Renewable energy in the Philippines

Rationale for renewable energy in the Philippines

Renewable energy implementation is considered important in the Philippines for several reasons. Given its geographic characteristics, the Philippines is highly vulnerable to the adverse effects of climate change. Rising sea levels are a threat to the Philippines, as it is an archipelago with many cities located near coastal areas. As the coastline recedes due to rising seas, coastal cities in the country will become more vulnerable to flooding. In the long run, rising sea levels may even make these cities uninhabitable. Climate change has also been linked to altered weather patterns and extreme weather events.

The continued reliance on fossil fuels is also detrimental to the government’s goal to maintain energy security, which pertains to the country’s ability to readily and affordably procure energy resources. The Philippines does not have a sizeable domestic production of oil and coal, and so it is a net importer of both these fossil fuels. In 2012, the Philippines imported 20 million tons of coal to generate energy, but only domestically supplied 8 million tons. Likewise, the Philippines needed 54 million barrels of oil in 2010, but only domestically produced 33,000 barrels. Given its heavy dependence on imported coal and oil, the Philippines is more vulnerable to power shortages caused by price fluctuations and supply constraints affecting these commodities. This in turn can lead to higher energy prices for consumers, as well as the possibility of energy rationing in certain areas.

Fossil fuels are also an unsuitable long-term energy source because rapidly depleting coal, oil and natural gas stocks. In the succeeding decades, it is predicted that diminishing fossil fuel reserves will result in supply constraints that appreciably drive up coal, oil and natural gas prices. Thus, the costs associated with procuring and using fossil fuel are expected to rise. It is also predicted that nearly all economically recoverable sources of fossil fuels will be fully depleted before the end of the 21st century.

Given the disadvantages of using fossil fuels to meet the Philippines’ energy needs, there have been movements to promote the wider use of renewable energy. The main drivers behind this are the desire to use cleaner and more secure energy sources. This is reflected in a statement released by the Philippine Department of Energy:

“The harnessing and utilization of renewable energy comprises a critical component of the government's strategy to provide energy supply for the country. This is evident in the power sector where increased generation from geothermal and hydro resources has lessened the country's dependency on imported and polluting fuels. In the government's rural electrification efforts, on the other hand, renewable energy sources such as solar, micro-hydro, wind and biomass resources are seeing wide-scale use.”

Renewable electricity overview

Despite its heavy reliance on fossil fuels for energy, the Philippines does utilize renewable sources of energy in its current energy mix. In particular, the Philippines utilizes hydropower, geothermal, solar, wind and biomass resources. Together, these renewable energy sources contributed 19,903 GWh of electrical energy in 2013, or 26.44% of the country’s power needs.

Government support

The Philippine government has passed four laws that seek to improve the state of renewable energy in the Philippines: the Electric Power Industry Reform Act of 2001 (RA 9136), the Biofuel Act of 2006 (RA 9367), the Renewable Energy Act of 2008 (RA 9513), and the Climate Change Act of 2009 (RA 9729). The Philippine Department of Energy (DOE) was lead agency mandated to implement the provisions of the former three laws.

Republic Act 9136

Republic Act 9136, or the Electric Power Industry Reform Act of 2001 (EPIRA), declared that “it is the policy of the state to promote the utilization of indigenous and new and renewable energy resources in power generation in order to reduce dependence on imported energy.” It stated that the DOE shall “encourage private sector investments in the electricity sector and promote development of Renewable energy Sources including small-scale renewable energy generating sources”

Moreover, for government efforts of missionary electrification, EPIRA promoted the utilization of renewable energy resources whenever feasible, providing power generation and its associated power delivery systems in areas that are not connected to the grid. This act also set criteria for determining qualified third parties that may participate in providing electricity to remote and unviable areas, giving preference to parties that would utilize least-cost renewable energy resources.

Republic Act 9367

Republic Act 9367, also known as the Biofuels Act of 2006, declared that “it is the policy of the State to reduce dependence on imported fuels with due regard to the public health, the environment, and natural ecosystems by mandating the use of biofuels,” wherein one aim is the availability of alternative and renewable clean energy without any detriment to the ecosystem and food reserves of the country.

