TURKEY’S ENERGY MARKET – GLOBAL LEGAL INSIGHTS – Energy 4th Edition
Kesikli Law Firm has authored the Turkey Chapter of Global Legal Insights – Energy Book 2015. The Energy Book covers 35 jurisdictions including Australia, Austria, Belgium, Benin, Bolivia, Brazil, Bulgaria, Chile, Congo, Cyprus, Finland, Georgia, Germany, Ivory Coast, Japan, Kazakhstan, Kyrgzystan, Luxembourg, Macedonia, Mexico, Mozambique, Nigeria, Portugal, Romania, Serbia, South Africa, Spain, Sweden, Switzerland, Tajikistan, Turkey, United Kingdom, USA, Uzbekistan and Venezuela.
Turkey Chapter of the Book is now live on http://www.globallegalinsights.com/practice-areas/energy/global-legal-insights—energy-4th-ed./turkey
Overview of the current energy mix, and the place in the market of different energy sources
The highly appealing energy sector is at the centre of Turkey’s foreign and domestic policies. In the ambit of the current domestic and foreign political crises, Turkey still retains its attractiveness for foreign energy investments as the Europe’s 6th and the world’s 16th largest economy.
An overview of Turkey’s electrical energy market is outlined in the table below, in accordance with the information gathered from Energy Ministry’s Strategy Development Directorate’s July 2015 Report No.09 (“Ministry’s Overview”): Chart 1.1 Overview of Turkey’s Electrical Energy (in GWh) – See chart in book.
The Turkish Government has established very ambitious objectives for 2023 relating to its electricity generation capacity based on Turkey’s high potential of renewable energy resources (hydro, wind, solar, geothermal), the realisation of which would increase the share of renewable energy in electricity generation from 2% to 30% by 2023. The ultimate target for power generation is to reach 120 gigawatts by 2023, which would require an approximate US$ 110bn of investment into the energy sector. Fast population growth, increasing energy demand and energy supply security strategies are the predominant factors encouraging the energy investments. Aiming to be among the top 10 economies in the world, Turkey is expected to undertake a remarkable economic transformation and regulatory harmonisation in the forthcoming years. It is expected that increased liberalisation will open new opportunities for global and local market players and foster competition in energy markets, which will consequently establish supply security.
Electricity: Until the enactment of the Electricity Market Law in 2001 which led to substantial progress in the liberalisation of the Turkish energy market, the private sector’s involvement in electricity activities in Turkey was limited to the Build Operate (BO) & Build Operate Transfer (BOT) model-based concession framework, and as such was exceptional. The privatisation of the Turkish energy market, the aim of which was to create a more liberal and competitive marketplace, started in 2004. Assets that were inefficient and required investment were targeted during the first phase of the privatisations, the most substantial being Turkey’s distribution network (divided into 21 regions) which were fully privatised as of 2013. The privatisations of natural gas-fired power plants and small hydropower portfolios have also been commenced as of 2008. While the installed power capacity in Turkey was around 28,000 MW in 2001, now it is around 71,600 MW; and while electricity production by the publicly held power plants represented 21.2% of total production as of the end of June 2015, this figure was 41.6% in 2004.
Chart 1.2 Allocation of Installed Power between Public and Private Sectors (in MW) – see chart in book.
While gross electricity consumption in 2010 was 210,434 GWh, this figure rose by 21% in 2014, reaching 255,545 GWh. Turkey imported 7,805 GWh of electricity and exported 2,696 GWh in 2014. These figures show that the Turkish energy market is hungry for energy investments.Larger hydro projects amounting to 1,400 MW are aimed to be privatised in 2015 and 2016, and in long-term projections, hydro portfolios with a total capacity of 6,000 MW are intended to be privatised.
