In conjunction with Turkey’s growing population and economy, energy consumption has grown consistently in recent decades. According to World Bank Group data, energy consumption in Turkey has increased 25 percent between 2005 and 2015. Despite such an increase, Turkey’s per capita energy consumption is still below OECD average leaving room for more growth of demand.
Turkey’s domestic energy production capacity, on the other hand, is not sufficient to meet the increasing demand. In order to reduce dependence on imported fossil fuels and enable sustainable economic growth, Turkey is undertaking projects to increase and diversify its energy production capacity.
Currently, hydroelectric plants make up 31 percent of Turkey’s installed power capacity, whereas gas and coal constitute 26 percent and 22 percent respectively. According to TEİAŞ data, as of August 2019, solar and wind farms make up around 14 percent of Turkey’s installed power capacity. At present, nuclear power is not part of Turkey’s energy production portfolio. Construction of Turkey’s first nuclear power plant at Akkuyu was initiated in April 2015, and preparatory work for at least two other nuclear power plants is in progress.
The Turkish energy sector has undergone rapid liberalization since the early 2000s. New laws concerning the electricity and natural gas markets were adopted and the Energy Market Regulatory Authority (EMRA) was established in 2001. Other major pieces of legislation on renewable and nuclear energy followed. Recently, there has been an increased level of activity in the power sector, especially on the renewables front, as well as privatization of power generation and distribution assets. The liberalization process still continues and is attracting both domestic and foreign investors.
The energy sector is regulated and overseen by a number of authorities including the Ministry of Energy and the EMRA. The EMRA, which was established to perform the duties assigned to it by energy-related legislation, regulates the electricity market, the natural gas market, the petroleum market and the liquefied petroleum market.
The Electricity Market Law provides the main framework of rules applicable to the electricity market. The EMRA complements the Electricity Market Law with secondary legislation.
The following activities may be undertaken in the electricity market: (i) generation, (ii) transmission, (iii) distribution, (iv) wholesale, (v) retail, (vi) market operation, (vii) export, and (viii) import. Only legal entities incorporated in the form of a joint stock company or limited company (please refer to “Corporate Environment” for details of these legal entity forms) may conduct these activities. While, as a general rule, electricity generation is conducted under a generation license issued by the EMRA, the applicable legislation also allows for unlicensed generation under certain circumstances described below.
There are no ownership restrictions imposed on foreign investors in the electricity market.
As a general rule, activities in the electricity market require that a company be issued an appropriate license. However, transmission and market-operation activities are exclusively performed by state-owned entities. Transmission is done through lines with voltage above 36 kV under the control of TEİAŞ. Market-operation activities are undertaken by EPİAŞ which operates the day-ahead, intraday and balancing markets. EPİAŞ is also responsible for the settlement of the market participants’ trading activities.
Licenses are issued upon fulfillment of the criteria, including certain minimum share capital and corporate requirements, set out in the applicable legislation. Licenses are issued for a maximum period of 49 years. For generation, transmission and distribution licenses there is a minimum license term of 10 years. Licenses may be renewed. For generation activities, prior to applying for the generation license, the applicant must first obtain a pre-license from the EMRA.
Licenses expire automatically at the end of their term or in case of bankruptcy of the license holder, upon request by the license holder or through loss of eligibility with an act of the EMRA. The EMRA also has the authority to impose monetary fines or, ultimately, cancel a license as a result of the license holder’s failure to comply with the requirements of the applicable legislation.
A generation license grants the holder the right to construct and operate an electricity generation facility with the purpose to sell the generated power. Generation license holders may sell electrical energy or electrical capacity to supply-license holders, users with direct private connection and eligible consumers. Eligible consumers are those who, because their electricity consumption exceeds certain levels determined by the EMRA, are free to choose their supplier or are directly connected to the transmission line. Generation license holders may conduct the wholesale and retail sale of power and also the import and export of power.
Generation activities require issuance of a pre-license in order for the project company to start the construction of the generation facility. The term of a generation pre-license is up to 36 months depending on the installed capacity of the facility or the type of energy used. A license may be issued for only one electricity generation facility. Upon fulfillment of all pre-license obligations, pre-license holders apply for a license. During the pre-license period the holder is required, among other things, to acquire title to or other right to use the project site, obtain zoning approvals, environmental clearances and apply to TEİAŞ or the distribution companies for system connection and system use arrangements.
