Philippines: Renewable energy in the Asia Pacific: a legal overview (3rd edition) - Philippines

Carbon Markets and Renewable Energy Update (Australia)
Last Updated: 11 September 2013
Article by Stephen Webb

PHILIPPINES

OVERVIEW

JURISDICTION LANGUAGE
Mixed legal system of civil, common, Islamic and customary law Filipino and English


BUSINESS ENVIRONMENT

  • Ease of Doing Business Report 2013: 138 out of 185 (down 2 rankings)
  • Global Competitiveness Index 2013: 65 out of 144 (up 10 rankings)
  • Index of Economic Freedom 2013: 97 out of 177 (up 10 rankings)
  • Corruption Perceptions Index 2012: 105 out of 176 (up 24 rankings)
POPULATION INCOME GNI PER CAPITA (PPP TERMS)
94.9 million Lower middle $4,140

PROFILE

The Philippines is an archipelagic nation comprising 7,107 islands. The country is a former Spanish colony and was also under American rule for a period in the early 20th century, which has contributed to the prevalence of Spanish and English, an affinity with western culture as well as a large Christian following. Following Japanese occupation during World War II, the Philippines gained its independence in 1946. Since then, the country has had periods of political stability intermingled with "people power" movements to overthrow presidents in 1986 and 2001. The Philippines avoided the economic downturn following the global financial crisis in 2008. However, it has faced increased tensions with China over territorial claims in the South China Sea and a prolonged insurgency from domestic terrorist groups operating in certain parts of the country.

ELECTRICITY INDUSTRY OVERVIEW

  • Electricity in the Philippines is said to be the most expensive in Asia, with an average retail rate across the country of US$0.23 per kWh.
  • According to the Department of Energy (DOE), hydropower and geothermal energy each accounted for 14% of energy consumption. Nonetheless, coal (37%) and natural gas (30%) are the main sources of electricity generation.
  • Around three million houses are without electricity in the Philippines. Dwellings with an electricity connection experience frequent power fluctuations.
  • A World Bank report noted that electricity demand rose 6.6% in 2012, with conservative projections for annual growth of 4% to 2015.

Electricity laws

  • The Electric Power Industry Reform Act of 2001(EPIRA) sought to comprehensively restructure the industry from "a vertically integrated, extensively publicly-owned utility business, [to an] industry [which] was envisioned to be broken down into its main components with a deregulated and effectively privatised generation and supply sectors".
  • While the transmission and distribution sectors remain regulated, the generation sector has been fully deregulated, with generation prices largely governed by market forces and/or settled in commercial terms.
  • The Energy Regulatory Commission (ERC) is the body charged with regulating the Philippine electricity sector.

Generation, distribution and transmission

  • With the privatisation of generation assets held by the National Power Corporation (NPC), the generation sector can be considered competitive as more investors from the private sector are engaging in the business of producing and selling electricity in the market.
  • NPC, in the meantime, continues to generate electricity from its own facilities and from Independent Power Producers (IPPs) under long term offtake agreements. The capacity produced by IPPs is also in the process of being privatised and assigned to IPP administrators trading in the market on behalf of NPC.
  • A number of bodies distribute electricity throughout the Philippines, including investor-owned utilities such as the Manila Electric Company (Meralco), local government-owned utilities and consumer-owned electricity cooperatives. Both the investor-owned utilities and electricity co-operatives operate under a rate-setting regime, whilst the investor-owned utilities operate on a performance-based scheme, which is slightly modified in approach and implementation for electricity co-operatives.
  • The transmission assets held by NPC were transferred by EPIRA to the National Transmission Corporation (TransCo). The operation, maintenance and upgrade of the assets, on the other hand, were privatised by way of concession contract undertaken by the Power Sector Assets and Liabilities Management Corporation (PSALM).
  • PSALM then awarded the 25-year concession contract to the National Grid Corporation of the Philippines (NGCP). As concessionaire, NGCP is required to prepare the Transmission Development Plan and is authorised to collect wheeling charges and other fees, as approved by the ERC.

Reforms

  • There have been significant reforms in the industry following the implementation of EPIRA including:
    • privatisation of more than 85% of NPC generation assets and IPP capacities in Luzon, and ongoing privatisation of assets and capacities in Visayas and Mindanao;
    • privatisation of the operation and maintenance of the transmission assets;
    • commercial operation of the Wholesale Electricity Spot Market (WESM) in Luzon and Visayas; and
    • unbundling of electricity rates to indicate generation, transmission, distribution, metering and ancillary services.

