RENEWABLE ENERGY – THE SUNRISE INDUSTRYThe Philippine energy mix is heavily dependent on fossil fuels and for this reason,electricity costs are one of the highest in Asia. According to a 2007 study of theUnited Nation Environmental Programme on the global trends in sustainable energyinvestment, climate change concerns, coupled with high oil prices, peak oil, andincreasing government support, are driving renewable energy (“RE”) legislation,incentives and commercialization.Development agencies like the Asian Development Bank are uplifting institutionalcapacity to develop and implement sustainable policy and regulatory framework.Government regulatory agencies often have limited budget availability to supportthese policies and possess limited capacity for public sector research and developmentand project preparation. Also, RE investments are perceived to be high risk anddeveloping countries have difficulty promoting foreign direct investment in largeutility scale plants, and on-and off-grid rooftop projects.The International Finance Corporation, the lending branch of the World Bank, plansto invest more than $300 million in the Philippines power sector this year, particularlyin renewable energy projects. Nevertheless, financial institutions identifiedconsistencies in policies and coordination between government bodies and feed-intariff as main regulatory issues.The Department of Energy seeks to adopt the use of clean and sustainable energysources and aims to accelerate the development and utilization of indigenous energysuch as geothermal, wind, solar, biogas, ocean and alternative fuels like biofuels andcompressed natural gas. Under the latest Philippine Energy Plan, the DOE hasidentified long-term goals, namely, to (i) increase RE-based capacity by 100 percentby 2013; and (ii) increase non-power contribution of RE to the energy mix by 10million barrels of fuel oil equivalent in the next ten years. In support of these generalgoals, the government aims to (i) be the number one geothermal energy producer inthe world; (ii) be the number one wind energy producer in Southeast Asia; (iii) doublehydro capacity by 2013; and (iv) expand contribution of biomass, solar and ocean byabout 131 MW.The Renewable Energy Act of 2008Republic Act No. 9513, also known as the “Renewable Energy Act of 2008” andsigned on 15 December 2008, is the first and most comprehensive renewable-energylaw in Southeast Asia which will enable the Philippines to capture a part of thesoaring investments in renewable energy development worldwide. Publicconsultations were held with different stakeholders across the Philippines to assist theDepartment of Energy (“DOE”) in drafting the RE Act Implementing Rules andRegulations culminating with the signing of Department Circular No.DC2009-05-0008 on 25 May 2009.The RE Act is a landmark legislation which the Philippine RE industry hopes willspur growth in exploration and development through the entry of foreign capital andthe institutionalization of a system of incentives. It also seeks to promote equitablesharing of the benefits with stakeholders notably the host communities and indigenouspeoples. Among the important features of the RE Act are:
- the definition of geothermal as mineral resource paving the way for the entry of 100% foreign-owned corporation in geothermal resource exploration, development and utilization;- setting up a system that will allow consumers to choose green sources of energy and providing for the establishment of a Renewable Portfolio Standard (“RPS”) system, which will require electricity suppliers to source a certain amount of their energy supply from RE resources;- declaration of the RE sector as a priority investment sector that will regularly form part of the Philippine investment priority plan;- provision in the law allowing the environmental compliance certificate for RE projects to be issued from the appropriate regional office of the Department of Environment and Natural Resources; and- institutionalizing government share on existing and new RE development projects equal to one percent (1%) of the gross income of RE resource developers resulting from the sale of RE produced and such other income incidental to and arising from the RE generation, transmission, and sale of electric power except for geothermal energy, which shall be at one and a half percent (1.5%) of gross income.Renewable Portfolio Standards and Feed-in TariffThe National Renewable Energy Board (“NREB”), the regulatory agency createdunder the law, shall set the minimum percentage of generation from eligible REresources and determine to which sector RPS shall be imposed on a per grid basis.The RPS will also be complemented by a Feed-in Tariff (“FiT”) system to encouragethe speedy entry of RE projects by giving priority connections to the grid forelectricity generated from emerging RE resources.The Energy Regulatory Commission (“ERC”) promulgated the FiT system ruleswhich took effect on 12 August 2010. The FiT offers guaranteed payments on a fixedrate per kilowatt-hour for emerging RE sources, namely, wind, solar, ocean, run-of-river hydroelectric, biomass and hybrid systems, excluding any generation for ownuse; while exclusions were given to base-load capable impounding hydro andgeothermal facilities. To avail of the incentives under the rules, RE plants shall beissued certificates of compliance authorizing them to operate as FiT-eligible REplants. The FiT shall be technology specific and must be differentiated based on thesize of the eligible RE plant, as recommended by the NREB. Under the rules,transmission operator, National Grid Corporation of the Philippines (“NGCP”), anddistribution utilities with RE plants embedded in their systems should connect andtake in energy generated and delivered by RE plants. Whenever some RE capacityare injected into the systems of NGCP or distribution utilities, this will be allocatedand distributed to their customers to assure RE plant operators that they have priorityconnection to the grid, as well as priority purchase and transmission of their plants’output. Payment for the use of clean energy will come from a uniform per-kilowatt-hour charge, dubbed Feed-in Tariff Allowance, which will be collected from allelectricity end-users. These collections will go to an NGCP-administered fund fromwhich payments to RE developers will be taken. While the RE Law directed that the
