The Strategic Role of Internal Audit in the Energy Sector

This article comprehensively examines the strategic assurance and advisory role of internal audit within the ecosystem of electricity energy generated and distributed from both fossil and renewable sources. It highlights the importance of internal control systems in managing the operational, financial, and legal risks faced by companies in the electricity generation and distribution sector, as well as in ensuring compliance with Energy Market Regulatory Authority (EMRA) regulations and facilitating the sustainable energy transition. Furthermore, the article demonstrates the value-add of internal audit practices—regarding operational efficiency and the achievement of Environmental, Social, and Governance (ESG) goals—through concrete case studies from Türkiye and around the world. It aims to provide energy sector professionals with pragmatic solutions and guidance in the fields of risk management and compliance.

Contents

• 1. Introduction: Energy Transition and the Evolving Role of Internal Audit
• 2. Internal Audit in Fossil Fuel and Renewable Energy Investments
  • 2.1. Risk Dynamics in Fossil Fuel Power Plants
  • 2.2. Value Creation in Renewable Energy Sources
• 3. The Assurance and Advisory Function of Internal Audit
• 4. Operational Efficiency and Supply Chain Management
• 5. Regulatory Compliance: EMRA Regulations and Legal Risks
• 6. Sustainability, ESG Reporting, and Climate Risks
• 7. Case Studies
  • 7.1. Global Example: PG&E (Pacific Gas and Electric) and Infrastructure Risks
  • 7.2. Turkish Example: Audit of the Renewable Energy Hybrid Capacity Increase Process
• 8. Conclusion and the Teolupus Perspective
• 9. Frequently Asked Questions (FAQ)
• 10. References

1. Introduction: Energy Transition and the Evolving Role of Internal Audit

The energy sector, a fundamental driving force of the global economy, is undergoing a historic transformation driven by policies to combat climate change, technological advancements, and geopolitical fluctuations. This shift—moving from fossil fuels toward renewable energy sources (RES) in pursuit of carbon-neutrality goals—has transformed the electricity generation and distribution ecosystem into a structure that is more complex, unpredictable, and exposed to risks (SHURA, 2024).

The internal audit function, which historically focused primarily on the accuracy of financial statements and the detection of past errors, has evolved into a strategic business partner today. According to the standards of the Institute of Internal Auditors (IIA), internal audit is an independent, objective assurance and consulting activity designed to improve an organization’s operations and add value to them (IIA, 2024). In the electric power sector, internal audit plays a critical role across a wide spectrum of areas—ranging from power plant investments to supply security, grid flexibility, digitalization (SCADA systems), and Environmental, Social, and Governance (ESG) regulations. By anticipating potential risks, internal audit units provide strategic insights to decision-makers and enhance organizational resilience (Teolupus, 2026).

2. Internal Audit in Fossil and Renewable Energy Investments

Türkiye’s installed electricity capacity and generation profile are undergoing a significant shift in favor of domestic and renewable sources. According to 2024 data, the share of wind and solar energy in electricity generation has surpassed 18%, exceeding the peak levels previously reached by domestic coal (Ember, 2025). This structural transformation directly impacts the audit universe and risk assessment methodologies of internal audit units.

Chart 1: Breakdown of Electricity Generation Sources in Türkiye (2024). Source: Adapted from Ember (2025) and TEİAŞ data.

2.1. Risk Dynamics in Fossil-Fuel Power Plants

In fossil-fuel power plants (such as coal and natural gas-fired facilities, including combined-cycle plants), internal audit activities focus primarily on the raw material supply chain, the management of fuel price risks, inventory controls, and the monitoring of emission quotas. Emission trading systems and carbon taxes create significant financial risks regarding the cost structures of fossil-fuel generation facilities. In this context, internal audit must evaluate the effectiveness of predictive maintenance processes—which minimize facility downtime—and identify operational inefficiencies (TSKB, 2025). Furthermore, the accuracy of pricing mechanisms and calorific value measurement processes within coal supply contracts lies at the heart of audit activities concerning corporate profitability.

