Does Turkish Energy Legislation offer Investment Opportunities for Unlicensed Solar Power Projects?

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1 1 Does Turkish Energy Legislation offer Investment Opportunities for Unlicensed Solar Power Projects? bby MURAT YÖRÜKOĞLU AND ŞEYMA OLĞUN* ABSTRACT Turkeby intends to increase its renewable energby generation capacitby in order to help meet its growing energby demand and to mitigate its energby dependencby. Turkeby acknowledges the importance of solar-based power projects in achieving this target, and is willing to increase its solar energby capacitby bby 5 GW bby This article explores whether Turkish energby legislation offers investment opportunities to investors in unlicensed solar power projects, bby analbysing the legal scheme provided under Turkish legislation. I.INTRODUCTION: RENEWABLE ENERGY POLICIES OF TURKEY As an emerging economy with a population increasing by over 13.4% per year 2, Turkey s energy demand is growing day by day. 3 Until recently, Turkey focused on importing gas and oil to address the energy gap between its demand and domestic production, increasing its national deficit 4 and dependency on foreign energy resources. In order to mitigate energy dependency, Turkey is now focusing on alternative resources, such as nuclear energy, and has set certain targets for 2023, one of which is raising the share of renewable energy sources in electricity generation to at least 30% of overall need. 5 To reach this level, the capacity of renewable energy generation is projected to increase to 61 GW, mainly in the forms of hydro, wind and solar generation. 6 In achieving this target, fostering solar energy carries great importance. As a country * Murat Yörükoğlu is a Partner in Boden Law Office and a graduate of İstanbul Bilgi University Faculty of Law. He has been involved in the Turkish energy sector for many years and has extensive experience in advising energy sector actors. Şeyma Olğun is an Associate in Boden Law Office and a graduate of Ankara University Faculty of Law. Her practice focuses on different aspects of energy projects. 1 The Republic of Turkey Ministry of Energy and Natural Resources, National Renewable Energy Action Plan for Turkey, December 2014, p For this statistic, please see Turkish Statistical Institute s demographic statistics (23 February 2016), < 3 Eurocoal, Coal Industry Across Europe 2013, 5th Edition, 2013, p H. Serhan Süzer, Why Turkey Should Aim for 100% Renewable Energy?, Turkish Policy Quarterly, Vol. 12 No. 2, Summer 2013, p The Republic of Turkey Ministry of Energy and Natural Resources, note 1, p Ibid., p. 18.

2 2 The Turkish Commercial Law Review Volume 2 Issue 1 Summer 2016 located in a sunny belt between the latitudes of 36 N and 42 N, Turkey has plentiful solar energy resources with a 380 billion kwh/year potential. 7 This, along with the government s current targets, creates a great opportunity for investors to invest in a Turkish solar power project. There is more than one way to make such an investment. One may always invest in a solar power project in Turkey by obtaining a licence according to current legislation. However, the Electricity Market Law No (the EML) also enables natural and legal persons to invest in solar electricity generation without a licence requirement under certain conditions. In order to provide a clear picture on the issues that should be taken into account while investing in unlicensed solar power projects in Turkey and shed a light on the future of such investments, the pros and cons of investing in unlicensed solar power investments as opposed to licenced solar power investments should be analysed, considering the schemes provided under the current legislation for each option. II. PROS AND CONS OF UNLICENSED SOLAR POWER PROJECTS: UNLICENSED PROJECTS VS LICENSED PROJECTS Under Turkish law, in order to engage in electricity generation, in principle, a generation licence must be obtained. As an exception to this principle, the EML provides that certain generation activities are exempt from this requirement. As per the EML, generation facilities based on renewable energy resources with a maximum installed capacity of 1 MW are exempt from the licence requirement. Unlicensed solar power projects have certain advantages in comparison to licenced projects. Firstly, as the name suggests, unlicensed solar power projects do not require a licence and involve less bureaucracy. Secondly, the total installed capacity for licenced projects in Turkey has been limited to 600 MW. Once this limit is reached, no further applications for generation licences will be accepted until and unless this limit is escalated by the Ministry of Energy and Natural Resources. 9 On the other hand, no such total installed capacity limitation applies for unlicensed generation. The capacity available in each transformer station is announced by the Turkish Electricity Transmission Joint Stock Company (Türkiye Elektrik İletim Anonim Şirketi) (TEİAŞ) and the distribution company to which the connection application should be made, and applicants apply for capacity allocation within such capacity limits. Additionally, the possibility to build adjacent power plants, albeit restricted with a recent amendment in the relevant legislation, 10 offers economies of scale for investors in unlicensed projects. Together with high licence fees, which investors are obliged to pay to obtain a pre-licence and a generation licence, annual licence fees are turning investors attention to unlicensed solar power projects. Application and annual system usage payments for unlicensed solar power projects are quite low compared to those of licenced projects. Notwithstanding this, unlicensed solar power projects also have certain disadvantages relative to licenced projects. Under the current legislation, unlicensed solar power plants are only able to sell electricity through a support mechanism, which 7 K. Barış and S. Küçükali, Availability of Renewable Energy Sources in Turkey: Current Situation, Potential, Government Policies and the EU Perspective, Energy Policy, Vol. 42, March 2012, p The Electricity Market Law No published in the Official Gazette dated 30 March 2013 and numbered Please see Section II(a)(2) for further details. 10 Please see Section II(a)(3) and Section II(b)(1) for further details.

