Elektrik Piyasasında Güncel Gelişmeler – Aralık 2020

Elektrik Piyasası Kanunu ve Bazı Kanunlarda Değişiklik Yapılmasına Dair Kanun 2 Aralık 2020 tarihli Resmi Gazete’de yayınlandı. 

Kanun değişikliği ile getirilen ana yenilikler şöyle:

– 30/06/2021 tarihinden sonra devreye girecek santraller için YEKDEM bedellerinin Türk Lirası olarak uygulanacağı belirtilmiş, bu konudaki usul ve esaslarının çıkarılması konusunda Cumhurbaşkanı’na yetki verilmiştir.

– Lisanssız elektrik üretim faaliyeti kapsamındaki tesisler için 10 yıllık YEKDEM sürenin bitiminden itibaren TL krş/kWh cinsinden kendi abone grubuna ait tek zamanlı aktif enerji bedelini geçmemek üzere uygulanacak fiyat için de uygulamaya ilişkin usul ve esasların belirlenmesi için Cumhurbaşkanı yetkilendirilmiştir. 

– Lisanssız elektrik üretimi yapan santrallere, lisans süreleri boyunca elektrik piyasasında oluşan saatlik piyasa takas fiyatının (PTF) yüzde on beşinin YEK Destekleme Mekanizmasına katkı bedeli olarak ödenmesi koşuluyla lisanslı üretim faaliyetine geçilmesi seçeneği tanınmıştır.

THE RIGHTS OF LANDOWNERS IN TURKISH MINING LAW

Introduction Globally, two distinct legal frameworks or systems that regulate mining activities exist: whereas in common law countries, such as the USA and Australia, mines belong to the proprietors of the relevant mining lands (i.e. the landowners own the mines), in civil law countries, such as Turkey, the State and not the landowners own the […]

2nd Renewable Corporate Power Purchase Agreements (“PPA”) Workshop

                                                              EXECUTIVE SUMMARY

Date: 18 June 2020
Venue: Online
Organizers: Solarbaba and TurSEFF
Legislation and Moderation Support: Ege Law
Participants: 

  • Energy Companies: Aksa Energy, Aydem, BayWa, Borusan EnBW, EnerjiSA, Engie, Entek, Foton Energy, Limak, OMV, Pure Energy, RES Anatolia and YBT Energy
  • Financial Institutions: Akbank, AkLease, Garanti BBVA Bank, Garanti BBVA Leasing, Isbank, Is Leasing and TSKB
  • Electricity Consumer Brands: H&M, Inter IKEA Group Textile Category, Lindex and Sisecam

Guest Participants: EPDK, Coorbiz, ELDER and Oculus Insights

  • INTRODUCTION

Three workshops have been planned by TurSEFF & Solarbaba for 2020 in Turkey with the main theme of “Power Purchase Agreements (PPA) as a model to create new renewable energy installed capacity” and the second workshop was held. The purpose of those workshops is to brainstorm with the participation of different parties and to present the useful ideas emerging from the synergy as reports to the public opinion, thus, to open the subject to discussion for its development. Each workshop is designed to focus on a different key aspect of Renewable Power Purchase Agreements (PPA). 

The first workshop took place with a focus on “electricity generation and trading” on February 22, 2020 at TurSEFF office with the participation of energy companies, who are currently working on the issue. Financial institutions, energy companies and corporate consumers participated in the second workshop with a focus on “finance” on June 18, 2020. The third workshop will be organized focusing on “consumer” aspect with the participation of more corporate electricity consumers from different sectors. 

In the executive summary of the second workshop below, the issue is presented from the perspectives of three parties of Power Purchase Agreements (PPA); (i) energy companies (electricity producer / seller) who are the IPPs (Independent Power Producers) and investors for renewable energy projects, (ii) corporate electricity consumers (buyers) who buy clean energy to be generated from these power plants in the long term and (iii) financial institutions to finance the projects.

  • ELECTRICITY CONSUMERS (BUYER) PERSPECTIVE:

From the perspective of textile sector:

Textile industry is among the most important sectors in Turkey in terms of production and trade. According to IHKIB’s (Istanbul Apparel Exporters’ Association) “Developments in the Global Apparel Industry” report dated 2019; Turkey ranked sixth place in the world in 2019 with 17.6 billion US dollars in export value for apparel exports. Moreover, the European Union countries’ apparel imports from Turkey in 2019 was 15.2 billion US dollars in import value and Turkey ranked third with 11.1% share.

Many global textile brands have production coordination offices and common manufacturing supply chains in Turkey. There is also a “Brands Joint Platform” with the participation of more than 20 global textile brands carrying out studies for manufacturers in textile supply chains. Three brands, which are members of that platform – H&M, IKEA Group Textile Category and Lindex contributed on the consumer side by participating in our workshop. 

These brands have goals and roadmaps on sustainability and climate change for 2030, 2040, whose details can be seen in their annual sustainability reports and they need to select their manufacturers in their global supply chains in accordance with the goals to be able to attain them. In this context, brands follow the manufacturers in their supply chains by conducting performance evaluations in the process to assure their compatibility with the goals. These performance evaluations require manufacturers to carry out some works and improvements in the process for the utilization of renewable energy and energy efficiency to reduce their carbon emission in line with the goals of being carbon neutral and then carbon positive of the brands. The brands also organize various trainings and awareness raising activities to contribute to the efforts of the manufacturers in their supply chains.

The textile manufacturers in Turkey are in a variety of size and capacity; along with the large factories, there are smaller manufacturers subcontracting or producing in limited rental spaces unfit for on-site renewable energy applications as well. For this reason, regarding the consumption of electricity from renewable energy, the brands demand from the manufacturers to generate their own electricity within the scope of self-consumption, if applicable, and if not to purchase electricity from renewable energy or renewable energy certificates instead. As per examples in Europe, i.e. Portugal and Italy, there is “Green Tariff” and the brands benefit from it. Having various alternatives in a country make it easier for the manufacturers to attain these goals according to their scope or scale. In this sense, they think that having various options such as Renewable Power Purchase Agreements (PPA) or Renewable Energy Certificates (REC) alternative to installing renewable energy systems in their will facilitate the transition on the consumer side.

Brands’ goals are global, and the same criteria and goals apply to manufacturers in all countries they work with. In this regard, taking the necessary steps to comply with the criteria and to keep their performance evaluation scores high is a subject to be seriously taken into consideration by the manufacturers in Turkey for the sustainability and global competitiveness of their business.

From the perspective of energy companies:

The European Green Deal is a forthcoming subject and brings serious opportunities and risks. There are substantial opportunities particularly in terms of both new renewable energy capacity increase and decarbonization of the industrial infrastructure in Turkey. With the good governance of the process it is possible to transform the possible risks here into opportunities. Therefore, the electricity consumers are expected to focus more on this issue of transformation and the energy companies should support consumers more in this regard.

The most critical heading in the European Green Deal for electricity consumer industrial companies in Turkey is “Border Carbon Adjustment” related to “Carbon Leakage” because Turkey is among the largest suppliers of the European Union and majority of the products of Turkey are exported to the E.U. countries (41.1% according to the Jan – May 2020 data of the Turkish Ministry of Commerce). Within the Green Deal, the European Union aims to price its emissions within the scope of its historical responsibilities. Due to the obligations that will be imposed on its industry, the European industry may lose its competitiveness compared to other countries or there is a risk that the European industry may shift to production outside the E.U. and because of that “Border Carbon Adjustment Mechanism” is considered to be applied for the non-member country suppliers. Once this mechanism will be established, the industrial companies in Turkey wishing to export their products to the European Union will have to bear an additional cost for both emissions from the generated electricity supplied by the grid and from their own processes. It would be wise for all companies to seriously consider these two aspects and start working on them. In this context, Renewable Power Purchase Agreements (PPA) may become a good option for electricity consumers to purchase electricity from renewable energy at a more affordable price. Although Green Tariff is another option for this, it is observed that it brings an additional cost to the consumer in some foreign applications. In addition, establishing a Carbon Emission Trading infrastructure and market it in line with Renewable Power Purchase Agreements (PPA) will be a positive development on the consumer side.

International companies having significant investments and/or supply chains in Turkey currently create substantial demand in the Turkish market for supplying their electricity consumption from renewable energy in accordance with their decarbonization goals. Likewise, many energy companies having international shareholders and active in the Turkish market have been working on Power Purchase Agreements (PPA) to be able to meet the demands of above-mentioned consumers’ international accounts for their operations in Turkey. Some of the global energy companies are waiting for the development of Renewable Energy Power Purchase Agreement (PPA) Mechanisms to enter Turkish market. 

Some of the concerns observed on the consumer side by the energy companies regarding the structure of Renewable Power Purchase Agreements (PPA) are as follows:

  • Electricity purchase is currently not a primary business for corporates, to whom the energy companies’ intent to sell electricity through Renewable Power Purchase Agreements (PPA) and it is far outside their value chain. The relationship between the electricity consumers and producers should be improved to disseminate the knowledge to all level of consumers. While all these developments are taking place, it becomes very crucial to inform and raise the awareness of electricity consumers. At this point, the structures and platforms established by companies are also very important in terms of providing information and experience exchange among themselves.
  • There is a misperception that renewable electricity may be more expensive than normal electricity. One of the most determinant factors in the preference of the Renewable Power Purchase Agreements (PPA) by consumers is the price factor and the fact that the prices of electricity produced from renewable energy have dropped considerably will cause the Renewable PPAs to be preferred more and more by the consumers. Currently, some consumers meet their electricity demands from the grid but purchase additional Renewable Energy Certificates. Even though this operation can be considered as a kind of Renewable PPA, the long-term predictability of the electricity price provided to the customer by a long-term Renewable PPA to create new capacity cannot be achieved in this structure.
  • In addition, the electricity consumers are hesitant when to sign long-term Renewable PPA, today or within few years. “Cannibalization Effect” is one of the main issues of the electricity market due to technological developments. Although the answer to this question requires some market knowledge and projections, the best decision can be made for the company with the help of the project developers or independent consultants.
  • The electricity consumers want to ensure that the energy supplied comes from renewable resources. For this reason, the Renewable Energy Certificates (REC), which will allow the buyer to keep track of the electricity consumed, are expected to gain importance.
  • In the self-consumption model on the unlicensed side, electricity cannot be sold according to the legislation. In this model, consumers can use the electricity they produce by investing in their rooftops themselves. If the sale of electricity generated in unlicensed power plants is allowed and a collateral structure can be established in this regard, energy companies can invest in factory rooftops, install RSPVs (Rooftop Solar PV) and sell the electricity to factory owners. By this way, a more consumer-friendly structure for the electricity consumer can be created with a new business and finance model within the scope of the self-consumption model, and both industrial and energy companies may win.
  • FINANCIAL INSTITUTIONS PERSPECTIVE:

The financial institutions in Turkey have achieved a significant growth in renewable energy financing. The key element of this growth was the YEKDEM mechanism, a feed-in-tariff scheme introduced by the Turkish Government in 2010. YEKDEM have offered elements that reduce the risk of financial institutions with a fixed price and public electricity purchase guarantee. The fact that the financing provided is mainly in US Dollars enabled financial institutions to eliminate the exchange rate risk.

