Spotlight: renewable energy project development in Philippines

An extract from The Renewable Vitality Legislation Evaluate, fifth Version

Introduction

In 2008, the Renewable Vitality Act (the RE Act)² was handed to spur improvement of renewable vitality initiatives and scale back reliance on fossil fuels. The RE Act exists inside an vitality regulation ecosystem that features the Electrical Energy Trade Reform Act (EPIRA) of 2001,³ which supplies the general restructured regulatory framework for the electrical energy business; the Biofuels Act of 2006,⁴ which inspires the usage of biofuels; and the Local weather Change Act of 2009,⁵ which supplies the authorized mandate to deal with local weather change.

Regardless of the regulation’s mandate, electrical energy continues to be dominated by fossil fuels, particularly coal. At current, coal vegetation account for 39 per cent of the nation’s 21,241MW of put in vitality capability. Renewable vitality accounts for round 31 per cent⁶ (hydro 15.5 per cent, geothermal 8.1 per cent, photo voltaic 3.7 per cent, wind 1.8 per cent and biomass 1 per cent), with the steadiness accounted for by oil-based sources at 18 per cent and pure fuel at 15 per cent (3,447MW).⁷

Furthermore, coal use is forecast to extend to 59.1 per cent of the overall energy combine by 2028 to satisfy the nation’s surging energy demand, pushed by sturdy macroeconomic fundamentals and demographic progress, coupled with authorities objectives to realize a 100 per cent electrification price by 2022. Non-hydro renewables technology can also be anticipated to say no barely to 10.2 per cent of the overall energy combine by 2028 due to the event of thermal sources.⁸

As a web importer of fossil fuels, the Philippines is topic to market components resulting in costly energy. To determine and safe a extra secure and sustainable energy provide, the Philippines is working in the direction of diversifying its vitality sources.

The yr in evaluation

The Philippines economic system suffered a deep recession in 2020 as a result of influence of the covid-19 pandemic, with GDP contracting by 9.6 per cent yr on yr. This was the biggest annual decline ever recorded since Nationwide Accounts information collection for the Philippines commenced in 1946.⁹

With government-imposed strict lockdowns, electrical energy consumption throughout the Philippines dropped by 4.04 per cent in 2020. Energy consumption stood at 101,756GWh in 2020,¹⁰ in comparison with 106,041GWh in 2019. As anticipated of the lockdowns, residential use elevated whereas that of commercial and industrial went down.

Some distribution utilities took steps to ease the monetary influence on clients by invoking the pressure majeure provision of their energy contracts, decreasing fastened expenses for technology capability that was not consumed.¹¹ The federal government, by the Vitality Regulatory Fee (ERC), additionally directed electrical energy distribution corporations to implement a staggered cost scheme and deferred the feed-in tariff cost for a month,¹² amongst different steps.

Efforts to reopen the economic system are anticipated to enhance consumption figures. Nonetheless, new covid-19 outbreaks in early 2021 resulted in new lockdowns within the capital area and different areas within the nation.

On the optimistic aspect, the nation’s put in renewable vitality capability elevated by 16 per cent in 2020, underscoring the rising shift in the direction of cleaner and extra sustainable vitality sources.¹³

Nonetheless, coal maintained its dominance within the energy technology combine with a share of 54.6 per cent, adopted by pure fuel with a 21.1 per cent share and renewable vitality (geothermal, hydro, biomass, photo voltaic and wind) with 20.8 per cent.¹⁴

Vitality officers consider that the nation’s goal of a 35 per cent renewable vitality share within the energy technology combine by 2030 continues to be achievable – regardless of renewable vitality’s reducing share over time – by the implementation of the Renewable Portfolio Requirements (RPS).¹⁵

Trying ahead, builders might be keenly anticipating the Inexperienced Vitality Public sale Programme, launched in July 2020 by the Division of Vitality (DOE), which units the framework for impartial energy producers to accumulate provide from renewable vitality initiatives because the Philippines goals to rebalance the vitality combine.¹⁶

The coverage and regulatory framework

i The coverage background

The next fiscal incentives can be found for renewable vitality builders underneath Rule 5 Part 13 of the RE Act Implementing Guidelines and Rules (IRRs):

1. earnings tax vacation for the primary seven years of business operation;
2. duty-free importation of renewable vitality equipment, gear and supplies;
3. particular realty tax charges on gear and equipment;
4. web working loss carry-over;
5. diminished company tax price (10 per cent after earnings tax vacation);
6. accelerated depreciation;
7. zero per cent worth added tax (VAT) price;
8. money incentive for renewable vitality builders for missionary electrification;
9. tax exemption of carbon credit; and
10. tax credit score on home capital gear and providers.