Power generation percentages based on the energy sources are mentioned in the below chart derived from the information gathered from the Ministry’s Overview: Chart 1.3 Overview of Turkey’s Electrical Energy (GWh) – (see chart in book)
Renewables: While Turkey has great potential for power generation through renewable sources, electricity generation capacity is highly dependent on imported natural gas, which causes a huge current deficit. Accordingly, Turkey’s energy strategy aims to establish energy supply security for the forthcoming years, decrease dependence on imported energy sources and improve energy efficiency. Turkey’s energy strategy also aims to improve the investment climate for foreign investors, as a result of which certain global market players have already established their positions in the market. If the targets set forth in the Energy Ministry’s 2015-2019 Strategic Plan are met, the energy mix in terms of resources would be approximately 40% natural gas, 25% hydro, 25% coal and 10% renewables by 2019.
The current power generation overview according to sources is mentioned below information gathered from the Ministry’s Overview): (see chart in book)
\ Incentives for Renewables: Turkey applies the Feed-in Tariff and certain incentives programmes to promote new renewable energy investments (see chart 1.5 below). Renewable power projects using locally manufactured equipment also take advantage of the additional (increased) Feed-in Tariff rates. This advantage encourages global equipment suppliers to build their own manufacturing facilities in Turkey. The general investment incentive plan entitles the owners of power plants using renewable energy sources to VAT and customs duty exemptions. Another type of incentive is for regional investments which are granted based upon the regions and are determined so as to redress regional imbalances within the country. Owners of investments equal to or above TL 50m are eligible for a strategic investment incentive plan, for the production of intermediate or final products with more than 50% import dependence. Research and development activities are encouraged through the large-scale investment incentive plan.
Chart 1.5 Feed in Tariff Schedule based upon the Law (see chart in book)
Solar: Turkey is a sun-rich country which has enormous potential for solar energy production. It is expected that 600 MW of solar energy production licences will be granted in 2015 through several phases of licence tenders. Limited infrastructure, and concerns over effective energy production, constitute the rationale of this phased tendering structure. The first phase of this year’s tenders was closed as of April 2015, and the following phases are expected to be opened in the near future.
Another option for investors is going for unlicensed projects, which became attractive due to the fact that unlicensed projects are not subject to licensing conditions and no tender process is required for such applications. While the unlicensed option was intended to encourage cogeneration projects to balance their uncontrolled production and to primarily meet their own power needs and sell the rest on the spot markets, unlicensed generation became an attractive alternative. Investors not willing to proceed with the time-consuming and bureaucratic licensing steps and conditions of large-scale licensed projects were drawn unlicensed projects, especially in the solar market.
As per the estimations of the Ministry of Energy, solar installed capacity is expected to be increased in stages in the coming years, to a minimum amount of 3,000 MW by 2023, which requires an approximate total of US$ 7bn of investments.
Wind: Turkey’s wind energy potential has not yet been realised through investments. The first attempt was made in 2007, when a total of 75 GW of licence applications were made in one day and many licences were granted to the applicants. Many of those projects could not be realised due to the licensees’ lack of finance, which resulted in a failure to meet the targeted capacity. Many of those licensees attempted to transfer their licences indirectly through the sale of the applicants’ shares as the trade of licences was banned, however only a few of them were able to carry out this plan. This experience prompted the legislators to set forth certain financial criteria to be met by the applicants of licences, and a pre-licence procedure was introduced recently. Between 24th–30th April 2015, 1,095 applicants applied for a total of 42,273.65 MW capacity to the Energy Market Regulatory Authority (“EMRA”), while the allocated capacity was limited to 3,000 MW.
Geothermal: While the share of geothermal energy represents a relatively small portion (1.18% as of the end of June 2015) of Turkey’s energy mix compared to other sources, it is expected to rise considerably in the near future due to the technological developments and investments that are intended be made for the exploration of the resources. Studies are being conducted by governmental authorities to introduce new incentives supporting investors’ early-stage explorations such as exploratory drilling and required examinations. Governmental authorities are also considering setting out additional Feed-in Tariffs to promote investments in geothermal energy.
