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Solar power has been one of the hot topics in the Turkish energy market in recent years. Considering the immense potential of solar energy, especially in the south of Turkey - with an annual irradiance potential of approximately 1.33 MWh per square meter - such attention to solar power should come as no surprise.

Although the potential of solar power in Turkey has been recognized for many years, it was not until June 2013 that the Energy Market Regulatory Authority (EMRA) in Turkey began to collect license applications for solar power plants. A limit of 600 MW has been set for the total amount of licensed capacity in this first phase. This limit has been criticized as being too low by market players. The number of applications to obtain solar power plant licenses proves these critics right; within four days, the total capacity of applications received by the authorities amounted up to 8.9 GW.

This high level of interest is very promising for the future of solar power in Turkey and will definitely put pressure on the government to increase its investment in the national grid as well as the capacity allocated for solar power.

It’s not only licensed solar power that investors are interested in. Unlicensed solar power has attracted considerable attention after the upper limit for projects without a license was increased from 500 kW to 1 MW. Investors are looking to use this opportunity to create portfolios based on projects of installations under this limit.

There are two laws regulating the electricity production using renewable energy resources: the Electricity Market Law and the Renewable Energy Law. The Electricity Market Law is the core law in the electricity market, regulating all licensed activities. Renewable Energy Law is specific to renewable energy and mainly regulates certain incentives granted for production of electricity by using renewable energy resources, including solar power.

 

Incentives for renewable energy

As a country almost barren of oil and gas resources, Turkey’s focus for local energy generation has shifted to renewables to minimize the negative effects of importing natural gas and oil to produce electricity. The government considers the funds transferred for the import of natural gas and oil to be one of the major reasons for the increase in Turkey’s current account deficit and, therefore, tries to decrease fuel imports by creating incentives for the use of renewable energy resources.

Some of the important renewable energy incentive policies that Turkey has implemented are as follows:

Feed-in tariff. Various legislative efforts have been made to encourage investors to make investments in power plants using renewable energy resources. The most important of these efforts has been the feed-in tariff (FIT) mechanism.

The Renewable Energy Law introduced the FIT concept to Turkey. However, it could not attract the required amount of investment at first because it provided the same price for every type of renewable energy, which proved to be too low to satisfy installation and operations costs.

Taking this problem into consideration, the Renewable Energy Law was amended in 2011 to increase FIT prices overall and to introduce tiered pricing for different types of renewable energy resources according to their perceived cost-effectiveness. A new incentive was also introduced that provides an additional increase in the FIT price if certain components used in the power plant have been produced in Turkey.

The FIT prices are determined as $0.133/kWh for solar power plants, $0.105/kWh for geothermal power plants, and $0.073/kWh for hydroelectric and wind power plants. If a renewable energy power plant uses local components listed in the Renewable Energy Law, the FIT applied to that power plant will be increased by an additional $0.040/kWh to $0.035/kWh, depending on the type of local component used in that power plant.

The incentive of using locally produced components may be subject to a dispute before the World Trade Organization (WTO), of which Turkey is a member. A similar system adopted by the Province of Ontario in Canada was challenged by the European Union and Japan before the WTO. Ontario lost the dispute and changed its incentive system to be in conformance with its responsibilities under WTO agreements.

Discounted license fees. Another important incentive for renewable energy power plants is a discount in the license fee. Renewable energy power plant licensees are required to pay only 10% of the ordinary pre-license and license fees.

 

 

Unlicensed electricity production. One of the most welcomed amendments brought about by the Electricity Market Law relates to unlicensed power generation. Under the previous electricity market law, power plants using renewable energy resources with a maximum capacity of 500 kW could generate electricity without obtaining a license from the EMRA. The maximum limit was constantly criticized for being extremely low.

The Electricity Market Law responded to the feedback from the market and increased the maximum capacity to 1 MW. This created a considerable increase of interest from equipment supply companies, mostly in the solar energy sector. The investors also began to use this as an investment model by creating multiple power facilities each with a capacity of 1 MW.

 

Some restrictions apply

Entry to the electricity market - even on an “un-licensed” basis - is not free, nor is it without restrictions. The Electricity Market Law and the Renewable Energy Law have been supplemented with various regulations and annexes that detail the provisions of the main legislation. Like all regulated activities in the electricity market, a production license must be obtained from the EMRA in order to establish and operate a solar power plant in Turkey.