Unlicensed generation (license-exempt generation)
Certain energy generation activities may be undertaken without a license and are free from the requirement to form a separate legal 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. This installed capacity threshold has been recently increased from 1 MW to 5 MW.
Although less burdensome compared to licensed generation, unlicensed generation also involves certain application formalities. Unlicensed generators must apply to distribution companies or organized industrial site distribution license holders in their region to obtain the relevant approval.
A supply license grants the holder the right to make wholesale and retail sales of electrical power to eligible consumers without any regional restrictions. If the supply license holder is authorized within a regional supply territory, it may engage in the sale of power to non-eligible consumers in that region and also to eligible consumers in that region that do not procure electrical power from another supply license holder. Supply license holders may also engage in trading activity (import and export) involving countries with which Turkey is interconnected.
Distribution is done through lines with a voltage of 36kV or less. Distribution was previously undertaken by the TEDAŞ, a state-owned entity. As part of the market liberalization process, Turkey was divided into 21 distribution regions and the distribution assets, which had been owned by TEDAŞ, were privatized. Each distribution company has the exclusive right to operate the distribution network in its respective region.
Certain restrictions applicable to license holders
Regulatory authorities, particularly the EMRA, oversee and monitor license holders. Below is a non-exhaustive list of issues that must be taken into account by investors in the electricity market:
Share transfer restrictions
The EMRA must approve any direct or indirect share transfer of 10 percent or more of a license holder (5 percent if the license holder is a public company), or share transfers resulting in a change of control. Approval is subject to the transferee’s fulfilment of criteria imposed on license applicants.
As mentioned above, during the construction period a generation license is preceded by a pre-license. During this period, subject to limited exceptions, no direct or indirect shareholding structure changes are permitted.
Transfer of licenses
As a general rule, licenses may not be transferred. The legislation provides for an exception for generation licenses in the form of a step-in right. In a limited or non-recourse project financing, if a generation license holder fails to fulfill its obligations under the loan documents, lenders may apply to the EMRA to issue the license to another legal entity as a continuation of the existing license.
The following transactions and the subsequent transfer of the rights and obligations of the licensed entity are also subject to the EMRA’s approval:
- Merger of a licensed entity with another entity (whether a license holder or not), the partial or full spin-off of a licensed entity or the transfer of a licensed entity’s rights and obligations upon a merger or spin-off;
- The transfer of a generation license holder’s rights and obligations to another entity due to a spin-off or to a new entity with the same shareholding structure as the license holder; and
- The sale or lease of a generation facility to another entity by a generation license holder.
Market share restrictions
The amount of electricity generated by a single generation company or by companies controlled by a single individual or legal entity may not exceed 20 percent of the total amount of electricity generated in Turkey in the prior year. Similarly, supply license holders may not purchase electricity in an amount equal to more than 20 percent of the total electricity consumed in Turkey in the prior year.
Turkey enacted renewable energy legislation in 2005 to encourage and support the use of renewable energy resources for electricity generation, for decreasing carbon emissions, protecting the environment and developing a manufacturing industry for the equipment and other facilities needed for the use and expansion of renewable energy resources.
Renewable energy support mechanism
The support mechanism encompasses the incentives provided by the Renewable Energy Law and its applicable regulations and is comprised mainly of feed-in tariffs and domestic component incentives. Project companies wishing to opt into the support mechanism must apply to the EMRA by the 31st of October in the year preceding the designated opt-in year. The EMRA evaluates all completed applications and publishes a preliminary list of qualified applicants on its website by 30th of November for the following year.
Settlement of power sales under the support mechanism is coordinated by EPİAŞ.
The feed-in tariffs listed below are valid for a period of 10 years for electricity generation facilities that are operational by December 31, 2020 and have opted into the support mechanism.
Power Source of
Domestic component incentives
In addition to feed-in tariffs, the Renewable Energy Law provides incremental price incentives for generators that use certain domestically manufactured mechanical and electromechanical components in their facilities. Similar to the feed-in tariff incentive, these incremental price incentives apply only to electricity generation facilities that commence operations before December 31, 2020, and opt into the support mechanism. At least 55 percent of the components used in an electricity generation facility must be locally manufactured to benefit from related incentives. Incentives for using domestically manufactured components are available for five years following the commencement of electricity generation at a facility.
