would make sense to give authority to one entity, most likely the Renewable Energy Directorate to be the single point for authorisations. If all the relevant permissions were taken from the other ministries by the directory, then investors would only need to deal with one point of contact.

12 244 The Turkish Commercial Law Review Volume 1 Issue 3 October 2015 There is no doubt that Turkey has very significant potential with regard to renewable energy sources. In particular, wind, hydro and solar energy are ripe for development and as the NREAP suggests the state should not delay implementation of policies to fully realise potentials. If this could be done successfully, the dependency of Turkey s energy market on fossil fuels could be reduced and the domestic production of clean energy increased. At one point in the 1990s Turkey was producing 45% of its energy from hydro power. With a commercially realistic and coordinated approach, there is no reason why Turkey cannot achieve similar figures or better by the third decade of this millennium.