Sale of electricity

  • For Luzon and Visayas, electricity is sold at the spot market price through the WESM or under a bilateral contract agreement. While physical dispatch of plants is undertaken by the system operator, the Philippine Electricity Market Corporation – as Market Operator – prepares dispatch instructions based on trading volumes and clearing price per hour in the WESM.

RENEWABLES INDUSTRY OVERVIEW

  • As a country rich in natural resources and susceptible to world oil price fluctuations, the Philippines initially adopted the development and use of hydropower and geothermal resources as early as the 1950s. Accordingly, the percentage of renewables contributing to electricity supply in the country is higher than regional and global averages.
  • Current generation capacity from renewable energy is estimated at 5GW.
  • Despite a relatively advanced renewable energy contribution, the Philippines has significant potential for further clean energy development. To this end, the Philippine Congress passed the Renewable Energy Act of 2008 (RE Act, see below). It was not until 2012 however, that feed-in tariff rates were announced, and the first grid-connected projects to use the feed-in tariff regime are not expected to be operating until 2014.
  • The Philippine Government's goals for the renewable energy sector include:
    • increasing renewable energy-based capacity by 15GW by 2030 (roughly 50% of total installed capacity);
    • becoming the number one geothermal energy producer in the world (currently second);
    • becoming the number one wind energy producer in South East Asia;
    • doubling hydropower capacity by 2013; and
    • expanding the contribution of biomass, solar and ocean energy by 131MW.

Hydropower

  • Hydropower already contributes a significant proportion of the Philippines' total electricity consumption.
  • Currently there are 134 hydropower plants, including 21 large hydropower plants in the Philippines.
  • The DOE mainly focuses on small-scale hydropower projects, partially due to the environmental impact of large hydropower rojects in the past.
  • Estimated potential from small hydropower is approximately 1.3GW.

Wind

  • Estimated wind potential in the country is 70GW; however, the wind industry in the Philippines is presently underdeveloped and many of the best possible wind sites are located far from population centres.
  • Despite this underdevelopment, the DOE is looking to wind power to meet increasing energy demand. It recently approved three wind projects including Altenergy's 67.5MW facility in Pililia, the Energy Development Corp's 87MW facility in Ilocos Norte and Trans Asia's wind project in Guimaras.

Solar

  • Aid organisations have invested in solar PV systems in the Philippines, predominantly for off-grid rural electrification.
  • The solar energy sector is particularly underdeveloped in the Philippines with just 1MW of on-grid capacity despite high solar radiation levels. As such, solar projects have been recognised as the priority energy source under the feed-in tariff regime. The first gridconnected projects to gain the benefit of the tariff are expected to be solar projects.

Geothermal

  • Geothermal energy is a major source of renewable energy in the Philippines, with total installed capacity at about 2GW.
  • The Philippines is the second largest producer of geothermal energy globally.

Biomass energy

  • Fuel wood is a dominant energy source in rural parts of the country, however this has led to deforestation.
  • Alternative sources, such as bagasse from sugar cane and rice husk are being utilised and further developed as fuel for power projects.
  • The Philippines has large agriculture, forestry and livestock industries, which results in the consumption of biomass energy widely throughout the country.

CURRENT ISSUES IN THE RENEWABLES INDUSTRY

  • In late May 2013, the DOE issued guidelines on the selection and awarding of certificates for renewable energy projects. The DOE will continue the 'first come, first served' approach. Under the new guidelines, upon a project being declared commercially viable, a developer must compete with other project proponents in building a renewable energy facility before being awarded a feed-in tariff.
  • The Philippines archipelagic geography means that the transmission and distribution of electricity is expensive. Accordingly, many areas are without a grid connection and rely on diesel-run power plants. Analysts have called for increased renewable energy in these areas as a cheaper, long-term alternative to diesel-run plants,however they note the need for further regulatory standardisation beyond the feed-in tariff regime, and also the 40% foreign ownership limit in the country as impediments to renewable energy electrification in these more remote areas of the country.
  • Some environmental groups have criticised the Government for continuing to commission coal plants, despite advocating renewable energy as the country's energy priority. DOE figures show that 23 coal-fired power plants are currently in the pipeline.
  • The ERC has deferred fixing a feed-in tariff rate for ocean energy.

