Breaking new ground with YEKA
Turkey’s YEKDEM scheme encouraged localisation of equipment manufacturing by offering an increase in feed-in tariffs for renewable projects that utilise domestically manufactured equipment. The YEKA scheme goes one step further by mandating the use of domestically manufactured equipment in projects that are tendered under the YEKA Regulation. By Ayesha Waheed, partner in London at global law firm Morgan Lewis, and Cagdas Evrim Ergun, partner in Ankara at Ergun Law Offices.
Following on from the success of its Mechanism for Supporting Renewable Energy Resources (YEKDEM) programme, which provided an attractive feed-in tariff scheme for renewable power projects and is slated to expire at the end of 2020, Turkey adopted the Regulation on Renewable Energy Resource Area scheme (Yenilenebilir Enerji Kaynak Alanlari or YEKA Regulation)1 in 2016 to encourage the development and use of domestic manufacture of equipment required for large-scale renewable energy generation facilities.
The YEKA Regulation introduced two types of YEKA models: (a) the YUKT (Allocation in Exchange for Domestic Production) model, in which the developer is granted the right to construct and operate renewable energy generation facilities and to sell, at a guaranteed price, the electricity produced by the generation facilities provided that the equipment used in the facilities is also manufactured by the developer; and (b) the YMKT (Allocation in Exchange for Use of Domestic Products) model, in which the developer is granted the right to construct and operate renewable energy generation facilities and to sell, at a guaranteed price, the electricity produced by the generation facilities provided that the equipment used in the facilities is domestically sourced – but it need not be manufactured by the developer.
The contractual framework of a YEKA project depends on the type of project. As noted above, the rights and obligations of the developer will differ depending on whether the project is tendered under the YUKT model or the YMKT model. In addition, the tender specifications of each project may also include specific differences.
Set out below are the general characteristics typically found in the YEKA projects tendered to-date but as the YEKA programme develops and evolves, the Ministry of Energy & Natural Resources (the Energy Ministry) may alter the specifics.
* The YEKA agreement – The contractual foundation for a YEKA project is the YEKA agreement, which is executed between, on the one hand, the special purpose vehicle (SPV) that is incorporated in Turkey by the winning bidder or consortium to develop the project (the Project Company), and on the other hand, the Energy Ministry, and acts as a government implementation agreement and power purchase agreement, all rolled into one.
Under the YUKT model, typically the power plant and the equipment manufacturing facility are developed by separate SPVs – the Power Plant Company and Factory Company, respectively – each of which is required to enter into the YEKA agreement.2
The YEKA agreement grants to the Power Plant Company the right to develop the power plant and, in the YUKT model, the Factory Company the right to develop the factory. It also contains the price guarantee for the power generated by the project. Typically, the Factory Company is free to sell in the open market any factory products not sold to, and utilised by, the Power Plant Company.
The Energy Ministry guarantees in the YEKA agreement that all electricity generated by the project will be purchased by EPIAS, Turkey’s energy market operating company, at the agreed price and for the agreed period, or amount of power generated.
EPIAS is not a party to the YEKA agreement and its obligation to purchase electricity generated by the project arises from the applicable legislation, the YEKA Regulation and the Electricity Market Law No 6446.3
The Energy Ministry also guarantees that EPIAS will pay for the purchased electricity at the agreed price. Since the Energy Ministry has no separate legal personality from the Turkish state; in effect, the Power Plant Company is the beneficiary of a sovereign payment guarantee from the Turkish state.
At the end of the term of the YEKA agreement, the power plant remains the property of the Power Plant Company, which is entitled to continue to sell the electricity generated by the plant in the open market until the end of the term of its generation licence (which is usually 30 or 49 years) but without the benefit of any price or payment guarantee from the Energy Ministry, and under the YUKT model the factory remains the property of the Factory Company.