The next incentives and privileges can be found underneath Rule 3 Part 17 of the RE Act IRRs:

1. tax rebates for purchases of renewable vitality parts;
2. monetary help programme;
3. exemption from the Common Cost;
4. money incentive for renewable vitality builders for missionary electrification;
5. cost of transmission expenses; and
6. Precedence Dispatch and Should Dispatch standing for intermittent renewable vitality assets.

The final eligibility necessities for incentives are registration with the DOE; DOE endorsement of the renewable vitality developer and its undertaking; and registration with the Board of Investments.¹⁷

ii The regulatory and consenting frameworkLegal framework for renewable vitality

Beneath the Philippine Structure, all pure assets are owned by the state. These embody all forces of potential vitality comparable to kinetic vitality from water, marine present and wind; and thermal vitality from photo voltaic, ocean, geothermal and biomass sources.¹⁸ The Structure additionally supplies that the exploration, improvement, manufacturing and utilisation of pure assets shall be underneath the complete management and supervision of the state.

The state might instantly undertake actions of this type or it could enter into co-production, three way partnership or co-production sharing agreements with Filipino residents, or firms or associations no less than 60 per cent of whose capital is owned by Filipinos.

The DOE interprets the Structure in such a method that overseas possession for renewable energy initiatives is restricted to 40 per cent.¹⁹ As well as, solely Filipino residents or firms the capital inventory of which is owned by Filipino residents are allowed to personal land – an necessary consideration for renewable vitality undertaking improvement.

Associated useful resource administration legal guidelines

Along with the energy-specific legal guidelines themselves, there are useful resource administration legal guidelines to think about, together with:

1. environmental rules, together with compliance with the Environmental Influence Evaluation System, applied primarily by the Division of Setting and Pure Sources (DENR);
2. the Native Authorities Code,²⁰ which directs periodic session with the native authorities items with respect to renewable vitality initiatives inside their respective jurisdictions; and
3. the Indigenous Individuals’s Rights Act.²¹

Typical renewables sector enterprise fashions

The next are the 4 main kinds of enterprise mannequin for on-grid renewable vitality initiatives.²²

Feed-in tariff

After an preliminary implementation marked by delays and dear procedures, the DOE has discontinued the feed-in tariff²³ programme in favour of the extra aggressive provide auctions.

Energy provide agreements with distribution utilities

Necessities for a aggressive choice course of apply for energy provide settlement (PSA)²⁴ contracts pursuant to the 2015 DOE Round titled ‘Mandating All Distribution Utilities to Endure Aggressive Choice Course of in Securing Energy Provide Agreements’. PSAs require approval by the ERC.

Web metering initiatives

The online metering mannequin²⁵ is, basically, restricted to particular objective car amenities with an put in capability of no more than 100kWp. Beneath the RE Act IRRs, it’s obligatory for distribution utilities to enter into web metering preparations (with out discriminating between finish customers’ requests).

PSAs with industrial bulk shoppers

Upon preliminary implementation of retail competitors and open entry (RCOA) underneath the EPIRA, electrical energy finish customers with a month-to-month common peak demand of no less than 1MW for the previous 12 months have been deemed ‘contestable clients’, entitled to supply their electrical energy provide from any provider of their selection.²⁶ This threshold was subsequently diminished to 750kW, however implementation was stalled by a brief restraining order issued by the Supreme Courtroom towards the DOE and the ERC from implementing obligatory migration of contestable shoppers to RCOA. The DOE has since made migration voluntary. Division Round No. DC 2019-07-001 issued in late 2019 additionally permits contestable clients use of transmission and distribution programs and to register voluntarily as a buying and selling participant within the wholesale electrical energy spot market (WESM).

