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Changes to the Licensing Process in the New Turkish Electricity Market Legislation

The new Electricity Market Law (the “New Law”) that came into force on March 30, 2013 brought some changes to the licensing procedures, especially for the generation licenses. The most important is the introduction of a “preliminary license” procedure in place of the pre-construction phase; a period where the licensees are required to obtain the various permits for their construction and operation, but are banned from share transfers. The new licensing regulation , drafted in accordance with the New Law, has further clarified the “preliminary license” procedure.

In the old system, generation licensees were provided a separate term for the pre-construction phase (22 to 30 months depending on the type of the power plant) and then the construction completion phase would follow (ranging from 18 to 72 months depending on the type of facility and installed capacity) . These terms were incorporated into the license and if the licensee was unable to start or complete the construction within their respective periods, they ran the risk of their license being terminated and their letters of guarantee (for substantial amounts, submitted during the application process as performance security) being registered as revenue (i.e. called upon) by the Energy Market Regulation Authority (“EMRA”) unless they applied for and were granted an extension.

These sanctions intended to ensure that licensees were composed of serious applicants intending to materialise the investments and contribute to the supply of national energy. Despite this sanction mechanism, there have still been many instances where the licensees preferred to view the license as a tradable commodity to be marketed to potential investors, rather than realising the investments themselves within the required timeframe. In order to set things right, Provisional Article no. 9 in the new Electricity Market Law provided that those licensees who have failed to start construction within their specified pre-construction term would be granted a final period of six months (or an extension, if they had time remaining for the pre-construction phase) to fulfil their obligations or their licenses would be terminated . If however they did not wish to proceed with the investment, they had one month to apply to EMRA and return their licenses/cancel their license applications; whereupon they would be able to recover the letters of guarantee submitted during their initial application.

The system under the New Law has now transformed the pre-construction phase into a “preliminary license”, where the applicants are issued a preliminary license for a 24-month period during which they are required to complete the necessary permit procedures to start construction and operations. This period does not include any periods of force majeure, and the EMRA Board is authorised to extend this by up to half, depending on the resource and installed capacity of the facility. The actual licenses would be issued only after the requisite permit procedures have been completed by the preliminary licensee. It should be noted however that in furtherance of EMRA’s aim to establish a sustainable energy supply in the market, the most important new restriction is a ban on share transfers during the term of the preliminary license.

Ban on Share Transfers

The new Law provides that except in cases of bankruptcy or inheritance, changes in the direct or indirect shareholding structure of the licensee company, share transfers and other acts or transactions which may result in share transfers are prohibited for the duration of the preliminary license; and the licensees are required to incorporate this restriction in their Articles of Association (Company charters) by the time that they apply to EMRA. If the share structure is changed in breach of this provision, or if the preliminary licensee fails to fulfil its obligations determined by EMRA, then the preliminary license will be cancelled, with the result that their letters of guarantee will be registered as revenue by EMRA.

The new licensing regulation has clarified the share transfer ban further and brought in three exceptions where this provision shall not apply:

a) Shareholding structure changes due to changes in the publicly traded shares of those licensee shareholders listed in the stock exchange,

b) Companies who were issued preliminary licenses regarding facilities to be established according to international agreements,

c) Changes in the indirect shareholding of foreign shareholders within the shareholding structure of a preliminary licensee.

Therefore, unless the preliminary licensee falls under one of the exceptions above, the shareholding structure should remain unchanged during the preliminary license period, and (as before) any changes of 10% or more in the direct or indirect shareholding structure (five percent or more for publicly held companies) shall be subject to EMRA approval during the actual license period. Conglomerates with intermediate holding companies investing in these generation companies will also need to pay attention to keeping their “indirect” shareholding in the preliminary licensee unchanged, at least for a minimum of 24 months.

Application requirements and Obligations under the Preliminary Licenses

The application requirements for preliminary licenses also reflect the new two-step licensing process, lowering the letter of guarantee and minimum capital requirements for preliminary licensee candidates, and shifting all permit requirements to the preliminary license phase itself, to be completed before the actual license application.

The preliminary license applicants are restricted to legal entities incorporated in Turkey in accordance with the Turkish Code of Commerce, either as a limited company or as a joint stock company (whose shares shall be registered shares, except for those that are publicly traded). Applicant companies are also required to have a minimum capital of 5% of the total investment value of the project and submit a letter of guarantee for the same value. This project investment value figure is also determined by EMRA based on type of energy resource, some current examples are 2.000.000 TL/MW for wind energy, 3.500.000 TL/MW for solar energy and 6.000.000 TL/MW for nuclear energy, etc. This means for example that, an applicant for a 50MW wind power plant would be required to have 5.000.000 TL minimum capital and also submit the same amount in a letter of guarantee. The new Turkish Code of Commerce requires that 25% of the capital is paid up during incorporation, with the rest to be paid up within 24 months. Consequently, even if the preliminary license is granted, the shareholders will have to make considerable investments while the company is yet to complete the necessary permits.

The preliminary license is granted once the applicant submits all necessary documents, pays the fees and successfully completes the evaluation process by EMRA, along with approvals from the relevant transmission and distribution authorities regarding the system connections. The preliminary licensee will then be required to apply for and obtain various permits and approvals such as the ownership/usufruct rights of the power plant site (if they do not already have them), approvals for the zoning plan of the site, preliminary construction plans for the facility, environmental impact assessments, technical interaction with military and civilian air services, military zones, construction permits, and system connection and usage agreements. The preliminary licensee will need to complete these authorisations and apply for the generation license within the preliminary license term. Additionally, they will also be required to increase their minimum capital and submit further letters of guarantee in accordance with the limits determined by EMRA

Current applicants

Provisional Article 10 in the New Law states that those who have already applied for the generation license under the old system, will be considered as “preliminary license” applicants and assessed accordingly. The licensing regulation Provisional Article 8 provides further details for those applicants who have already passed assessment and received conditional approval from the EMR Board. (a) If the applicants have failed to fulfil the conditions within the specified time frame (except for causes of force majeure or due to circumstances found acceptable by the EMR Board) their applications will be rejected and letters of guarantee will be registered as revenue. (b) If they are within the time limit, then the applicants will be granted 90 days to complete their obligations under the regulation, or given the option to withdraw their applications altogether and recover their letters of guarantee.

While EMRA wished to streamline the licensing process and set a stricter path for the investors with the new electricity market legislation, it remains to be seen whether that will be the case in practice. The next step, in our opinion, is making all of the relevant permit procedures more efficient and transparent for all players in the market; otherwise the preliminary licensees will be hard pressed to complete the procedures within 24 months – which would hinder EMRA’s aims to create sustainable and consistent supply of power to meet the ever growing national consumption of energy.

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