The financial institutions agree that a new market will be formed after YEKDEM with Renewable Power Purchase Agreement (PPA) models. The fact that financial institutions have not had a prevalent experience so far indicates the needs will be determined more clearly over time. However, all financial institutions participating in the workshop are eager to take part in this new market. The most critical issues are how the legal structure will be formed, what the contracts will cover and how the risks will be minimized.

The PPA model is the financing of a bilateral agreement. The best example of a PPA is Mini-YEKAs (Licensed renewable power plant public tenders with installed capacities 10-20 MWs each). The fact that one of the contracting parties in Mini-YEKAs is the government, makes it a model in which many risks of the investor are eliminated at the initial stage.

In the PPA model, when financing is done based on the contract between the two parties, financial institutions must be able to measure the credibility of both parties and evaluate their guarantees. 

Since rooftops are important area that may be subject to Renewable PPAs, experiences in financing RSPV (Rooftop Solar PV) investments will be guiding. Earning income from the savings in rooftop solar energy investments does not enable the repayment of financing with external cash flow. In that case, where there is no income transfer, leasing financing comes into prominence because the balance sheet evaluation of the investing institution is essential. Eliminating obstacles for renting roofs and enabling roof sharing will be the developments that will pave the way for the financing of Renewable PPAs. 

Requirements for the PPAs to finance them:

For the development of PPA financing, it is important to establish the structure of the contracts. The PPAs should be carefully reviewed and formulated by the lawyers from the very beginning. What the contracts will cover is the most important factor for financing institutions. The involvement of financial institutions in the financing process before the contract, agreeing on pricing, maturity, payment terms and other scope of the contract and adjusting the financing conditions accordingly are among the factors that will increase the accessibility of projects to finance and reduce the risk for all parties. 

The Renewable PPAs are expected to include at least the following clauses: 

  • The maturity of the contract is one of the basic criteria for financing. Payment plan and terms must be compatible. 
  • It is extremely important that the contract is final and irrevocable. If the contract is terminated, the subject of the penal sanctions to be applied should be clearly stated in the contract. The financial institutions expect that the contract can only be terminated under the very limited circumstances. Even if the contract is terminated, the presence of penal clause in the contract that the principal and the reduced amount of interest during the term of the loan to be paid on the day of termination, will be the priority of the financial institutions. 
  • The contract price must be predictable. Forming these contracts at a fixed price will keep the investor, the electricity buyer, and the financier on the safer side of the project returns. However, pricing may be expected to be subject to a certain escalation mechanism. The buyer may want to set the price with a market clearing price (MCP) minus a price, but this situation may make it difficult for the financial institutions to finance and increase the demand for equity due to market risk. Of course, it is obvious that every financial institution will make decisions in line with their own risk perception and risk appetite for the financing of projects subject to such contracts and will implement a policy in this direction. 
  • Contract Currency: If contracts are signed in Turkish Lira, prices may be indexed with a TL reference interest rate (TLREF); as in the MCP mechanism of EPİAŞ. It is a good model that can be used in the example where the maximum and minimum prices are determined based on US dollars, 25% – 25% CPI-PPI (Consumer Price Index – Producer Price Index), 50% exchange weight in foreign currency. However, the primary choice of financial institutions is a contract in US dollars.

Major risks: 

Project risk is one of the major risks that financiers will take, and there is no problem in analyzing the project risks with the experience of financial institutions in this regard. However, the buyer’s ability to pay the amount specified in the contract during the term of the contract is the most important risk for financial institutions. The financial strength of the buyer and the long-term sustainability of its business activity are other important parameters of risk measurement. In a fixed price contract, the price of the buyer party may remain too high over time within the agreed term and therefore the buyer party may want to terminate the agreement. 

Risk management: 

In Turkey, there is no sophisticated balance sheet risk assessment mechanism as in the advanced economies to assess the risk of the buyer side. Long-term O&M (Operation and Maintenance) agreements with the EPCs (Engineering Procurement Construction Companies), performance bonds, construction period insurances will be risk mitigating instruments. Determining how the buyer’s payments will be made, monitoring the payments, and guaranteeing them to the financial institution are other important elements of risk management. For the case of excessive price fluctuations, if both parties put forward their spot market expectations in writing in advance to reshape the contract accordingly, such approach may relieve all parties. 

Collaterals: 

Since the PPA model seems risky by the financial sector representatives, the financial institutions may request an additional collateral. The letter of guarantee or financial security will complement the process. State-supported credit insurance will also be one of the guarantees that will increase the financing capability. Of course, the insurance period must match the term of the contract. The formation of a state-supported credit insurance that will ensure these commercial risks will pave the way for the system.      

As a result, the PPA model creates a new market potential on the side of financial institutions. Although financial institutions prioritize the potential in the private sector, the PPA model has a huge market potential especially for financing the municipalities. The model, in which the contract risk is eliminated, and payments are secured by the public, will enable commercial finance institutions to evaluate the potential in this area. The financial institutions assume that the electricity suppliers are corporates. As market go into more depth, small players will enter the sector and additional measures may be required to increase these enterprises’ access to finance. 

  • ELECTRICITY PRODUCERS (SELLER) PERSPECTIVE:

The suggestions of energy companies participating in the workshop on Renewable PPAs, which are in use as a financing model in the renewable energy sector in many countries of the world, can be summarized as follows.

Legislative status regarding Renewable PPAs:

  • In the self-consumption model on the unlicensed side, electricity cannot be sold according to the legislation. In this model, investors can invest in their own rooftops and consume the electricity they generate. If the sale of electricity generated in unlicensed power plants is allowed and a collateral structure can be established in this regard, energy companies can invest in factory rooftops, install RSPVs (Rooftop Solar PV) and sell the electricity to factory owners. This will pave the way for Energy Service Company (ESCO) model or the Built-Operate-Transfer (BOT) in the sector. This model does not contradict the self-consumption model, and it is a financing model within the self-consumption model. In this way, the self-consumption RSPV projects and as well as WPP (Wind Power Plant) projects as the upper limit for self-consumption system investments is 5 MW, can be implemented faster. Both industrial and energy companies can win.
  • On the licensed side, there is a YEKDEM model coming to an end and a new mini-YEKA model. Licensed companies have been already selling electricity from different types of resources. While YEKDEM has an electricity purchase guarantee (feed-in-tariff), PPA is not an attractive commercial model, but it is predicted that it will be attractive for renewable power plants to exit YEKDEM after completing their 10-year period starting from 2021. In the current situation, although there is an energy company that will make the investment, the consumer to buy the electricity and the financial institution that will provide financing, it is very difficult to create licensed renewable capacity due to grid connection capacity limits. For the case that the electricity producer, consumer, and financier sign a Renewable PPA, it will be useful to define the methodology of the grid connection capacity allocation to develop the PPA structure. As a proposal, one of the cities announced in the Mini-YEKA package may be declared as a pilot city and proceed as a tender with the corporate renewable PPA model. Energy companies who want to implement this business model may compete for grid capacity allocation based on fixed electricity purchase prices in the PPAs by bringing the agreement they have made with corporate electricity consumers, without demanding an electricity purchase guarantee from the state. 
  • An alternative point of view that came to the agenda in the workshop is the creation of a single regulation specific to the PPA that can cover renewable energy investments of all sizes, without making any distinction such as unlicensed or licensed. For example, an industrialist may install 2 MW on his rooftop or buy 2 MW equivalent electricity from 20 MW power plant or may become shareholder for 2 MW of a 20 MW power plant and receive the energy. However, it is very important to include unlicensed energy generation facilities in the market regulated by EPİAŞ. 
  • Workshop participants predominantly interpret the Renewable PPAs as long-term corporate bilateral electricity trade agreements with the purpose of creating new renewable capacity, which we call “additionality”, and the three items mentioned above are related to this.
  • Moreover, some of the workshop participants have negative priced wind project portfolios in hand and this is an overall market portfolio of 2500 MW. If these portfolios are given the Renewable PPA alternative, it will be possible to realize these investments that currently occupy the grid capacity, thus it is an option for the creation of new renewable capacity “additionality” that has been brought to the agenda. 
  • In addition, participating energy companies are currently working on the Renewable PPAs for the wind power plants (a total capacity of 3500 MW in the perspective of 2020-2024) that are out of or will exit YEKDEM after 10 years. Although these power plants are discussed in our workshop, they are not the priority topic of our workshop, as they are completing return of investment periods, have the ability to sell electricity at affordable prices, can easily sell them with shorter-term agreements, and there is no chance of creating “additionality” – new capacity. 
  • Again, a view that came to the agenda in the workshop is that there is no legislative obstacle against all what mentioned and can be solved with business models. Although there are a small number of companies that have already accomplished this model or are close to do so, it will be beneficial to enable or support the Renewable PPA issue for capacity increase in renewable energy with some legislative changes, especially for more players of different sizes to reach and enter the market. 

Inclusion of unlicensed generation into the system with the logic of a virtual power plant:

On the unlicensed generation side, opening the way for the management of these projects in the power market (EPİAŞ) by combining these projects in a virtual power plant structure by an aggregator, will create a positive effect for the Renewable PPAs to become more prevalent. Thus, these projects may have a more predictable and objective structure both on the financing side and for the market risk to be taken and may be subject to PPAs. With the ability to trade the energy generated from those facilities and enabling them to perform market access transactions, those small distributed facilities can be managed with the logic of portfolio management and combined with demand side, new added value areas may be created. 