Only limited liability companies and joint-stock companies established in Turkey may obtain electricity production licenses. There are no restrictions on foreign ownership, however. Applicant companies may be backed by 100% foreign capital. The license regulation requires the applicant company to provide at least 20% of its own capital in the total estimated investment amount.

The Electricity Market Law introduced a new licensing system by incorporating a pre-licensing procedure before the actual licensing process. Pre-licensing is the first tier of a two-tier licensing system established to facilitate all administrative and bureaucratic requirements.

The previous electricity market law required the issuance of the generation license by the EMRA as a prerequisite for submitting other applications, ultimately delaying the process. The pre-license procedure aims to solve this problem. When a company applies for a license, it will first be granted a pre-license within a maximum period of 24 months.

With this pre-license, the applicant company will have the right to make applications for various administrative permits, licenses and related documents, as well as to acquire property rights and usage rights on the site where the facility will be built. If the necessary permits cannot be obtained over a period of 24 months - or if the obligations specified by the EMRA cannot be fulfilled - the applicant will not be granted an electricity generation license.

Although the 24-month pre-license period has been criticized by the market for being too short, the law has not been amended to reflect this view. This demonstrates the enthusiasm of the government for new electricity generation projects to be realized as quickly and efficiently as possible. The question is whether the same level of enthusiasm will be shown by the administrative bodies issuing the required permits.

 

Solar licensing procedures

License application procedure for solar and wind power plants differs from the licensing procedure of other power plants. That is, investors cannot apply for solar or wind licenses any time they want. They need to wait for the pre-determined application dates.

There is a simple reason for this: The transmission system of Turkey needs to have available capacity to connect solar and wind power plants to the national grid. If a lot of these intermittent power sources are connected to the transmission system at the same time and without coordination, this may create problems in terms of balancing the system for periods when the wind and solar resource is not available. Moreover, the regions where such intermittent resources are most abundant are understandably where the vast majority of proposed projects are concentrated, and there is generally more than one application for the same sites in these regions.

The “first-come, first-serve” principle would not be the best policy for granting solar or wind licenses because such a system would tend to encourage license-trading. Therefore, the Electricity Market Law has avoided this policy. Instead, a system was adopted where the EMRA collects license applications within a given period. That’s why the Turkish Electricity Transmission Co. examines its grid system each year and allocates available capacity for different connection points to which solar and wind power plants can be connected.

According to the license regulation, vacant capacity for solar and wind energy facilities will be declared by the Turkish Electricity Transmission Co. by April 1 of each year. Based on those available capacity figures, the investors will be able to make pre-license applications that year for wind power plants during the first five days of October and for solar power plants during the last five days of October.

The pre-determination of the license application dates has been a very important amendment in Turkey’s electricity market legislation. Formerly, the application dates were not specified in the legislation. Thus, the investors were obliged to wait for EMRA to declare a date when it would collect the license applications for wind and solar power plants. This prevented the potential investors from making projections for their future investments.

As there are not too many available connection points declared each year, it is normal that there is more than one application for the same connection points. In those cases, a competition is opened by the Turkish Electricity Transmission Co. to determine which company will be entitled to connect to the grid for a particular slot.

A contest regulation sets forth that the winner of the completive bidding must make a payment to Turkish Electricity Transmission Co. in three installments.

Under the former regulation, the payments were to be made in 20 years. These amendments under the new contest regulation separate the serious investors from the casual speculators and make it more likely that the former will be able to obtain solar or wind licenses.

The energy sector in Turkey has suffered much from companies obtaining electricity production licenses for the sole purpose of trading them. The licenses that were not purchased by actual investors did not turn into actual production, which had a negative impact on the electricity supply. The pre-licensing procedures for “un-licensed” wind and solar projects have the goal of creating renewable energy projects that actually produce electricity.

There is no doubt that Turkey has a great potential in solar power, but this great potential has to be turned into actual electricity production. The parliament, the government and the EMRA has just begun to make efforts to that effect. Therefore, it is fair to say that the solar power market in Turkey, which was born late, is now taking its first baby steps. With enough support from the government and the EMRA, it can easily start to run on its own toward maturity. R

 

Ozan Karaduman is a senior associate at Istanbul-based law firm Mehmet Gun & Partners. His practice focuses on mergers and acquisitions, contracts, and telecommunications and energy law. He can be reached by email at info@gun.av.tr.