Among other efforts to make Turkey energy independent in time for the 100th anniversary of the founding of the Republic, the government recently came up with a plan to increase the share of renewable in the country’s energy supply.
THE Ministry of Energy and Natural Resources (“MENR”) announced its Action Plan for Renewable Energy on December 2014, which set out targets in order to meet Turkey’s increasing energy needs by significantly increasing renewable energy as a portion of its generation portfolio; at least 30% of the total electricity demand by 2023. As with the MENR’s other recent plans, the principal policy goal behind this projected increase in renewables is an attempt to reduce Turkey’s dependency on imported energy resources.
Creating an investor-friendly legal framework through the establishment of Renewable Energy Resource Areas (“RERA”) is vital to fostering investments in renewable resources for power generation. The MENR introduced the Regulation on Renewable Energy Resource Areas (“RERA Regulation”) against this backdrop. The RERA Regulation tackles the above mentioned policy goal by bundling sizable plots of land under private or public ownership into potential RERAs. The RERA model promises an increase in output by maximizing economies of scale and facilitating the acquisition of land rights and the permitting process for large-scale renewable sourced power generation plants.
The business model built into the RERA Regulation and underlying the allocation of RERAs to potential investors also requires the domestic manufacture of high-tech generation equipment (e.g., photovoltaic modules or wind turbine components) for use in the power plant. The requirement to manufacture locally is known as the “Requirement of Domestic Manufacturing of Equipment” (“RDME”) and the requirement of local procurement is known as the “Requirement of Usage of Domestically Manufactured Equipment” (“RUDME”). This aspect of the RERA Regulation reveals another long term policy goal, which is the transfer of renewable power generation technology into Turkey against a guaranteed return on investments in renewable power generation. This latter component of the RERA model presupposes that the government will enter into a power purchase agreement with the RERA investor for the purchase of the power that is generated, at a fixed price, and for a definite term through a feed-in tariff, to encourage investment in renewables and ensure a minimum return on investment despite the future variance in market prices.
Two Paths for RERA Development
The RERA Regulation provides two methods for the development of RERAs, one method that would allow the General Directorate of Renewable Resources (“GDRR”) under the MENR to develop RERAs, and another method that would allow the MENR to organize a tender that allocates the connection capacity of the transmission grid and authorizes the winning bidder to develop the RERA.
The first would require the GDRR to conduct preliminary assessments based on available maps, energy potential atlas, and measurement data for RERA sites. Following this stage, the GDRR requests an opinion from Türkiye Elektrik İletim A.Ş. (“TEİAŞ”) on transmission grid availability in order to allocate capacity. The designated area may be announced as a “RERA Candidate” and more detailed feasibility studies may then be conducted based on the TEİAŞ connection opinion and is subject to approval by the GDRR.
As an alternative method for RERA designation, the MENR may organize an auction to grant connection capacity allocation to RERA development proposals, where the winning bidder (i.e., the bid with the lowest power unit price) in such tender will make its own feasibility study as opposed to having the GDRR identify the RERAs through preliminary feasibility studies prior to the tender being announced. In this second model, the MENR would announce the proposed connection areas and their corresponding total connection capacity and then organize an auction for the allocation of connection capacity. Applicants would submit their financial proposal for the full capacity announced in the call for tender.
Upon the assessment of the proposals, the winning applicant would sign a RERA Usage Right Agreement and begin its survey of the area in order to determine appropriate sites for generation units (e.g., photovoltaic panels or wind turbines) that would meet the demands for all of the announced connection capacity. The contemplated sites for RERA development within the proximity of the proposed connection points must be submitted to the GDRR within 90 days. If the GDRR rejects the proposed plant location it will request another search for the appropriate sites within the same connection area provided that the allocated connection capacity thereto is not exceeded. If the GDRR approves the plan, it will then designate the area as a RERA and make the official announcement.
Even though the RERA Regulation obliges the applicant to seek all necessary permits at its own cost during the development stage, it is also stated that the MENR will cooperate in good faith during the permit application process in order to prepare the RERA for commercial operations. This tender method will ideally accelerate the RERA designation process and eliminate the bureaucratic procedures to be followed in the first method, where the GDRR has the initiative on preliminary feasibility studies for project development.
Competition Announcement for Investments on RERAs
The designation of RERAs will be followed by the granting of the RERA usage right to the investors. The GDRR will open the RERAs to investment by organizing a competition to grant such right. The competition will be announced in the Official Gazette and on the website of the GDRR, accompanied by information on connection capacity, RDME and RUDME specifications, minimum requirements for construction timeline, projected output of the factory to be established for RDME, electricity purchase ceiling price, and purchase terms and other information that the MENR may deem necessary.
