Meşrutiyet Cad. No. 98 D. 10 Beyoğlu, Istanbul / Turkey Tel: Fax: A REGULATORY UPDATE. New Electricity Market Law

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1 Meşrutiyet Cad. No. 98 D. 10 Beyoğlu, Istanbul / Turkey Tel: Fax: A REGULATORY UPDATE New Electricity Market Law

2 ELECTRICITY MARKET LAW PASSED BY THE TURKISH PARLIAMENT Turkey has the vision to become an energy trading hub in the region for both physical and financial trading of energy commodities. This vision requires a strong regulatory framework which would promote the development of liberalized, transparent, and sustainable energy markets. Last year, the Ministry of Energy and Natural Resources ( Ministry ) prepared two draft laws and submitted them for public comment; one being the draft Electricity Market Law and the second one the draft law amending the Natural Gas Market Law. The draft Electricity Market Law was submitted to the Industry, Trade, Energy, Natural Resources, Information and Technology Commission of the Parliament 1 ( Commission ) in December After several amendments were made to the draft by the Commission, the draft law was submitted to the Parliament in February 2013 before it was passed by the Parliament on 14 March The Electricity Market Law No ( EML ) will enter into force following its approval by the President of the Republic 2 and its publication in the Official Gazette which is expected by the end of March 2013 unless it is vetoed by the President and sent back to the Parliament. In parallel to the vision of becoming an energy trading hub, the most crucial amendment brought by the EML is the designation of two market operators; one for spot transactions and one for derivative transactions of electricity. Although it currently only includes the electricity market and authorizes two separate entities for spot and derivative transactions rather than organizing them under one exchange, it should be considered as a good start on the path to create a comprehensive commodities exchange. Market Operation EML introduces the market operation activity as a new market activity that is subject to a license, the market operation license. 3 Market operation activity is defined as the operation of organized wholesale power markets and the financial settlements of the transactions made in these markets. Organized wholesale markets are defined as (i) day-ahead markets and intra-day markets, where electricity, capacity, and retail sale activities are conducted and operated by an intermediary legal entity holding a market operation license, the Energy Markets Operation Company (Enerji Piyasaları İşletme A.Ş. ( EPİAŞ )); (ii) markets where standardized electricity contracts, (i.e. capital market instruments) and 1 According to the Internal Procedures of the Turkish Parliament, a draft law, before its review in the General Assembly of the Parliament, is submitted to the review of the relevant commission by the President of the Parliament. 2 The EML was sent to the President of the Republic on 21 March License issuance and obtaining procedures are to be clarified in secondary legislation. 1

3 the derivative markets where derivatives based on the electricity and/or capacity are traded and operated by Exchange İstanbul (Borsa İstanbul Anonim Şirketi A.Ş. ( Borsa İstanbul 4 )) and (iii) power markets such as the balancing power market and the ancillary services market which are organized and operated by Turkish Electricity Transmission Company (Türkiye Elektrik İletim A.Ş ( TEİAŞ ) the state owned transmission company). Accordingly, the EML refers to three market operators: EPİAŞ, Borsa İstanbul and TEİAŞ. Although the market players insisted on organizing spot transactions and derivatives under one exchange, the EML authorizes separate entities for spot transactions and derivatives, namely EPİAŞ and Borsa İstanbul. 5 In the initial version of the EML sent to the Commission, over the counter ( OTC ) markets were included in the definition of the organized wholesale market. This has been criticized by the market players during the reviews of the first draft of the law, as OTC markets are not organized markets by definition. In the final version of the EML passed by the Parliament, the definition of organized wholesale markets is amended to exclude OTC markets from the definition of organized wholesale markets. However, the reason behind this amendment was not due to the fact that OTC markets are not organized markets by definition, but because the strong opposition in the Commission claimed that the definition of OTC has never been clarified under Turkish legislation. That being said, the fact that there is no reference in the EML to OTC markets, and that the EML provides no definition of OTC markets, does not mean that there will be no OTC market in Turkey. The EML recognizes electricity trade based on bilateral agreements as it was previously the case under the Law No Operation and Structure of EPİAŞ The EML states that EPİAŞ will operate the organized wholesale markets other than those operated by Borsa İstanbul and TEİAŞ. Thus, EPİAŞ is designed as the market operator for the day-ahead and intraday markets where electricity, capacity, and retail sale activities are conducted. The initial version of the law was not clear on the structure of EPİAŞ. It has been discussed whether it should be established as a public-private partnership or not. The final version clearly stipulates that there will be a maximum of 15% state ownership in EPİAŞ. The EML authorizes the Council of Ministers to increase the state share up to 30%. However, Borsa İstanbul is explicitly excluded from this restriction. 4 Please note that according to the Capital Markets Law No. 6362, which entered into force on 30 December 2012, Borsa İstanbul shall be established within 6 months following the effective date of the Law No There is no provision stipulating how the delivery would take place for the transactions realized in Borsa İstanbul when trade requires physical delivery. 2