DOE

The DOE is the lead company mandated to implement the RE Act.²⁷ Along with its features underneath present legal guidelines, the DOE shall:

1. promulgate the RPS guidelines;
2. set up the renewable vitality market and direct the Philippine Electrical energy Market Company (PEMC) to implement adjustments to include the foundations particular to the operation of the renewable vitality market underneath the WESM;
3. supervise the institution of the Renewable Vitality Registrar by the PEMC;
4. promulgate the suitable implementing guidelines and rules essential to realize the goals of the GEOP;
5. decide the minimal share of technology which may be sourced from renewable vitality assets accessible from the Nationwide Energy Company Small Energy Utilities Group (NPC-SPUG), or its successors-in-interest or certified third events in off-grid areas;
6. problem certifications to renewable vitality builders, native producers, fabricators and suppliers of domestically produced renewable vitality gear to function foundation for his or her entitlement to incentives, as offered for within the RE Act;
7. along with related authorities companies, formulate and implement the NREP;
8. administer the Renewable Vitality Belief Fund as a particular account in any of the federal government monetary establishments recognized underneath Part 29 of the RE Act;
9. suggest and endorse renewable vitality initiatives making use of for monetary help with authorities monetary establishments pursuant to Part 29 of the RE Act;
10. encourage the adoption of waste-to-energy applied sciences pursuant to Part 30 of the RE Act;
11. decide the mechanisms for the grant of subsidies to electrical energy shoppers of host native authorities items (LGUs), along with the Division of Finance, the ERC and the Nationwide Renewable Vitality Board (NREB); and
12. carry out such different features as could also be essential, to realize the goals of the RE Act.²⁸

NREB

The NREB acts as a collegial physique primarily tasked with recommending insurance policies to the DOE and monitoring the implementation of the RE Act. It’s composed of presidency and personal members appointed by the President.²⁹

Renewable Vitality Administration Bureau

The RE Act additionally established the Renewable Vitality Administration Bureau underneath the DOE to develop, formulate and implement insurance policies, plans and programmes to speed up the event, transformation, utilisation and commercialisation of renewable vitality assets and applied sciences, amongst different features.³⁰

ERC

The ERC, in session with the NREB and electrical energy business contributors, establishes web metering interconnection requirements and pricing methodologies in addition to different industrial preparations essential to make sure the success of web metering for the renewable vitality programme.³¹

NPC-SPUG

Within the efficiency of its mandate to supply missionary electrification, the NPC-SPUG or its successors-in-interest or certified third events in off-grid areas sources a minimal share of its complete annual technology from accessible renewable vitality assets within the space involved, as could also be decided by the DOE.³²

Renewable vitality market and certificate-based monitoring

To expedite compliance with the institution of the RPS, the DOE is remitted to determine the renewable vitality market. The renewable vitality market is a sub-market of the WESM, the place renewable vitality certificates (RECs) could also be traded.³³

RECs exhibiting the vitality sourced, produced and bought or used are issued by the Renewable Vitality Registrar to electrical energy business contributors. The Renewable Vitality Registrar is remitted to problem, maintain and confirm RECs similar to vitality generated from eligible renewable vitality amenities.³⁴

Renewable vitality integration with the electrical energy grid

Part 8 of the RE Act IRRs requires the Nationwide Transmission Company (TransCo) and the NGCP, which is the grid concessionaire, and all distribution utilities to:

1. embody the connection amenities required for renewable energy-based energy amenities of their transmission and distribution improvement plans, topic to approval by the DOE; and
2. impact connection of renewable energy-based energy amenities with the transmission or distribution system upon receipt of a proper discover of approval by the DOE and the beginning of business operations of the renewable energy-based energy amenities.

The connection amenities of renewable energy-based energy vegetation, together with any extension of transmission and distribution traces, are topic solely to ancillary providers masking such connections, pursuant to the ERC pointers and Open Entry Transmission Service Guidelines.

The ERC, in session with the NREB, TransCo and its concessionaire, supplies the mechanism for the restoration of the price of connection amenities.