Since the RERA method is used for large-scale licensed electricity generation investments, the applicants are required to meet all conditions applicable to preliminary license applications under the Electricity Market License Regulation. According to that regulation, applicants of preliminary license must be incorporated either as a joint stock company or a limited liability company, the shares of joint stock company must be in registered form unless they are listed on a stock exchange, and the direct and indirect shareholders together with board of directors members (managers in limited liability companies) must not be subject to certain restrictions in the Electricity Market Code, which prohibits shareholders (holding 10% or more of the shares) and board members of legal entities that have had their license canceled from making a license application for three years. Although the Electricity Market License Regulation requires the preliminary license candidates to be a joint stock company or a limited liability company, the most recent amendments to the RERA Regulation allow individuals to participate in RERA tenders, provided that such individual incorporates an entity eligible to apply for preliminary license once the tender is awarded. This provision aims to increase participation in the tenders by postponing the incorporation process to a later stage.
The RERA Regulation provides that joint ventures are entitled to make such applications as well. However, a share transfer restriction is applicable to a joint venture that is ultimately awarded the tender. Joint venture applicants must provide a commitment letter, where the partners of the joint venture undertake that there will be no change in the shareholding structure of the joint venture project company to be incorporated following the tender without first obtaining the written approval of the MENR. This undertaking is binding for the period between the incorporation of the joint venture company and the full commissioning of the generation plant. The applications for the competition are subject to the review of a commission to be established by the MENR.
The results of the tender and the winning bidder are subject to MENR approval following an assessment of the tender commission. Upon issuance of approval, the winning bidder will be invited to execute RERA Usage Right Agreement within 30 days.
Licensing and Sale of Generated Electricity
The RERA Regulation stipulates that the winning bidder must apply to the Electricity Market Regulation Authority for a preliminary license within 45 days following the execution of RERA Usage Right Agreement. Failure to apply within the specified period shall result in a penalty to be deducted from the security deposit. In case such amount is not paid in 15 days, such security deposit is forfeited in the amount of penalty and RERA Usage Right Agreement and all rights related to RERA are terminated. The terms of preliminary and generation licenses are deferred to the tender specifications.
The RERA scheme envisages that the government will enter into a power purchase agreement with the RERA investor to purchase the power generated at a fixed price for a definite term through feed-in tariffs starting automatically from the partial commissioning of the plant, as part of the RERA Usage Right Agreement, in order to ensure a minimum return on investment despite what the market prices may be in the future. Unlike other generation plants subject to the Renewable Energy Resources Support Mechanism, the feed-in tariff for RERA plants will be determined on a case-by-case basis and the fixed price cannot be increased above a ceiling that is written into the tender specifications during the guarantee period.
The first tender announcement regarding the allocation of Karapınar RERA with RDME conditions was published in the Official Gazette on October 20, 2016 for the construction and commissioning of a solar power plant in Karapınar, Konya with a total annual installed capacity of 1000 MWe. The tender was held on March 20, 2017 and was awarded to the joint venture of Kalyon-Hanwha Q Cells. The second RERA tender was the wind energy RERA tender, and it was organized for the construction of wind energy plants in 12 cities with a total installed capacity of 1000 MWe. This tender was held on August 2017 and was awarded to Siemens - Türkerler- Kalyon consortium for USD 3.48 cent/kilowatt.
Certain aspects of the RERA Regulation may be questioned by investors looking for more certainty for the prospects of their participation in the tender and ultimately, their investment. The MENR has discretion to approve the winning bidder elected by the tender commission or to cancel the tender at any stage, despite the bidder fulfilling tender requirements thus far. Experiences with the tender processes for the initially identified RERAs may result in certain aspects of the RERA Regulation being developed further, given the commitment of the Turkish government to boost renewable energy resources.
The RERA scheme introduced a new opportunity for larger investors in renewables to team up with equipment manufacturers to invest into renewables in Turkey, possibly positioning Turkey as a hub for renewable power generation exports in the future. RERAs are introduced as the solution to accelerate commissioning of installed capacity based on renewable resources. On the other end of the spectrum, decentralized, smaller plants located closer to consumption points are also critical in renewable capacity development as they reduce transmission losses, lower carbon emissions and contribute to national security of supply.