RENEWABLE ENERGY – THE SUNRISE INDUSTRY

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Thursday, 9 December 2010

The 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 the United Nation Environmental Programme on the global trends in sustainable energy investment, climate change concerns, coupled with high oil prices, peak oil, and increasing government support, are driving renewable energy (“RE”) legislation, incentives and commercialization.

Development agencies like the Asian Development Bank are uplifting institutional capacity to develop and implement sustainable policy and regulatory framework.  Government regulatory agencies often have limited budget availability to support these policies and possess limited capacity for public sector research and development and project preparation.  Also, RE investments are perceived to be high risk and developing countries have difficulty promoting foreign direct investment in large utility scale plants, and on-and off-grid rooftop projects.

The International Finance Corporation, the lending branch of the World Bank, plans to invest more than $300 million in the Philippines power sector this year, particularly in renewable energy projects.  Nevertheless, financial institutions identified consistencies in policies and coordination between government bodies and feed-in tariff as main regulatory issues.

The Department of Energy seeks to adopt the use of clean and sustainable energy sources and aims to accelerate the development and utilization of indigenous energy such as geothermal, wind, solar, biogas, ocean and alternative fuels like biofuels and compressed natural gas.  Under the latest Philippine Energy Plan, the DOE has identified long-term goals, namely, to (i) increase RE-based capacity by 100 percent by 2013; and (ii) increase non-power contribution of RE to the energy mix by 10 million barrels of fuel oil equivalent in the next ten years. In support of these general goals, the government aims to (i) be the number one geothermal energy producer in the world; (ii) be the number one wind energy producer in Southeast Asia; (iii) double hydro capacity by 2013; and (iv) expand contribution of biomass, solar and ocean by about 131 MW.

The Renewable Energy Act of 2008

Republic Act No. 9513, also known as the “Renewable Energy Act of 2008” and signed on 15 December 2008, is the first and most comprehensive renewable-energy law in Southeast Asia which will enable the Philippines to capture a part of the soaring investments in renewable energy development worldwide.  Public consultations were held with different stakeholders across the Philippines to assist the Department of Energy (“DOE”) in drafting the RE Act Implementing Rules and Regulations 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 will spur growth in exploration and development through the entry of foreign capital and the institutionalization of a system of incentives.  It also seeks to promote equitable sharing of the benefits with stakeholders notably the host communities and indigenous peoples.  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 Tariff

The National Renewable Energy Board (“NREB”), the regulatory agency created under the law, shall set the minimum percentage of generation from eligible RE resources 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 encourage the speedy entry of RE projects by giving priority connections to the grid for electricity generated from emerging RE resources.

The Energy Regulatory Commission (“ERC”) promulgated the FiT system rules which took effect on 12 August 2010.  The FiT offers guaranteed payments on a fixed rate per kilowatt-hour for emerging RE sources, namely, wind, solar, ocean, run-of-river hydroelectric, biomass and hybrid systems, excluding any generation for own use; while exclusions were given to base-load capable impounding hydro and geothermal facilities.  To avail of the incentives under the rules, RE plants shall be issued certificates of compliance authorizing them to operate as FiT-eligible RE plants.  The FiT shall be technology specific and must be differentiated based on the size of the eligible RE plant, as recommended by the NREB.  Under the rules, transmission operator, National Grid Corporation of the Philippines (“NGCP”), and distribution utilities with RE plants embedded in their systems should connect and take in energy generated and delivered by RE plants.  Whenever some RE capacity are injected into the systems of NGCP or distribution utilities, this will be allocated and distributed to their customers to assure RE plant operators that they have priority connection 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 all electricity end-users. These collections will go to an NGCP-administered fund from which 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 Rules eventually fixed the period to 20 years to ensure that the ensuing cost to electricity end-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 25 Philippine pesos per kWh.  Solar will carry the highest tariff, while wind will have an average tariff of 12 Philippine pesos to 15 Philippine pesos per kWh.  The tariff is subjected to periodic change based on forecasted revenues for the expected deliveries of eligible RE plants, applicable FiTs and administration costs of the NGCP.  The tariff will also be adjusted to account for the inflation of foreign exchange rate fluctuations. In addition, it will be subjected to a two percent (2%) annual degression for its whole duration to encourage RE developers to invest at the initial stage and speed up development.  The ERC will review and readjust the tariff system in certain situations, such as when installation targets are already completed or when significant cost changes have been made.  However, readjusted tariffs will only be applicable to new renewable energy developers.

Other RE Policy Mechanisms

Under the RE Act, the DOE shall establish a Green Energy Option program which provides 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 the requirements of the green energy option program, end-users may directly contract from RE facilities their energy requirements distributed through their respective distribution utilities.  The law also establishes a net-metering system in which the distribution grid user has a two-way connection to the grid and is only charged for its net electricity consumption and is credited for any overall contribution to the electricity grid. Subject to technical considerations and without discrimination and upon 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 the required connection facilities fro RE-based power facilities in the Transmission and Distribution Development Plans upon approval by the DOE of such facilities. The connection facilities of RE power plants, including the extension of transmission and distribution lines, shall be subject only to ancillary services covering such connections.  The National Power Corporation-Small Power Utilities Group or its successors-in-interest and/or qualified third parties in off-grid areas shall, in the performance of its mandate to provide missionary electrification, source a minimum percentage of its total annual generation upon recommendation of the NREB from available RE resources in the area concerned, as may be determined by the DOE.

To facilitate compliance with RPS, the DOE shall establish the Renewable Electric Market (“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 the WESM.

Fiscal Incentives

RE Developers of renewable energy facilities, including hybrid systems, in proportion to 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 Importation of RE Machinery, Equipment and Materials; Special Realty Tax Rates on Equipment and Machinery; Net Operating Loss Carry-Over; Corporate Tax Rate of ten percent (10%) on net taxable income; Accelerated Depreciation; Zero Percent Value-Added Tax Rate; Cash Incentive for RE Developers for Missionary Electrification; Tax Exemption of Carbon Credits; Tax Credit on Domestic Capital Equipment and Services; Incentive for RE Commercialization given to manufacturers, fabricators, and suppliers of locally-produced RE equipment and components; Exemption from the Universal Charge; and, Financial Assistance Program given by Government financial institutions such as the Development Bank of the Philippines, Land Bank of the Philippines, Phil-Exim Bank.

Conclusion

Compared to electric power distribution, power generation using new and renewable energy technologies is not a regulated industry.  The Philippine government hopes that the policy mechanisms and incentives established under the RE Law will attract enough renewable energy projects with the proposed level of feed-in tariff that are scheduled to shrink over time and the costs of producing renewable energy are low enough that subsidies can be lowered in the future.  The first order of the day is the implementation of the feed-in tariff rules and any delay will have a negative impact on investment interests. Like in any resource development project, the Philippine government also needs to address issues related to the complicated approval and permitting process to reduce and expedite procedures particularly in land use, environment and social acceptability regulations. The National Government should also assist host local government units in integrating potential RE resources into the local development land use and resources use plans.

Fernando “Ronnie” Peñarroyo is the Managing Partner of Puno and Peñarroyo Law Offices (fspenarroyo@punopenalaw.com).  He acquired his Bachelor of Science in Geology and Bachelor of Laws from the University of the Philippines and Master of Laws from the University of Melbourne.  He specializes in Energy, Resources and Environmental Law and Project Finance.  He is a trustee of the International Geothermal Association, the National Geothermal Association of the Philippines and the Philippine Mineral Exploration Association.

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