Implementation of Renewable Energy Certificates and pricing carbon:

It is critical to ensure that the resource is from renewable energy and monitoring it so that the new structures and business models such as Renewable PPA based on renewable energy can develop in the market. In this context, creation of Renewable Energy Certificates (REC) related mechanisms along with the legislation is crucial. With the YEK-G regulation, which was published as a draft in early July after our workshop, a step was taken towards this. 

As explained in detail on the consumer side, along with the E.U. Green Deal and expected Carbon Border Adjustment, Turkey may also begin pricing carbon. This is one of the most important issues for Renewable PPAs to become commercially attractive. 

Competition law and contracts over 5 years:

Energy companies stated that supply contracts having a maturity more than 5 years cannot be signed due to competition law restrictions. This issue is also discussed in Europe. The general assumption is that supply contracts longer than 5 years disrupt the competitive market, but there are some exceptions to this acceptance. If the relevant supply contracts contribute to technological development, the consumer benefits from this and can obtain a price guarantee, the relevant contracts will be exempt from this 5-year limitation. There are evaluations that the electricity sales contract signed for the sale of electricity produced in a nuclear power plant in Europe should not be subject to this limitation for the reason stated above. 

YEKDEM costs may be removed for Renewable PPAs:

In case of signing a Renewable PPA, energy companies recommend not to charge YEKDEM costs from projects within the scope of this model since electricity trade is realized between the parties without burdening the state. In this way, the Renewable PPA, renewable energy and new renewable capacity may be supported indirectly. 

Expectations from financial institutions:

With the decrease in renewable energy project costs and return on investment periods, especially in solar energy projects, the state-supported purchase-guaranteed structures in the world are leaving their places to free market mechanism business models. Likewise in Turkey, as YEKDEM will stop at the end of 2020, it is possible to observe that starting this year EMRA have taken some steps to pave the way for free market mechanism business models with various draft regulations such as YEK-G.

Until today, financial institutions have been financing renewable energy projects in a much different structure within the framework of the YEKDEM mechanism. It is important that financial institutions closely follow these changes and start working to adapt themselves to new business models with free market mechanisms. There are highly experienced financial institutions in Turkey and based on experience we can observe that these institutions have capabilities to rapidly adapt to changes in the legislation. 

At this point, the expectation of energy companies from financial institutions is that they are willing to leave a little more their comfort areas to finance new structures and business models such as Renewable PPA for the market to develop and to start developing the necessary financial structures and models to finance those models in a way that will bring the least burden to all parties. 

Recommendations for renewable PPA financial risk elimination:

  • In the case that the YEKDEM model is no longer on the agenda, the electricity market may create a mechanism and/or fund in order to minimize or eliminate the buyer risk in the Renewable PPAs emphasized by the financial institutions.
  • Additional collaterals may be developed to facilitate the work of financial institutions. An amount of EUR 50-100 million may be used to finance projects to be made under the Renewable PPAs model, in cooperation with a green fund or a development bank. Local financial institutions in Turkey may be included as well. This fund may manage all these risks on a market basis.
  • Insurance companies may develop different products to minimize or eliminate the buyer risk in Renewable PPAs.
  • Secondary market / derivative products may be introduced. For example, there are products traded on international platforms to ensure weather derivatives; if the wind does not blow or if the solar radiation is not at the desired level. 
  • The guarantees like the ones provided in long-term commodity trading, may also be applied in energy trading, and instruments such as Coface and KGF may be used.
  • Again, on the buyer side, a more developed mechanism may be established for the balance sheet risk assessment side as in Europe.
  • Financing mechanisms may be developed to apply the project finance approach. For that, financial institutions may issue Green Bonds.
  • With all these alternative proposals, it is an important aspect to include the financial institutions in the subject from the stage when the Renewable PPAs are started to be discussed.

Feasibility and cost reduction due to technological advances:

From the point of view of energy companies, the attraction of the Renewable PPA for all parties is primarily related to the feasibility of the projects and the return on investment. Investments have become very attractive now, when we approach from the technology and costs perspective and follow the decline in renewable energy costs in recent years. However, it is expected that the efficiency will increase, and the costs will decrease with new PV panel technologies, especially in solar energy. The decrease in the return period of investments will both increase the interest of investors and facilitate the work of financial institutions with shorter-term Renewable PPAs. In addition, the development of storage technologies and the decrease in costs will enable new, more flexible business models in the market.

Global companies may transfer global knowledge and experience to Turkey:

International companies having operations or/and Turkish business partners in Turkey having experience on Renewable PPAs, may transfer these global know-how and experience to Turkey and thus serve the local market to develop and the sector to raise its competitiveness rank globally and to attract foreign investor to invest more in Turkey.

  • QUESTIONNAIRE 1

Question: In your opinion, is leading the Renewable PPAs up more important in licensed applications or unlicensed applications?

Result: 35% Licensed, 65% Unlicensed

  •  QUESTIONNAIRE 2

Question: In your opinion, is leading the Renewable PPAs up more important in solar power or wind power?

Result: 80% Solar Power, 20% Wind Power

 

  • CONCLUSION
  1. Renewable Power Purchase Agreements (PPA) online workshop organized by TurSEFF and Solarbaba on June 18, 2020 has been an important step especially in terms of involving financial institutions and the consumer side of all PPA parties in the studies.

With this workshop, financial institutions had the opportunity to hear the knowledge and experience of energy companies conducting global activities on an alternative business model such as Renewable PPA. In addition, energy companies had the opportunity to listen and understand the approaches of different financial institutions on the Renewable PPA model.

Moreover, the consumer perspective was also included in the workshop and it was decided to organize the third workshop with a “consumer” focus with the participation of more consumers from different sectors in the participants list.

 

FINANCIAL LEASING UNDER TURKISH LAW


Under Financial Leasing, Factoring And Financing Company Law Numbered 6361 (hereinafter referred as “Law”), Financial Leasing is stated as a leasing transaction enabling one of the following aspects on condition to be based on a financial leasing contract; transferring the possession of an asset by the lessor authorized pursuant to the Law or related legislation to the lessee at the end of the lease giving the lessee the right to purchase the asset at a sum less than its current market value at the end of the lease period.

  • What can you rent with financial leasing and what are the advantages of benefiting from financial leasing method for energy projects?

In accrodance with Article 19 of the Law; movables and immovables may be subject to a financial leasing contract in Turkey. Any goods which indivudally constitutes an asset may be leased under financial leasing contract.

Thus, financial leasing is an advantageous method to be used while meeting the investment of energy facilities and its equipment. It enables a building owner to use a renewable energy installation without having to buy it. The installation is owned or invested in by another party, usually a financial institution. The building owner pays a periodic lease payment to that party that is determined under financial leasing contract.

Using financial leasing method will also bring some advantages listed below while imlementing the Energy Poject:

  • Without touching your equity, the project can be financed.
  • Periodic payment plans are created according to the cash flow of the project.
  • There is an option to purchase the leased asset at a representative price at the end of the leasing period.
  • The project’s financial electricity needs will be met and it also contributes to the annual greenhouse gas emission reduction.
  • It plays an important role in increasing productivity and profitability by using the working capitals to meet other needs of the firms by providing them to be used by renting instead of purchasing the investment goods.
  • The financial leasing contract has some tax advantages. As per Decision of the Council of Ministers dated 30.12.2007 and numbered 2007/13033, %1 VAT is appliacable for some equipments or complementary parts of the project. Also the investors who hold “Investment Incentive Certificate” will be subject to customs tax exemption and VAT exemption support while leasing of machineries and equipments that are covered by the financial leasing contract.
  • The financial leasing contracs and the papers related to its acqusition, amentdement or security deposit are exempt from stamp tax or charges.
  • Risk management with fixed rent against fluctuations in currency values and interest rates.
  • What are the phases of financial leasing process?

1-The lessee selects the property or asset and makes a preliminary agreement with the seller including the price and delivery terms.

2-Prior sale of the property or asset, the lessor presents the payment plans to be applied to the lessee for the investment to be made.

3-Upon agreement on payment plan between the lessee and lessor, the parties executes a financial leasing contract in a written form. Every natural and legal person authorized to conduct legal proceedings may be a lessee and participation and development banks as well as financial leasing companies may be a lessor under a financial leasing contract. Real estate and movable goods under financial lease contract shall be annoted or registered to the land registery, to the special registries for movable goods, if any, be and notified to the Association of Financial Leasing, Factoring and Financing Companies (“the Association”). Movable goods not registered to a special registery shall be registered to the special registery to be kept by the Association. The registery to be kept by the Association is accessible by public and the persons who are not party of a financial leasing contract may not allege that a lease annoniation was unbeknownst by to them.

4- Upon execution of financial leasing contract, the lessor buys the property from the seller and the invoice is issued to the lessor. In imports, the importer is the lessor. It fulfills the necessary financing conditions for the import of the good and imports the good. By delivering the goods to the lessee, the lessee obtains the property. The purchased property must be insured. The insurer party is specified as per mutual covenant of the parties under the financial lease contract. But in any case, insurer premiums shall be paid by lessee.

5-In accordance with the terms of the financial leasing contract, rental fees are collected from the lessee.

6-In case the lessee and lessor agreed purchasing of the property and/or asset under financial lease contract, at the end of the contract period, the goods are transferred to the lessee at a representative price.

  • Is ıt possible to operate financial leasing from a company incorporated abroad?

In accordance with Article 51 of Law, the financial leasing companies which are incorporated abroad can make financial leasing to the investors who are located in Turkey on the condition that cross-border financial leasing contract is registered at the special registry of Union of Financial Leasing, Factoring and Financing Companies (hereinafter referred as to ‘Union’ or ‘FKB’).

  • Is it possible to sell and lease back the equipment or asset which I own?

The sell and lease back method is not regulated under prior regulation, namely Financial Leasing Law No.3226. However under Article 51 of Law; sale and lease back is regulated as a financial leasing method which enables businesses to sell an asset, property rights of which is owned by said business, to a financing company and continue to use such asset by leasing it back from the same financing company by means of a financial leasing contract. The sell lease back method has exemptions with respect to corporation income tax, VAT, stamp tax and title deed fees.