In session with stakeholders, the NGCP can also be tasked with figuring out the utmost penetration restrict of intermittent renewable energy-based energy vegetation to the grid, by technical and financial evaluation.³⁵ Certified and registered renewable vitality producing items with intermittent renewable vitality assets are thought of to have Should Dispatch standing primarily based on accessible vitality and luxuriate in the advantages of Precedence Dispatch standing. The PEMC and TransCo or its successors-in-interest implement technical mitigation and enhancements within the system to make sure the protection and reliability of electrical energy transmission.³⁶

The DOE adopts a service contract system for the event of renewable vitality initiatives. Renewable vitality builders are required to safe by the President or the Secretary of Vitality a renewable vitality service contract (RESC) with the Philippine authorities masking a specified interval. Throughout this era, the renewable vitality developer has the unique proper to discover, develop and utilise geothermal, hydropower, wind, ocean and different renewable vitality assets inside a selected space.³⁷

The DOE Certificates of Registration of the RESC serves as proof of entitlement to incentives underneath the regulation.

Land use permits

LGUs have the facility to reclassify lands pursuant to Part 20 of the Native Authorities Code. Classification of agricultural lands refers to their authorized use (whether or not agricultural, residential, industrial or industrial) as contained within the land use plan and is topic to the necessities of Joint Memorandum Round MC-54-1995 issued by the Division of Agrarian Reform (DAR), the Division of Agriculture, the Division of the Inside and Native Authorities, and the Housing and Land Use Regulatory Board.

As well as, any change within the present bodily use of agricultural land for siting functions have to be authorized by the DAR by the land use conversion course of. This is applicable to all agricultural lands, together with these awarded pursuant to Republic Act No. 6657 or the Complete Agrarian Reform Legislation.³⁸

The RESC offers the renewable vitality developer the unique proper to discover, develop or utilise a selected renewable vitality contract space. It’s divided into two levels, that are indicative of anticipated time frames:

1. The pre-development stage includes the preliminary evaluation and feasibility as much as the monetary closing of the renewable vitality undertaking. Validity of the pre-development RESC is, basically, restricted to 2 years.
2. The event or industrial stage includes the event, manufacturing or utilisation of renewable vitality assets, together with the development and set up of related amenities, as much as completion of the commissioning of the facility plant. Validity of the event RESC is, basically, restricted to 5 years.

Nonetheless, the expertise of builders might fluctuate relying on the situation of the location.

Sure vitality initiatives might profit from Govt Order 30 issued by the President on 30 June 2017, requiring involved authorities companies to behave inside 30 days on allow purposes involving vitality initiatives of nationwide significance (EPNS). If no resolution is made inside that time-frame, the applying is deemed authorized. To be thought of an EPNS, energy technology and transmission initiatives should present:

1. a capital funding of no less than 3.5 billion Philippine pesos;
2. a major contribution to the nation’s financial improvement;
3. vital consequential financial influence;
4. a major potential contribution to the nation’s steadiness of funds;
5. a major influence on the setting;
6. complicated technical processes and engineering designs; or
7. vital infrastructure necessities.

Indigenous folks’s rights

The Indigenous Individuals’s Rights Act of 1997 requires builders to make sure that the rights of the indigenous peoples positioned within the proposed renewable vitality service space are protected. That is achieved both by a willpower by the Nationwide Fee on Indigenous Those who the undertaking doesn’t overlap with or have an effect on an ancestral area or that the affected indigenous folks have given their free and prior knowledgeable consent to the undertaking (following notices and hearings).

Expanded Nationwide Built-in Protected Areas System Act of 2018

Beneath the Expanded Nationwide Built-in Protected Areas System Act of 2018 (the NIPAS Act),³⁹ renewable vitality initiatives could also be allowed inside a protected space however must be exterior the ‘strict safety zones’.

The NIPAS Act describes these zones as:

possessing some excellent ecosystem, options and species of natural world of nationwide scientific significance that must be maintained to guard and protect nature in its undisturbed state and to protect ecologically consultant examples of the pure setting to make sure their availability for scientific examine, environmental monitoring, schooling, and for the upkeep of genetic assets in a dynamic and evolutionary state.

