Turkey put in place new feed-in tariffs and other incentives for renewable energy in a new law enacted December 29 by the Turkish parliament.

Demand for electricity in the country has been growing at a rate of more than 6% a year for the past decade. Turkey imports around 70% of its electricity to meet this growing demand. Turkey has no large oil and gas reserves, but it has ample renewable energy resources, especially geothermal, hydraulic, wind and solar.

Given these market realities, as well as concerns about pollution and energy security, the Turkish government has been liberalizing the energy market and encouraging investors to undertake renewable energy projects. The new law—called Law No. 6094 for short or the “Amendment of the Law on Utilization of Renewable Energy Resources for the Purpose of Generating Electrical Energy”—is the latest in a series of policy measures aimed at encouraging renewable energy.

Existing Incentives

Two key statutes and one regulation contain the core rules that govern the renewable electricity sector in Turkey. They are commonly referred to as the “Electricity Market Law No. 4628,” the “Renewable Energy Law No. 5346” and the “electricity market licensing regulation.”

The regulatory body with responsibility for the sector is the Energy Market Regulatory Authority, or “EMRA.” The government ministry with jurisdiction is the Ministry of Energy and Natural Resources.

Independent generators already enjoyed a number of incentives to use renewable energy before the latest action by parliament in late December to give more encouragement. The following types of renewables already enjoy favored status under Turkish law: “wind, solar, geothermal, biomass, biogas, wave, current and tidal energy resources together with hydraulic generation plants either canal or run of river type or with a reservoir area of less than fifteen square kilometers.”

Independent generators must pay a one-time licensing fee when applying for permission to build that can run as high as the Turkish lira equivalent of approximately €120,000, or about $160,000, and additional annual fees of nominal amounts. However, generators proposing to build power plants that use renewables are exempted from the application fee except for 1% of application fees otherwise payable. Once they obtain a license, they remain exempted from paying annual license fees for the first eight years of commercial operation. Effective as of December 2010, renewable generators with an installed capacity of less than 500 kilowatts are exempted from both the initial and annual licensing fees altogether. This new incentive also permits facilities generating electricity for their own use to sell their excess electricity to the market under certain conditions.

Licensed electric utilities must give priority to purchases from renewable generators, but only if the price is no higher than the sale price of the state-owned wholesale supplier, TEİAŞ, and there is no cheaper source of supply. The purchase price is determined by the regulatory body, EMRA, and is calculated as the average Turkish wholesale price for the previous year. However, it cannot be less than the Turkish lira equivalent €50 a mWh. (This purchase priority applies under existing law, but will no longer apply under the new law enacted in late December.)

In addition, the state-owned electricity transmission company, TEİAŞ, and privately-owned transmission companies must provide priority to renewable generators in interconnecting them to the grid. The permitting costs, rent and other costs of gaining rights of access and usage of state-owned land are subject to an 85% reduction where the property is used for a renewable energy project. This incentive is available only to projects that are in operation before December 31, 2012. The break on rent or easement fees runs for 10 years after a project commences operation.

What is Changing?

The new law that parliament enacted in late December provides additional incentives for projects that commence operations between May 18, 2005—the effective date of the original renewable energy incentives—and December 31, 2015. Renewable generators have the choice of opting into the new incentives, but they do not have to do so. The new incentive package is called the “renewable energy support mechanism.” Certain existing renewable energy incentives will remain in place for those who choose not to opt in.

The new incentive package covers the same renewable energy sources as the existing incentives, but with the clarifying replacement of “biogas” by “gas obtained from biomass, including landfill gas.” The definition of “biogas” has been expanded to clarify coverage of energy sources derived from biomass by-products.

The new law provides the following feed-in tariffs for licensed renewable generators that apply to the electricity regulatory body, EMRA, by October 31 of the year before they desire to start benefiting from these feed-in tariffs.

