The option to convert licensed generation facilities to unlicensed facilities has many advantages for companies that wish to primarily generate their own energy.
THE original Electricity Market Code (“EMC”) was enacted in 2001, establishing the energy market as it is known today. However, a new EMC came into force on March 30, 2013, which introduced several innovations including a change in the regime for regulating energy market activities.
Under the previous EMC, legal entities that primarily generated electricity to satisfy their own energy needs were required to obtain an auto producer license and legal entities generating electricity mainly to satisfy the energy needs of their shareholders were required to obtain an auto producer group license. The 2013 Sectoral Improvement Report prepared by EMRA showed that almost 300 auto producer licenses were in existence at the end of 2013. With the changes made under the new EMC, the Energy Market Regulatory Authority (“EMRA”) stopped issuing new auto producer and auto producer group licenses and replaced the existing ones ex officio with generation licenses, without prejudice to their existing rights and without claiming any license fee. The new EMC also further defined the way unlicensed energy production can be conducted.
The first unlicensed electricity generation scheme was actually introduced at the end of 2010 through a regulation based on the old EMC. This was expanded upon three years later under the new EMC, changing the previous scheme on unlicensed electricity generation, and developing it further under the Regulation on Unlicensed Electricity Generation in the Electricity Market, which provided further detail on the application of this new scheme.
Effects on Energy Generation Facilities
Previously, electricity generation activities conducted at each of the below facilities would have been required to obtain auto producer licenses, but under the new legislation, the following facilities are now exempt from this licensing requirement:
- generation facilities that are operated independently without connection to a transmission or distribution system;
- generation facilities with a maximum installed capacity of 1MW;
- micro co-generation facilities;
- co-generation facilities that meet an efficiency value to be determined by the Ministry of Energy and Natural Resources; and
- generation facilities based on renewable energy resources, using all of the energy they generate without delivering the same to the transmission or distribution system, and the generation and consumption of which takes place at the same measurement point.
Differences between Licensed and Unlicensed Generation Regimes
The unlicensed electricity generation concept seems very similar to the auto producer license as they both aim to allow the generation of electricity to meet one’s own need. Despite this similarity however, with the application of the new EMC the legal regime overseeing electricity generation facilities is significantly different. As licensed market players, generation license holders (previously auto producer license holders) are obligated to fulfill many approval and notification requirements. Among other obligations, EMRA must provide prior written approval for the following actions: (i) each transfer of shares (directly or indirectly) representing 10% or more of the share capital (5% for publicly held companies), or share transfers resulting in change of control of a generation license holder legal entity; (ii) mergers and demergers of a legal entity that holds a generation license; and (iii) any amendments to the articles of association of a legal entity holding a generation license regarding shares, share transfers, mergers and demergers, and share capital decreases.
However, for unlicensed generation facilities, once the provisional approval for unlicensed generation is complete, the owner can transfer shares to an individual by sale, asset transfer, or another method without additional EMRA approval. For legal entities, the owner can also freely sell shares, merge, or demerge without being subject to approval requirements.
Converting Licensed Facilities into Unlicensed Facilities
Seeing these similarities and differences, the legislative authority has given generation license holders the option to convert their generation facilities to unlicensed ones. For an electricity generation license holder to convert its facility to an unlicensed one: (i) the facility’s provisional acceptance must be complete; (ii) the facility must be eligible for unlicensed electricity generation; and (iii) the applicant legal entity must have a consumption facility to use all or some of the electricity generated through its facility.
Although this option may seem tempting at first, it comes with its own challenges. Certain types of unlicensed generation facilities are unable to sell surplus electricity and cannot freely trade energy as a generation license holder. In other words, the owners of unlicensed electricity generation facilities cannot execute bilateral agreements for the sale of surplus electricity generated in their facilities or sell this energy in organized electricity wholesale markets. The reason behind this is that owners of unlicensed electricity generation facilities are expected to generate electricity solely to meet their own needs.
However, unlicensed facilities using renewable energy can benefit from the Renewable Energy Resources Support Mechanism (“YEKDEM”) for up to ten years following their provisional acceptance. YEKDEM is a mechanism created to encourage facilities to use renewable energy through offering financial incentives by offering a guaranteed price for energy sold. Although generally YEKDEM requires electricity generators to have a license, it allows certain types of exempt producers to benefit from price guarantees by selling through retail companies required to purchase their excess energy.
The regime for unlicensed electricity generators is less bureaucratic in general as this system was created for individuals or legal entities to generate electricity for their own needs, not as commercial activity. Operating as an unlicensed facility has proven to be beneficial for companies who primarily operate to meet their own needs, while the system can be problematic for those who wish to sell excess energy. However, the YEKDEM mechanism may be available to alleviate this burden for companies using renewable energy for up to ten years. More details are still to come on when the ten-year period would be deemed to have begun for converted companies and what options may be available for converted companies after the ten-year period expires. Although no conversion application has been made yet, this is an option worth considering for generation license holders who generate electricity mainly to meet their own needs, not for trade, and would prefer to be fast and flexible with corporate transactions.