1. INTRODUCTION TO THE ENERGY MARKET
Due to its remarkable economic growth over the past decade, Turkey's demand for energy has considerably increased. In order to meet this growing demand, Turkey's energy policy for the next ten years includes the following targets:
- increasing total installed power to 120,000 MW;
- increasing the share of renewable energy sources to 30 per cent;
- establishing an energy stock exchange with a diversified product range;
- commissioning at least two nuclear power plants;
- minimising its petroleum and gas import costs;
- maximising the use of hydropower;
- increasing wind-power installed capacity to 20,000 MW;
- installing power plants with 1,000 MW of geothermal and 5,000 MW of solar energy;
- extending the length of electricity transmission lines to 60,717 km;
- reaching a power distribution unit capacity of 158,460 MVA;
- raising the natural gas storage capacity to 11 billion m3; and
- increasing installed coal-fired capacity to 30,000 MW.
These targets demonstrate that energy demand levels will continue to expand, as will the development of Turkey's energy market. Although in the early 2000s Turkey took remarkable steps in liberalising its energy market1, these steps were not sufficient to reduce Turkey's foreign dependency. Due to insufficient domestic energy generation, Turkey's primary objective is to strengthen the security of supply. Turkey is determined to diversify its energy supply routes and sources, by including nuclear energy in its generation bundle and increasing the share of renewable energy. Considering Turkey's targets for the next 10 years and the substantial increase in energy demand2 it is clear that significant investment (more than double the total amount invested in the last decade) will be required in order to meet expected national demand levels by 2023. In line with these prospects, several significant developments affecting the Turkish energy market and its players occurred in 2017 and 2018 as outlined in the following sections.
2.1 Market overview
The Turkish electricity market is one of the fastest growing electricity markets in the world, growing annually by an average of about nine per cent. In addition to private companies, there are three state-owned companies3 active in the local electricity market:
- Elektrik Üretim Anonim Șirketi ("EÜAȘ"), the state generation entity;
- Türkiye Elektrik İletim Anonim Șirketi ("TEİAȘ"), the state transmission entity; and
- Türkiye Elektrik Dağıtım Anonim Șirketi ("TEDAȘ"), the state distribution entity.
While the state generation entity, EÜAȘ, still plays an important role in this market, the role of private companies is rapidly increasing through both privatisation and establishment of new facilities.
TEİAȘ conducts all of Turkey's transmission activities, effectively operating a monopoly in the local electricity transmission market. Aside from the transmission activities exclusively conducted by TEİAȘ, other market activities are fully accessible to private companies. The distribution network is divided into 21 regions, each with its own distribution company. All of these companies have been privatised since 2013. TEDAȘ no longer operates any distribution companies, but it continues to own the distribution assets. Meanwhile, EÜAȘ still has an important role in the electricity generation market, although the power plants operated by EÜAȘ are being privatised.
The new Electricity Market Law4 (the "EML") stipulated the creation of an electricity exchange market, which would be administered through a newly incorporated company, Enerji Piyasaları İșletme Anonim Șirketi ("EPİAȘ"). EPİAȘ was incorporated in March 2015 and obtained a market operation licence on 1 September 2015. Following incorporation, TEİAȘ and the Borsa İstanbul (the "BI") each hold 30 per cent of the corporation's total shares, with the remaining 40 per cent held by various private energy companies. Under this shareholding structure, TEİAȘ and the BI hold Class A and Class B shares, whereas private energy companies hold Class C shares. Upon its incorporation, EPİAȘ started conducting the market operation activities of the organised wholesale electricity markets (including day-ahead and real-time market activities) other than those operated by the İstanbul Stock Exchange and TEİAȘ. TEİAȘ continues to conduct balancing activities.
2.2 Regulatory overview
The Ministry of Energy and Natural Resources (the "MENR") is ultimately responsible for preparing and implementing energy policies, plans, and programs in coordination with its affiliated institutions. Under the MENR's support, the Energy Market Regulatory Authority ("EMRA") is responsible for regulating and supervising electricity market operations in a competitive environment. EMRA's powers and duties can be summarised as issuing licences; setting, amending, enforcing and supervising regulations on performance standards; setting out pricing principles; and maintaining the development and performance of infrastructure for implementation of new power trading and sales methods. The EMRA exercises its powers through the Energy Market Regulatory Board (the "EMRA Board").
The primary pieces of legislation regulating Turkey's electricity market are the EML and the Electricity Market Licence Regulation5 (the "Electricity Market Licence Regulation").
