TURKEY COUNTRY PROFILE 77

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1 TURKEY COUNTRY PROFILE 77 Overview Turkey has a population of approximately million, with a GDP around USD 794,228 million. lii The total primary energy supply in 2007 was Mtoe (million tons of oil equivalent), of which 3.1% is hydro power, 29.3% is coal/peat, 5.0% is combustible renewable and waste (including biomass, biogas and waste), 30.4% is natural gas, 30.7% is oil and 1.5% is geothermal/solar/wind. Net imports are around Mtoe. CO 2 emissions are (measured as Mt of CO 2 ). liii Turkey joined the European Economic Commission as an associate member in 1992 and signed the European Union (EU) Customs Union agreement in Turkey is an observer party to the Energy Community Treaty (EcT). 1. Institutional structure The Ministry of Energy and Natural Resources (MENR) is charged with primary responsibility over the energy sector; regulatory implementation is the responsibility of the Turkish Energy Market Regulatory Authority (EMRA), which was established in 2001 pursuant to Electricity Market Law No. 4628, last substantially amended in The EMRA is an autonomous legal entity responsible for regulating and monitoring electricity, natural gas, petroleum and liquid petroleum gas (LPG) markets. It is a multimember body made up of nine commissioners including one chairman and one deputy chairman, with 399 staff members (95% of them having higher education). Board members are selected and appointed by the Council of Ministers among candidates that have at least completed a four-year academic programme in relevant subjects. Moreover, at least ten years of experience in public or private sector, as well as having excelled themselves in their professions, are required. The term of office for the chairman and members of the Board is six years and Board members may be re-elected. The members of the Board cannot be dismissed from the office before the expiry of their terms of office, except for: gross violation of job requirements set forth in Electricity Law, criminal sentence connected to the duties assigned to them, lost of eligibility to be a civil servant, incapacity for a period exceeding three months due to illness or any other physical impediment. The members of the Board cannot accept any duty in public or private institutions during their membership. Within two years from the termination of their terms of office, members of the Board cannot be employed by, or hold shares in, any entity regulated by the EMRA. Besides, they cannot have any direct or indirect relation which might yield an income from any such legal entity or its affiliates, and cannot deal with trading of electricity, natural gas, petroleum and LPG. The EMRA is mostly financed through: fees collected from licence applications, renewals, modifications, licence copies and annual licence fees; 10% of the administrative fines imposed to regulated entities and power transmission surcharges which are equal to one percent of the transmission tariff at most. The yearly budget is approved by the Parliament and the total budget for year 2009 is TRY million Information herein is drawn primarily from EMRA s answers to questionnaires provided by this project and from its 2008 Annual Report. 78 As of October 2009, TRY million is equivalent to approximately US$ million, or EUR million. 164

2 The EMRA sets up tariffs methodology and approves tariff levels, 79 issues licences, establishes quality services standards and deals with matters such as congestion management and consumer complaints. The EMRA regularly cooperates with the Turkish Competition Authority in matters related to the energy sector. EMRA s decisions may be appealed to the State Council. 2. Electricity sector a. Market framework As of November 2008, the Energy Community Secretariat reported full compliance with EU Directive 2003/54/EC, except as to cross-border trade. In 1984, the law on Authorising the Institutions Other than Turkish Electricity Authority with Power Generation, Transmission, Distribution and Trade (Law 3096) abolished the legal monopoly of the Turkish Electricity Authority (TEK), by allowing private companies to engage in power businesses. TEK was incorporated and divided into two organisations generation, transmission and wholesale supply (TEAS) and distribution (TEDAS) in order to prepare it for privatisation. In February 2001, the new Electricity Market Law (Law 4628) mandated TEAS to be legally split into three companies: TEIAS, EUAS and TETAS covering transmission, generation and wholesale trading respectively (in addition, the energy regulatory authority was established). As for 2009, EUAS, TEAS electricity generation successor which is still statecontrolled, retains a market share of about 56% on capacity basis. TEIAS, which is completely state-owned, is responsible for transmission and for nondiscriminatory dispatch of all power plants. As the sole TSO of the country, TEIAS is not allowed to carry out any other activity apart from transmission. TETAS, TEAS trading successor, buys and sells electricity at the wholesale level, still enjoying a dominant position. Since 2004 a fairly liquid wholesale market, based on bilateral contracts and a balancing pool, has been operative; TEIAS is the market operator. A day-ahead market started as of 1 December Currently, only consumers with consumption over 480 MWh and those directly connected to the transmission network corresponding to about 49% of the overall market are eligible. According to the latest strategy announced by the government, full market opening is expected by The regulator is authorised to progressively lower the eligibility limit. In the distribution sector, starting from year 2008, regional divisions of TEDAS have been progressively privatised and currently the private sector s share in distribution is around 25%. Distribution companies may carry out retail and generation activities subject to account unbundling. The Electricity Market Law foresees that legal unbundling should be implemented by the end of Until the end of 2012 (transition period) the MENR will have the final word on tariffs levels. 165

