Geothermal Electricity Generation in Turkey: Large Potential Awaiting Investors

Posted in Energy Environmental, social and governance (ESG)

Turkey is a country with ample geothermal energy resources. As opposed to oil and gas which are mainly imported, geothermal energy is a clean, sustainable and homegrown source of energy. Turkey is currently the fourth largest geothermal power producer in the world after the US, the Philippines and Indonesia.

The current installed geothermal electricity generation capacity in Turkey is 1.515 MW with a total of 48 plants in operation. The total electricity produced in geothermal plants is 885,139.93 MWh, equating to 3.44% of total electricity production in December 2019. According to the Turkish Geothermal Power Plant Investors Association, the target for 2020 is to have an installed capacity of 2,000 MW.

LEGAL FRAMEWORK

Pursuant to the Turkish Constitution, all natural resources are under the full control and ownership of the State. Exploration and operation rights of natural resources may be transferred to individuals or legal entities by the State for a limited time period in accordance with applicable legislation.

1.     GEOTHERMAL EXPLORATION AND OPERATION ACTIVITIES

Development of geothermal resources requires (i) an exploration license, and (ii) an operation license.

i. Exploration License

Exploration licenses, which enable private entities to conduct exploration activities in a specific geographical area, are issued by the General Directorate of Mining and Petroleum Affairs (Maden ve Petrol İşleri Genel Müdürlüğü) which is part of the Ministry of Energy and Natural Resources (Enerji ve Tabii Kaynaklar Bakanlığı – the “Ministry of Energy”).

Exploration licenses are granted for a term of three years and can be extended for an additional term of one year. In addition to licensed exploration activities conducted by private entities, the General Directorate of Mineral Research and Exploration (Maden Tetkik ve Arama Genel dürlüğü - the “MRE”) also conducts licensed exploration activities. Operating licenses for commercially viable geothermal resources identified by MRE are sold via public auctions to private entities.

ii. Operation License

An operation license enables the holder to use geothermal water, gas and steam for energy production, heating or for other industrial purposes. An exploration license holder must apply for an operation license before the expiration date of the exploration license.

The duration of an operation license is 30 years. The term may be extended indefinitely for further ten-year periods.

An operation license may be transferred, pledged or leased to a third party.

After securing an operation license, the holder has three months to apply for other required assessments and permits, including the certificate of Environmental Impact Assessment (the “EIA”), to avoid cancellation of the operation license.

If the operation license is secured for power generation, the license holder must apply to the Energy Market Regulatory Authority (Enerji Piyasası Düzenleme Kurumu - the “EMRA”) for a generation license within three months. The operation license will be cancelled if the operation license holder fails to timely file the application or if the application is rejected.

Failure to commence operations by the deadline specified in the operation license may result in cancellation of the license and the cashing of bid bonds deposited by the license holder.

2.     ELECTRICITY GENERATION

There are two types of electricity generation from geothermal sources: licensed and unlicensed.

2.1 Licensed Generation

A generation license grants its holder the right to construct and operate an electricity generation facility with the purpose of selling the generated power. Generation activities require the issuance of a preliminary license in order for the project company to start the construction of the generation facility.

i. Preliminary License

A preliminary license is issued to generators during the pre-construction stage. The generator must obtain the required permits, approvals and licenses to commence construction and also secure title to, or right of use of, the relevant land during the pre-licensing period.

The pre-licensing period is 24 months, unless there is a force majeure event (unavoidable and unforeseeable events beyond the reasonable control of the generator, including acts of God and war). This period may also, under certain circumstances, be extended for up to an additional 12 months by EMRA. If the generator fails to secure the required permits, approvals or licenses within the pre-licensing term, no generation license will be issued.

Direct or indirect changes in the shareholding structure of the generator are prohibited during this period. Any such changes or the failure of the generator to fulfill any requirements imposed by EMRA will result in the revocation of the pre-license.

ii. Generation License

Following the end of the preliminary license period, provided that all the conditions are met, EMRA will issue the generation license for a maximum period of 49 years.

The construction period, the construction completion date and the projected annual electricity generation amount will be indicated on the generation license.

2.2 Unlicensed Generation (License-Exempt Generation)

Certain generation activities may be undertaken without a license and are free from the requirement to form a separate entity for such activities. In general, private individuals and entities may directly or indirectly own and operate renewable energy generation facilities with a total installed capacity of 5 MW or less. Excess power not consumed by the generator may be sold back to the grid using the appropriate feed-in rate.