duration of the FiT rates be fixed at a period for at least 12 years, the FiT Ruleseventually fixed the period to 20 years to ensure that the ensuing cost to electricityend-users be spread out over a longer period and therefore lower.It was reported that the estimated tariff will range from 7 Philippine pesos to 25Philippine pesos per kWh. Solar will carry the highest tariff, while wind will have anaverage tariff of 12 Philippine pesos to 15 Philippine pesos per kWh. The tariff issubjected to periodic change based on forecasted revenues for the expected deliveriesof eligible RE plants, applicable FiTs and administration costs of the NGCP. Thetariff will also be adjusted to account for the inflation of foreign exchange ratefluctuations. In addition, it will be subjected to a two percent (2%) annual degressionfor its whole duration to encourage RE developers to invest at the initial stage andspeed up development. The ERC will review and readjust the tariff system in certainsituations, such as when installation targets are already completed or when significantcost changes have been made. However, readjusted tariffs will only be applicable tonew renewable energy developers.Other RE Policy MechanismsUnder the RE Act, the DOE shall establish a Green Energy Option program whichprovides end-users the option to choose RE resources as their sources of energy.Upon the determination of the DOE of its technical viability and consistent with therequirements of the green energy option program, end-users may directly contractfrom RE facilities their energy requirements distributed through their respectivedistribution utilities. The law also establishes a net-metering system in which thedistribution grid user has a two-way connection to the grid and is only charged for itsnet electricity consumption and is credited for any overall contribution to theelectricity grid. Subject to technical considerations and without discrimination andupon request by distribution end-users, the distribution utilities shall enter into net-metering agreements with qualified end-users who will be installing the RE system.The National Transmission Corporation and all distribution utilities shall include therequired connection facilities fro RE-based power facilities in the Transmission andDistribution Development Plans upon approval by the DOE of such facilities. Theconnection facilities of RE power plants, including the extension of transmission anddistribution lines, shall be subject only to ancillary services covering suchconnections. The National Power Corporation-Small Power Utilities Group or itssuccessors-in-interest and/or qualified third parties in off-grid areas shall, in theperformance of its mandate to provide missionary electrification, source a minimumpercentage of its total annual generation upon recommendation of the NREB fromavailable RE resources in the area concerned, as may be determined by the DOE.To facilitate compliance with RPS, the DOE shall establish the Renewable ElectricMarket (“REM”) and shall direct the Philippine Electric Market Corporation(“PEMC”) to implement changes to the Wholesale Electric Spot Market (“WESM”)Rules in order to incorporate the rules specific to the operation of the REM under theWESM.Fiscal IncentivesRE Developers of renewable energy facilities, including hybrid systems, in proportionto and to the extent of the RE component, for both power and non-power applications,
are entitled to the following incentives: Income Tax Holiday; Duty-free Importationof RE Machinery, Equipment and Materials; Special Realty Tax Rates on Equipmentand Machinery; Net Operating Loss Carry-Over; Corporate Tax Rate of ten percent(10%) on net taxable income; Accelerated Depreciation; Zero Percent Value-AddedTax Rate; Cash Incentive for RE Developers for Missionary Electrification; TaxExemption of Carbon Credits; Tax Credit on Domestic Capital Equipment andServices; Incentive for RE Commercialization given to manufacturers, fabricators,and suppliers of locally-produced RE equipment and components; Exemption fromthe Universal Charge; and, Financial Assistance Program given by Governmentfinancial institutions such as the Development Bank of the Philippines, Land Bank ofthe Philippines, Phil-Exim Bank.ConclusionCompared to electric power distribution, power generation using new and renewableenergy technologies is not a regulated industry. The Philippine government hopesthat the policy mechanisms and incentives established under the RE Law will attractenough renewable energy projects with the proposed level of feed-in tariff that arescheduled to shrink over time and the costs of producing renewable energy are lowenough that subsidies can be lowered in the future. The first order of the day is theimplementation of the feed-in tariff rules and any delay will have a negative impacton investment interests. Like in any resource development project, the Philippinegovernment also needs to address issues related to the complicated approval andpermitting process to reduce and expedite procedures particularly in land use,environment and social acceptability regulations. The National Government shouldalso assist host local government units in integrating potential RE resources into thelocal development land use and resources use plans.Fernando “Ronnie” Penarroyo is the Managing Partner of Puno and Penarroyo LawOffices (firstname.lastname@example.org). He acquired his Bachelor of Science inGeology and Bachelor of Laws from the University of the Philippines and Master ofLaws from the University of Melbourne. He specializes in Energy, Resources andEnvironmental Law and Project Finance. He is a trustee of the InternationalGeothermal Association, the National Geothermal Association of the Philippines andthe Philippine Mineral Exploration Association.