2.3 Regulated electricity market activities
The following electricity market activities are regulated by the EML and the Electricity Market Licence Regulation:
- generation (coal, hydro, geothermal, wind, solar, hydraulic, biomass, biogas, wave, current and tidal energy sources);
- energy exchange;
- import; and
In order to conduct electricity market activities, companies must obtain separate licences for each activity. To conduct a single activity in multiple facilities located in different regions, companies must also obtain a separate licence for each facility. This is the general principle, but supply licence holders can conduct electricity trading activities (wholesale, export, import, and retail sales); and the individuals or legal entities that:
- generate electricity for their own needs; and
- have facilities or equipment that are not operating parallel to the transmission and distribution network,
are not required to obtain any licence, as long as they remain disconnected from the transmission and distribution networks, and do not conduct wholesale or retail activities.
In May 2019, EMRA introduced the new Regulation on Generating Electricity without a Licence6 (the "Unlicensed Generation Regulation" or "Regulation"). Under the EML, generation facilities with an installed capacity of up to 1 MW of renewable energy resources are exempt from the licensing requirement. Moreover, if a company generates more electricity than it consumes, the surplus may be sold in the same distribution region in which it is produced, within the scope of the RER Support Mechanism - the Renewable Energy Law established a renewable energy support mechanism ("RER Support Mechanism"); or may also be consumed in other facilities owned by the same party in the same distribution region for a period of 10 years.7 Maximum capacity of 1 MW per transformer centre can be allocated to individuals or legal entities generating solar or wind energy (excluding rooftop installations), regardless of the number of consumption facilities owned by that individual or legal entity. When calculating the 1 MW limit, both the individual or legal entity and/or entities in which such persons have direct or indirect shares are considered the same person. Finally, no capacity fee is charged to the renewable energy facilities whose capacity is below 5 MW.
2.4 Significant sector issues
Under the Electricity Market Licence Regulation, licence holders engaged in more than one market activity and/or carrying out the same licensed activity in more than one facility or region, are required to keep separate accounts and records for each activity, facility or region. Retail companies engaged in both electricity sales and retail services must keep separate accounts for sales and retail services and must avoid cross-subsidization between these activities.
The shareholders of distribution utilities can own shares in newly established retail sales companies. However, as of 1 January 2016, distribution utilities will not be able to purchase administrative and support services from companies controlled by their parent company (i.e. companies controlled by the parent company of the relevant distribution utility). Furthermore, as of 1 January 2016, retail sales companies and distribution utilities will be required to use different physical premises and information system infrastructures.
The Electricity Market Licence Regulation also sets forth certain share transfer restrictions. Under Article 6 of the EML and Article 19 of the Electricity Market Licence Regulation, direct or indirect changes in shareholding structure and/or share transfers (aside from certain exceptions set forth under the Electricity Market Licence Regulation) are forbidden within the preliminary licence period. EMRA will cancel a preliminary licence if such a transaction occurs.
However, Article 57 of the Electricity Market Licence Regulation provides exceptions to this prohibition with respect to the preliminary licence period. Accordingly, in addition to the situations relating to inheritance and bankruptcy, this prohibition does not apply to:
- changes in the shareholding structure of publicly listed legal entities, with regard to their publicly listed shares;
- changes in the shareholding structure of legal entities with publicly listed shareholders, with regard to the publicly listed shares of these shareholders;
- companies granted a preliminary licence for facilities established in line with international agreements;
- indirect changes in the shareholding structures of companies holding preliminary licences resulting from changes in their foreign shareholders' shareholding structures;
- direct or indirect changes in the shareholding structure of an entity holding a preliminary licence, caused by a public offering of this entity's shares or the shares of its direct or indirect shareholders;
- direct or indirect changes in the shareholding structure of a legal entity holding a preliminary licence, caused by the exercise of pre-emption rights by the entity's shareholders;
- changes resulting in direct partnership of the indirect shareholders of a legal entity holding a preliminary licence, which is stated in the preliminary licence of such entity, without any changes in their shareholding percentages in this legal entity;
- direct or indirect changes in the shareholding structure of a state-owned entity, resulting from this entity's privatisation;
- direct or indirect changes in the shareholding structure of an entity holding a preliminary licence, among the existing shareholders, which do not result in a change of the company's control;
- direct or indirect changes in the shareholding structure of an entity holding a preliminary licence (in which majority of shares are directly or indirectly held by state institutions and organisations), caused by a capital increase or a change in shareholders, provided that there is no new shareholder, other than state institutions and organisations;
- direct or indirect changes in the shareholding structure of an entity holding a preliminary licence, caused by this entity's or its direct or indirect shareholders' acquisition of their own shares, within the scope of the Turkish Commercial Code8;
- direct or indirect changes in the shareholding structure of an entity holding a preliminary licence, caused by share transfers among individuals who are direct or indirect shareholders of this entity and who are spouses or first-degree relatives; and
- direct or indirect changes in the shareholding structure of an entity holding a preliminary licence, the control of which is seized by the Savings Deposit Insurance Fund of Turkey.