It encourages investments in biofuels with the following incentives: specific tax on local or imported biofuels component. The sale of raw material used in the production of biofuels shall be exempt from the value added tax. Moreover, government financial institutions, such as the Development Bank of the Philippines, Land Bank of the Philippines, Quedancor and other government institutions providing financial services shall extend financing to Filipino citizens or entities that shall engage in activities involving production biofuel feed-stock as certified by the DOE.

Finally, the law saw the creation of the National Biofuel Board (NBB), which would monitor the implementation of, and evaluate for further expansion, the National Biofuel Program (NBP) prepared by the DOE.

Republic Act 9513

Republic Act 9513, also called the Renewable Energy Act of 2008 pushed for the wider use of renewable energy in the Philippines. In particular, the law called for the state to:

(a) Accelerate the exploration and development of renewable energy (RE) resources such as, but not limited to, biomass, solar, wind, hydro, geothermal and ocean energy sources, (b) Increase the utilization of renewable energy by institutionalizing the development of national and local capabilities in the use of RE systems, and promoting its efficient and cost-effective commercial application by providing fiscal and non-fiscal incentives; (c) Encourage RE resources as tools to effectively prevent or reduce harmful emissions for the protection of health and the environment; and (d) Establish the necessary infrastructure and mechanism to carry out the mandates specified in this Act and other existing laws."

On-grid renewable energy development

Under Section 6 of RA 9513, A Renewable Portfolio Standard (RPS) was made to set a minimum percentage of generation from eligible renewable energy resources and determine to which sector RPS shall be imposed on a per grid basis.

Under Section 7 of RA 9513, A Feed-In Tariff System was implemented for electricity produced from wind, solar, ocean, run-of-river hydropower and biomass. FiT encourages RE capacity by guaranteeing prices in the form of long-term contracts to RE producers, typically based on the cost of generation of each technology. Under the FiT System, qualified developers of emerging RE sources are offered on a fixed rate per kilowatt-hour (kWh) of their exported electricity to the distribution or transmission network. This scheme excludes the energy utilized from RE plants eligible for own use. FiT is one of the policy mechanisms eyed by the DOE as it aims to maintain the share of RE to at least 30% in the country’s power mix. The DOE highlights that FIT subscriptions for RE resources has significantly increased to 806.82 MW from 646.65 MW installations since the start of 2016.

Under Section 10 of RA 9513, Net-metering for Renewable energy was promoted by having the distribution utilities enter into net-metering agreements with qualified end-users of RE systems.

Off-grid renewable energy development

Under Section 12 of RA 9513, NPC-SPUG, in charge of providing missionary electrification, was ordered to source a minimum percentage of its total annual generation from available RE resources in the area concerned.

Incentives

Under Section 15 of RA 9513, developers of renewable energy facilities duly certified by the DOE are entitled to many incentives, particularly an income tax holiday for the first seven (7) years of its commercial operations, duty-free importation of renewable energy machinery, equipment and materials within the first ten (10) years upon the issuance of certification, under certain provisions, special realty tax rates on renewable energy equipment and machinery, net operating loss carry-over, zero percent Value-Added Tax (VAT) Rate for the sale of fuel or power generated from renewable sources of energy, and Tax Credit on domestic capital equipment and services.

Under Section 21 of RA 9513, the renewable energy sector was declared a priority investment sector that will regularly form part of the country’s Investment Priority Plan. DOE-accredited manufacturers, fabricators and suppliers of locally produced renewable energy equipment and components are entitled to tax and Duty-Free Importation of materials, tax credit on domestic capital materials, Income Tax Holiday and exemption for seven (7) years, and zero-rated VAT transactions.

Under Section 22 of RA 9513, DOE-certified individuals and entities (i.e. farmers) engaged in the plantation of crops and trees used as biomass resources are entitled to duty-free importation and be exempted from Value-Added Tax (VAT) on all types of agricultural inputs, equipment and machinery for a period of ten (10) years after the effectiveness of the Act.

Provisions

Under Chapter 8 of RA 9513, the National Renewable energy Board (NREB) was created to evaluate and recommend the mandated RFS and minimum RE generation capacities for off-grid areas, to monitor and recommend specific actions for implementing the National Renewable energy Program (NREP), and other such functions to attain the objectives of the Act, and the Renewable energy Management Bureau was created for the purpose of implementing the provisions in the Act. The Renewable energy Trust Fund, overseen by the NREB was also established for financing the enhancement of development and greater utilization of renewable energy.