3 Does Turkish Energy Legislation offer Investment Opportunities for Unlicensed Solar Power Projects? 3 is available only for ten years. The electricity generated from licenced solar power plants, on the other hand, may be sold freely in the market. The future of unlicensed solar power projects is ambiguous in this regard. In addition to the foregoing a regulation amending the Regulation regarding the Generation of Unlicensed Electricity in the Electricity Market 11 (the Unlicensed Electricity Regulation) has recently been enacted providing certain restrictions with regards to building adjacent unlicensed power plants 12 (the Amending Regulation). Under this section, we will explore the advantages and disadvantages of unlicensed solar power generation. a) Pros of Unlicensed Projects 1. Less Bureaucracy Obtaining a generation licence is quite time-consuming and involves a lot of bureaucracy. In comparison, the implementation of unlicensed projects involves little procedure and takes considerably less time. In order to obtain a generation licence, one must first apply for a pre-licence, during the term of which the investor is expected to fulfil certain requirements such as obtaining decisions, permits and approvals, taking certain steps, such as acquiring the ownership of or obtaining a utilisation right over the property at which the solar power plant will be located, obtaining the zoning approval and receiving the Environmental Impact Assessment from the Ministry of the Environment and Urbanisation, which are necessary for investors to commence investments and projects. The licence requirement also impacts the timing of the investment, as pre-licence applications are only accepted in November of each year, whereas the investor may at any time make an application for an unlicensed solar power project. 13 Further, the licence requirement invites direct competition. Accordingly, if there is more than one pre-licence application for a solar power plant in the same area and/or with respect to the same connection point and/or connection region, companies willing to establish a solar power plant must participate in a contest where they submit bids to obtain a right to be connected to the system and where the highest bidder is granted a prelicence. The pre-license period, in which requirements pertaining to the pre-licence period are fulfilled, may be a term of maximum 24 months (except when there is an extension due to force majeure events). However, depending on the installed capacity and resource type of the relevant generation facility, such period may be extended up to 36 months by 11 The Regulation regarding the Generation of Unlicensed Electricity in the Electricity Market published in the Official Gazette dated 2 October 2013 and numbered The Regulation Amending the Regulation on the Unlicensed Electricity Generation in the Electricity Market published in the Official Gazette dated 23 March 2016 and numbered Although that is generally the case, there might be certain cases where it is not possible to make such an application for a certain time. As per the Amending Regulation, if additional capacity is allocated in a transformer station, this additional capacity will be announced in April, August and December each year. For this additional capacity, applications will be accepted three months after the announcement. The same principle will apply for capacity created as a result of commissioning of a new transformer station and applications to be made for allocation of the newly-created capacity.