After obtaining a licence under the Electricity Market Licence Regulation, only the following share transfers are subject to EMRA's prior approval:
- direct or indirect acquisition of 10 per cent or more (five per cent or more in publicly-held companies) of the shares in a licence-holding company;
- any transaction resulting in the change of control of a licence-holding company;
- any transaction resulting in the change of ownership or usage rights in a licensed facility;
- share pledge; or
- merger, in accordance with Article 59 of the Electricity Market Licence Regulation.
2.5 Trading including import and export
In addition to the EML and the Electricity Market Licence Regulation, electricity trading is regulated by the Regulation on Electricity Market Balancing and Settlement9 (the "Balancing and Settlement Regulation"). The Balancing and Settlement Regulation sets forth the principles and procedures regarding the day-ahead market and real-time balancing of active electricity demand and supply, as well as the settlement of trade in these markets. The Market Financial Reconciliation Center (the "MFRC") operates the day-ahead market, as well as the balancing market.
In Turkey, supply licence holders (i.e., wholesale, export, import, and retail sales) can conduct electricity trading activities. In order to participate in the electricity market, electricity traders must either conclude a bilateral electricity purchase agreement with another licence holder or contribute to the organised markets themselves.
Electricity is traded mostly through bilateral agreements on an over-the-counter basis. Agreements are not subject to the EMRA's approval and thus, all commercial terms and conditions are freely negotiable. Electricity can also be traded on a day-ahead and real-time basis.
The EML and the Electricity Market Import and Export Regulation10 (the "Import/Export Regulation") set forth the principles and procedures for electricity import and/or export, and the principles with regards to allocation and use of interconnection capacity for cross-border trade in the electricity market. Under the Import /Export Regulation, subject to the EMRA's approval, the following entities can import or export electricity from or to countries that meet the enumerated international interconnection conditions:
- EÜAȘ and private companies holding supply licences may engage in electricity import and/or export and
- generation companies may engage in electricity import,
provided that the relevant provisions permitting such activities are included in their licences.
On 18 September 2010, a trial run was carried out for the synchronous parallel connection of the Turkish national electricity system (operated by TEİAȘ) to the European Network of Transmission System Operators for Electricity ("ENTSO-E"), for the Continental Synchronous Regional Network of Europe. In April 2015, TEİAȘ became an observer member after Turkey's successful synchronisation with the ENTSO-E Continental Europe Region. TEİAȘ signed a long-term agreement for a permanent connection to the continental European grid, following a trial period that started in September 2010. The observer member status will give TEİAȘ the possibility to attend groups and task forces within the association.
Finally, in 2017, through the international interconnections, Turkey imported electricity (GWh 2,729.06) from Bulgaria (76.02 per cent), Georgia (18.08 per cent), Iran (5.58 per cent) and Greece (0.02 per cent) and exported electricity (GWh 3,300.10) to Greece (96.97 per cent), Bulgaria and Georgia. Data in relation to 2018 has not yet been published.
2.6 Transmission, distribution and grid access
TEİAȘ conducts all of Turkey's transmission activities. The EML does not envisage TEİAȘ's privatisation. The distribution network, however, is divided into 21 regions, with a different distribution company in each, all of which have been privatised. TEDAȘ no longer operates any distribution companies but continues to own the distribution assets. TEİAȘ conducts all transmission activities in Turkey and the 21 distribution companies conduct the distribution activities in their respective regions. TEİAȘ and the distribution companies are required to meet the demands of individuals and companies for connection to the transmission and distribution systems. The Regulation on the Electricity Market Connection to and Use of the System11 (the "System Connection and Use Regulation") sets forth certain circumstances for rejection of requests for connection to the transmission system operated by TEİAȘ and the distribution system operated by the respective distribution company.
1. Turkey had started a significant liberalisation process in the energy sector in 2001, with the electricity sector taking a leading role. With the liberalisation process, the Turkish energy sector became more competitive, attracting more investors in all fields of energy. However, the targeted extent of liberalisation has not been achieved in full. In any case, Turkey's long-term target is to stop being an energy importer and start exporting energy.
2. Turkey's energy demand is estimated to grow by approximately seven per cent each year until 2023.
3. Prior to 9 July 2018, there was a fourth state-owned company active in the electricity market, namely Türkiye Elektrik Ticaret ve Taahhüt A.Ș. ("TETAȘ"), which was a state power trading entity. On 9 July 2018, TETAȘ merged with EÜAȘ.
4. Published in the Official Gazette dated 3 March 2001 and numbered 24335.
5. Published in the Official Gazette dated 2 November 2013 and numbered 28809.
6. Published in the Official Gazette dated 12 May 2019 and numbered 30772.
7. See Section 3 for further information.
8. Published in the Official Gazette dated 14 February 2011 and numbered 27846.
9. Published in the Official Gazette dated 1-14 April 2009 and numbered 27200.
10. Published in the Official Gazette dated 17 May 2014 and numbered 29003.
11. Published in the Official Gazette dated 28 January 2014 and numbered 28896.
© Kolcuoğlu Demirkan Koçaklı Attorneys at Law 2019
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