According to statistics, % 30 of electricy production is aimed to be obtained from renewable energy sources in 2023 and 3 GW installed power is aimed to be reached in solar energy. Considering the need of natural resources and global change in the world, benefiting from financial leasing’s method opportunities will bring advantages for investors that designing projects.

As the financial leasing has its own legislation, seeking legal advice is recommended in order to procure the lessee’s rights under lease contract. Please be noted that the content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

For detailed information please contact; info@ege-law.com or duygu.tuncer@ege-law.com

 

 

 

1-Türkiye Ekonomisinde Yenilenebilir Enerji Projelerinin Gerçekleştirilmesinde Sorunlar ve Çözüm Önerileri-Günüşen Yılmaz-A Yılmaz

 

CYBERSECURITY AND DATA PROTECTION: DIRECTORS’ LIABILITY


There is no single company that does not deal with data. Employee files, fiscal reports, product information or business plans are easily falling within the definition of data and besets every company with data protection obligations. Bearing the potential to face severe implications alone brings data protection to the top priority for any company and makes data one of the most important assets that a company has. Undoubtedly, when liability of a company is at stake, directors and board members’ role will be an integral part to this. As a legal entity, companies operate through real persons and in particular managed by directors and board members. This brings us to our subject, namely, directors’ and board members’ liability on data protection.

What obligations does data protection include?

This includes; guarding the availability of the data to employees who need it; providing the integrity of the data (keeping it correct and up-to-date); the confidentiality of the data; and the assurance that it is available only to people who are authorised. Who are obliged to provide data protection in terms of GDPR and KVKK? In terms of data protection and cybersecurity, there are two main applicable legislations in Turkey; the General Data Protection Regulation (“GDPR”) and Turkish Data Protection Law (“KVKK”).

GDPR bears responsibility on the controller for procurement of data protection. According to article 24, the controller must implement appropriate technical and organisational measures to ensure and to be able to demonstrate that processing is performed in accordance with GDPR. Moreover, the controller is also responsible for regular updating of such measures. Parallel with the GDPR and although defining the controller as the data responsible, article 12 of KVKK sets out that the data responsible shall take the necessary technical and organisational measures to provide data processing, data access and to keep personal data in accordance with respective laws.

Who is the controller? Who shall be deemed as the controller?

Both under GDPR and KVKK, the controller (or the data responsible) is defined as the natural or legal person, public authority, agency or other body which, alone or jointly with others, determines the purposes and means of the processing of personal data. Thus, whoever determines means and purposes of processing data must be deemed as the controller. Since companies are obliged to ensure the robustness of IT infrastructures, security of data and protection from cyber risks, the very same is to be deemed as “the controller” or the “data responsible” in terms of two main applicable legislations in Turkey. KVKK clearly states that data responsible are guardians of the personal data that is obtained for processing purposes. Data responsible is the supervisor in procurement of the integrity of personal data, execution of the mandatory and necessary precautions to protect it and furthermore, such responsible entities are not allowed to disclose the personal data in a way to contradict with applicable law and regulations.

Board of Directors’ Position in terms of Data Protection Liability

Directors and board members of a legal entity cannot be accepted as the controller in terms of data protection regulations. The data responsible (or the controller) is the one who determines “how” and “why” the data is processed and in a company, the legal entity itself corresponds to these questions. In terms of Data Protection Law, directors are not deemed as the controller and sanctions to be imposed under KVKK are applicable on the legal entity. Besides, there is no specific provision under Turkish Data Protection Regulation that holds representatives of a legal entity liable for cyber security breaches and data protection violations. However, what if an action of a director leads to a sanction of the legal entity under KVKK are applicable on the legal entity.

Data Protection Regulation?

In this case, general liability provisions of the Turkish Commercial Code (“TCC”) can be resorted at all times. If a company is subject to fine under KVKK due to its director’s misconduct, it shall be able to recourse to liability of the director. Article 553 of the TCC suggests that members of Board of Directors may only be liable against to company, to shareholders or to the creditors of the company if they damage the company by failing to perform their duties arising from articles of association and law with their fault. Moreover, directors are obliged to perform their duties with utmost diligence and care to protect interests of the company based on the good faith principle.

Directors who fail to perform their duties and cause damage due their fault shall be held liable against company under TCC. Thus, any act of breach that violates safekeeping of personal data and failing to take necessary precautions and monitor these on behalf of the company shall lead to the liability of the representatives.

Worth mentioning that under German law there are explicit provisions that may lead to the liability of directors due to data protection failures. 1 According to the German Stock Corporation Act, Section 93, directors are obliged to gain proper oversight of cybersecurity and must act with utmost care within their establishment. Furthermore the same Act suggest that directors must take appropriate and necessary measures in particular to establish a monitoring system to detect any threat at an early stage which may endanger continued existence of the company.

Lack of specific regulation defining directors’ duties within data protection scope in Turkey and having TCC as a single resort may result in “non-liability” of a director. As known, TCC grants the opportunity to directors to assign their representation power to a third person by an internal directorate. Thus, such third party will be held liable in case of failing to act with care and diligence. However, there should be circumstances where such liability cannot be run from as in the case of public debts. A Director is hold liable (and even with their personal assets) if a company owes public debts irrelevant from the assignment of powers and duties to a third person.

To Conclude

Rapid developing nature of IT law requires specific attributions in relations to the liability of the directors. General liability provision of TCC may fall short in meeting some needs, as it necessarily requires “fault” precondition. No failure by the directors should be left out of sight especially actions deriving from negligence. In order to enhance law enforcement and make Turkey an effective contributor in the international fight against cybercrime, we believe more measures must be taken in respect to safekeeping of personal data.

For more information, please contact hande.aksu@ege-law.com or info@ege-law.com

COVID 19 PRECAUTIONS- PRESIDENTIAL DECREE

COVID 19 PRECAUTIONS- PRESIDENTIAL DECREE

On 22 March 2020 a Presidential Decree has been published on the Official Gazette and entered into force as precautions against COVID 19 pandemic.

The Decree suspends all enforcement and bankruptcy procedures, except enforcement procedures due to maintenance payments, beginning from the Decree date until 30 April 2020.  Accordingly new enforcement procedures will not be commenced and provisional remedies will not be enforced and executed until 30 April 2020.

 

LEGAL EVALUATION OF RENEWABLE POWER PURCHASE AGREEMENTS – I

June 2020

LEGAL EVALUATION OF RENEWABLE POWER PURCHASE AGREEMENTS – I

  1. Introduction

Energy transition caused by global climate changes and technological developments has led major energy consumers to explore new business models to take part in energy transition and use them for their own needs.  Corporate consumers, who have important roles in accelerating energy transition, have voluntarily turned to renewable energy procurement in order to achieve the carbon emission reduction goals expected from them[1].  In response to these needs, energy sector players have promoted (even financed) renewable energy projects with different methods by developing business models that gained acceptance in many countries around the world.

In the first paper of our series, which will consist of several papers, we will evaluate the applicability of Renewable PPA (“RPPA”) structure under Turkish law by giving brief information about corporate renewable energy procurement methods.

In our next papers, we will discuss the problems arising in RPPA applications and risk management and standardization efforts regarding RPPAs, and the self-consumption with third-party financing model, which has been much discussed in the Turkish energy sector recently.

  1. Corporate Renewable Energy Procurement Methods

In international energy markets, most preferred business models in order to procure renewable energy by corporate consumers are (i) self-generation or self-consumption, (ii) transfer of unbundled guarantee of origin (GO)[2], (iii) green energy offers[3], and (iv) renewable power purchase agreements (PPA)[4].

Since the term used recently as Renewable Power Purchase Agreement (“RPPA”) in the Turkish energy market is used for all above-mentioned business models, we will first define these business models briefly and then evaluate the applicability of RPPAs, within the scope of the Turkish energy market and other relevant Turkish legislation.

  1. Self-Consumption with Third-Party Financing Model

In this model, which is used in some energy markets, a third-party contractor finances the power generation facility to be used for self-consumption and it undertakes its installation, commissioning, operation, maintenance and repair, and assumes the majority of the financial and commercial risks associated with the project[5].  Then the contractor can lease the plant to the consumer and the consumer makes the agreed payment to the contractor with the proceeds gained from the electricity generated by the plant.  One of the price items to be paid to the contractor by the consumer in the markets, where the trade of electricity is allowed with the self-consumption model, is the sale price of the electricity generated by the plant.

Although, in this model, there is third-party financing and, in some cases, an RPPA, it is accepted as the self-consumption model but not an RPPA in international markets[6].

Corporates, rather than having direct ownership of the power generation plants installed on their roofs, prefer to lease these facilities and purchase the electricity generated from them in order to reduce their risk[7].

In the self-consumption model in Turkey, the financing of facilities by third-party investors is being evaluated by investors and consumers.  However, since electricity generated in accordance with the Regulation on Unlicensed Electricity Generation cannot be traded in any way (Article 24), in Turkey, this structure must be designed without the sale of the electricity.  The evaluation of this structure according to Turkish law will be discussed in another paper.

  1. Unbundled (Bare)[8] Guarantee of Origin Model

Another method used by corporations when performing energy transition is the purchase of the renewable energy source certificate separately from electricity – without purchasing electricity – from a renewable energy generator or from the intermediary companies that trade these origin documents.

Corporates reach their renewable energy consumption targets by purchasing these products in an amount corresponding to their electricity consumption.

These certificates, which are used to track the source of the energy generated, contain information related to the features of the power plant, such as the location of the power plant, the source from which the power is generated (technology), the age of the power plant or whether it receives incentives or not[9].

  1. Green Energy Offers

Green energy offers offered by supply companies to their subscribers in many countries is another method that companies use in renewable energy transition.  In this method, the supply company[10] offers special renewable energy supply agreements to its customers who wish to purchase renewable energy under green supply program[11].  Such supply agreements enable companies to purchase long-term renewable energy directly from supply companies.

The supply company may supply renewable energy and/or source document from its own generation companies, as well as it may obtain such source certificates from third parties.  The supply company uses the source certificate on behalf of the customer who purchased renewable energy.  The customer pays an additional price on the electricity bill in exchange for the renewable electricity energy he has purchased.

