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Turkish electricity market round-up 2020

January 18, 2021

2020 was an active year for the Turkish energy market. The uncertainties and strict measures taken in the early days of the pandemic did not impact the government’s critical energy-sector reform agenda items. Likewise, renewable energy sector investors worked hard to make their investments operational to benefit from incentives, for which the application deadline was initially scheduled to expire by December 31, 2020.

While considering options to replace the existing renewables incentive scheme, Turkey also focused on introducing new concepts to diversify the electricity market, both on the supply and demand side as well as in the trading area.

These concepts, which aim to create a deeper market that attracts participants from different investment and risk profiles will, undoubtedly, shape the energy agenda in 2021 and beyond.

Below is a brief summary of the major regulatory steps taken in 2020 along with our predictions as to what the next steps may be in 2021.

Electricity futures market introduced

The regulatory framework establishing the electricity futures market (Vadeli Elektrik Piyasası) (“EFM”) was introduced in February by the Energy Market Regulatory Authority (“EMRA”). In October, the Turkish Energy Exchange (“EPİAŞ”) and Istanbul Settlement and Custody Bank (“Takasbank”) signed a protocol to clarify the details of their cooperation to establish the necessary technical infrastructure for the EFM.

Initially scheduled to be operational by year-end 2020, to accommodate potential application and compliance challenges encountered by various stakeholders due to the COVID-19 pandemic, the start date of the EFM was postposed in November, to June 1, 2021. In December, EPİAŞ started to accept applications from interested parties to start virtual EFM simulations as of January 4, 2021.

Because the EFM is an electricity trading option with physical delivery obligations in the balancing and settlement mechanism, it is expected to attract over-the-counter transactions to an organized market and create greater market depth, price transparency as well as more predictability.

What do we expect from the EFM in 2021?

We expect that after the market becomes operational in mid-2021, energy companies wishing to manage power procurement costs and related risks will start actively participating in the EFM. A properly functioning EFM, with sufficient liquidity, is also expected to serve as a reference point for future energy investment decisions by a diverse group of investors.

Hybrid power plant option becomes available

In March, the installation of power plants utilizing multiple energy sources to generate electricity, hybrid power plants, became available by a set of amendments to the Electricity Market License Regulation (the “License Regulation”) and the Regulation on the Certification and Support of Renewable Energy Sources (the “Support Regulation”).

In June, EMRA also announced the “Rules and Principles for the Determination of Boundaries of Power Plant Areas Subject to License or Preliminary License” to set out principles for determining hybrid power plant areas.

These developments make it possible to install and operate two different varieties of hybrid plants: (i) “combined renewable energy plants" (birleşik yenilenebilir elektrik üretim tesisi), utilizing more than one renewable energy source in a single power plant; and (ii) "support-source energy plant" (destekleyici kaynaklı elektrik üretim tesisi), involving the addition of a secondary renewable source in the generation process.

Hybrid power generators are also allowed to sell output generated from renewable sources in the feed-in tariff mechanism (“YEKDEM”).

What do we expect from 2021?

It is anticipated that new greenfield projects will take into account the specific features of hybrid structures. Because there are specific designations of where hybrid energy projects may be located, such as forestry areas, agricultural lands, etc., which come with their own sets of regulation, developers will need to pay close attention to these regulations. We expect conversion of current power plants into hybrid power plants will develop strongly after the expected adoption of amendments to relevant legislation to facilitate development of hybrid power plants.

It is also expected that the complexities surrounding the installation and operation of hybrid power plants will require the energy sector to use more sophisticated EPC and O&M agreements.

New unlicensed generation category created

In December, Turkey adopted significant amendments to key legislation in a variety of energy sectors. Law No. 7257 on the Amendment of the Electricity Market Law and Certain Other Laws (the “Amendment Law”) has, among other things, introduced a new type of unlicensed electricity generation activity. Consumers are now able to generate their own electricity from renewable resources without obtaining a generation license. Electricity that can be generated without a license will be limited to the capacity specified in the grid connection agreement signed by the consumer. In other words, the existing 5MW limit on unlicensed generation does not apply if a consumer’s grid connection agreement provides for a larger capacity.