* Land lease agreement – In cases where the YEKA tender includes a state obligation to provide land for the project, the project will also require a land lease or superficies agreement. Otherwise, the Project Company may purchase, lease or otherwise procure, through for example expropriation, the land for the power plant and the factory, if applicable, outright.
* EPC and O&M agreements – Where the Power Plant Company does not intend to itself construct the power plant, it will also need to enter into one or more construction and procurement agreements or it may choose to have a single engineering, procurement and construction (EPC) contract on a turn-key basis.
Similarly, if the Power Plant Company does not itself have the technical capability to operate and maintain the power plant, it may enter into a separate operating and maintenance agreement with an operator that is suitably experienced. The same applies to the Factory Company in respect of the construction and operation of the factory under the YUKT model.
* The YEKA agreement direct agreement – In recognition of the likelihood that the YEKA projects, which are expected to be very capital-intensive, will need to be project financed, it is expected that the Energy Ministry will agree to enter into a direct or tri-partite agreement with the Project Company and the Project Company’s lenders, or a security agent on their behalf, although no form of the direct agreement has been attached to the YEKA agreements signed to-date.
In order for the YEKA projects to be bankable, we expect that the direct agreement will include customary protections for lenders, such as an acknowledgement that the rights and receivables of the Project Company under the YEKA agreement will be assigned to its lenders and the grant of step-in rights and substitution rights to the lenders in certain circumstances. See under Recent Law on Initial YEKA Projects below.
YEKA projects awarded to-date
So far, there have been three tenders awarded under the YEKA Regulation: (1) the 1,000MW Solar-1 YEKA project under the YUKT model, (2) the 1,000MW Wind-1 YEKA project also under the YUKT model and (3) Wind-2 YEKA projects, which comprise four different projects with 250MW of capacity each.
A second large-scale solar tender, also for 1,000MW but this time under the YMKT model, was announced in October 2018 but was cancelled shortly thereafter. A 1,200MW offshore wind project was also tendered under the YMKT model, but it was also cancelled. The Energy Ministry has only very recently announced that it will be launching a new solar tender under the YEKA programme in December 2019.
* Solar-1 YEKA project – In March 2017, the Energy Ministry launched a reverse or Dutch auction tender for 1GW of solar power capacity under the YUKT model. This resulted in a consortium comprising South Korea’s Hanwha Q-Cells and Turkey’s Kalyon being awarded the project on the basis of a bid of US$6.99 cents per kWh. The winning consortium was required to set up an SPV to build a 1GW solar power plant as well as a vertically integrated 500MW solar module factory producing the photovoltaic modules required by the power plant.
The term of the YEKA agreement is 15 years, commencing from the date of the agreement, which term has been extended by a new law, see under Recent Law on Initial YEKA Projects below. The YEKA agreement provides specific deadlines for the completion of the vertically integrated photovoltaic module factory, 21 months from the date of signing of the YEKA agreement, and the solar power plant, 36 months from the date of signing of the YEKA agreement.
However, because the price guarantee period commences on the date on which the YEKA agreement is signed, there is a strong incentive on the Power Plant Company to complete the project in the shortest possible time in order to maximise the operation period during which it benefits from the price guarantee.
The winning consortium is also required to establish a research and development department employing some technical staff and engineers, which is required to continue activities for at least 10 years.
According to news reports, Hanwha Q-Cells recently sold its shares in the project to Kalyon, the other member of the winning consortium.
* Wind-1 YEKA project – In August 2017, the Energy Ministry launched a reverse or Dutch auction tender for 1GW of wind power capacity under the YUKT model. This resulted in a consortium comprising Germany’s Siemens and Turkey’s Turkerler and Kalyon being awarded the project on the basis of a world record-setting US$3.48 cents per kWh, a price that was more than 50% lower than the Turkish feed-in tariff at the time.
The winning consortium was required to build not only a 1GW solar power plant but also a wind turbine factory in Turkey, utilising at least 65% local content and employing at least 90% local employees.