The renewable energy law provides incremental price incentives for generators that use certain domestically manufactured mechanical and electromechanical components in their facilities.
Other incentives granted under the Renewable Energy Law and other applicable laws include
- Access and use of state-owned land. An 85 percent reduction on permit costs, rent and other costs of gaining rights to access and use of state-owned land will be applied during the first ten years of investment for generation facilities operational by December 31, 2020.
- Grid connection priority. TEİAŞ, the state-owned electricity transmission company, will give grid connection priority to renewable energy generators.
- License fee discounts. The pre-license application fee for renewables will be 10 percent of the non-renewable energy pre-license fee. A discount will also be available on the fee for the amendment of license.
- Authorizations. Renewable energy projects may be developed in protected areas such as national parks, natural parks, natural protection zones, protected forests and wildlife developments sites if the required permits from the relevant authorities are obtained.
Renewable Energy Resource Areas (RERA)
In line with its renewable energy targets, Turkish government has embarked on large scale renewable projects or RERAs, to be developed on privately owned or public lands. The projects are awarded through a tender process. Winning bidders are also required to set up a manufacturing facility and conduct research and development activities, as part of the government's promotion of local manufacturing.
The three RERA projects awarded so far are for solar and wind power, each having an installed capacity of 1 GW, with a purchase guarantee of 15 years. There are several other RERA projects in the government agenda.
The unlicensed generation of renewable energy, especially of solar power, is an area of interest for both domestic and foreign individuals and entities.
Unlicensed renewable generation facilities may have an installed capacity of 5 MW or less. A generation facility with an installed capacity exceeding 5 MW must be licensed by the EMRA. License-exempt generation was introduced for consumer facilities to be able to meet their own power consumption through facilities of their own. In other words, the underlying reasoning of license-exempt generation is the satisfaction of one’s own power consumption and not the trading of the power generated.
That said, prior to March 2016, the unlicensed generation legislation did not explicitly prohibit (or allow) setting up multiple generation facilities each having an installed capacity of 1 MW or less (the then-applicable threshold) thereby reaching a total installed capacity which would normally require a generation license. Domestic and foreign investors have used this structure and set up multiple facilities, each having an installed capacity of 1 MW or less, for trading purposes. However, due to amendments made to the legislation in March 2016, the total amount of installed capacity a single person may directly or indirectly own in unlicensed wind or solar generation facilities within a substation may not exceed the applicable threshold. Investors are not able to establish separate special purpose vehicles, each holding a separate unlicensed project, to be operational in a substation. Unlicensed generation facilities which secured a “call letter” (a letter issued by the distribution company allowing the facility to connect to the grid) prior to March 2016, are exempt from this restriction.
Although unlicensed generators are exempted from company formation formalities imposed on licensed generators, they must still obtain approval from the distribution company for grid connection, system usage and secure land use rights and environmental clearance.
Each unlicensed facility is required by law to be connected to a consumption unit. Any excess power not consumed in the consumption unit may be sold to the grid. The power so generated may benefit from applicable feed-in rates and domestic component incentives.
Prior to becoming fully operational, the relevant facility will receive provisional acceptance to continue commercial activities and complete certain tests required to evidence full and safe functioning. As a general rule, during this time period, no share transfer may be made. There exist some exceptions to this rule, such as shareholding structure changes due to: (i) inheritance, (ii) transfer of publicly traded shares of a public generation company or its public shareholder, or (ii) changes in the shareholding structure of a foreign shareholder.
Once the provisional acceptance is issued, unlicensed facilities may be transferred with the approval of the relevant distribution company. A step-in right, as described earlier for licensed generation, is also possible for banks and other financial institutions that have provided limited or non-recourse project financing to the unlicensed generator.
Under the Constitution, natural resources and the right to explore and exploit such resources belong to the state. However, the state may assign these rights to persons or legal entities for a limited time period. The Turkish government has expressed the policy objective of promoting private participation in the oil and gas markets.