3 b. Network access and tariffs By law TEIAS and regional distribution companies have to guarantee nondiscriminatory access to transmission and distribution networks. The EMRA is responsible for setting methodology and approving access tariffs (regulated Third Party Access, TPA). Use of system charges are paid by both generators and consumers (through their suppliers). In order to establish the market model envisaged in Law No. 4628, a grid code was adopted in January The Code sets out the rules of network access and the technical and commercial procedures for ensuring efficient operation of the transmission system as well as system stability and quality of service. As for network investment, TEIAS and distribution licensees have to assign connection priority to generation facilities that make use of domestic natural resources and renewable resources. Capacity allocation is carried out on a yearly basis. Tariffs are set up ex ante according to a pre-defined methodology and published in the Official Gazette before every tariff period. Categories of regulated tariffs are as follows: connection, transmission, distribution, average wholesale price, wholesale price for TETAS, retail supply, retail supply services and ancillary services. Access to the networks may be refused only for insufficient system capacity or justified operational reasons. The EMRA deals with disputes arising from access denial. c. Operational environment MENR is responsible for monitoring and taking necessary measures regarding security of supply. Regulator takes part in monitoring security of supply through granting licences, monitoring investments and reporting. MENR authorises the completion and start up of new generation capacity. If peak demand is not met by the installed capacity (with adequate reserve margin), a centrally organised auction is to be employed upon decision of the Council of Ministers. The preparation of the necessary legislation is under way. EMRA sets quality of service standards. As for losses and damages that may affect consumers due to a lack of quality and/or interruptions in power supply, compensation provisions are included in the transmission and distribution licences or in the supply contracts. Regional distribution companies have the role of supplier of last resort. Each year, the EMRA presents a report to Parliament, posted on its web site: Its decisions are also posted in the same website in Turkish. By law, the EMRA must hold evidentiary consultations of relevant organisations, companies and institutions for its decisions. As for foreign capital investment, the Electricity Market Law prevents foreign legal entities from acquiring a controlling share in power generation, transmission and distribution assets. The EMRA may grant TPA exemptions. 166