4 Another discussion point in the market was whether EPİAŞ should be part of Borsa İstanbul or not. The EML clarified that EPİAŞ will not be part of Borsa İstanbul but rather a separate and independent entity. Borsa İstanbul will be a shareholder in EPİAŞ. Apart from the state owned entities and Borsa İstanbul, the EML also refers to institutions as shareholders of EPİAŞ without specifically mentioning their qualifications. We understand that the details of the shareholding structure of EPİAŞ will be clarified in secondary legislation. By referring to institutions without making any distinction between public or private institutions, we understand that the EML suggests that private sector companies can also be shareholders in EPİAŞ. The EML stipulates that the organizational structure and the operation principles of EPİAŞ are yet to be determined by secondary legislation that will be enacted by the Energy Market Regulatory Authority ( EMRA ) within six months following the effective date of the EML. 6 The shareholder institutions, state owned institutions, and Borsa İstanbul will each be represented in the management of EPİAŞ. 7 Further details about the management structure of EPİAŞ are expected to be clarified through secondary legislation. Stamp Duty Exemption The EML provides a stamp duty exemption for the transactions made within the organized wholesale markets. In other words, trade in non-organized markets is not exempt from stamp duty. 8 The market players argued during the first draft of the law that the stamp duty exemption must be granted not only to the transactions made in the organized wholesale markets but also to those transactions made in the non-organized markets. However this request has not been taken into account and the EML does not provide any stamp duty exemption for the bilateral transactions to be performed outside of the organized markets. 6 The EML will enter into force on the date that it is published in the Official Gazette. 7 Please note that the ownership of the state companies or public economic enterprises in private sector companies is regulated under the Legislative Decree No. 233 dated 18 June According to the Legislative Decree, if a state owned entity holds minimum 15% and maximum of 50% of the equity of a private law company, the latter is deemed to be a subsidiary of the state owned entity. Pursuant to the Legislative Decree No. 233, the state owned entities appoint one member to the Board of Directors of the relevant subsidiary for each 15% equity share that they hold in the subsidiary. 8 Stamp duty applies to a wide range of documents including but not limited to, agreements, financial statements and payrolls. Stamp duty is levied as a percentage of the highest monetary amount stated on the documents at different rates. Currently, the stamp duty rate for most documents is 0.948%. For documents that do not contain any monetary amount the stamp duty is a fixed amount, TL (approximately EUR 16). The upper limit of the stamp duty is TL 1,487, (approximately EUR 630,000). 3