Renewable vitality initiatives exterior the strict safety zones are nonetheless required to undertake reduced-impact applied sciences to stop injury to the ecosystem. The proponent is required to publish a bond with the DENR, in an quantity ample to cowl the estimated price of harm upon the undertaking’s decommissioning or price of rehabilitation of the world.

Renewable vitality undertaking improvement

i Possession buildings used within the undertaking financing of renewable vitality initiatives

The next are typical possession buildings used within the undertaking financing of renewable vitality initiatives:

1. possession by undertaking developer who initially funded the pre-development of the undertaking (i.e., securing permits and regulatory approvals);
2. possession by a personal fairness fund or an fairness sponsor (normally to finance the fairness portion of the development price with the intent of promoting the finished undertaking to an operator); and
3. possession curiosity held by the engineering, procurement and building (EPC) contractor, whereby the contractor, in taking up fairness threat within the undertaking, could also be mentioned to be an fairness sponsor and not merely a provider.

Fairness financing could also be break up between frequent inventory and most popular inventory. The popular inventory might or might not have a dividend coupon however is often redeemable. The aim of the redeemable most popular inventory is to permit a money sweep of funds trapped within the undertaking firm when there are not any retained earnings accessible for dividend funds.

ii Principal documentation for renewable undertaking finance

The principal documentation for securing undertaking finance from lenders is just the standard omnibus time period mortgage settlement or a syndicated mortgage settlement for big initiatives.

iii Tenor for time period debt for renewable vitality initiatives and the safety buildings

The utmost tenor provided by Philippine banks is 15 years or much less relying on the undertaking’s underlying offtake contract. Banks will usually not lend for a interval longer than the lifetime of the offtake. Typical safety preparations embody:

1. actual property mortgage over the undertaking land and buildings;
2. pledge over shares within the undertaking firm;
3. deed of task over the facility provide settlement or money flows or financial institution accounts; and
4. joint and solidary surety or company assure from the undertaking sponsor.

iv Distinctive options of renewable undertaking financing

Whereas phrases are usually much like these in different undertaking financing, there could also be conditions when banks introduce modifications primarily based on the economics of the undertaking:

1. Rate of interest: for initiatives which have an extended building interval, the unfold over the benchmark tenor is larger whereas the undertaking is being constructed however steps down when the undertaking is operational.
2. Fairness refinancing: as banks are usually conservative when the undertaking doesn’t have a PSA, they could select to lend solely half of their funding dedication throughout building and lend the steadiness on completion. Because of this the undertaking sponsor should finance nearly all of the undertaking price throughout building, which might then be ‘refinanced’ by the financial institution after building.

v Venture finance contributors and suppliers

Venture contributors are:

1. an fairness or undertaking sponsor;
2. a undertaking developer (who usually will get a free carried curiosity within the undertaking);
3. a financial institution lender;
4. an EPC contractor; and
5. deal advisers (monetary, technical and authorized).

Venture finance is principally offered by improvement banks such because the Improvement Financial institution of the Philippines and Landbank. Alternatively, industrial banks usually faucet into inexperienced bonds or wholesale lending amenities provided by multilateral banks such because the Worldwide Finance Company or the Asian Improvement Financial institution.

vi Distributed renewable vitality

To facilitate the entry of distributed vitality assets into the transmission and distribution programs, the ERC moved to create a further class of licences (or certificates of compliance (COCs)) to cowl distributed technology corporations or these offering distributed vitality assets (DERs) (with this licence class known as COC-DER).

On 7 June 2017, the ERC issued the draft Licensing Guidelines for Distributed Vitality Sources and Microgrid Techniques (the DER Licensing Guidelines), which function an addendum to the 2014 Revised COC Guidelines.⁴⁰

DERs are smaller energy sources that might be aggregated to supply energy essential to satisfy common demand. DERs additionally embody demand- and supply-side assets that may be deployed all through the system of an electrical utility to satisfy the vitality and reliability wants of the purchasers served by the system, together with however not restricted to renewable vitality amenities, managed hundreds (together with electrical car charging), vitality storage and different measures essential to include renewable technology assets.

