THE POWER TO BE

Turkey 2013 | EXECUTIVE GUIDE | REVIEW: LEGAL

Mr. Zeynel Tunç, Counsel heading the Energy, Infrastructure, and Construction Practice at Paksoy, on Turkey's electricity law, the developments taking place in the privatization of its electricity market, and on renewable energy.

Turkey is one of the fastest growing and promising energy markets in the World. Considering the key parameters such as per capita energy consumption, growing economy, and population, it looks like the country will maintain this position for a long time.

Turkey continues to grow: Since 2002 GDP per capita has tripled from $3,492 to $10,504, and GDP per capita surpassed $15,000 according to purchasing power parity (PPP). A growing population supported by a strong economy makes Turkey one of the most attractive markets among the emerging economies. The country still needs to pour billions of dollars into the energy and infrastructure sectors to meet the growing demand. Electricity consumption is also expected to continue to grow strongly in the future, requiring billions of dollars investments each year over the coming years, indicating an attractive market climate for private investors. The global energy companies, mostly European, entered and continue to enter the Turkish electricity market to have a share in this attractive market, which is expected to grow 8% every year.

As a result of Turkey's financial crises from 1998 to 1999 and again in 2001, and from subsequent IMF pressure originating from its monetary and policy assistance to Turkey, the Turkish government had no option but to stop providing Treasury guarantees for investments carried out by the private sector. Having failed in making long-overdue energy investments due to a lack of funds, Turkey felt the need to liberalize its market to overcome the growing energy issues in the country.

Consequently, in response to the need for sustainable private involvement in the electricity sector, the government embarked on a far-reaching reform program to create a competitive market structure with separate generation and distribution firms that may gradually be privatized. As such, motivations by the Turkish government to engage in power sector reform and to open up its power sector to competition were driven by the high cost of energy supply, the high unreliability of the system, and the significant underinvestment in energy.

During the course of this liberalization process, a new legal framework for the Turkish electricity market was introduced by the passage of the Electricity Market Law No. 4628 (the Previous EML) in 2001. The Previous EML and the secondary regulations following the passage of the Previous EML cover generation, transmission, distribution, wholesale, retail and other respective services of electricity, including its import, export, and the rights and responsibilities of individuals receiving those services related to electricity. Furthermore, a regulatory body, the Energy Market Regulatory Authority (EMRA), was established to oversee the market players and their activities.

Finally, in addition to passing various secondary legislations under the Previous EML, a new Electricity Market Law No. 6446 (the New EML) was enacted recently, on March 30, 2013. The New EML introduced a number of new features to Turkey's electricity market, such as a preliminary license, a supply license for retail and wholesale activities, and the incorporation of a new market operator for the operation of the wholesale markets. With the New EML, the Previous EML was not promulgated entirely, but its name was changed to “the Law on the Organization and Competence of the Energy Market Regulatory Authority," which only covers the establishment and scope of authorities of the EMRA.

The market is still in the liberalization process, and the ultimate objective is to create a fully functioning and competitive market. The reforms in the market are aimed at the establishment of competitive market prices reflecting the cost of new generation required to keep pace with the growing demand.

The privatization process for distribution regions is about to be completed. Once the process is complete, the whole distribution system will be in the hands of the private sector. These distribution regions are privatized through the transfer of operational rights, while the ownership of physical assets remains with the state.

Although public companies still have a major presence in the market, system expansion has substantially been driven by independent power producers, which currently hold a significant share of generation capacity. The electricity generation market share of the state will gradually decrease through the privatization of the generation assets of Turkish Electricity Generation Co. (EÜAŞ). Apart from strategic hydro electrical power plants such as Atatürk Dam and HEPP, Keban Dam and HEPP, the assets of EÜAŞ will be privatized.

Despite strong growth, the Turkish economy has been suffering from a current account deficit driven by energy costs.

Currently, the main fuel source for electricity generation is natural gas, which Turkey does not have. In order to tackle this chronic economic problem, the government has been launching initiatives to minimize the role of imported natural gas in electricity generation. For this purpose, incentives are granted to investments in renewables and lignite-fired power plants, such as discounted connection fees, tax advantages, and feed-in tariffs.

Furthermore, Turkey promotes renewable energy investments through investment incentives and feed-in tariffs. There have been a large amount of investments in wind energy, though the untapped solar potential is yet to be utilized. Turkey lies in a sunny zone (36º and 42ºN latitude) with average solar radiation of 3.6 kWh/sqm day, and the total yearly radiation period is approximately 2,640 hours. The EMRA recently accepted applications for solar power generation licenses, and the number of applications indicates strong investor interest.

Overall, Turkey has shown that it is committed to promoting a robust private investment regime for its electricity market. It has passed a great deal of progressive legislation, and created road maps to address population growth and energy consumption. The government is implementing these changes so that it may provide its population with a stable, efficient, clean, and secure source of energy. By making its market more competitive and transparent, the government also hopes that this will in turn attract more private investment and increase the domestic production of materials associated with such investments. Furthermore, Turkey has been making efforts to promote the development of its renewable energy sector to meet its population's growing demand for energy rather than relying more on foreign energy imports. The untapped solar energy potential of Turkey promises relatively good opportunities for investors.

One of the apparent objectives of the New EML is to eliminate the so-called “license traders" from the market and only allow real investors to be active. The preliminary license concept will force license holders to invest in projects to a certain extent (until the preliminary license is turned into a generation license).

The provisions of the New EML on coal- and lignite-fuelled generation assets are just a reflection of the government's announced policy to utilize the country's large lignite fields. The initial reaction of the market is also a good sign that there will be large-size investment flows into this sector from domestic and international businesses.

Likewise, the Turkish natural gas market is also promising. Turkey has seen a rapid increase in its natural gas consumption in the last two decades following extensive urbanization and, as a result, a significant increase in industrial production. Besides its proximity to natural gas production areas (such as Russia, the Caspian Sea, and the Middle East) and to consumers in southern and central Europe, Turkey will play a key role in the foreseeable future in terms of natural gas transportation through the construction of additional pipelines, of which the Trans-Anatolian Natural Gas Pipeline project is one.

Turkey's energy regulatory policy has changed dramatically in favor of a transparent and free market environment, especially in the years after the late 1990s. As a result, the natural gas market has become increasingly competitive and open to local and international companies. In order to promote free market values and provide a competitive and transparent natural gas sector for both local and foreign companies, the Natural Gas Market Law was enacted in 2001, putting an end to the state-owned pipeline company BOTAŞ' monopoly and paving the way for private investors to enter the natural gas market.