3.     ISSUES TO CONSIDER

3.1 Environmental Issues

Exploration, operation activities and subsequent electricity generation are subject to completion of the EIA process. The applicable legislation divides investment types into two different environmental risk profiles with different approval processes for each. Category one is comprised of projects that are likely to have significant adverse effects on the environment. Geothermal projects generating 20 MWe or more fall into this category. Category one projects require an environmental impact assessment report prepared by the project owner. After review of the report, the Ministry of Environment and Urban Planning (the “Ministry of Environment”) issues an “Environmental Impact Assessment Affirmative” or “Environmental Impact Assessment Negative” decision. In case of an Environmental Impact Assessment Negative decision, the project may not be developed.

The second risk category includes projects that are within certain safe harbor guidelines and are deemed less likely to have serious impact on the environment. For risk category two projects, the Ministry of Environment determines after review of the applicant’s file whether the above process should be commenced. If the Ministry of Environment issues an “Environmental Impact Assessment Not Necessary” decision, the project may be carried out without further assessment. If, however, an “Environmental Impact Assessment Necessary” decision is issued, the more burdensome process described above is triggered. Geothermal projects generating 5 MWe up to 20 MWe are within this category.

3.2 Land Issues

The title to or the usage right of a project site must be secured during the preliminary license period. State-owned land includes land registered in the name of the Treasury as well as other land under the control or at the disposal of the State. Legal use of such land may be secured by acquisition through tender or through servitude rights.

Application for use of forest lands must be made to the appropriate Ministry of Agriculture and Forestry Affairs Regional Directorate ( Tarım ve Orman Bakanlığı Bölge Müdürlüğü).

Turkish real estate regulations impose certain restrictions on ownership of real estate by companies with foreign shareholding.

The ownership right of land does not encompass the ownership right of geothermal resource on such land. Therefore, although land containing geothermal resources may be owned by a private entity, the state ultimately owns the geothermal resources within that land.

4.     BENEFITS AND INCENTIVES

Geothermal power plants that opt into the renewable energy support mechanism may benefit from feed-in rates provided by the Renewable Energy Law (Yenilenebilir Enerji Kanunu). The feed-in rate of US$ 105 MWh is valid for a period of 10 years for any geothermal facility operational by December 31, 2020. If a licensed generator uses locally manufactured parts (e.g., steam or gas turbine) an additional contribution will also be added.

The Renewable Energy Law also provides for a reduction of 85% on fees related to rent, right of access and usage permission for the first 10 years of operation for power plants commissioned prior to December 31, 2020 on land owned by the Treasury.

Geothermal power plants also benefit from the general incentive program of the Ministry of Industry and Technology (Sanayi ve Teknoloji Bakanlığı) if the project meets the criteria under the applicable rules. Incentives may include exemption from customs duties for imported machinery and equipment and exemption from value-added tax for imported or domestically purchased machinery and equipment.

5.     FINANCING GEOTHERMAL PROJECTS — WORLD BANK AND EUROPEAN BANK FOR RECONSTRUCTION AND DEVELOPMENT INITIATIVES

The World Bank announced on August 25, 2016, that Turkey had applied for up to US$ 290 million to fund the “Turkey Geothermal Development Project.” US$ 40 million of the US$ 290 million sought to be covered by the Bank’s Clean Technology Fund. The Turkey Geothermal Development Project, to be implemented by a public development bank, Türkiye Kalkınma Bankası A.Ş. (the Development Bank of Turkey), and Turkey’s first private development bank, Türkiye Sınai Kalkınma Bankası A.Ş. (the Industrial Development Bank of Turkey), was announced by the World Bank on November 1, 2016. The current closing date of the project is December 31, 2022.

The Turkey Geothermal Development Project, which has two components, aims to boost the geothermal sector by helping to minimize developer risk at the exploration stage and by providing long-term financing for the development and operation stages. The first component of the project, a Risk-Sharing Mechanism funded by the Clean Technology Fund’s US$ 40 million contribution, is designed to support geothermal investments early in the exploration and resource verification stages. The second component of the program focuses on the financing of geothermal investments made by the private sector companies throughout Turkey. The Development Bank of Turkey and the Industrial Development Bank of Turkey will both use the credit line provided by the World Bank specifically to support geothermal developers. Loans will be granted at market rates but with longer tenors than currently available. As of end of February 2020, almost US$ 200 million under the second component have been disbursed to the Turkish banks.

More recently, the European Bank for Reconstruction and Development, the Asian Infrastructure Investment Bank and the Black Sea Trade and Development Bank provided financing of US$ 350 million for three new units at Efeler geothermal power plant, expected to be the largest geothermal power plant when completed.

We expect that the interest in the geothermal power sector, both from domestic and foreign investors and financiers, will grow, helping Turkey reduce its dependence on important power.

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