Coal: Turkish energy policy welcomes the use of domestic energy sources, supporting this with the investment incentive system that favours utilising coal and lignite, both abundant in Turkey. Coal-fired power generation accounted for 27.57% of electricity production in Turkey by the end of June 2015. Turkey’s coal potential is still being exploited and new coal plants are being built.
Natural gas: Turkey is one of the largest gas markets in Europe in terms of its annual consumption rates, and unlike many other European countries, Turkey’s natural gas consumption is still growing robustly (1.7 trillion cubic feet in 2014). As Turkey’s natural gas reserves are very limited, it imports approximately 98% of its natural gas from countries like Russia, Azerbaijan, Algeria, Iran and Nigeria, mainly through the State-owned company Petroleum Pipeline Corporation (Boru Hatları ile Petrol Tasima Anonim Şirketi) (“BOTAS”) which dominates the natural gas sector in Turkey. Turkey’s unique geographic location surrounded by the world’s leading oil and gas reserves (Russian Federation, the Caspian region, Mediterranean, North Africa and the Middle Eastern countries), makes it one of the major natural transit countries for maritime and pipeline transportation of gas and oil.
The controlling legislation of the natural gas market is the Natural Gas Market Law No.4646, enacted with the objective of liberalising the natural gas market. The dominant gas market player, State-owned BOTAS, is required by such law to reduce its market share in import, wholesale and distribution fields, and subsequently BOTAS’s import contracts are being gradually transferred to other market players through tenders. However the current market share of BOTAS with regard to imports still represents a high proportion of the natural gas import market.
While Turkey’s power is substantially dependent on natural gas, its gas storage facilities are still very limited (approximately 3 billion m3). Further investments into the construction of gas storage facilities are crucial to prevent seasonal imbalances in natural gas demand and to reduce the financial losses due to “take or pay” basis contracts. Natural Gas Market Law requires importers to provide guarantees to arrange available storage areas for at least 10% of their gas imports. The government has also taken the initiative to cover the aforementioned concerns with the on-going construction of the Salt Lake Natural Gas Underground Storage facility, with the objective (amongst general concerns) to optimise the operation of the natural gas pipeline network in Central Anatolia. The plan is to reach a capacity of 500 million m3 working gas capacity when the first phase is completed in 2016, and 1 billion m3 working gas capacity when the second phase is completed in 2019. When the project is completed, a maximum of 40 million m3 of natural gas will be able to be distributed to the Turkish natural gas network per day. The facility is planned to be fully operational by 2019. There are also other on-going gas storage projects led by the government.
Turkey is associated with four international gas pipelines, namely: the Russia – Turkey West Gas Pipeline; the Russia – Turkey Blue Stream; the Iran – Turkey Pipeline; and the Baku – Tblilisi – Erzurum Pipeline. Natural gas also enters the main BOTAS transportation system through LNG terminals at Marmara Ereglisi and Aliaga; from the Turkish Petroleum Anonim Ortakligi (“TPAO”) store at Marmara Degirmenkoy; and from two production sites in Turkey.
The current natural gas import figures of Turkey for the years 2004- 2015 by country is outlined in the table below (Chart 1.6) based upon information gathered from the Ministry’s Overview:
Chart 1.6 Natural Gas Import by Country (million m3) (see chart in book)
Chart 1.7 Crude Petroleum and Natural Gas Consumption (see chart in book)
Petroleum: Turkey’s oil reserves are located in the Batman, Adiyaman and Thrace regions. Turkey produces 61,000 b/d of petroleum and other liquids in Turkey which accounts for approximately 9% of Turkey’s oil consumption. State-owned TPAO is the controlling exploration and production entity in Turkey, holding privileged rights in exploration and production activities. TPAO collaborates with foreign players such as Shell, in the form of joint ventures for certain upstream activities. The real potential of Turkey’s petroleum reserves has not been discovered yet, due to the requirement of high-value investments and certain foreign politics.The current crude petroleum and natural gas consumption overview of Turkey is shown below (based upon information gathered from the Ministry’s Overview):
Changes in the energy situation in the last 12 months which are likely to have an impact on future direction or policy
Turkey’s overall gas security policy carries crucial importance for the country’s energy security. Natural gas-fired plants have suffered losses due to expenses associated with the costs in recent years and have been shut down in certain periods. In addition to that, the Turkish Lira continues to fall dramatically against the US dollar and euro due to foreign and domestic political crises, and the current deficit is widening. Negotiations regarding a discount in natural gas prices are currently being undertaken with Iran. Concurrently, as announced by the Anatolian Agency, Turkey and Iran have launched a new round of negotiations on a project to build an additional pipeline to carry natural gas to Europe. Turkey has also been involved in other natural gas pipeline projects, as hereinafter discussed, which would lead Turkey to diversify its long-term supply contract portfolio and enable Turkey to become an energy hub from Central Europe and the Middle East through Europe.
