Ercüment Erdem Prof. Dr. H. Ercüment Erdem

The New Electricity Market Law

March 2013

The new Electricity Market Law No. 6446 (“New EML”) was enacted by the Turkish Grand National Assembly on 14 March 2013 and published in the Official Gazette numbered 28603 on 30 March 2013. Surprisingly, Electricity Market Law No. 4628[1] was not abrogated with the enactment of the New EML, but its title was changed to “Law on the Organization and Duties of the Energy Market Regulatory Authority” (“Previous Law” or “EMRA Law” where appropriate) and was partially amended by the new law. Accordingly, the provisions regarding the organization and duties of the Energy Market Regulatory Authority (“EMRA”) remain in effect under the EMRA Law. According to the New EML, all references in the legislation to the repealed articles of the Previous Law shall be considered as references to the related articles of the New EML.
The New EML envisages some important changes and in this article those changes will be reviewed.

Activities and Licenses

Under the New EML, the licenses and the rules to be applied are based on the types of electricity market activities. In other words, the New EML is structured around types of activities rather than types of licenses. The electricity market activities which require a license are listed under Article 4 of the New EML as generation, transmission, distribution, wholesale, retail sale, market operation, export and import. The New EML does not mention retail sale service and trade activities, as did the Previous Law. However, in the New EML market operation is introduced as a new type of activity.
Article 14 of the New EML sets forth the activities that can be conducted without a licence. Whereas under the Previous Law 500 kW was the maximum installed capacity for a renewable energy plant to operate without a license, the New EML has raised that maximum to 1 mW. In addition, the Council of Ministers is authorised to increase the maximum installed capacity for a renewable energy plant to operate without a license to 5 mW.
The draft of the New EML previously announced by EMRA initially stipulated that transactions such as share transfer and change of control, which result in a change in ownership or usufruct rights, could be conducted without requiring the approval of, but by simply notifying EMRA. However, this change is not included in the New EML, and similar to the Previous Law, those transactions are still subject to EMRA’s prior approval under the New Law.

EPIAS and the Activity of “Market Operation”

The New EML defines a new activity called “market operation” as the operation of organized wholesale electricity markets and financial settlement of activities conducted in such markets, along with other related financial transactions.
Currently electricity market operation activities are conducted by the Market Financial Reconciliation Center (“MFRC”), organized under the Turkish Electricity Transmission Joint Stock Company (“TEIAS”). The New EML establishes a new company to assume the role of the MFRC, the Energy Market Operation Joint Stock Company (“EPIAS”). The permanent officials and equipment of the MFRC will be transferred to EPIAS, which will be a private legal entity acting under an EMRA issued market operation license. Pursuant to the New EML, EPIAS is to be incorporated and initiate its activities, and the relevant regulations will be enacted within six months from the date the New EML enters into force.

Preliminary License for Generation

As per Article 6 of the New EML, a preliminary license is required for commencement of generation activities. EMRA will issue a preliminary license for a specified term to the legal entities who apply to conduct electricity generation activities, during which period they must obtain the necessary permits, approvals and licenses, as well as acquire ownership or usufruct rights to the land where the generation facility is to be located. The term of the preliminary license cannot be more than twenty-four months excluding the occurrence of force majeure events. EMRA is entitled to increase the preliminary license term by half, for a maximum of thirty-six months, based on the energy source type and the facility’s installed capacity.
The New EML stipulates that legal entities that could not obtain the above-mentioned documents, certify the acquisition of the property or usufruct rights, or fulfil the other legal requirements shall not be granted a generation license. In addition, before a generation license is granted, where there are any direct or indirect changes in the shareholding structure (with the exception of inheritance), share transfers or non-fulfilment of other legal requirements, the preliminary licence will be cancelled. Moreover, if the preliminary license term expires or the legal entity holding the license files for or falls into bankruptcy, the preliminary licence will automatically become null and void. However, there is no express provision in the new EML stating when the preliminary licence becomes null and void.

Distribution License Holders and Other Market Activities

As per Article 9 of the New EML, electricity distribution companies can only operate in the territory indicated in their license, cannot conduct activities other than distribution activities and cannot directly become a shareholder in other legal active in the electricity market. Moreover, while generation companies are prohibited from becoming controlling shareholders under the Previous Law, the New EML completely prohibits legal entities active in the electricity market from becoming direct shareholders in a distribution company. As argumentum a contrario, indirect shareholding is not prohibited.

Supply License and Supply Companies

Wholesale and retail sale activities, which were regulated as different types of licences, “wholesale license” and “retail sale license”, under the Previous Law, are regulated as one licence type, a “supply license”, under the New EML. As per Article 10 of the New EML, supply companies can conduct wholesale and/or retail sale activities without territorial limitations. In addition, it is stipulated that supply companies may also import from and export to countries with which the interconnection condition is satisfied.

The Conversion of the Auto Producer License to the Generation Licence

The “auto producer” and “auto producer group” licences are not explicitly regulated under the New EML. Instead, temporary Article 7 of the New EML holds that generation licenses will be automatically issued to auto producer license holders within six months of the effective date of the New EML, and no licence issuance fee shall be charged. Moreover, any applications filed to obtain an auto producer license will be treated as generation license applications.