4 4 The Turkish Commercial Law Review Volume 2 Issue 1 Summer 2016 the Energy Market Regulatory Authority (the EMRA) board. Only after the fulfilment of all requirements pertaining to the pre-licence period, including the application for the signing of connection agreements and obtaining all necessary permits for construction of the plant, can investors obtain the full generation licence. Although applications for solar energy generation licences have been accepted since mid-2013, the first solar energy generation license was only granted in late subsequent to the first contest being held. As of writing of this article, only two licences have been granted for solar energy generation. In order to build an unlicensed solar power plant, investors are first required to apply to the distribution company authorised in the region where the power plant will be located with certain documents such as land usage right documents, a single-line diagram showing the technical characteristics of the solar power plant and a letter from the Ministry of Food, Agriculture and Livestock stating that the relevant land is not an agricultural land. If the relevant distribution company deems the application sufficient, it will send investors a call letter and invite them to sign the connection agreement. The relevant distribution company, inter alia, takes the following matters into consideration: the applicant s consumption amount, the capacity of the transformation station to which the concerned unlicensed power plant will be connected and the location of generation and consumption facilities. Upon the issuance of this document, investors have ninety days to apply for project approval to the institution authorised by the Ministry of Energy and Natural Resources, 15 and have 180 days for obtaining the approval. Investors sign a connection agreement with the distribution company within thirty days following the project approval. 16 Therefore, the entire process is completed within a maximum of 210 days starting from the receipt date of the call letter. After the signing of the connection agreement, investors begin the construction. The term for the provisional acceptance differs depending on whether the concerned unlicensed solar power plant is to be connected to the distribution system from high or low voltage levels. Provisional acceptance has to be achieved in the year following the execution of the connection agreement, if the plant is to connect to the system from low voltage level and two years if it will connect from high voltage level. Where the provisional acceptance is not achieved at the end of aforementioned terms, the connection agreement automatically becomes null and void, except force majeure situations. Once the construction works and the provisional acceptance are duly completed, investors execute a system usage agreement with the distribution company in 14 Turgut Cankorel, Turkish Solar Update, (26 June 2016), < articles/ 2016/01/turkish-solar-update.html>. 15 As per the letter of the Ministry of Energy and Natural Resources dated 15 February 2016, TEDAŞ (Turkish Electricity Distribution Joint Stock Company) is authorised as the project approval unit for the unlicensed solar power plants until the end of Therefore, one may say that execution of the connection agreement is conditional upon the project approval and obtaining a call letter does not guarantee the execution of the connection agreement. That being said, there are certain legal consequences of obtaining a call letter. As an example, according to the Amending Regulation, in case of a licence application made on the same date as the unlicensed application or made for the same area where the unlicensed solar power plant will be located, the licence application will have the priority over the unlicensed application, unless the unlicensed applicant is entitled to receive or have already received a call letter. For further information regarding the Amending Regulation, please see Section II(b)(1) below.

5 Does Turkish Energy Legislation offer Investment Opportunities for Unlicensed Solar Power Projects? 5 the month following the provisional acceptance. 17 The power plant becomes operational upon the signing of the system usage agreement. As they can put their power plants into use within a shorter time and with going through less procedure, investors tend to prefer developing unlicensed projects over licenced ones. 2. No Capacity Limitation Law No on the Utilisation of Renewable Energy Resources for the Purpose of Generating Electrical Energy 18 (the Renewable Energy Law) provides a limit of 600 MW for total installed capacity of licenced solar power plants in Turkey through 31 December This limit was to be subject to escalation by annual announcements to be made by the Ministry of Energy and Natural Resources. Unfortunately, the Ministry has made no such announcements to this date. Unlicensed generation plants are not subject to such a total installed capacity limit applicable for the entire country. On the other hand, it should be noted that unlicensed projects are subject to the capacity limits of the relevant transformer stations (which are published by TEİAŞ and the relevant distribution company in their websites) Possibility to Build Adjacent Unlicensed Solar Power Plants Until the enactment of the Amending Regulation, there was no restriction against establishing multiple solar power plants in a distribution region, with each up to 1 MW installed capacity, as long as each solar power plant has its own consumer facility. Accordingly, investors enjoyed economies of scale by establishing multiple solar power plants adjacent to each other. With the Amending Regulation enacted, this opportunity has vanished for future projects; however, investors still have the opportunity to invest in projects that have obtained the right to receive a call letter, projects that have obtained call letters and project approvals, and finally projects that have executed connection agreements, since those are exempt from the restrictions envisaged in the Amending Regulation No Licence Fee Another advantage of developing unlicensed solar power projects is that they are not subject to the considerably higher licence fees that apply to licenced projects. In order 17 Power Generation Plants Acceptance Regulation published in the Official Gazette dated 6 November 2015 and numbered (the Acceptance Regulation) has introduced a pre-acceptance phase that needs to be achieved prior to the provisional acceptance. The electricity generation facilities that have achieved preacceptance begin selling the generated electricity. One of the main requirements for pre-acceptance is the execution of system usage agreement with the relevant distribution company. The Acceptance Regulation is not applicable for the electricity generation facilities connecting to the system from low voltage level, and in terms of acceptance phases of the facilities connecting to the system from high voltage level, it will be applicable as of 6 November2016, unless the Council of Ministers decides to prolong this period for six months. Therefore, once the Acceptance Regulation is applicable, the system usage agreements of the solar power plants connecting to the system from high voltage level will be executed with the distribution company before the provisional acceptance but upon the pre-acceptance. 18 The Utilisation of Renewable Energy Resources for the Purpose of Generating Electrical Energy Law No published in the Official Gazette dated 18 May 2005 and numbered The solar power plants connecting to the system from low voltage level may be subject to a separate capacity limit under the Unlicensed Electricity Regulation. 20 Please see Section II(b)(1) for further details.