On the other hand, while Turkey has successfully privatised the distribution sector, it still needs to complete its structural action plan to liberalise the natural gas market. Transparency and competition must be established and the unbundling of BOTAS must be secured to realise a more liberalised natural gas market. Successful integration of the natural gas market to EPİAŞ, Turkey’s new energy trading platform, would also be a desirable step to establish an open and transparent market, together with the privatisation of the İstanbul Gas Distribution Company (“IGDAS”) as contemplated by the Draft Amendment on the Natural Gas Market Law.
Major events or developments
Gas pipeline projects: Indisputably, the Trans Anatolian Natural Gas Pipeline Project (“TANAP”) is the most preeminent development affecting the Turkish Energy Market. Turkey and Azerbaijan signed an intergovernmental agreement in 2012, and considerable progress has been made thereafter. TANAP aims to transport natural gas produced from Azerbaijan’s Shah Deniz II field in the Caspian Sea to Turkey and then on to Europe. TANAP has been seen as a major project that will contribute to the supply diversification and energy supply security of Turkey and European Union countries. The signing ceremony for the Shareholder Agreement was held on March 13th, 2015 at the Ministry of Energy and Natural Resources with the participation of representatives from Turkey, the State Oil Company of Azerbaijan Republic (SOCAR), BP and BOTAS. After the acquisition process is completed, TANAP’s shareholding structure will be as follows: Southern Gas Corridor Closed Joint Stock Company (SGC) 58%; BOTAS 30%; and BP 12%. Within the scope of the TANAP project, gas flow to Turkey is planned to start in 2018, and the initial capacity is expected to be 16 billion cubic metres per year, which will be gradually increased to 24 billion cubic metres and subsequently to 31 billion cubic metres.
It is also expected that new gas sources will be introduced to the Turkish gas market through Turkish Stream, the Shah Deniz 2 project, the Iran − Turkey − Europe Natural Gas Pipeline Project (ITE), the Absheron project and the Israel projects.
Establishment of EPIAŞ: On theMarch 12th, 2015, EPİAŞ, Turkey’s new energy trading platform, a joint stock company, was officially established with 61,572,770.00 TL capital. This substantial step will play an important role in the liberalisation process of the market. EPİAŞ is going to be a managing authority in the electricity sector in Turkey as a private corporation under the supervision of Borsa Istanbul A.S (“BIST”) (Securities Exchange) and EMRA. EPİAŞ’s shares are divided into three types. Type A shares are owned by Turkey’s transmission system operator, TEİAŞ and BOTAS equally and amount to 30% of total shares. Type B shares are owned by BIST and amount to 30%. Type C shares comprise the remaining 40%, which are open to private energy companies dependent upon certain conditions. Furthermore, private energy companies are prohibited to have more than 4% of EPİAŞ shares regardless of whether they fulfil the aforementioned conditions. As a management body partially owned by private individuals, EPİAŞ seems to be an important step towards the privatisation phase.