2.2. Value Creation in Renewable Energy Sources

Renewable energy facilities—such as solar, wind, hydroelectric, and biomass—possess a distinct risk profile. For these facilities, which rely on climatic conditions and meteorological data, production forecasting and the management of imbalance costs are of critical importance. Internal audit units can prevent financial losses by auditing power plant capacity factors, the accuracy of wind and solar measurement data, and the settlement processes managed by EPİAŞ (Energy Markets Operation Inc.). For facilities participating in the Renewable Energy Support Mechanism (YEKDEM), the compliance of incentive applications with legal requirements and the calculation of domestic component support payments are areas of audit that require meticulous attention (SHURA, 2024).

3. The Assurance and Consulting Function of Internal Audit

In the energy sector, internal audit—as one of the fundamental building blocks of the “Three Lines Model”—provides both assurance and consulting services. Within the scope of its assurance role, internal audit offers independent confirmation to senior management and the audit committee regarding whether the internal control systems, risk management frameworks, and governance processes of electricity generation and distribution companies are operating as designed (IIA, 2024).

The advisory role encompasses proactive activities aimed at enhancing the company’s value. For instance, when an energy company is establishing a new energy trading desk, the internal audit unit can get involved from the very beginning to provide management with advisory services regarding potential market risks, limit breaches, and approval mechanisms. This dual role—a critical factor in companies achieving their corporate objectives—lays the groundwork for optimizing resource allocation and minimizing operational losses.

Chart 2: The Strategic Impact of Internal Audit on Energy Sector Processes. Source: Adapted by the authors based on sectoral risk dynamics (IIA, 2024; SHURA, 2024).

How was it created? The ratios presented in the chart (the “Internal Audit Focus Score”) were formulated as a “representative sample assessment score,” representing a synthesis of the Institute of Internal Auditors’ (IIA) risk assessment standards, SHURA’s sectoral transformation reports, and Teolupus’s consulting experience.

Rationale for Scores:

• Regulatory & EMRA Compliance (95%): For energy companies in Türkiye, EMRA regulations represent the strictest area of ​​oversight with the least margin for error. Since license revocation, exclusion from tariff structures, and massive administrative fines directly threaten the future of the investment, this area has been assigned the highest priority score for internal audit.
• Operational Efficiency (88%): Electricity generation and distribution are businesses heavily driven by high CAPEX (capital expenditure) and physical assets. Reducing loss and theft rates and preventing facility downtime (through predictive maintenance) directly impact profit margins; consequently, this area ranks second with a high score.
• ESG & Sustainability (85%): Due to the European Union’s Carbon Border Adjustment Mechanism (CBAM), this has evolved from a matter of reputation into a commercial and financial imperative. Therefore, the audit function’s role in mitigating “greenwashing” risks has been assigned a critical importance score.
• Financial & Credit Risks (78%): Financial reporting audits are a long-established, standard process. As the sector’s primary uncertainties now stem from legal (regulatory) and systemic/climatic (operational/ESG) factors, this area is considered relatively more “routine” compared to the others, resulting in a score of 78%.

4. Operational Efficiency and Supply Chain Management

Electricity generation and distribution are capital-intensive and asset-focused sectors. Throughout the lifecycle—from the construction (CAPEX) of power plants to their operation (OPEX)—procurement and supply chain processes are highly vulnerable to risks of corruption and misconduct. Internal audit ensures the efficient use of the organization’s financial resources by analyzing supplier selection criteria, the transparency of tender processes, and contract management (TSKB, 2025).

In electricity distribution networks, reducing loss and theft rates (comprising both technical and non-technical losses) is a critical performance indicator for company profitability. Modern internal audit functions, utilizing continuous monitoring and data analytics tools, can detect anomalies by analyzing big data from smart meters and evaluate the process efficiency of field interventions targeting electricity theft. Furthermore, cybersecurity audits of SCADA systems—which manage critical infrastructure—are vital for ensuring operational continuity.

5. Regulatory Compliance: EMRA Regulations and Legal Risks

The Turkish electricity market is strictly regulated by the Energy Market Regulatory Authority (EMRA). The requirement to unbundle electricity generation, distribution, and wholesale and retail sales activities imposes stringent compliance obligations on sector participants. Violations of these rules—which were introduced to prevent cross-subsidies and safeguard market competition—can expose companies to heavy administrative fines and the risk of license revocation (SHURA, 2024).