Republic Act 9729

Republic Act 9729, also known as the Climate Change Act of 2009, stated that "it is the policy of the state to afford full protection and the advancement of the right of the people to a healthful ecology in accord with the rhythm and harmony of nature. It is to make it a policy of the State to incorporate a gender-sensitive, pro-children and pro-poor perspective in all climate change and renewable energy efforts, plans and programs." The state aims "to strengthen, integrate, consolidate and institutionalize government initiatives to achieve coordination in the implementation of plans and programs to address climate change in the context of sustainable development."

Issues with implementation

Despite the enactment of the Renewable Energy Act in 2008, new investments in renewable energy have reportedly been slow on the uptake. The FiT were approved only in 2012, and thus far, there have been two investments in solar facilities that are expected to be operational in 2016. The four-year span in the approval of the FiT delayed a potential investment of $2.5 billion. Compared with the original FiT tariffs filed by the National Renewable energy Board (NREB) before the energy Regulatory Commission in April 2011, the approved rates in July 2012 are much lower. In 2015, the regulators are looking at even lower FiT tariff levels for the next batch of FiT applicants.

Involvement of the private sector

Republic Act 9513, or the Renewable Energy Act of 2008 encourages the involvement of the private sector in renewable energy, given that there is an increasing shift towards clean and sustainable energy. The Renewable Energy Act of 2008 seeks to attract members of the private sector to contribute to the development of renewable energy in the country by offering fiscal and non-fiscal incentives.

Fiscal incentives include tax breaks, as well as funding assistance from both the government and third parties. A number of international organizations have expressed willingness to aid Philippine businesses in developing local renewable energy infrastructure. Such organizations include: German Technical Cooperation (GTZ), United States Agency for International Development (USAID), Asian Development Bank (ADB), United Nations Development Programme (UNDP), and Japan International Cooperation Agency (JICA).

Barriers to private sector participation

However, there are factors that makes their involvement challenging or that may hinder potential actors from entering the industry in the first place. Such barriers include high transaction costs, social engineering costs, need for political connections, lack of local technology/expertise, and government price ceilings on energy prices derived from renewable energy sources.

High transaction costs

Many private sector businesses are facing high transaction costs due to bureaucratic inefficiency and procedural delays. For instance, many private sector players face troubles due delays in the issuance of standard documents, which are caused by intra-governmental conflict. Such delays are problematic on the side of the private sector actors, as they face increasing transaction and labor costs as time draws on.

Social engineering costs

In addition to the previously mentioned transition costs, private sector players also face social engineering costs. This type of cost involves certain indigenous groups and non-governmental organizations in which they engage in “informal forms of ‘harassment’ such as public information threats, mobilization of protests, and the ‘slander of corporate reputation’ in exchange for financial concessions.” These can reach up to approximately US$20 million which are distributed among the different types of government officials.

Lack of local technology

Many renewable energy sources, such as wind power and solar power, require specialized equipment that are not produced in the Philippines. Because of this, many private sector players involved in renewable energy must import needed equipment and tools from other countries before they can begin operations in the country. Since doing this can prove to be prohibitively expensive, many private firms choose not to get into renewable energy in the Philippines.

Price ceilings on electricity rates

Due to the high costs associated with investing in renewable energy infrastructure, private sector firms try to recoup their investment through higher rates. However, certain government agencies, such as the energy Regulatory Commission (ERC) impose lower generation rates on power producers in order to safeguard consumer interests. Because imposed rates are significantly lower than the proposed rates submitted by renewable energy producers, many private firms are reluctant to enter the renewable energy sector, because this could mean a long payback period and low profits, if any at all.

Public-private partnership

Public-private partnerships are a kind of contractual agreement between a government entity and private sector player, wherein the private sector player provides a public asset or service with the government's support. In public-private partnerships, the government benefits by tapping into the expertise of the private actor, who can provide assets and services to the public more efficiently. The government also benefits by offloading some investment cost onto the private partner. In exchange for taking on the risk of providing a public asset or service, the private partner gets to benefit economically from the public-private partnership.

As of June 2015, the Department of Energy (DOE) has awarded 646 service contracts to private sector players under the Renewable Energy Law with installed capacity of 2,760.52 MW.

The DOE posts updates of its Private Sector Initiated Power Projects—both committed and indicative, of all types of power sources, and of all regions—every month in its official website.

Listed below are the current committed private sector initiated power projects that involve renewable energy:

*—off grid project