5 Financial Settlements According to the EML financial settlements of transactions made in organized wholesale markets, including in the markets operated by TEİAŞ (i.e. balancing power market and ancillary services market), will be made by EPİAŞ. The EML also appoints the central clearing bank, i.e. Takasbank, for certain financial transactions, to be determined under secondary legislation, by referring to the Capital Markets Law No Licenses Supply license The EML merges the wholesale and retail sale activities into one license type, the supply license. The existing wholesale and retail sale license holders will be ex officio granted with a supply license without prejudice to their rights under the existing licenses. With the latest changes, a definition of authorized suppliers has been added into the EML. Retail and distribution activities had previously been provided under the umbrella of one legal entity. Upon the separation of the retail side from the distribution arm of distribution companies by 1 January 2013, retail companies have recently been established. Such retail companies are now defined as authorized suppliers under the EML. Authorized suppliers are entitled to sell electricity to (i) eligible customers across Turkey, (ii) non-eligible consumers and (iii) customers of last resort as last resort supplier (defined below) in the relevant distribution region. The suppliers, which currently hold a wholesale license, are entitled to sell electricity to eligible consumers only. As a result, supplier companies and authorized supplier companies will not have equal rights unless the eligible consumer limit is decreased to 0 kwh. As mentioned above, the EML introduces the last resort supplier concept. The EML obliges the authorized supplier companies to supply power, as a last resort supplier, to the eligible consumers whose power demands cannot be met by other suppliers. According to the EML, tariffs of the last resort suppliers would be regulated tariffs. The eligible consumer limit has been determined to be 5,000 kwh per annum for the year EMRA aims to decrease the eligible consumer limit to 0 kwh by The EML further stipulates that some part of the power to be supplied by the last resort supplier must be provided by Turkish Electricity Trade Company (Türkiye Elektrik Ticaret ve Taahhüt A.Ş. ( TETAŞ ) - the state owned wholesale company). The percentage that would be provided by TETAŞ is to be determined by EMRA. 4

6 Generation License Generation companies will be able to buy electricity/capacity from organized wholesale markets, and EMRA will determine the upper limit that they can purchase. The upper limit will be a percentage of the total annual generation amount stipulated in their generation license. The generation companies can purchase electricity/capacity in order to fill the gap between their actual production and their supply requirements. They can sell electricity/capacity in the organized wholesale markets, as well as to suppliers, eligible consumers and persons with whom they have a direct line. Preliminary License The EML introduces a preliminary license for generation activities. Current license applications will be treated as preliminary license applications. Before applying for a generation license, investors are expected to fulfill certain requirements stated in the preliminary licenses such as obtaining the necessary permits and approvals, or completing certain transactions such as property acquisition or usufruct right establishment. A preliminary license can be given for a maximum period of 24 months. The EML stipulates that in order to obtain a generation license, following the fulfillment of the requirements stated in their preliminary licenses, applicant companies will have to provide a security deposit which will amount to no more than 10% of the value of the investment. Re-issuance of revoked licenses The generation facilities on which construction was started before the effective date of the EML but for which licenses were revoked for any reason 9 would be given a second chance to obtain a license. Accordingly, the relevant companies which had their generation licenses revoked would be entitled to apply to EMRA for issuance of a new license within one year following the entry into force of the EML. Such legal entities will be granted with a new license if the Ministry determines that the investment has reached an irreversible point and that the investment is in the public interest. 9 The term any reason seems to be controversial as it may lead to an interpretation that the licenses revoked based on a court decision may also be reissued. 5