These feed-in tariffs are generally less favorable than what was proposed in the draft legislation that was initially considered by parliament. For example, the magnitudes of the tariff rates are measured in dollars instead of euros, and they are significantly lower—for example, the draft had proposed feed-in tariffs as high as €250 a mWh for photovoltaic solar projects. In addition, while the draft included feed-in tariffs for wave, current and tidal energy sources, the new law as enacted does not. Moreover, the new law provides a single feed-in tariff for all forms of solar energy (while the draft had provided higher tariffs for photovoltaic solar projects) and all forms of wind energy (while the draft had provided higher tariffs for offshore wind projects). Finally, the draft had provided for 20-year feed-in tariffs in certain instances, with a higher tariff rate during the first 10 years than the second 10 years. The new law, as enacted, does not have this distinction.

The tariffs in the schedule are available only to facilities commencing operations before December 31, 2015. The Council of Ministers is expected to publish a schedule of feed-in tariffs for facilities that are built after 2015. The tariffs in the new schedule cannot exceed the tariffs in the existing schedule. There is no deadline for the Council of Ministers to publish the post-2015 schedule.

In addition to the high feed-in tariffs, the new law provides incremental price incentives for renewable generators that use certain domestically-manufactured components in their projects. These incremental incentives are available only to facilities that commence operations before December 31, 2015 and only for five years after they go into service. The incremental incentives range from the Turkish lira equivalent of $4 to $35 a mWh, depending on the type of project. For example, it is $6 a mWh for reflective surface panels used in solar thermal projects, $13 a mWh for turbines used in hydroelectric projects and $35 a mWh for using photovoltaic modules in solar projects.

The new law also provides a pooling mechanism for making payments to renewable generators. According to the new mechanism, utilities buying renewable power from a project that has opted into the “renewable energy support mechanism” must make their payments directly to a pool that is managed by the state-run Market Financial Settlement Center, or “PMUM.” Funds are then distributed from the pool to the renewable generators according to the amount of electricity they have sold. While the new law specifies that payments to the pool shall be made for each billing cycle in Turkish liras (based on the currency exchange rate of the day on which power is provided to the grid), it generally delegates to the the energy regulator, EPDK, the authority to implement the pooling mechanism. In essence the pooling mechanism functions as a limited government purchase guarantee, since failure to make a payment into the pool would be in direct violation of the law in addition to a breach of contract.

The total capacity of solar projects that can be connected to the grid is limited. In the event that multiple solar developers apply for licenses in the same geographic area, then TEİAŞ will use a reverse bidding process to award slots starting with projects demanding the lowest feed-in tariffs. The total installed capacity of licensed solar plants that will be connected to the grid before December 31, 2013 cannot exceed 600 megawatts. These limits were not part of the draft legislation originally debated by parliament.

The new law authorizes the Ministry of Energy and Natural Resources to identify areas of the country that have good renewable energy resources and notify the local zoning authorities so that the areas are protected for renewable energy projects. It also extends to December 31, 2015 the 85% break on the costs of using state-owned land. All existing licenses for independent power projects are expected to be amended within three months after the new law takes effect upon publication sometime in January in the Official Gazette to specify the installed capacity of the licensed project and maximum permitted annual power production. The new law permits renewable generators to install additional capacity at already licensed projects as long as the additional capacity does not expand a project outside the geographical area specified in the license or provide more electricity into the system than the amount of installed power specified in the license.

Analysis

The new law is probably not sufficient to make Turkey a more attractive sector for renewable energy than other major renewable markets. Turkey has the largest geothermal energy potential in Europe, more solar energy potential than California, and compelling potential in wind and hydraulic energy. However its renewable energy sector is in its infancy.

While the new law provides an improvement over the current regulatory regime, historically regulators elsewhere have provided more generous incentives to boost this industry into growth stages. For example, feed-in tariffs last 20 to 25 years after a project commences operation in the European Union, as opposed to the 10 years being in the new law. In addition, solar feed-in tariffs range between €300 to €540 a mWh and wind feed-in tariffs range between €80 to €200 a mWh, which are significantly higher than those put in place by the new law.