  1. Renewable Power Purchase Agreements

Another method corporates use in their renewable energy supply is the Renewable Power Purchase Agreements (“RPPA”).  PPA structures are discussed in many countries and the existing structure is being developed with acquired experience.

The Turkish energy sector stakeholders are also closely following this business model, which is an alternative for financing renewable energy projects and creating new capacity, and are working to make its use more common in the sector.

By 2025, 11,885 MW capacity will leave the Renewable Energy Resources Support Mechanism (“RESSUM”) and generate without incentives in Turkey [12].

11,885 MW of the 21,033 MW capacity that benefits from the RESSUM in 2020, that is to say, more than its half will leave RESSUM and generate without incentives in the next 5 years.  In addition, in the 2019-2023 Strategic Plan of the Ministry of Energy and Natural Resources, the creation of a capacity close to 22,000 MW based on solar and wind energy, where RPPAs can be used as a business model, is targeted[13].  Also, the RPPA model can be used by the parties in order to realize the capacities, which are at the pre-license stage but cannot benefit from the RESSUM for various reasons, at a predictable price.

  • What is RPPA?

Basically, RPPA is a power sales agreement between an energy consumer and a generator.  The parties regulate the purchase of energy needed by the consumer from an existing or green-field power plant for renewable energy purposes in the relevant sales agreement.  The RPPAs – taking into account the needs of the generation plant – are usually concluded for a period of 5 to 15 years.

RPPA, which is one of the most preferred methods used by generators to finance their investments following the gradual decline in the mechanisms provided by governments to encourage the generation of renewable energy, is increasingly preferred between the parties in the energy sector as it is structured according to the needs of the parties.

RPPA, which is actually an electricity sale agreement, appears to be a new business model because, unlike conventional energy law contracts, which often restrict the parties to negotiate, the contracting parties are able to set the conditions for the purchase of any kind of electricity they wish based on the freedom of contract.

In order to be consider a power sales agreement as RPPA, the contract must contain some features.  For example, the relevant electricity sales contract may finance or re-finance a renewable energy plant.  In addition, the RPPAs will contain, unlike conventional electricity sales contracts, the provisions that determine what kind of source documents will be used to track that the purchased electricity is green[14].

  • RPPA Types

In international markets, different classifications for the RPPA types are made according to the nature of the parties, whether they benefit from any incentives or not, and the structure of the agreement.

  • Considering the nature of the parties, the distinction between Utility PPA and Corporate PPA is very important in terms of the provisions that must be included in the agreement. Utility PPA is concluded between a generator and a supply company, while Corporate PPA is concluded directly between the generator and an end-user consumer company[15].  In Corporate PPAs, a third intermediary company, usually assuming the responsibility of balancing, is also a party to the contract[16].
  • Another classification is made according to the product subject to RPPA. Electricity supply is carried out between the parties in the RPPA, which is referred to as the physical RPPA.   Physical RPPA is divided into on-site and off-site RPPA[17] depending on the use of the electrical grid for the supply of electricity.  The pricing of the agreement and the distribution of risk between the parties will differ depending on whether the grid is used for electricity supply.

In financial RPPA, the generator/supplier sells its electricity in the spot market.  The generator/supplier and the electricity purchaser/consumer agree on an agreement price in RPPA, and the difference between that price and the market price of electricity is offset between the parties.  Electricity supply between the parties does not occur in financial RPPAs[18].  With these RPPAs, the transfer of source documents can also be carried out.  These agreements, called contracts for difference, are considered a financial product and are subject to the capital market rules of the relevant country.

  • Why RPPA?

Among the objectives of corporate consumers to procure renewable energy, corporate social responsibility strategies are undoubtedly at the top.  Many companies are turning to renewable energy to meet the green demands of their customers and are trying to get involved in green supply chains.  However, the biggest factor in companies’ preference for renewable energy is the expectation that electricity cost generated from renewable energy sources will decrease perpetually and, besides, the carbon costs will increase in the long run [19].

While environmental responsibility causes corporates to procure renewable energy through all the other methods mentioned above, RPPA is the preferred model for corporates that want to create new capacity (additionality)[20] by constructing their own generation plants.

For power generators, however, RPPA is preferred for financing or refinancing of generation plants due to the gradual reduction of government incentives provided for renewable energy[21].  The transition of the energy market from an incentive-based model to free market conditions has led renewable energy investors to turn into alternative financing models.  Within the framework of the European Union Green Deal, the member states of the European Union have agreed to reduce carbon emissions in their own countries, as well as to supply the products they import from green supply chains.

RPPAs will also cause the parties to the agreement to create a guarantee against fluctuating electricity prices.  Long-term RPPAs allow both consumers and generators to make financial projections in terms of energy revenues and expenses.

In many countries, including Turkey, RPPAs are also considered alternatives to state-sponsored purchase-guaranteed tenders for the promotion of renewable energy generation.  That is, the investors participating in the tender are bound by the tender specifications presented to them, and these specifications include unilateral severe penalties in cases where they fail to complete the projects in time[22].  Although such penal clauses are stipulated in RPPA structures as well, the negotiability of these agreements by the parties is an important reason for the acceptance of the terms of the agreement by the parties.

  • Reasons Why RPPAs Are Not Preferred

Valid for the other corporate green energy procurement briefed above, the most important reason why RPPAs are not preferred is the changes in energy policies and, accordingly, in legislation.  Changes in the incentive system, changes in the items that make up the price of electricity (e.g. distribution price, RESSUM costs, etc.) slow down or even hinder the orientation of corporations towards renewable energy[23].

Although corporate social responsibility strategies cause corporations to prefer renewable energy, the main factor in decision making in the procurement/purchasing departments of corporations is that renewable energy does not cost more than conventional energy.  Therefore, the fact that electricity to be supplied with a RPPA does not, or is thought will not, cost less will cause companies to approach this structure with suspicion. Also, the procurement departments of corporations do not prefer RPPA because the structure of RPPA is more complicated than conventional power purchase agreements.[24]

Legislative and technical restrictions on the monitoring of the origin of the supplied electricity and the transfer of the origin documents are also seen as a hinder for of the corporations to procure renewable energy and, therefore, to be part of a RPPA[25].

  • Evaluation of RPPAs in Terms of Turkish Law
    • In Terms of Energy Legislation[26]
  1. General

As mentioned above, a RPPA is basically an electricity sale agreement, the provisions of which can be negotiated between the parties.  The parties are able to shape the provisions of the contract according to their own demands based on the freedom of contract.  Bilateral agreements concluded between supply companies can create a framework for RPPAs.

Although the term bilateral agreement is used in many legislation, its definition in Turkish electricity legislation is made in the Regulation for Consumer Services as follows: “The commercial agreements that are concluded between real or legal persons subject to the provisions of private law regarding the purchase and sale of electrical energy and/or capacity and not subject to the Board’s approval”.

According to this definition, a holder of a supply or generation license and the consumers who have the freedom to choose their supplier will be able to freely determine the contents of the electricity sales agreement that they will conclude.

Although the RPPAs are negotiated and concluded between the parties based on the freedom of contract, they will also contain the provisions subject to the legislation due to the regulated nature of the energy sector.

Since the provisions relating to grid connection, balancing obligations and transfer of origin documents regulated in legislation in some countries will differ in the legislation based on the capacity of the parties (such as free consumer, end consumer, authorized supply company[27]) to the agreement under the energy legislation or the characteristics of the generation plant (such as being already established or being to be established simultaneously with RPPA or being off-site or on-site) each of these matters must be evaluated separately within the RPPA.  In most cases, additional contracts arising from energy legislation will also have to be concluded with the parties to the agreement or third parties along with a RPPA.

Parties to RPPA prefer to enter into a service agreement for the services with a market access service provider (aggregator) assuming all market operations and risks, including balancing, under such agreement. Such contracts can be arranged within the RPPA or a separate service contract can be concluded with the relevant service provider.

  1. Documentation and Tracking of the Origin of Energy

In a RPPA, as we stated above, the tracking of the renewable energy sources is one of the most important elements of the agreement.  In Turkish electricity legislation, in Article 24 of the Regulation on Certification and Support of Renewable Energy Sources, it is stated that the Renewable Energy Source (RES) document shall be issued for the determination and tracking of the source type/origin of electricity generated from the power plant by the generators generating electricity from a renewable energy source accordance with its license[28] and for the utilization of the applications under RESSUM.  There is no regulation in the electricity legislation related to the bare transfer of RES documents (without the purchase of electricity).  However, the fact that it is stated that the RES document will be issued in order to take advantage of the RESSUM applications may mean that a power plant benefiting from a RESSUM application will not be able to make bare transfer of the RES document.   Moreover, the presence of certificates accepted in international markets will result in the transfer of the RES documents will not be preferred by foreign corporations or corporations with foreign partner in practice. In addition, despite these regulations in the legislation, the RES Document is not issued in practice.  Therefore, there is no circulation of the RES document in practice.

Since 2016, certification of Turkish renewable power plants through the I-REC system and the bare transfer of these certificates is possible.  In Turkey, first I-REC certificates was issued for Bayramhacılı hydroelectric power plant (HPP) with a capacity of 48 MW owned by Senerji Enerji Üretim A.Ş.[29]

The tracking of electricity generated from renewable energy sources in Turkey, although there is no certificate, can also be performed with contractual obligations through the trust relationship among the parties. The resource/origin of the generation facility is specified in the licenses issued on behalf of the proprietor of the generation plant.  The amount of electricity generated in these plants can be obtained with the data obtained from the market operator EPİAŞ at the end of each reconciliation period.

  • In Terms of Competition Law

In countries where the RPPA structure is used, another issue is whether the long-term conclusion of RPPA constitutes a violation of competition law legislation for the purpose of RPPA.

The reason for this assessment is the recognition that long-term contracts can have a disruptive effect on competition in the European Union, both at the union level and in accordance with the regulations contained in the competition law legislation of the member states[30].

The Turkish competition law legislation was created on the basis of the European Union competition law legislation and the aforementioned regulations are included in the Law on the Protection of Competition No. 4054 (the “Competition Law”) and the Communiqué on Group Exemption of Vertical Agreements No. 2002/2 (the “Communiqué”).