Major blackout: On April 3rd, 2015 Turkey had a major blackout which affected almost every province. TEİAŞ stated that the reason for the power cut was a problem in the transmission lines. The Prime Minister of Turkey underlined that all possibilities, including a terrorist attack, were being investigated. Throughout the day, the Minister of Energy and Natural Resources made three declarations in which he made predictions as to the cause of blackout, although he could not specify the reason precisely. Three days after the blackout, the Minister of Energy and Natural Resources declared that the power cut was due to a sudden shutdown of five transmission lines. He added that, in his opinion, while there had been a technical failure, the power cut was triggered by an operational mistake. The head of TEİAŞ resigned after this huge blackout. Interestingly, on the day of the incident only hydro and coal plants were operating and gas-fired plants were shut down due to low prices. A failure in one of the coal-fired power plants triggered the blackout as there was no back-up power. This experience begged the question: are renewable energy sources fully dependable even if we increase their shares within the market? Coincidentally, on the night of the incident, the Turkish Parliament had passed a law ratifying the collaboration agreement between Turkey and Japan on the construction of nuclear power plants in Turkey.
On the day of the massive blackout, the opposition party submitted a draft law on the Indemnification of Monetary Damages Caused by Major Power Cuts. This proposed law, which was consequently declined, included four clauses which had proposed that damages sustained as a result of major power cuts throughout the country should be compensated by the Treasury of Turkey.
Interconnection: On April 15th, 2015 Turkey was permanently connected to one of the largest AC synchronous grids in the world, ENTSO-E’s Continental Europe grid, after a long-term negotiation process and a trial period that had begun in September, 2010. This constitutes the first legally binding agreement on energy between the European Union and Turkey. This plug-in to Europe’s grid will be extremely beneficial to the Turkish electricity market as it brings new opportunities to the import and export of electricity and is likely to increase the reliability of electricity supply within the country.
Developments in government policy/strategy/approach
In an effort to increase energy production, the predominant project of the Turkish government has been the building of two nuclear power plants. These plants have caused much public debate due to the inherent hazards of operating nuclear power plants and the fact that Turkey is located in a highly active seismic zone. The first nuclear power plant (“the Akkuyu NPP”) is going to be built in Mersin Province. The construction of the Akkuyu NPP will be initiated by the end of 2015. Turkey has signed an intergovernmental agreement related to this project with the Russian Federation which has been ratified by Law 27648 of July 21st, 2010. The Akkuyu NPP will have four power units with a capacity of 1,200 MW each. The projected lifespan of the Akkuyu NPP is 60 years. The second nuclear power plant is going to be built in Sinop Province (the “Sinop NPP”). This power plant will also have four power units, however the capacity of each power unit will be 1,100 MW. A joint venture comprising Mitsubishi Heavy Industries Ltd., a Japan corporation, and Areva SA, a French corporation, has been selected to carry out this construction. The construction of the Sinop NPP is planned to commence in 2017.
Developments in legislation or regulation
Electricity Market Law: As of March 2014, the previous Electricity Market Law No.4628 (“Previous Electricity Market Law”) was partially amended and renamed as the “Law on the Organization and Duties of the Energy Market Regulatory Authority”, and the new Electricity Market Law No 6446 (“New Electricity Market Law”) entered into force. A summary of the introduced concepts of the New Electricity Market Law and its secondary legislation is set forth below:
Licensing: Unlike the Previous Electricity Market Law, the New Electricity Market Law (and License Regulation) introduced a new licence type called “supply licence” as a result of the merger of wholesale and retail licences.
*Pre-licensing process*: In addition to the current licensing system, the New Electricity Market Law introduced a new system by incorporating a “pre-licensing procedure” for electricity generation activities before the actual licensing procedure. Under both the Electricity Market Law and the License Regulation the pre-licence was defined as the permission issued for a specific time period and for obtaining approvals, permissions, licences etc. which are required for the commencement of generation facility investments by legal entities intending to conduct generation activities. As per the License Regulation, the term of pre-licensing cannot exceed 24 months. However, in line with the source type and the installed capacity, the application terms of the pre-licence may be extended up to 36 months, contingent on EMRA’s approval. With pre-licensing systems, the legal entities which will be engaged in electricity generation activity will have the opportunity to fulfil their required administrative and bureaucratic obligations within this 24-month period. By providing this opportunity, the pre-licence procedure aims to implement a more functional and convenient practice preceding the obtainment ofgeneration licences.