Internal audit units must periodically test the effectiveness of regulatory compliance programs. Tariff audits conducted specifically for distribution companies are highly sensitive matters. The accuracy and regulatory compliance of operating expenses, investment expenditures (RAB – Regulated Asset Base), and target loss/theft rates declared by companies to the EMRA (Energy Market Regulatory Authority) must be subjected to rigorous internal audit scrutiny. Ensuring that the relevant expenses are accurately reflected in tariff calculations guarantees the correct determination of the company’s revenue cap and, consequently, safeguards investor returns. Conducting root cause analyses regarding regulatory violations enables the design of controls to prevent the recurrence of similar risks in the future.

Teolupus positions itself as a strategic solution partner for energy companies, enabling full compliance with EMRA regulations and the proactive management of legal risks through its internal audit and compliance consultancy services (Teolupus, 2026).

6. Sustainability, ESG Reporting, and Climate Risks

In an era where traditional financial reporting is rapidly giving way to integrated reporting, Environmental, Social, and Governance (ESG) criteria have become a focal point for the energy sector. In particular, the European Union Green Deal and the Carbon Border Adjustment Mechanism (CBAM) are introducing a series of new standards that directly impact electricity generation and export processes in Türkiye. Investors closely monitor the carbon footprint data disclosed by companies, focusing on transparency and accuracy (TSKB, 2025).

Standard non-financial metrics used to measure carbon intensity generally rely on the following fundamental logic:

Carbon Intensity = Total Greenhouse Gas Emissions (tCO₂e) / Net Electricity Generated (MWh)

The strategic role of internal audit in this context is to provide assurance regarding the accuracy of data in ESG reports, thereby eliminating the risk of “greenwashing.” Internal audit must verify the data collection methodologies, calculation standards (e.g., GHG Protocol, GRI, SASB), and reporting processes for Scope 1 (direct emissions), Scope 2 (indirect emissions), and Scope 3 (supply chain emissions). Reputational damage and financial penalties arising from non-compliance with environmental regulations can only be averted through a robust ESG audit framework. In this regard, the ESG reporting audit and sustainability consultancy services offered by Teolupus stand out as valuable offerings that reinforce corporate credibility (Teolupus, 2026).

7. Case Studies from the World and Türkiye

To better understand the impact of the effectiveness or inadequacy of internal audit mechanisms on corporate outcomes, it will be useful to examine case studies at the global and local levels.

7.1. Global Case: PG&E (Pacific Gas and Electric) and Infrastructure Risks

PG&E, one of the largest electricity distribution companies in the United States (California), was found responsible for the “Camp Fire” wildfires in 2018, which caused significant loss of life and property, due to the neglect of its aging grid infrastructure (CAL FIRE, 2019). Independent investigations conducted after the disaster revealed structural weaknesses in the company’s risk management and internal control processes. Focusing on financial targets led to the continuous postponement of network maintenance investments; the internal audit function failed to adequately report to the board of directors the catastrophic scenario posed by these postponed operational risks (fire hazard) to the company’s survival.

Conclusion: This case demonstrates that internal audit should focus not only on financial compliance but also on operational risks related to engineering, field operations, and critical infrastructure maintenance. An effective internal audit mechanism should alert the board to critical risks by identifying potential environmental and societal risks that may arise from cuts in maintenance budgets.

7.2. The Turkish Case: Renewable Energy Hybrid Capacity Increase Process Audit

The “Multiple Source (Hybrid) Electricity Generation Facility” regulation, introduced to accelerate wind and solar energy investments in Turkey, has allowed energy companies to install additional sources (e.g., solar panels next to a wind farm) to their existing facilities. An EPDK-licensed renewable energy company appointed its internal audit unit as a consultant to the project before starting the capacity increase investment (TSKB, 2025).