According to Article 4 of the Law, “Agreements and concerted practices between undertakings, and decisions and practices of associations of undertakings which have as their object or effect or likely effect the prevention, distortion or restriction of competition directly or indirectly in a particular market for goods or services are illegal and prohibited.”

Communiqué, on the other hand, regulates that agreements made between two or more enterprises operating at different levels of the production and distribution chain for the purpose of buying, selling or reselling certain goods or services (vertical agreements) shall be considered exempt from the prohibition mentioned in Article 4 of the Law, provided that they meet the conditions specified.

In addition, the communiqué provides that vertical agreements containing the obligation to provide to the sole purchaser may benefit from the exemption recognized in the communiqué provided that the purchaser’s share in the market in which the goods or services subject to the vertical agreement does not exceed 40%.

The obligation to provide to the sole purchaser is defined in subparagraph (h) of the first paragraph of Article 3 of the Communiqué as a direct or indirect obligation for the provider to sell the goods or services subject to agreement to only one purchaser within Turkey for its own use or resale purposes.

Also, according to Article 5 of the Law:

“The Board, in case all the terms listed below exist, may decide to exempt agreements, concerted practices between undertakings, and decisions of associations of undertakings from the application of the provisions of article 4:

  1. a) Ensuring new developments and improvements, or economic or technical development in the production or distribution of goods and in the provision of services,
  2. b) Benefiting the consumer from the above-mentioned,
  3. c) Not eliminating competition in a significant part of the relevant market,
  4. d) Not limiting competition more than what is compulsory for achieving the goals set out in sub-paragraphs (a) and (b).”

Also, Article 7 of Electricity Market Law No. 6446 limits the sector share of generation activities with the provision that “The total amount of electricity generated by a real or a private sector legal person through the generation companies under their control shall not exceed twenty percent of the total amount of electricity generated in Turkey published for the previous year.”

Also, in accordance with Article 10, the same Law specified the highest market share in this sector with the provision that “the amount of electricity to be sold by these private legal persons to final consumers shall not exceed twenty percent of the electricity consumed within the country during the previous year.” With these provisions, certain market shares were determined by energy legislation.

Although it is disputable that in the light of the above information, theoretically a long – term agreement may prevent new market entries and therefore be anti – competitive, considering that RPPAs provide an economic development, that the consumer will benefit it by obtaining long term price guarantee, that the market share in the Turkish energy generation or supply sector[31] will not be achieved[32], thus, the competition will not be disrupted due to the duration of RPPA – although each agreement needs to be evaluated individually -, we believe that it does not constitute a violation of competition law.

A long-term electricity sale agreement for a nuclear power plant in the European Union was exempted from competition restrictions for the reasons mentioned above[33].  In the decision concerned, taking into account the period of amortization of the generation plant, the requirement to provide cash flow through a long-term agreement for the economic amortization of the plant is stated[34].

 

 

  • In Terms of Capital Market Legislation

We have stated above that the financial RPPAs are the payment of the difference between the market price of electricity and the reference electricity price agreed in the agreement between the parties, without the physical supply of electricity between the parties.

With this definition, financial RPPAs will constitute a derivative product in the context of the Capital Market Law No. 6362.  Article 3 of the Capital Markets Law defines derivative instruments as follows:

“Instruments listed below or other derivative instruments designated in this context by the Board:  

1) Derivative instruments giving the right to buy, sell or interchange securities,

2) Derivative instruments the values of which depend on the price or return of a security; the price or a price change of a foreign currency; an interest rate or a change in the rate; the price or a price change of a precious metal or precious stone; the price or a price change of a commodity; statistics published by institutions deemed appropriate by the Board and changes in them; derivative instruments which provide the transfer of credit risk, which have measurement values such as energy prices and climatic variables and depend on an index level which is formed by these listed items or on changes in this index level; the derivatives of these instruments and derivatives giving the right to interchange the listed underlying assets.

3) Leveraged transactions on foreign exchange and precious metals as well as other assets to be designated by the Board,

Derivative transactions that will be traded between the parties over-the-counter basis, out of stock exchange, must be reported to the data storage authority authorized in accordance with Article 87 of the Capital Markets Law and Communiqué on the Principles Regarding the Reports to be Made to the Data Storage Institution (IV – 87.1), which is issued by the Capital Markets Board about the procedures and principles of this declaration.

However, according to the Communiqué “The reporting obligation for derivative contracts concluded by legal entities resident in Turkey other than investment institutions, between each other, or in foreign organized or over-the-counter markets without intermediation of an investment institution authorized by the Board, is assumed by the legal entities who are resident in Turkey. Within the scope of this paragraph, legal entities are public joint stock companies, collective investment schemes, portfolio management companies, mortgage financing institutions, housing finance and asset financing funds, asset leasing companies, financial institutions authorized as per the Banking Law No. 5411, dated October 19, 2005, insurance and reinsurance companies licensed as per the Insurance Law No. 5684, dated June 3, 2007, pension companies licensed as per the Individual Pension Savings and Investment System Law No. 4632, dated March 28, 2001, financial leasing companies, factoring companies and financing companies authorized as per the Financial Leasing, Factoring and Financing Companies Law No. 6361, dated November 21, 2012, as well as the companies designated by the Central Bank of the Republic of Turkey as per the Regulation on the Principles and Procedures for Monitoring Transactions Affecting Foreign Currency Positions by the Central Bank of the Republic of Turkey, published in the Official Gazette No. 30335 on February 17, 2018.

Therefore, financial RPPAs other than a RPPA concluded among the parties explicitly mentioned in the Communiqué are not subject to any reporting under capital market legislation. However, the Communiqué may, at the discretion of the Board, decide that some derivative instruments will be subject to reporting obligations.  When the application of financial RPPAs becomes widespread in our country, such reporting obligations may be introduced as in the international markets.

  1. Intermediate Conclusion

In accordance with the evaluations made above, RPPAs, which are basically an electricity sales agreement, can be concluded based on the freedom of contract, and there is no regulation preventing the conclusion of a RPPA in accordance with the Turkish law legislation examined in this article.

  1. RPPA Structure Template

Although it differs depending on the purpose and type of RPPA, we believe that the provisions set out in the table below should be included in the agreement.

Purpose

–       RPPA Type

–       Product description

Contract term

–       Under what circumstances is termination possible?

–       What happens if it is terminated before its term?

Rights and obligations of the parties

–       General

–       Operation of the plant

–       Balancing

–       Contracts to be concluded with third parties (connection)

–       Market Access Services

Default Situations

–       Nonpayment

–       Incomplete performance

Declarations and representations of the parties Effective Date
Amount of Electricity

–       What periods?

–       How much?

Bankruptcy provisions
Electricity Price

–       Calculation Method of the Price

–       Items included in the price (such as distribution price)

–       Adaption

Transfer of Source Document

–       Which method to be used for tracking

Connection Requirements Measure
Interruption cases

–       Maintenance cases

–       Cases arising from the system operator

Provisions of termination
Compensation and Liability Provisions Case of Substitute Procurement
Significant Adverse Change Provisions  
Safety Provisions General adaptation provisions
Other Provisions Renewal/Extension Options
Force Majeure States Insurance and Taxes

 

The provisions mentioned above should be evaluated for each individual agreement.  In a financial RPPA, for example, there will be no need for most of these provisions.  However, for a green-field project, apart from the provisions mentioned above, different contracts should be concluded for financing, installation, maintenance and finally for the sale of electricity, which all should be structured together.

 

 

DISCLAIMER:

This paper is intended to provide general information only. It cannot substitute for, or be used for the purpose of, legal advice or professional legal service.  You are advised to seek legal services for each concrete transaction.  No commitment is made for the correctness of the information given in the paper due to the rapid change in the legislation, practice and information.

REFERENCES:

 

  • Corporate Sourcing of Renewables: Markets And Industry Trends, IRENA 2018;
  • EU WWF Report Global Corporate Renewable Power Procurement Models Lesson from India;
  • ABlEG Nr. L 178, 1991, S. 31 – Scottish Nuclear;
  • Treaty on the Functioning of the European Union;
  • Commission Regulation (EC) No 2790/1999;
  • Analysis of the Trade in Guarantees Of Origin, Economic Analysis for Energy Norway OE-Report 2017-58;
  • Hilpert, Johannes, Rechtliche Bewertung von Power Purchase Agreements (PPAs) mit erneuerbaren Energien, Würzburger Studien zum Umweltenergierecht;
  • Energy Brainpool, Power Purchase Agreements: Finanzierungsmodell von Erneuerbaren Energien, 2018;
  • DFBEW, Corporate Power Purchase Agreements (Corporate PPAs) für erneuerbare Energien in Deutschland und Frankreich, 2018;
  • Raikar, Santosh; Adamson, Seabron, Renewable Energy Finance: Theory and Practice;
  • HSH Nordbank, Corporate PPA – Branchenstudie April 2018;
  • RE-Source Risk Mitigation for Corporate Renewable PPAs, March 2020;
  • PPA Academy Hamburg February 2020 Pexapark;
  • https://opensolarcontracts.org/#contracts
  • https://www.epdk.org.tr/
  • http://resource-platform.eu/
  • https://pexapark.com/
  • https://www.3megawatt.com/guide/ppa
  • https://www.euwid-energie.de/
  • https://www.rekabet.gov.tr/
  • https://europa.eu/
  • https://efet.org/
  • https://www.strommarkttreffen.org/
  • https://www.energybrainpool.com/

 

 

[1] For example RE100 or Renewable Energy Demand Enhancement (REDE)

[2] The term “unbundled energy attribute certificates” (EACs) is used in America for the term GO, which is adopted in Europe.

[3] In some countries, it is used as utility green procurement.

[4] Corporate Sourcing Of Renewables: Markets And Industry Trends, IRENA 2018 ve EU WWF Report Global Corporate Renewable Power Procurement Models Lesson From İndia

[5] There are also models where the contractor, the financier and the consumer are different in self-consumption model. In this tripartite relationship, the contractor sets up the system and leases it to the financier, and the financier sub-leases the system to the consumer.

[6]Corporate Sourcing of Renewables: Markets and Industry Trends, IRENA 2018, s. 51.