4 3. Gas sector a. Market framework The introduction of the Natural Gas Market Law in May 2001 (Gas Law) has replaced all previous legal frameworks. The objective of the Gas Law is to establish a financially viable, stable and transparent natural gas market through liberalisation in order to supply natural gas of good quality to the consumers in a reliable, competitive, low-cost and environment-friendly manner. Its aim is to ensure the independent regulation and supervision of the natural gas market. For those purposes, the Gas Law has introduced several restrictions, such as: no company can be a shareholder in another company operating in the same activity cross participation of companies operating in different aspects of the gas chain is strictly limited BOTA cannot enter into any new gas import contracts except LNG, until its import decreases to 20% of the annual gas consumption, and is required to decrease its share through gas contract release until it reaches the 20% threshold The Natural Gas Market Law also introduced several new general measures including: a new independent regulator responsible for all licensing activities and for supervising prices in the gas sector unbundling of importation, transmission, storage and distribution of natural gas, and privatisation of BOTA (excluding the future transmission company) privatisation of local distribution operations gradual market liberalisation from Separation of BOTA accounts regarding transmission, storage, sales and import activities was required within one year after one-year preparation period following from the passing of the new law. After 2009, BOTA is required to be legally unbundled and be restructured into trade, transmission and storage companies. This target now seems unrealistic. Currently, BOTA is the only transmission company and it still enjoys a dominant position throughout the entire gas chain (excluding distribution). However, apart from BOTA, several companies are active in the wholesale and Liquefied Natural Gas import sectors. Moreover, in accordance with the Gas Law, the EMRA has conducted tenders for city gas distribution: as of March 2009 the distribution tender process has been completed for 55 distribution zones and for 53 of them the EMRA has already issued distribution licences. b. Network access and tariffs As mentioned above, the opening of the gas market is ongoing and the EMRA is to yearly determine eligibility thresholds. According to EMRA s decision of 17 October, the eligibility threshold within the distribution regions, which is fixed at 15 million cm/year set by the tender documents, will be decreased five years after the issuance of the licence to 1 million cm/year. In addition to the aforementioned threshold, other criteria are used to allow consumers to choose 167

5 their supplier; in particular, user unions, electricity generation companies and cogeneration facilities are eligible. As for Third Party Access (TPA) to the transmission network, which according to the law has to be non-discriminatory, rules and procedures are set out in the grid code of BOTA, which was approved by the EMRA on September Capacity allocation in the transmission network is made on a yearly basis. Prorata is applied if demanded capacity exceeds maximum available capacity. Transmission and distribution companies have the obligation to connect any user upon demand, according to the criteria set by the EMRA, which is also responsible for settling disputes arising from refusal of TPA and related issues. Categories of gas regulated tariffs are as follows: transmission, distribution, connection, storage and retail supply. In particular, an entry-exit model has been adopted for transmission tariff. c. Operational environment Thanks to its geographical location, Turkey plays an important role as a gas corridor from Central Asia to the European continent. Thus, several strategic gas pipelines currently in construction are planned to cross the Turkey s territory: Nabucco project that would transport gas from the Caspian Sea to Bulgaria, Romania, Hungary and Austria, the Turkey-Greece-Italy interconnection, which would bring gas to Europe from the Caspian sea, Iran and the Middle East, and the South Europe Gas Ring Project, which would carry gas from the Caspian Sea, Middle East and Southern Mediterranean countries to Europe. The EMRA participates in the monitoring of medium and long-term supply/demand balance on the national market as well as part in the monitoring of quality and level of maintenance of the networks. In particular, transmission network investment programmes are subject to the examination and approval of the EMRA. Quality of service standards are set out in transmission and distribution licences. The Gas Law does not comprise a specific provision for the supplier of last resort; however in market practice distribution companies take on that duty. In case of licence cancellation affecting a distribution company, the EMRA takes all the measures necessary to avoid supply interruptions. 4. Renewable energy sources/energy efficiency As part of its bid for EU membership and as a result of its rapidly-growing energy demand, Turkey has in recent years introduced national legislation and adopted policies aimed at promoting energy efficiency and renewable energy. As for legislation, energy efficiency and renewable energy are regulated respectively by the Law on Energy Efficiency No of May 2007, last amended in amended July 2008; and by the Law on Use of Renewable Energy Resources for Generating Electrical Energy No issued in May 2005 and last amended in April A sector national policy has been set up in the Strategy Paper for Electricity Market and Security of Supply, approved by Higher Planning Council on 18 May Pursuant to the Renewable Energy Sources Law, the following sources currently qualify as renewable resources : wind, solar, geothermal, biomass, biogas, wave, small hydro power and current and tidal energy resources. Turkey has a big potential 168