The proposed DER Licensing Guidelines cowl technology corporations that personal or function any of the next:

1. a DER put in within the premises of, and instantly linked to, the load aspect of an finish person with no interconnection to the transmission or distribution system;
2. a DER put in within the premises of, and instantly linked to, the load aspect of an finish person with an present interconnection to the transmission or distribution system; and
3. a microgrid system or a localised grouping of distributed vitality sources, hundreds and storage mechanisms that may function each as a part of the central grid or independently as an ‘island’.⁴¹

In October 2019, the ERC launched a draft of the foundations that features distributed vitality assets and hybrid vitality programs amongst these needing prior certification from the company earlier than they will function commercially.

vii Vitality storage programs

The DOE can also be placing collectively a ‘good grid’ street map to modernise the nationwide electrical system. Vitality storage programs might be one of many ‘key parts’.

In relation to this, the DOE issued Division Round No. DC2019-08-0012 titled ‘Offering a Framework for Vitality Storage within the Electrical Energy Trade’ on 1 August 2019.

Most initiatives are funded by non-recourse undertaking finance, however it’s doable for banks to require company ensures or recourse to the dad or mum, particularly the place the renewable vitality undertaking shouldn’t be supported by a long-term contract.

Distributed and residential renewable vitality

Mergers and acquisitions

Renewable vitality provide chains

All producers, fabricators, and suppliers of domestically produced renewable vitality gear and parts shall be entitled to the next privileges:⁴²

1. importation freed from tax and obligation, together with VAT;
2. a tax credit score on home capital parts, components and supplies;
3. an earnings tax vacation and exemption; and
4. zero-rated VAT transactions.

i Exemption from tariff duties

The importation of equipment and gear and supplies and components thereof, together with management and communication gear, by a renewable vitality developer shall be exempt from tariff duties within the first 10 years following the issuance of the developer’s certificates of registration, topic to sure situations:

1. the equipment and gear are instantly and truly wanted and shall be used completely within the renewable vitality amenities for the transformation of and supply of vitality to the purpose of use;
2. the importation of supplies and spare components shall be restricted to part supplies and components for the particular equipment or gear authorised to be imported;
3. the type of capital equipment and gear to be imported have to be in accordance with the authorized work and monetary programme of renewable vitality amenities; and
4. the importation shall be coated by delivery paperwork within the identify of the duly registered renewable vitality developer or operator to whom the cargo might be instantly delivered by customs authorities.⁴³

ii Tax credit

A tax credit score equal to 100 per cent of the worth of the VAT and customs duties that might have been paid on the renewable vitality equipment, gear, supplies and components had these gadgets been imported shall be given to all registered renewable vitality builders who buy equipment, gear, supplies and components from a home producer, fabricator or provider topic to the next situations:

1. the gear, equipment and spare components are justifiably wanted and shall be used completely by the registered renewable vitality developer in its registered exercise;
2. the acquisition of the gear, equipment and spare components is constructed from an accredited or recognised home supply, wherein case prior approval by the DOE must be obtained by the native producer, fabricator or provider; and
3. the acquisition of the equipment, gear, materials and components shall be made inside the validity of the renewable vitality service or working contract.⁴⁴

Different key issues

Conclusions and outlook

The Philippines is dealing with tight electrical energy provides within the close to future, with demand growing and an absence of latest technology capability.

Coal continues to be probably the most closely used vitality supply. The truth that it’s an imported useful resource contributes to larger electrical energy prices.

Whereas renewable vitality initiatives have been put in place exactly to decrease electrical energy prices and scale back dependence on imported gasoline, the Philippines at the moment lags behind its neighbours when it comes to renewable vitality penetration. Renewable vitality improvement tends to be difficult given the quite a few and typically complicated regulatory hurdles and consequently undertaking funding may be laborious to return by.

These challenges however, many components – together with the nation’s rising economic system, engaging fiscal and non-fiscal incentives, and the wealth of obtainable renewable assets – mix to make the Philippines one of the crucial engaging locations for renewable vitality undertaking improvement. Figuring out the suitable associate and acquiring the suitable recommendation are key.