7 Auto-producer license The EML abolishes the auto-producer license type and converts it to the generation license. Existing auto-producer licenses will be ex officio converted to generation licenses within six months beginning from the entry into force of the EML. License holders will not be charged any license issuance fee. Expropriations The Law No had authorized the EMRA to conduct the expropriation processes necessary for the generation and distribution companies in order to perform their generation or distribution activities. However, this created a significant workload for the EMRA which was already busy with its duties of regulating and supervising the market. According to the EML, expropriations that are necessary for the attribution of generation license and prelicense holders shall be conducted by the Ministry of Finance and the expropriations necessary for distribution license holders shall be conducted by Turkish Distribution Company (Türkiye Elektrik Dağıtım A.Ş. ( TEDAŞ ) - the state owned distribution company). License exemptions License exemptions exist for the following categories: (i) Emergency groups and generation facilities which are not connected to the transmission and distribution systems; (ii) generation facilities based on renewable energy sources with a maximum installed capacity of 1 (one) MW; (iii) municipalities solid waste facilities and generation facilities established for disposal of mud from treatment plants; (iv) micro co-generation facilities and co-generation facilities 10 that meet the efficiency figures which will be determined by the Ministry and which fall within the categories determined by the EMRA and (v) renewable generation facilities that consume all the electricity that they generate, without feeding it into the transmission or distribution systems. The Council of Ministers is entitled to increase up to five times the granted limit of the installed capacity of renewable energy generation facilities that will be exempted from the license requirement. The EML also raised the installed capacity limit from 50 kw to 100 kw for micro co-generation facilities to be exempted from the license requirement. 10 EML defines micro co-generation facilities as the co-generation facilities which have a total installed capacity of 100 kw and below where co-generation facility is defined as facilities that simultaneously generate both heat and electricity. 6

8 Incentives to the generation facilities and distribution companies The Law No has provided a discount of 50%, for a duration of five years, on the transmission system utilization fees for the generation facilities commissioned by 31 December The transactions and documents prepared during the investment period of generation facilities that were commissioned by 31 December 2012 were also exempted from stamp duty and levies. The EML extends the abovementioned commissioning date to 31 December The Council of Ministers is entitled to further prolong this date up to five years. Another incentive provided in the EML is regarding the use of state properties in renewable energy facilities and generation facilities exploiting mines and minerals. Accordingly, if any state property is used for generating electricity from renewable resources or mines and minerals, the Ministry of Environment and Forestry or the Ministry of Finance shall permit the use of such properties with respect to the facility and access ways and energy transmission grids up to the connection point of the grid in return for a fee. Such permission may be in the form of permits, leases, rights of easement or rights of usage. For facilities that start operating before the end of 2020, for access ways and energy transmission grids up to the connection point, a discount of 85 percent shall be applied to the fees for permission, lease, right of easement and right of usage for the first ten years of their investment and operation periods. The Council of Ministers is entitled to extend this deadline by five more years. Earnings emanating from transfers, mergers, spin-offs and partial spin-offs that will be conducted for the privatization of the distribution companies and generation facilities and/or companies, will be exempted from corporate income tax until 31 December Private law companies that will transfer generation facilities of Electricity Generation Company (Elektrik Üretim A.Ş. ( EÜAŞ ) the state owned generation company) through privatization process will be granted a grace period which will expire on 31 December 2018 in order to complete the environmental permit requirements. No penalty will be applicable to them during this period. The Council of Ministers is entitled to extend this deadline up to three more years. Market Restrictions Under the Law No. 4628, public distribution companies could not engage in generation activities. However, private distribution companies were entitled to conduct generation activities. The EML sets out restrictions for the activities of distribution companies. According to the EML, a distribution company cannot engage in any activity other than distribution or be a direct shareholder of a legal entity engaged in any other market activity. Under the Law No. 4628, the total amount of power that a real person or entity 7

9 could sell through wholesale companies under its control could not exceed 10% of the total electricity consumed in the market during the preceding year. The EML does not set a limit for a person or a company controlling supplier companies but rather for individual supplier companies. According to the EML, the total amount of electricity to be sold by supplier companies to the end customers cannot exceed 20% of the total electricity consumed in the market during the preceding year. Also, the EML provides that the total electricity amount that supplier companies can purchase from generation companies and importer companies (i.e. wholesale companies with an importation authorization) cannot exceed 20% of the total electricity consumed in the market during the preceding year. TETAŞ has been excluded from the above market restrictions. Under the Law No. 4628, the total amount of electricity that a real person or entity could generate through generation companies under its control could not exceed 20% of the electricity amount generated in Turkey in the preceding year. The EML preserves this ratio. For your questions please contact Değer Boden (dboden@boden-law.com) or Özlem Ege (oege@boden-law.com). 8