Enacted in 2013, the Petroleum Law regulates the exploration and production of petroleum products, including crude oil and natural gas, and aims to promote and liberalize the Turkish upstream oil and gas markets. Notably, the law removed state-owned TPAO’s monopoly in the acquisition of petroleum product permits, licenses and leases, thus opening the field to competition by private companies. The law also removes limitations on the number of licenses that may be obtained by any license holder.
The Petroleum Law regulates both onshore and offshore activities and provides for the issuance of five-year exploration licenses for onshore projects (with extensions possible for an additional four years) and eight-year exploration licenses for offshore projects (with extensions possible for an additional six years). At the end of the respective license period, license holders may be granted an additional two-year period for the commercial evaluation of the oil discovery. Exploration and production licenses are granted by the General Directorate of Mining and Petroleum Affairs. If a discovery is made during the exploration period, an operating license is issued to permit production and sale of the petroleum for a period of 20 years. Upon expiration of the operation period, the physical structures must be decommissioned and, upon the approval of both the Ministry of Energy and TPAO, the operating rights of the petroleum field may be auctioned.
If the land that is subject to a petroleum license is owned by a private person, the petroleum license holder may utilize such land by leasing or acquiring it, establishing a servitude right over it or having it expropriated under relevant expropriation procedures.
Petroleum rights holders may export 35 percent of their production from onshore fields and 45 percent of their production from offshore fields. The remaining part of the petroleum or natural gas must be set aside for the domestic market. For fields that were discovered prior to 1980 the entire portion of the discovered petroleum must be set aside for the domestic market.
Petroleum license holders are required to pay the state a share equal to one-eighth of the market price of the petroleum or natural gas produced under the applicable license.
Both domestic and foreign legal entities are entitled to obtain exploration and operation licenses. Any share transfer in an entity with an exploration or operation license that results in a change of control is subject to the prior approval of the Ministry of Energy. Petroleum rights are required to be registered in a registry maintained by the General Directorate of Mining and Petroleum Affairs.
Downstream activities are subject to license from the EMRA. In the oil sector downstream activities requiring a license include refining, distribution, storage, transmission, processing and dealership activities. In the natural gas sector downstream activities requiring a license include import, export, transmission, storage, wholesale, distribution and transportation activities.
Licenses granted for petroleum activities have no specified minimum period but have a maximum period of 49 years. Licenses granted for natural gas sector activities have a minimum of 10 years and a maximum of 30 years and are not transferable.
Downstream petroleum and natural gas licenses may only be obtained by companies established in Turkey. However, there is no limitation on foreign ownership of such companies.
Oil & gas transit
Turkey, due to its geographical situation between oil rich Middle Eastern and Caucasian countries and highly industrialized European markets, is a key transit country in the global oil and gas sector.
In the oil sector, the Baku-Tbilisi-Ceyhan Pipeline connects the Azerbaijan oil fields to Turkey’s Mediterranean ports for shipment to Europe. The 1,768 kilometer long pipeline has a capacity to discharge a maximum of one million barrels of crude oil per day. The Kirkuk-Ceyhan Pipeline carries crude oil from Iraq to Turkey’s Mediterranean ports with a current usable capacity of 300 thousand barrels per day. In addition to these operational pipelines, in an effort to create an alternative to maritime crude oil transportation, projects are underway to connect the Black Sea to the Mediterranean Sea with a crude oil pipeline.
In the gas sector, the Baku-Tbilisi-Erzurum Pipeline (also known as the Shah Deniz Pipeline) transports Azerbaijan’s natural gas to Turkey to serve Turkey’s natural gas demand. A natural gas pipeline running between Karacabey and Komotini, with a capacity of 7 billion cubic meters per year, also connects Turkey and Azerbaijan’s natural gas with Greece. In addition, TANAP will carry the gas from Azerbaijan’s Shah Deniz-2 gas field and the Caspian Sea to Turkey and Europe. TANAP will run between the Turkish borders with Georgia and Greece and the length of the main pipeline will reach 1,850 kilometers.
BOTAŞ, the state-owned pipeline company, operates the transmission network and manages third-party access to the network. Parties that wish to use the network are required to apply to BOTAŞ for capacity allocation at an entry point and an exit point. Connection and transmission tariffs are set by the EMRA. Any disputes regarding access to the transmission network are subject to resolution by the EMRA. The EMRA decisions may be appealed before Turkey’s administrative courts.