*Unlicensed electricity generation*: As set forth under Article 14 of the New Electricity Market Law and Article 7 of the License Regulation, the following electricity generation facilities are excluded from obtaining a generation licence and incorporating a new company:
One of the major amendments of the Electricity Market Law with respect to unlicensed electricity generation was raising installed capacity limit for renewable energy plants from 500kW to 1 MW. Additionally, the Council of Ministers has been authorised to increase the maximum installed capacity limit for an unlicensed renewable energy plant up to 5 MW, based upon the source of energy.
Share transfer restrictions: The pre-licensing process comes with a trade-off: until the relevant licence is granted, pre-licence holder legal entities’ shareholders are not allowed to: (i) enter into any direct or indirect transaction that would change the shareholding structure of the legal entity; or (ii) enter into any transaction that would cause their shares to be transferred. This rule shall not apply where a share transfer is due to inheritance or bankruptcy, or with regard to the public shares of publicly held companies. Such share transfer restrictions shall not apply to legal entities that are granted pre-licences based upon international treaties. Another exception to the rule is that the rule shall not apply to changes in the shareholding structure of the foreign legal entity shareholders of pre-licence holders (resulting in an indirect change in the shareholding structure). This rule requires investors to set up and arrange all their financing and partnership structures before the pre-licensing process.
Proposals for changes in laws or regulations
Natural Gas Market Law No. 4646 (“Law No. 4646”) has been in force since 2001. Ever since then, in order to meet the requirements of markets and actors that were operating in the natural gas market, Law No. 4646 has been amended several times. However on 4 August 2014, a draft law (“Draft Law”) which proposes comprehensive amendments to Law No. 4646, was submitted to Parliament and is still expected to be enacted. A selected summary of the comprehensive novelties introduced by the Draft Law is mentioned below:
Liberalisation of the natural gas market:
As a significant step in the liberalisation of the natural gas market, the Draft Law brings a process for reconstruction of BOTAS. The Draft Law requires BOTAS to be unbundled, separating natural gas transportation, operation of LNG terminals and storage facilities, trading and marketing activities. Under this reconstruction process the Draft Law foresees that BOTAS’ role as the owner of the national gas grid remains; however, the vertically integrated legal personality of BOTAS will end within a maximum of one year after the date the Draft Law goes into effect. Accordingly, BOTAS will be split into three separate entities, conducting: (i) transmission activities; (ii) LNG plant operations and storage activities; and (iii) other activities. The third entity which may possibly carry out natural gas trading activities will retain the name BOTAS.
Furthermore, as per the Draft Law, this third entity which will retain the name BOTAS will not execute natural gas purchase agreements (excluding purchase agreements for LNG importation) or renew its current natural gas purchase agreements until its import rate falls to 20% of national consumption. However, with the decision of the Council of Ministers, BOTAS will be entitled to execute new natural gas purchase agreements to ensure gas supply security or to export gas. Additionally, Draft Law also contemplates that BOTAS will not have the right to execute natural gas sales agreement if the Council of Ministers adopts a decision in this respect; however, expired sales agreements may be renewed. The Draft Law further requires that sales made in accordance with quantities required for subscribers of gas distribution companies and last-resort supply obligations are excluded from this restriction.
Privatisation of Istanbul Gas Distribution Company:
As per the Draft Law, İstanbul Gas Distribution Company (“İGDAŞ”) will be privatised by the Privatisation Administration in accordance with the request of the İstanbul Greater Municipality (“Municipality”) provided that privatisation of İGDAŞ is conducted without prejudice to ownership and dividend rights of the Municipality and all financial rights arising from its shareholding remain with the Municipality.
One of the most important amendments introduced by the Draft Law is that no company (excluding generation companies) will be entitled to sell more than 20% of EMRA’s forecast for national natural gas consumption for each specific year.
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