If an unlicensed generator produces more that its actual electricity consumption needs, the excess capacity may now also be traded.

What do we expect from 2021?

We expect the participation of auto-producers from a broad range of sectors in the power generation and trading activities.

Renewable energy certificates introduced

Issuance and trade of “Renewable Energy Resource Guarantee Certificates” (“YEK-G Certificates”), which are similar to EU Directive 2009/28/EC Guarantee of Origin certificates (GoO), has become possible by the Regulation on Renewable Energy Resource Guarantee Certificates in the Electricity Market (the “Regulation”) issued by EMRA in November.

YEK-G Certificates attest that a certain amount or proportion of electricity supplied to consumers has been generated from renewable energy sources. The certificates will be registered with a central database and all transactions (issuance, transfer, redemption and cancellation) relating to YEK-G Certificates will be conducted by EPİAŞ as the market operator.

What do we expect from 2021?

The YEK-G Certification model is a very new concept in the Turkish energy market. We view it as a response to the increasing amount of interest being paid by a diverse group of domestic and international market players to green certificates and green electricity supply agreements.

Further details regarding the certification process and operation of the organized trading market will be clarified in the near future  by EPİAŞ, after which time we believe YEK-G Certificates will start to be used actively in the Turkish market.

YEKDEM and other renewable energy incentives

Although it is anticipated that the government will introduce a new state incentive program for renewable energy investments, in the meantime Presidential Decree No. 2949 issued in September extended the deadline for participation in the existing YEKDEM program to June 30, 2021.

In December, Turkey adopted significant amendments to key legislation in a variety of energy sectors, including electricity and renewables (the “December Amendments”).  These amendments appear to indicate that the YEKDEM program will continue to be available even after June 30, 2021, although it is likely with new unit prices, denominated in Turkish Lira and lower than the prices set out in the Renewable Energy Law, to be determined by the President.

The December Amendments also extended the commissioning deadline to December 31, 2025 for the renewable energy based generation facilities to benefit from an 85% discount from permit, lease, servitude and utilization right fees for a ten-year period starting from their license issuance date. These facilities will also be exempt from paying the Forest Villagers Development Fee (Orman Köylüleri Kalkındırma Geliri) and the Forestation and Soil Erosion Control Fee (Ağaçlandırma ve Erozyon Kontrolü Geliri).

The December Amendments also changed the definition of “renewable energy resources” under Law No. 5346 on the Use of Renewable Energy Sources for Electric Energy Generation, where “landfill gas” and “other gasses emitted by biomass” are no longer included as renewable energy sources.

What do we expect from 2021?

The YEKDEM scheme, which enables generators to sell their output at fixed US Dollar denominated prices for ten years, is reported to be a driving factor behind most of the renewable power generation to date. The mechanism has also helped Turkey to realize national renewable energy generation targets.

We do not expect the program to be allowed to expire, but rather, in order continue to encourage renewable power generation and to increase in greenfield renewable energy projects, we expect the President to clarify post-June 30, 2021 unit prices and the price adjustment mechanism.

In the meantime, we see an increased interest in Renewable Energy Resource Area (“YEKA”) projects. Applications for the most recent small-size solar YEKA projects will be accepted between March 8-12, 2021.

December 2020 Amendments

In addition to YEKDEM, the December Amendments introduced further investor-friendly variations to the Electricity Market Law. These amendments include, among other things, eliminating the EMRA approval process for transfer of shares or change of control in license holders which are not subject to regulated tariffs; facilitated and more streamlined land allocation procedures for new investments; and a shortening from 10 to 5 years of the maximum period for the Turkish Electricity Transmission Corporation (TEİAS) to reimburse costs incurred by generators and consumers to connect their systems to TEİAS transmission lines.

What do we expect from 2021?

While we have seen that the December Amendments are welcomed by investors, achieving the market clarity and allowing the amendments to fully take hold requires further amendments to secondary legislation to bring it in line with the new regimes introduced by the December Amendments. We, therefore, expect the adoption of further amendments in 2021, targeting the secondary legislation.