The internal audit unit has primarily audited the investment budget, subcontractor selection processes, and EPDK license amendment obligations. As a result of data analytics studies, it was determined that some ambiguities in the technical specifications to be used in the tender process could lead to cost overruns, and the tender model was revised. In addition, control points were established in the workflows to identify the risk of violating regulatory notification deadlines in the process of integrating the newly installed solar panels into the YEKDEM mechanism.

Conclusion: The proactive advisory role of internal audit ensured that the company completed its hybrid plant investment within the planned budget and legal timeline, preventing potential incentive (YEKDEM) losses due to non-compliance with regulations. Increased process efficiency maximized the return on investment (ROI).

8. Conclusion and Teolupus Perspective

In conclusion, the rapid transformation in the electricity generation and distribution sector necessitates companies to redefine their risk appetites and control mechanisms. Internal audit has evolved from a function of retrospectively finding errors to a strategic navigation tool that secures the company’s future in terms of risk management, regulatory compliance, and sustainability (ESG). Especially considering macroeconomic variables such as exchange rates in the Turkish market, regulatory intensity, and increasing energy demand, companies with an effective internal audit unit gain a competitive advantage (Ember, 2025; SHURA, 2024).

At Teolupus, we have a deep understanding of the unique and complex dynamics of the energy sector; and with our expertise in internal audit, risk management, and ESG reporting audits, we add value to companies’ journey towards sustainable growth (Teolupus, 2026). We believe that decision-makers should position internal audit activities not as a cost element, but as a strategic investment that protects profitability, improves processes, and eliminates legal risks.

9. Frequently Asked Questions (FAQ)

What is the impact of internal audit on loss and leakage rates in electricity distribution companies?

Internal audit units identify anomalies in billing and collection systems using continuous audit and data analytics techniques. By measuring the efficiency of field audit operations, they offer process improvements aimed at reducing non-technical losses (illegal usage).

Why is ESG reporting auditing important in the energy sector? 

Investors, credit rating agencies, and regulators such as the European Union (CBAM) want to trust the accuracy of the carbon emission and sustainability data that companies declare. ESG auditing confirms the transparency of this data, prevents greenwashing claims, and facilitates access to international funds.

What risks do compliance audits with EMRA (Energy Market Regulatory Authority) regulations prevent?

Incorrect reporting of tariff components, violations of licensing obligations, or practices contrary to competition rules create heavy administrative fines and reputational damage for companies. Compliance audits eliminate these administrative risks by detecting these violations before regulatory authority (EMRA) audits.

How does the “advisory” role of internal audit work in energy projects?

Internal audit gets involved in the process while a new power plant investment or digital transformation project (e.g., smart grid installation) is still in the design phase. It assesses project risks, ensures that internal controls are robustly established from the outset, and provides recommendations to prevent budget/time overruns.

What value-added services does Teolupus offer to the energy sector? 

Teolupus provides services to the energy sector including the establishment of corporate risk management systems, outsourcing or co-outsourced internal audit functions, regulatory compliance consulting, and ESG reporting audits in accordance with international standards.

10. References

• California Department of Forestry and Fire Protection (CAL FIRE). (2019). PG&E Camp Fire Investigation Report. Retrieved from https://www.fire.ca.gov/.
• Ember. (2025). Turkey Electricity Outlook 2025. Retrieved from https://ember-energy.org/app/uploads/2025/03/TR-Turkiye-Electricity-Review-2025.pdf.
• SHURA Energy Transition Center. (2024). Turkey Energy Transition Outlook 2023. Retrieved from https://shura.org.tr/wp-content/uploads/2024/04/ozet.pdf.
• TSKB Economic Research. (2025). Monthly Energy Bulletin – January 2025. Accessed from https://www.tskb.com.tr/uploads/file/enerji-bulteni-ocak-20250210.pdf.
• Teolupus Risk Management and Independent Auditing Inc. (2026). Our Services: Risk Management, Internal Audit and ESG Consulting. Accessed from https://www.teolupus.com/. 
• The Institute of Internal Auditors (IIA). https://www.theiia.org/ (2024). International Standards of Professional Practice in Internal Auditing (IPPF).
• TEİAŞ, Turkey Electricity Generation-Transmission 2024 Statistics https://www.teias.gov.tr/turkiye-elektrik-uretim-iletim-istatistikleri