RENEWABLES LAWS

  • The RE Act mandates the DOE to establish a Renewable Energy Market (REM) to be operated under the WESM, for trading of renewable energy certificates to facilitate compliance with the Renewable Portfolio Standard (RPS).
  • The RPS requires electricity suppliers to source a minimum amount of energy from "eligible renewable sources". Section 2 of the RE Act provides for exploration and development of biomass, solar, wind, hydropower, geothermal and ocean energy sources.
  • The RE Act seeks to accelerate the exploration and development of renewable energy sources, and increase the utilisation of renewable energy. The DOE is the lead agency mandated to implement the RE Act.
  • The National Renewable Energy Board (NREB) was created under the RE Act and its function includes recommending specific actions to facilitate the implementation of the National Renewable Energy Program.
  • On-grid renewable energy development under the RE Act includes the establishment of the RPS. Thisis complemented by a feed-in tariff to accelerate the development of emerging renewable energy sources. It includes priority connections to the grid for renewable energy; priority purchase and transmission of, and payment for such electricity by the grid system operators; and for the NREB to recommend for ERC to approve the fixed tariff rate.
  • Consumers may choose to source their power from renewable sources (known as the "Green Energy Option" under the RE Act).
  • The RE Act also establishes a Renewable Energy Trust Fund to enhance the development and greater utilisation of renewable energy, to be administered by the DOE as a special account in government financial institutions.

GOVERNMENT INCENTIVE PROGRAMS

  • There are a number of incentives under Chapter VII of the RE Act for achieving the above renewable energy targets, such as:
    • income tax holiday of seven years;
    • corporate tax rate of 10%;
    • duty-free importation of renewable energy machinery, equipment and materials within the first 10 years;
    • 10 year exemption from tariff duties;
    • net operating loss carry-over for the next seven years following the loss;
    • accelerated depreciation;
    • 0% value-added tax rate;
    • cash incentive for missionary electrification (outside the three main grids and where connection to existing network is not feasible);
    • special realty tax;
    • tax exemption on carbon credits;
    • tax credit on domestic capital equipment; and
    • net-metering for renewable energy to allow consumers generating their own power to sell back to the grid.
  • However, the main incentive for renewable energy developers is the feed-in tariff regime. The rates offered for wind, solar, hydropower and geothermal energy are relatively high by regional standards and second only to Japan.

MAJOR PROJECTS/COMPANIES

  • The first hydropower project – the Ambuklao Hydropower Plant – was commissioned in 1956. The facility is now owned and operated by the joint venture company of SN Power of Norway and Aboitiz Power of the Philippines.
  • Explorations for the Tiwi and MakBan Geothermal Power Plant Complex commenced in 1964, with the first unit in Tiwi commencing operations in 1976. The steam field is operated by the local company of Chevron Geothermal.
  • North Wind Power Development Corporation has developed the 33MW Bangui Bay North wind farm in Ilocos Norte. It is currently the only commercial wind farm in operation in the country; however the DOE has approved three new wind farms for commercial operation (see above).
  • A number of mini-hydropower development contracts have been approved recently, including an 8MW Villasiga MHP in Bugasong, Antique.

FOREIGN INVESTMENT/OWNERSHIP

  • In the Philippines 1987 Constitution, foreign ownership was limited to 40% in a number of sectors, including (implicitly) the renewable energy sector. This is seen as a major limiting factor for foreign investors in the renewable energy sector in the Philippines.
  • The Foreign Investments Act of 1991, as amended, provides for the regular issuance of a "Foreign Investment Negative List" that can be used as a reference by prospective investors.
  • The Government's Investment Priorities Plan nonetheless recognises renewable energy investment as a priority investment area.

RELEVANT INTERNATIONAL TREATIES

  • The Philippines was one of the first countries to ratify the United Nations Framework Convention on Climate Change in 1994. The Philippines also quickly ratified the Kyoto Protocol, however as a "developing" country, it does not have any binding greenhouse gas reduction targets to meet.
  • In a report submitted to the UN in 2000, the Philippines outlined its various mitigation, adaptation and prevention initiatives, such as the passing of the Clean Air Act of 1999.

© DLA Piper

This publication is intended as a general overview and discussion of the subjects dealt with. It is not intended to be, and should not used as, a substitute for taking legal advice in any specific situation. DLA Piper Australia will accept no responsibility for any actions taken or not taken on the basis of this publication.


DLA Piper Australia is part of DLA Piper, a global law firm, operating through various separate and distinct legal entities. For further information, please refer to www.dlapiper.com

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