The term of the YEKA agreement is 15 years, commencing from the date of the agreement, which, as with the Solar-1 YEKA project, was recently extended by the new law. The YEKA agreement provides specific deadlines for the completion of the construction of the turbine factory, 21 months from the date of signing of the YEKA agreement, and the 1GW power plant, 36 months from the date of signing of the YEKA agreement.
However, as with the Solar-1 YEKA project, because the price guarantee period commences on the date on which the YEKA agreement is signed, there is a strong incentive on the Project Company to complete the project in the shortest possible time in order to maximise the operation period during which it benefits from the price guarantee.
* Wind-2 YEKA projects – In June 2018, the Energy Ministry launched a reverse or Dutch auction tender for an aggregate of 1,000MW onshore wind projects, comprising four projects with 250MW installed capacity each, with a ceiling price of US$8 cents per KwH under the YMKT model.
This resulted in each of Germany’s Enercon and Turkey’s EnerjiSA being awarded two projects of 250MW each, to be located in four different provinces in Turkey.
The winning prices offered by Germany’s Enercon and Turkey’s EnerjiSA ranged from US$3.53 cents per kWh for the Baliksesir region to US$4.56 cents per kWh for the Aydin region. Similar to the Solar-1 and Wind-1 YEKA projects, the electricity purchase guarantee term will be 15 years from the date of signing of the YEKA Agreement.
Recent law on initial YEKA projects4
As there have been some delays in the Wind-1 and Solar-1 YEKA projects for reasons outside of the project company’s control and, we understand from press reports, difficulties in obtaining financing for those projects, a new law was enacted on July 19 2019 in relation to those initial projects. Under the new law:
i) A time extension of 36 months was granted to the terms provided under the YEKA agreements;
ii) The shareholders/consortium members of existing YEKA projects are permitted to transfer their shares to third parties, without the transferee company being required to be a technology provider, which had been a requirement originally;
iii) The existing YEKA agreements can be amended by the parties to include provisions aimed at protecting the interests of lenders, and;
iv) The YEKA agreement is a private law agreement.
These legislative changes are expected to facilitate the financing of the Solar-1 and Wind-1 YEKA projects.
The Energy and Natural Resources Minister was recently quoted as having said that the Energy Ministry will be announcing new solar tenders (i.e. Solar-2 YEKA projects) under the YEKA programme in February 2020 and they aim to officially launch the tenders by April or May 2020. The new tenders will be under the YKMT model, i.e. there will be no requirement to establish an equipment manufacturing facility. Differently from the Solar-1 YEKA Tenders, the size of the projects will be considerably smaller, which should make it easier for the winning consortia to finance these projects. It is expected that there will be approximately 40 separate tenders for each so-called “mini YEKA project” with an installed capacity of 10 to 50 MW each in various locations throughout Turkey.
We also understand that the Energy Ministry has proposed that rather than there being a separate direct agreement with lenders, the various lender protections such as step-in rights be included in the YEKA agreement, with the lenders being given third party beneficiary rights (instead of being made a party). However, until the tender documents are released this can’t be verified.
The Offshore wind project, which was tendered under the YMKT model in 2018 but was later cancelled, is also expected to be re-launched in 2020. A Strategic Sector Cooperation Agreement was signed between Turkey and Denmark in early 2017 for cooperation and technical assistance in relation to offshore wind project in Turkey, which was extended for another three years in March 2019. The Energy Ministry is expected to reflect the outcomes of such technical assistance in the new offshore YEKA tender.
1 – Published in the Official Gazette dated October 9 2016 and numbered 29852.
2 – Note, however, that the structure under the tender specifications of the first solar YEKA project was different, see under YEKA Projects awarded to-date.
3 – Published in the Official Gazette dated March 30 2013 and numbered 28603.
4 – Law No 7186, published in the Official Gazette No 30836 (Rep) dated July 19 2019.