6 5. Conclusion in producing electricity from renewable energy sources (e.g., approximately 25% of the electricity in Turkey is produced from hydroelectric power plants). It is noteworthy that waste-to-energy, which is a controversial form of renewable energy, is not included. The regulations are not tailored to each energy resource individually but as the Turkish renewable energy market develops, it is expected that specific regulations accommodating the characteristics of each generation segment will be introduced. Under the Renewable Energy Sources Law, developers that seek to generate renewable energy in Turkey must obtain from the EMRA a power generation licence under the Electricity Market Licensing Regulation and a renewable energy resource certificate (RER). RERs are valid for one year, and are issued to monitor the purchase and sale of renewable energy in the domestic and international markets. They are also issued to oversee the operation of incentives provided to developers. Under the Licensing Regulation, the EMRA is required to forward a duly filed licence application to TEIAS, and/or the relevant territorially incumbent distribution company for a technical review of the proposed plant's connection to the transmission/distribution grid. TEIAS and/or the relevant distribution company has 45 days to complete its review, and if it issues a favourable opinion, the EMRA then has 45 days from the receipt of such opinion to complete its own review. The Renewable Energy Sources Law provides a purchase guarantee coupled with a guaranteed feed price for the benefit of all RER certified producers that commence their operations before 31 December The end of 2011 deadline may be extended by the Council of Ministers provided that its decision to grant such extension is published in Turkey's Official Gazette before 31 December The benefit of the guarantees, which are granted through the RER, extends for a maximum of 10-year period. However, as stated above, each RER has a term of one year and must be renewed annually. In February 2009, Turkey ratified the Kyoto Protocol to the United Nations Framework Convention on Climate Change, following an overwhelming vote in the national parliament. Being late in participating in the Convention on Climate Change and ratifying the Kyoto Protocol, Turkey has missed the possibility of becoming a party to the protocol and benefiting from its financial tools. Turkey performs well with respect to its grouping (Group B EcT including observers), somewhat above average for electricity and considerably above average for gas. Within its Group, Turkey has an electricity sector score of relative to an EcT (including observers) average score of Turkey has a gas sector score of relative to an EcT (including observers) average of The institutional structure and the regulatory framework meet the benchmark; however progress has still to be made with respect to market opening both in the electricity and gas sectors. Turkey has one of the fastest-growing electricity markets in Europe. Electricity has become increasingly important in the industrial energy mix, although the bulk of industrial energy demand is still met by oil and coal. Despite high electricity prices (among the highest in Europe), demand has grown even faster in the residential/commercial sector, more than tripling in the past 15 years and is expected to double between 2009 and

7 Turkey s ability to attract foreign direct investment and to capitalise on its geographical position as an energy bridge to Europe will be tested in the next few years. An east-west corridor, with potential supplies from Central Asia and the Middle East would be capable of delivering further gas supplies to the European gas market. This route is attractive to many European players as a way to diversify supply to their markets. The ongoing privatisation process also offers interesting opportunities for energy investors. Electricity spider graph Turkey Note: The diagram presents the electricity sector results of Turkey, in accordance with the benchmarks and indicators identified in the assessment model. The extremity of each axis represents an optimum score of 1.0, that is, full compliance with international best practices. The fuller the web, the closer the overall electricity regulatory framework approximates international best practices. The results for Turkey are represented by the thick bold line. For comparison purposes, the shaded area presents the electricity sector average of the Group B countries. Electricity Sector - Comparative view of Group B countries (contracting parties and observers) Notes: (O) stands for observers of the Energy Community Treaty. The results for Serbia do not include Kosovo. 170

8 Gas spider graph- Turkey Note: The diagram presents the gas sector results of Turkey, in accordance with the benchmarks and indicators identified in the assessment model. The extremity of each axis represents an optimum score of 1.0, that is, full compliance with international best practices. The fuller the web, the closer the overall gas regulatory framework approximates international best practices. The results for Turkey are represented by the thick bold line. For comparison purposes, the shaded area presents the gas sector average of the Group B countries. Gas Sector - Comparative view of Group B countries (contracting parties and observers) Notes: (O) stands for observers of the Energy Community Treaty. The results for Serbia do not include Kosovo. 171