[7] Corporate Sourcing of Renewables: Markets and Industry Trends, IRENA 2018, s. 17

[8] The term “bare (çıplak)”, which is also used for share certificates in the Turkish Commercial Code, is suggested for the term which has not yet been used in the Turkish energy sector.

[9] Analysis of the Trade in Guarantees Of Origin, Economic Analysis for Energy Norway OE-Report 2017-58 s. 9.

[10] The term supply company is used for the term “utility”, which is used in international energy sector, in this model.

[11] Corporate Sourcing of Renewables: Markets and Industry Trends, IRENA 2018 s.49.

[12] https://www.epdk.org.tr/Detay/Icerik/3-0-72/elektrikyekdem

[13] https://www.enerji.gov.tr/File/?path=ROOT%2f1%2fDocuments%2fStratejik%20Plan%2f2019-2023%20Stratejik%20Plan%c4%b1.pdf

[14] Hilpert, Johannes, Rechtliche Bewertung von Power Purchase Agreements (PPAs) mit erneuerbaren Energien,  Würzburger Studien zum Umweltenergierecht, p. 2

[15] Raikar, Santosh; Adamson, Seabron, Renewable Energy Finance: Theory and Practice, p. 155.

[16] HSH Nordbank, Corporate PPA – Branchenstudie April 2018, p. 5.

[17] Physical or sleeved PPA

[18] Corporate Sourcing of Renewables: Markets and Industry Trends, IRENA 2018 s. 4

[19] European Commission, Competitiveness of Corporate Sourcing of Renewable Energy, Part 2 of the Study on the Competitiveness of the Renewable Energy Sector,  Final Report, ENER/C2/2016-501, 28 June 2019, p. 7.

[20] “Additionality”, new capacity creation in international RPPA applications, is one of the reasons why RPPA is particularly preferred by investors.

[21] Energy Brainpool, Power Purchase Agreements: Finanzierungsmodell von Erneuerbaren Energien, 2018, P. 2; DFBEW, Corporate Power Purchase Agreements (Corporate PPAs) für erneuerbare Energien in Deutschland und Frankreich, 2018, P. 11.

[22] Hilpert, Johannes, Rechtliche Bewertung von Power Purchase Agreements (PPAs) mit erneuerbaren Energien,  Würzburger Studien zum Umweltenergierecht, s. 10.

[23] European Commission, Competitiveness of Corporate Sourcing of Renewable Energy, Part 2 of the Study on the Competitiveness of the Renewable Energy Sector,  Final Report, ENER/C2/2016-501, 28 June 2019 p. 8.

[24] Pexapark Hamburg February 2020 Academy Documentation.

[25] European Commission, Competitiveness of Corporate Sourcing of Renewable Energy, Part 2 of the Study on the Competitiveness of the Renewable Energy Sector,  Final Report, ENER/C2/2016-501, 28 June 2019 p.9.

[26] We would like to underline that our evaluations in this section apply only to licensed power generation plants.

[27] Balancing and Settlement Regulation, Regulation Concerning the Customer Services, Connection and System Usage Regulation, Service Quality Regulation on Distribution and Retail Sales, and in particular Electricity Market Law.

[28] The reason the license emphasis is specifically stated here is that the RES document will be used for generator licensees and only for the identification and monitoring of proof of source type.

[29] https://balkangreenenergynews.com/green-power-certification-starts-in-turkey-via-i-rec/

[30] The Treaty on the Functioning of the European Union Article 101 and the rest; Commission Regulation (EC) No 2790/1999

[31] The market to be determined is of great importance in terms of determination of market shares. It needs to be considered as the generation or supply sector of electricity sold via RPPAs.

[32] For electricity generation share, see the EMRA Electricity Market Development Report for 2019 on p. 27, for installed power share, the same report on p. 30, for supply share, the same report on page 55 and more, supply side on p. 76 ff. The related report also examines competition issues in the Electricity Market under the heading Competition, page 75 ff.

[33] ABlEG Nr. L 178, 1991, S. 31 – Scottish Nuclear

[34] ABlEG Nr. L 178, 1991, S. 31 – Scottish Nuclear

COVID 19 PRECAUTIONS- PRESIDENTIAL DECREE

COVID 19 PRECAUTIONS- PRESIDENTIAL DECREE On 22 March 2020 a Presidential Decree has been published on the Official Gazette and entered into force as precautions against COVID 19 pandemic. The Decree suspends all enforcement and bankruptcy procedures, except enforcement procedures due to maintenance payments, beginning from the Decree date until 30 April 2020.  Accordingly new […]

Recent Developments on Crowdfunding in Turkey

 

 The Communiqué No.III-35/A.1 on Equity Based Crowdfunding (“Communiqué”), prepared by The Capital Markets Board (“CMB”), has been published on the Official Gazette dated 3 October 2019 No.30907.

This article will primarily focus on how the Communiqué regulates crowdfunding of companies and start-ups by investors on equity basis.

What does Crowdfunding mean?

In essence crowdfunding is a method of raising capital in small amounts from a large group of people using the Internet and social media (social platforms).

In line with the above explanation, under Article 3 (z), the Capital Market Law No.6362 (“Law”) also prescribes crowdfunding as raising capital from a large group of people through crowdfunding platforms in order to meet funding needs of a project or startup within the framework of terms and conditions set by the CMB.

How does Crowdfunding work in Turkey?

 Equity based crowdfunding is a strictly regulated matter and is only allowed to be done in compliance with Law and the Communiqué.  The main applicable rule here is to perform such activity only through crowdfunding platforms licensed by the CMB.  Any equity based fund raising activity of start-up companies occurring outside of the regulatory scope shall be invalid and subject to fine.

Article 35/A of the Law defines the crowdfunding platforms and sets the requirements for such establishments.  Companies seeking funds need a licensed platform in order raise funding from investors.  In other words, all activity shall be performed on a platform where all stages of the process (fundraising campaign) will be transparent and open to public knowledge.

According to the Law, crowdfunding platforms are intermediary institutions that operate online.  As mentioned, crowdfunding platforms are required to obtain operation license from CMB in order to start their activity.  Furthermore, the relevant article sets out some details for platform companies such as how their shareholding structure should be, what the requirements for their share transfer are needed, and moreover what the maximum fundraising limit of start-ups should be.

The Communiqué on the other hand provides detailed information regarding legal requirements for the platforms and procedures for running a crowdfunding campaign.

Requirements for Crowdfunding Platforms

 The Communiqué prescribes the conditions for companies that seek to perform as a crowdfunding platform and accordingly platforms must comply with the following requirements.

 According to the Article 5 of the Communiqué, platforms must apply to the CMB in order to obtain a license and to be accepted to the list of platforms to be published by CMB.  Some of the essential conditions that companies must carry in order to be enlisted as a crowdfunding platform are:

  • to be established as a joint stock company;
  • to have a paid in share capital minimum of 1,000,000 Turkish Liras;
  • to include “crowdfunding platform” in its trade name;
  • to undertake the commitment to operate solely within the scope of crowdfunding activities in its articles of association;
  • to have a board of directors consisting of at least three members.

The Communiqué lists also further requirements for founders and board members of platform companies. For instance founders and board members of a platform cannot be (i) bankrupt; (ii) convicted of any crimes listed in the relevant article i.e. embezzlement, bribery, extortion; (iii) involved in any activities / incidents that may lead or had led to cancellation of the license of an incorporation subject to CMB regulation.

In case of losing one of the above mentioned features, the crowdfunding platform must report such lack to the CMB within two days following occurrence of the incident.  If the relevant non-compliance is not to be cured within the given time period then the platform company shall be delisted by the CMB.

What activities do Crowdfunding platforms conduct?

 According to Article 11 of the Communiqué crowdfunding platforms are solely allowed to act within the scope of crowdfunding activity.  Moreover, the same article suggests that platforms are also allowed to provide consultancy service to start-up companies and to entrepreneurs as intermediary services.  Agreement to be executed between the start-up companies and crowdfunding platforms must be executed in written and in form provided in the Annex 2 of the Communiqué.

Platforms are expected and obliged to set up a web page that is to be dedicated to each start-up company or project seeking funds during and after their fund raising campaign for the following five years.  The website shall serve as an informative platform in relation to companies’ announcements and operations.  According to the Communiqué, information form on the fund raising campaign as approved by the investment committee and any other information that may affect investors’ decision must be disclosed to investors on the relevant web page during and following the fund raising process.

Every start-up company that needs to raise fund through crowdfunding must apply to these platforms.  Applications to run such campaign must be approved by the investment committee of the crowdfunding platform.  In case of rejection, the start-up company must be informed of the disapproval reason.

Information such as the fund amount targeted and collected at each fundraising campaign, investors’ number and remaining fundraising process must be disclosed on daily basis by the platform.  Fundraising results must be announced to the public on the next day following the end of each campaign even if the outcome of the fundraising process is not successful.

What activities Crowdfunding platforms cannot perform?

 Subject to article 12 of the Communiqué, platforms are not allowed to act as an intermediary for activities involving loan or borrowing money and not allowed to conduct fundraising activities through any other capital market instruments but equity based.

It is not allowed to provide fundraising service to start-ups located abroad which are seeking funds from Turkish investors.

Moreover, platforms are prohibited from providing investment consultancy both to companies and to investors that intend to engage with crowdfunding activity.  Founders, board members and members of the investment committee of the platform are not allowed to provide investment to start-up companies and to projects running fundraising campaign.

How does Crowdfunding Process work?

 In order to raise funds through crowdfunding, as a prerequisite, start-up companies must firstly apply to licensed platforms in order to become a member to act as intermediary platforms to operate funding flow between start-ups and investors.

There is maximum limit amount for a real person investor for equity based crowdfunding activity. Real person investors who are not deemed as qualified investors cannot invest more than 20,000 TL in a year on platforms as crowdfunding activity.  Scope and definition of qualified funders are to be determined by the CMB.

Start-up companies must already be established in advance of seeking funds through equity based crowdfunding method.  Otherwise funds shall not be transferred to the respective company.  Funds can only be raised by way of capital increase and can only be transferred to the company in the form of equity that are to be subscribed by capital increase.  No funds can be raised by sale of existing company shares.  Shares that are issued by way of capital increase may be non-voting shares.  Equity based funds must be paid all in cash and if investors are to be granted any shareholding right or privilege these must be indicated explicitly in the information form.