6 6 The Turkish Commercial Law Review Volume 2 Issue 1 Summer 2016 to obtain a pre-licence and a generation licence, an applicant must pay licence fees, the amount of which depends on the installed capacity of the generation facility (and must also pay annual licence fees depending on the generated electricity amount of TRY per generated kwh). Initial licence fees for 2016 range from TRY to TRY 29, depending on installed capacity. 23 Depending on the power plant project s installed capacity, unlicensed electricity investors are also subject to certain application and annual operation fees. However, such amounts, in comparison with the licence fee amounts, are quite insignificant Benefiting from Feed-In Tariffs The feed-in tariff incentives and local equipment support provided for renewable energy generation activities also apply to unlicensed projects. The renewable energy support mechanism provided in the Renewable Energy Law enables the sale of such surplus energy to authorised supply companies on the basis of feed-in tariffs for solar-based renewable energy, which is the highest feed-in tariff among all renewable sources at the TRY equivalent of USD per kwh. This feed-in tariff will apply to both licenced and unlicensed renewable energy investors for a period of ten years. Licenced and unlicensed renewable energy investors may also enjoy local equipment support if they use locally produced mechanical and/or electro-mechanical equipment or components in their renewable energy facilities. 25 This local equipment support incentive provided for solar power plants differs from USD to USD per kwh according to the type of the component manufactured and is applicable for a five-year period starting from the relevant facilities commencement of generation. b) Cons of Unlicensed Projects 1. Possible Capacity Allocation and Share Transfer Restriction The Amending Regulation has brought significant changes on the Unlicensed Electricity Regulation which appeared to the detriment of investors. The Amending Regulation imposes capacity and share transfer restrictions upon unlicensed projects. It permits a maximum installed capacity allocation of 1 MW in each transformer station for natural or legal persons generating wind or solar energy, regardless of the number of consumption 21 Approximately EUR 176 as of time of writing. 22 Approximately EUR 8,804 as of time of writing. 23 Generation facilities based on renewable energy are only subject to 10% of the original licence fees. Other facilities are subject to the original licence fees, which are ten times the figures above. 24 Application fee for the year of 2016 was set by the EMRA with its decision numbered and dated 28 December 2015 as TRY 0 for unlicensed power plants with an installed capacity less than or equal to 250 kw, while the same amount is determined with the same decision as TRY 500 for those their installed capacity is higher than 250 kw. The annual operation fee for the year of 2016 is, on the other hand, determined by the EMRA with its decision numbered and dated 28 December 2015 as TRY 0 for unlicensed power plants with an installed capacity less than or equal to 250 kw, while the same amount is determined with the same decision as TRY 1,000 for those with an installed capacity of more than 250 kw. 25 There is a draft regulation lifting the provisions of the Unlicenced Electricity Regulation related to local equipment support. If enacted, unlicenced renewable energy investors will not be able to benefit from the local equipment support.