Provisions on Total Market Share

The Previous Law set forth restrictive provisions related to total market share or total sale amounts for companies active in the electricity market. These restrictions were 10% of the previous year’s total energy sales within Turkey for wholesale companies and 20% of the previous year’s calculated total installed capacity within Turkey for generation companies.
The New EML also regulates market share restrictions for license holding companies. Pursuant to its provisions:

  • Generation companies controlled by any real person or any private sector legal entity cannot hold a total installed capacity of more than 20% of the previous year’s calculated total installed capacity within Turkey (Art.7/para.5);
  • Private sector legal entities that hold supply licenses cannot purchase electricity from generation or export companies exceeding 20% of the previous year’s total consumption of electricity within the country (Art.10/para.6);
  • Supply companies cannot sell electricity on a wholesale or retail basis exceeding 20% of the of the previous year’s total consumption of electricity in Turkey (Art.10/para.6).

Changes related to Applicable Sanctions

As per Article 16 of the New EML, the monetary sanctions applicable as a result of non-performance of duties and non-fulfilment of the requirements arising out of the law or related legislation are increased.
Moreover, as per paragraphs 3 and 4 of Article 16 of the New EML, in the event that distribution or supply companies do not conduct their activities pursuant to the legislation, impede their services, decrease their service quality to an unacceptable degree, become insolvent or are in a position to become insolvent EMRA can dismiss some or all of their board members and appoint new ones. In such an event, EMRA will be deemed as the addressee (defendant) of any claims filed against the members it appointed to the board of directors of said distribution or supply companies. Where any such aforementioned claim results in compensation due to the plaintiff, such compensation will be borne by EMRA, with a right of recourse.

Exceptional Provision regarding Environmental Requirements

Pursuant to temporary Article 8 of the New EML, the state owned generation company, EUAS (Elektrik Üretim A.Ş. Genel Müdürlüğü), its subsidiaries and affiliates, as well as publicly owned companies that are to be privatised according to privatisation legislation, are granted a grace period until the end of 2018 to become compliant with environmental laws and acquire the required permits. Accordingly, it is stipulated that their activities cannot be cancelled and no sanction can be applied due to non-compliance with environmental laws during the grace period and even for the period prior to the grace period. This exceptional provision is very important for generation companies that are or will be subject to privatisation.

Temporary Articles and the Extension of Some Deadlines

Some deadlines set in the Previous Law are extended with the New EML. Some of them are as follows:

  • The price equalisation mechanism for distribution companies and supply companies, which was applied until the end of 2012, is extended until the end of 2015, and until such date the national tariff applies.
  • The corporate tax and VAT exemptions, which were applied until the end of 2010 to the mergers, spin-offs and transfers of generation and distribution companies subject to privatisation, are extended until the end of 2023.
  • A 50% discount on system utilization fees during the investment periods and for five years as of the operation start date, and the exemptions from stamp tax and duties granted to generation facilities are extended until the end of 2015.

Further to the aforementioned, pursuant to temporary Article 12 of the New EML, within one year of the New EML’s effective date, generation licenses shall be issued to the generation facilities and projects subject to existing agreements[2]. The terms of such licenses will be subject to the same rights and obligations and limited by the term in the existing agreements.
Moreover, it is regulated under paragraph 1 of temporary Article 14 that new licenses shall be issued to former generation license holders who started the construction of power plants but whose licenses were cancelled or ceased before the entry into force of the New EML; provided that the Ministry of Energy and Natural Resources (“MENR”) decides the construction is irrevocable and there is public interest for continuance. However, this provision is not applicable to hydro-electric power plant facilities.

Conclusion

The New EML introduces some important changes in the current electricity market system. These include: amendments to license types, framing its provisions around each type of market activity, specific provisions for certain license types (i.e. distribution, supply and generation), the introduction of a preliminary licensing mechanism and investment incentives such as extended deadlines and grace periods for environmental compliance. The New EML also introduces EPIAS which will be an independent private company authorised for the market operation activity.
The principle reason for drafting the New EML was that the Previous Law was not sufficient to follow the factual progress achieved by the market actors and regulatory authorities since 2001. The goal is that the law, as the primary legislation, shall guide the market actors in the future and constitute a legal basis for secondary legislation. Harmonization with European Union legislation and the composition of a new market with a secure supply that generates investor interest are the other reasons behind the new law.
The systematic of the New EML is based on the market activities. Therefore, one can argue that it is neatly drafted when compared with the Previous Law. On the other hand, from a legal technical point, transformation of the Previous Law to EMRA Law and the lack of succession between its articles after this transformation can be criticized.


[1] Official Gazette 3 March 2002, nr. Reiterated 24335
[2] Existing agreements are defined as the contracts and concession and implementation agreements signed before the enactment of Previous Law in accordance with the terms and conditions of Law no. 3096 dated 04.12.1984, no. 3996 dated 08.06.1994, no. 4283 dated 16.07.1997 and no. 4501 dated 21.01.2000 and related regulations.