Start-up companies or entrepreneurs are allowed to raise fund by crowdfunding maximum twice a year.  Should fund need exceeds 1,000,000 Turkish Liras, at least 10% of such amount has to be paid by qualified investors during fundraising campaign.

Fundraising activity (campaign) starts once the information form (upon its approval by the investment committee) is published on the respective website dedicated for the relevant start-up that needs funding.  Start-up companies are not allowed to start a second fundraising campaign before completing the first process. Investors who wish to provide funding to the respective start-up must be apply to crowdfunding platforms.  Platforms transfer investors’ funding request to the Central Registry Agency (CRA) at the end of each day during the time of campaign. Money collected from investors are escrowed by the CRA in a blocked account to be opened in the name of the start-up company and CRA is the sole authority to transfer the accrued funds to the start-up company that needs funding.

Once an investor decides to provide funding, investors must make the proposed payment upon receiving payment order.  Investors may use their right of withdrawal with no excuse within 48 hours following the receipt of such payment order by informing the crowdfunding platform.

If fund amount exceeds funding need of the start-up company, the exceeding amount shall be delivered among investors by considering equality principle.  Companies must have a capital increase corresponding to the amount raised during the course of campaign latest within 30 days upon completion of the fundraising campaign.  CRA is responsible to register the equities subscribed following the capital increase and these are to be transferred to investors’ accounts at the end of the whole process.

 Where the Funding can be used by Start-ups?

Start-ups companies must issue a report on where the fund will be used and this report must be published on the respective website during the course of fundraising campaign.  Companies are not allowed to use the funding on real estate related transactions such as purchase of real estate projects or real estate project financing.  An independent audit company is responsible for controlling whether the company uses its funding in accordance with the allowed purpose of use as indicated on the report issued for this purpose.

Requirements for Start-up Companies

Start-ups that are seeking equity based funding must

  • engage with technology and/or production activities,
  • be established within last two years as of the publication of information form
  • have a website that is examined and maintained regularly.

Companies that are listed below are not allowed to engage with equity based fundraising activity:

  • publicly held corporations,
  • companies which are controlled by another legal entity,
  • companies where publicly held companies and capital market institutions are shareholders with minimum of %50.1 shares.

Furthermore, in case of circumstances such as (i) if a legal action is taken against the start-up company, (ii) if any of the dissolution reasons stated in the articles of association occur for the start-up company, (iii) if a dissolution decision is taken by the General Assembly of the start-up company, (iv) if the start-up company applies for bankruptcy or (v) management of the start-up company changes, then a public disclosure must be made for each.

 

Commercial Arbitration in Turkey

 

Commercial arbitration, as an alternative dispute resolution method, is a means of settling commercial disputes by referring them to a neutral person, an arbitration tribunal which might consist of a single arbitrator or several arbitrators.  The parties agree in advance that the decision or award will be accepted as final and binding.

In Turkey, the modern legal framework for commercial arbitration was laid down when the Law on International Arbitration number 4686 (the “Turkish Law on International Arbitration”) was enacted in 2001.  The Turkish Law on International Arbitration is based on the United Nations Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration, also known as the UNCITRAL Model Law.  Moreover, Turkey is a contracting party to the 1958 New York Arbitration Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”), the European Convention on International Commercial Arbitration and the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the “ICSID Convention”).  Another Turkish law which governs commercial arbitration in Turkey is the Civil Procedure Law number 6100 (the “Turkish Civil Procedure Law”) that is also based on the UNCITRAL Model Law.  Several other Turkish laws which contain provisions pertaining to arbitration exist.

Benefits of Commercial Arbitration:

Arbitration can offer several advantages as an alternative to litigation:

  • Flexibility – The form and type of arbitration can be tailored to suit the parties.
  • Speed – The process can be started and resolved quickly, without waiting for court dates. Discoveries and preliminary processes are kept to a minimum.
  • Efficiency – Although the parties must pay the costs of the arbitration, it is often more efficient than litigation in the courts.
  • Confidentiality – With few exceptions, proceedings take place in private and awards are not published without the consent of the parties.
  • Voluntary – Arbitration takes place only by the parties’ mutual consent.  This consent may be given when the parties enter a contract, or later when the dispute arises.
  • Final – The arbitrator’s decision is final and binding, and court appeals are rare.

Types of Arbitration:

Institutional Arbitration:

An institutional arbitration is one where a specialized institution is appointed and takes on the role of administering the arbitration process and case management.  In institutional arbitration, the arbitrators follow the arbitration rules and procedures of that particular arbitration institution when carrying out the arbitration process.  Each institution has its own set of rules which provides a framework (such as timelines

 

for the filing of documents or procedures for making applications etc.) for the arbitration and its own form of administration to assist in the process.

Common international arbitration institutions include the International Chamber of Commerce (ICC), the London Court of International Arbitration (LCIA), the American Arbitration Association, the Arbitration Institute of the Stockholm Chamber of Commerce (SCC) and the International Centre for Settlement of Investment Disputes (ICSID).

The most prominent Turkish arbitration institutions are the Istanbul Arbitration Centre (İSTAC), the Istanbul Chamber of Commerce Arbitration and Mediation Center (İTOTAM) and the arbitration institution of the Union of Chambers and Commodity Exchanges of Turkey (TOBB).

Ad Hoc Arbitration:

In the case of ad hoc (or non-institutional) arbitration, the rules and procedures that are to be followed in an arbitration process are not determined by an arbitration institution, but by the parties themselves.  Ad hoc arbitration means that the arbitration should not be conducted according to the rules of an arbitral institution.  Since, parties do not have an obligation to submit their arbitration to the rules of an arbitral institution; they are free to state their own rules of procedure.

Domestic Arbitration:

In a Turkish context, domestic (or national) arbitration is an arbitration process where all the parties to an arbitration process are Turkish nationals and the place/seat of arbitration is in Turkey, i.e. arbitration processes which do not contain a so-called “foreign element” are deemed as domestic arbitration processes.  In Turkey, domestic arbitration is usually carried out in accordance with the Turkish Civil Procedure Law.

Pursuant to Article 407 of the Turkish Civil Procedure Law, the provisions of the arbitration section (Articles 407 – 444) of the Turkish Civil Procedure Law are applicable to legal disputes which do not contain a “foreign element” as defined in the Turkish Law on International Arbitration and where the specified seat of arbitration is located in Turkey.

International Arbitration:

Again in a Turkish context, international arbitration is an arbitration process which contains a “foreign element”, as defined by Turkish law and where the seat of arbitration is located in Turkey.  In Turkey, international arbitration is governed by the Turkish Law on International Arbitration

According to Article 1 of the Turkish Law on International Arbitration, “[t]his Law shall be applicable where a dispute has a foreign element and the place of arbitration is determined to be in Turkey or where this Law is chosen as the governing law [of arbitration] by arbitrating parties or their sole arbitrator or arbitral tribunal.

Article 2 of the Turkish Law on International Arbitration defines the term “foreign element” as follows:

The existence of any of the following circumstances demonstrates that the dispute has a foreign element and, under such circumstances, arbitration is considered as international:

  1. where the parties to the arbitration agreement have their domiciles or habitual residences or places of business in different States;
  2. where one of the following is situated outside the State in which the parties have their domiciles or habitual residences or places of business;
  3. the place of arbitration, which is determined in, or pursuant to, the arbitration agreement; [or]
  4. a place where a substantial part of the obligations arising from the underlying contract is performed or a place where the dispute has the closest connection;
  5. where a shareholder of the company which is a party to the underlying contract that constitutes the basis for the arbitration agreement has brought foreign capital [into Turkey] in accordance with the laws concerning the encouragement of foreign capital or where a loan and/or guarantee agreement needs to be signed for the execution of the underlying contract;
  6. where, in accordance with the underlying contract or with the underlying legal relationship, the movement of capital or of goods shall be made from one country to another.

Legal Disputes Which Cannot Be Arbitrated:

Pursuant to Article 408 of the Turkish Civil Procedure Law, disputes which arise from real rights (rights in rem) pertaining to immovables (immovable property, i.e. real estate) or which arise from matters/affairs/businesses that are not at the parties’ disposal cannot be subject to arbitration.

Article 1 of the Turkish Law on International Arbitration defines the same subject in a very similar manner and states that the Turkish Law on International Arbitration “shall not be applicable to disputes related to real rights concerning immovables and to disputes that are not within the parties’ disposal.[1]

Arbitration Agreement/Clause:

An arbitration agreement is a written contract in which two or more parties agree to settle a dispute outside of court and by means of arbitration.  The arbitration agreement is ordinarily a clause in a larger contract, in which case, it is referred to as an arbitration clause.

An arbitration agreement or clause must be in written form.  Both the Turkish Civil Procedure Law in (Article 412) and the Turkish Law on International Arbitration (in Article 4) specify that an arbitration agreement or clause must always be in writing.  A written arbitration agreement or clause is a legal requirement for the validity of such arbitration clause/agreement.

Recognition Enforcement of Foreign Arbitral Awards in Turkey:

In Turkey, the recognition and enforcement of foreign arbitral awards is subject to the relevant provisions of the Act on International Private Law and Procedure Law number 5718 (the “MÖHUK”) (Article 1 and Articles 60 – 63) and to the New York Convention.  Moreover, Turkey has also signed various bilateral and multilateral agreements pertaining to the recognition and enforcement of foreign arbitral awards.

As a rule of thumb, in Turkish legal practice, the recognition and enforcement of a foreign arbitral award shall be carried out in accordance with the New York Convention if the country where the relevant arbitral award originates from has ratified the New York Convention.  However, if the country where the relevant arbitral award originates from has not ratified the New York Convention, the recognition and enforcement of a foreign arbitral award in Turkey should be carried out in accordance with the MÖHUK.

In both cases, the recognition and enforcement of a foreign arbitral award in Turkey requires a ruling by the Turkish court with jurisdiction in the relevant matter.

[1] Legal proceedings which require a ruling by a state court, such as criminal proceedings or divorce proceedings or bankruptcy proceedings can be named as examples of matters that are not subject to the parties’ disposal.