7 Does Turkish Energy Legislation offer Investment Opportunities for Unlicensed Solar Power Projects? 7 facilities belonging to the same person. 26 While calculating the 1 MW limit, the Amending Regulation considers both real or legal persons and their direct or indirect subsidiaries as the same person. The Amending Regulation states that the determination of the direct and indirect shareholding structure of the facility owners shall be based on the declaration of the legal entity that owns the facility, and in the event that the information provided regarding the shareholding structure is found to be missing, misleading, or false, the call letters for the execution of the connection agreements shall be cancelled. Consequently, Amending Regulation, through the restrictions provided therein, dissuade investors from building adjacent solar power plants each having an installed capacity of 1 MW. Notwithstanding this, the Amending Regulation states that the facilities that are entitled to receive a call letter will not be subject to the new capacity allocation restrictions. A company is considered to be entitled to receive a call letter when the relevant distribution company publishes such capacity allocation on its web site. Accordingly, in addition to the projects that have obtained the right to receive a call letter, the projects that have obtained the call letters and project approvals and finally the projects that have executed connection agreements shall all be safe from these new restrictions a fortiori. The Amending Regulation also envisages a share transfer restriction for unlicensed electricity generation projects, prohibiting the shareholders of the facility owner companies from transferring to third parties all or part of their shares in the companies that own the unlicensed facilities. The restriction starts from the date of application, and applies until the provisional acceptance date. The consequence of non-compliance with such provision is the cancellation of the call letters of the relevant facilities, although the share transfer cannot be deemed invalid according to the Turkish Commercial Code No Therefore, there is a risk for the investors of cancellation of their project s call letters, if the investors acquire the shares of the project companies holding call letters, project approvals or connection agreements before the provisional acceptance of their projects. 2. Uncertainty with regard to the Future of Unlicensed Projects: Feed-in Tariffs Unlicensed electricity generation was initially conceived to allow small-sized plants to be built for the purpose of meeting the owner s own energy needs; unlicensed projects, therefore, presuppose consumption facilities. If the plant generates more than the consumption of the consumption facility, the surplus energy may be sold to the authorised supply company of the relevant distribution region 28 through the renewable energy support mechanism provided in the Renewable Energy Law. Therefore, by establishing a separate consumer facility with very limited or no consumption, investors tend to benefit from the feed-in tariffs and local equipment support for their entire generation amount. 26 This limitation is not applicable for rooftop solar applications. 27 The Turkish Commercial Code No published in the Official Gazette dated 14 February 2011 and numbered Authorised supply companies are supply licence holding companies that have been demerged from the distribution companies and are entitled to sell electricity to eligible consumers across Turkey and non-eligible consumers in their region. They are obliged to sell electricity to eligible consumers in their distribution regions whose power demands cannot be met by other supply companies as last resort suppliers.

8 8 The Turkish Commercial Law Review Volume 2 Issue 1 Summer 2016 The regulatory and governmental authorities practice has thus far indicated that this is not perceived to be against the general principle of the legislation, which allows the sale of surplus energy. Although the current legislation on unlicensed electricity generation enables investors to sell surplus energy through the renewable energy support mechanism as explained above, it does not allow investors to sell electricity generated in unlicensed power plants on the free market, unlike electricity generated at licenced generation facilities. 29 The feed-in tariff applies to both licenced and unlicensed renewable energy facilities for a period of ten years. Although this mechanism currently creates a favourable environment for investing in unlicensed solar projects in Turkey, it is not clear how such projects will sell electricity after this ten-year period expires. The lapse of the ten-year term of the feed-in tariff will have significantly more impact on unlicensed solar energy investors than licenced investors, as unlicensed electricity generators may only sell their electricity through the renewable energy support mechanism and/or use such energy for their own consumption. Contrary to licenced generation, they cannot sell electricity either through bilateral agreements or in organised electricity wholesale markets. After the lapse of such period, investors in unlicensed facilities may choose to isolate their generation facilities by disconnecting the plant from the distribution system and selling the electricity their facilities generate to third party consumers located near the plant by transmitting the electricity through direct lines. They may also convert their facilities into licenced facilities by obtaining licences. Regardless of the exact route chosen, it seems that the profit margin of these investments will be lowered significantly. That being the case, there is an expectation in the market that unlicensed generation facilities will be provided with licences by the end of the term of the feed-in tariff. However, there is currently no draft legislation or any governmental or formal declaration in this regard. Therefore, the scheme, as it currently stands, creates a sizeable uncertainty for large investments. III. CONCLUSION As a result, being exempt from burdensome licence procedures and fees, and being able to benefit from feed-in tariffs make unlicensed solar power plants a good investment opportunity for investors. On the other hand, investors should take into consideration the risk arising from the uncertainty regarding the term after the ten-year period provided for feed-in tariffs expires. Additionally, investment opportunities for future projects seem to have vanished with the enactment of the Amending Regulation, however there are still opportunities for projects already entitled to receive a call letter, which constitute not an insignificant number at all. 29 The electricity generated from a licenced solar plant may be sold to third parties through bilateral agreements on the negotiated price or in organised electricity markets, unless they opt into the feed-in tariff system. Therefore, even when the concerned scheme is no longer applicable, those plants will be able to, without any further action, continue their operations.