The Renewable Energy Law Review: Philippines
In 2008, the Renewable Energy Act (the RE Act)2 was passed to spur development of renewable energy projects and reduce reliance on fossil fuels. The RE Act exists within an energy law ecosystem that includes the Electric Power Industry Reform Act (EPIRA) of 2001,3 which provides the overall restructured regulatory framework for the electric power industry; the Biofuels Act of 2006,4 which encourages the use of biofuels; and the Climate Change Act of 2009,5 which provides the legal mandate to address climate change.
Despite the law's mandate, electric power is still dominated by fossil fuels, especially coal. At present, coal plants account for 39 per cent of the country's 21,241MW of installed energy capacity. Renewable energy accounts for around 31 per cent6 (hydro 15.5 per cent, geothermal 8.1 per cent, solar 3.7 per cent, wind 1.8 per cent and biomass 1 per cent), with the balance accounted for by oil-based sources at 18 per cent, and natural gas at 15 per cent (3,447MW).7
Moreover, coal use is forecast to increase to 59.1 per cent of the total power mix by 2028 to meet the country's surging power demand, driven by strong macroeconomic fundamentals and demographic growth, coupled with government goals to achieve a 100 per cent electrification rate by 2022. Non-hydro renewables generation is also expected to decline slightly to 10.2 per cent of the total power mix by 2028 because of the development of thermal sources.8
As a net importer of fossil fuels, the Philippines is subject to market factors leading to expensive power. To establish and secure a more stable and sustainable power supply, the Philippines is working towards diversifying its energy sources.
The year in review
The Philippines economy suffered a deep recession in 2020 due to the impact of the covid-19 pandemic, with GDP contracting by 9.6 per cent year-on-year. This was the largest annual decline ever recorded since National Accounts data series for the Philippines commenced in 1946.9
With government-imposed strict lockdowns, electricity consumption across the Philippines dropped by 4.04 per cent in 2020. Power consumption stood at 101,756GWh in 2020,10 compared to 106,041GWh in 2019. As expected of the lockdowns, residential use increased while that of industrial and commercial went down.
Some distribution utilities took steps to ease the financial impact on customers by invoking the force majeure provision of their power contracts, reducing fixed charges for generation capacity that was not consumed.11 The government, through the Energy Regulatory Commission (ERC) also directed electricity distribution companies to implement a staggered payment scheme, and deferred the feed-in-tariff charge for a month,12 among other steps.
Efforts to reopen the economy are expected to improve consumption figures. However, new covid-19 outbreaks in early 2021 have resulted in new lockdowns in the capital region and other areas in the country.
On the positive side, the country's installed renewable energy (RE) capacity increased by 16 per cent in 2020, underscoring the growing shift toward cleaner and more sustainable energy sources.13
However, coal maintained its dominance in the power generation mix with a share of 54.6 per cent, followed by natural gas with 21.1 per cent share; and renewable energy (geothermal, hydro, biomass, solar and wind) with 20.8 per cent.14
Energy officials believe that the country's target of a 35 per cent RE share in the power generation mix by 2030 is still achievable despite RE's decreasing share over the years, through the implementation of the Renewable Portfolio Standards (RPS).15
Looking forward, developers will be keenly watching for the DoE's Green Energy Auction Programme, launched in July 2020, which sets the framework for independent power producers to acquire supply from renewable energy projects as the Philippines aims to rebalance the energy mix.16
The policy and regulatory framework
i The policy background
The following fiscal incentives are available for renewable energy developers under Rule 5 Section 13 of the RE Act IRRs:
- income tax holiday for the first seven years of commercial operation;
- duty-free importation of renewable energy machinery, equipment and materials;
- special realty tax rates on equipment and machinery;
- net operating loss carry-over;
- reduced corporate tax rate (10 per cent after income tax holiday);
- accelerated depreciation;
- zero per cent value added tax (VAT) rate;
- cash incentive for renewable energy developers for missionary electrification;
- tax exemption of carbon credits; and
- tax credit on domestic capital equipment and services.
The following incentives and privileges are available under Rule 3 Section 17 of the RE Act IRRs:
- tax rebates for purchases of renewable energy components;
- financial assistance programme;
- exemption from the Universal Charge;
- cash incentive for renewable energy developers for missionary electrification;
- payment of transmission charges; and
- Priority Dispatch and Must Dispatch status for intermittent renewable energy resources.
The general eligibility requirements for incentives are: registration with the DOE; DOE endorsement of the renewable energy developer and its project; and registration with the Board of Investments.17
ii The regulatory framework
Legal framework for renewable energy
Under the Philippine constitution, all natural resources are owned by the state. These include all forces of potential energy such as kinetic energy from water, marine current and wind; thermal energy from solar, ocean, geothermal and biomass sources.18 The constitution also provides that the exploration, development, production, and utilisation of natural resources shall be under the full control and supervision of the state.
The state may directly undertake activities of this kind or it may enter into co-production, joint venture or co-production sharing agreements with Filipino citizens or corporations or associations at least 60 per cent of whose capital is owned by Filipinos.
The DOE interprets the constitution in such a way that foreign ownership for renewable power projects is restricted to 40 per cent.19 In addition, only Filipino citizens or corporations the capital stock of which is owned by Filipino citizens are allowed to own land – an important consideration for renewable energy project development.
Related resource management laws
In addition to the energy-specific laws themselves, there are resource management laws to consider:
- environmental regulations,, including compliance with the Environmental Impact Assessment (EIA) System, implemented primarily by the Department of Environment and Natural Resources (DENR);
- the Local Government Code,20 which directs periodic consultation with the local government units with respect to renewable energy projects within their respective jurisdictions; and
- the Indigenous People's Rights Act.21
Typical renewables sector business models
The following are the four major types of business model for on-grid renewable energy projects.22
After an initial implementation marked by delays and costly procedures, the DOE has discontinued the feed-in tariff23 programme in favour of the more competitive supply auctions.
Power supply agreements with distribution utilities
Requirements for a competitive selection process apply for power supply agreement (PSA)24 contracts pursuant to the 2015 DOE Circular entitled 'Mandating All Distribution Utilities to Undergo Competitive Selection Process in Securing Power Supply Agreements'. PSAs require approval by the ERC.
The net-metering model25 is in general restricted to special-purpose vehicle facilities with an installed capacity of not more than 100kWp. Under the RE Act IRRs, it is mandatory for distribution utilities to enter into net-metering arrangements (without discriminating between end users' requests).
PSAs with commercial bulk consumers
Upon initial implementation of retail competition and open access (RCOA) under the EPIRA, electricity end users with a monthly average peak demand of at least 1MW for the preceding 12 months were deemed 'contestable customers', entitled to source their electricity supply from any supplier of their choice.26 This threshold was subsequently reduced to 750kW, but implementation was stalled by a temporary restraining order issued by the Supreme Court against the DOE and the ERC from implementing mandatory migration of contestable consumers to RCOA. The DOE has since made migration voluntary. Department Circular No. DC 2019-07-001 issued in late 2019 also allows contestable customers use of transmission and distribution systems and to register voluntarily as a trading participant in the wholesale electricity spot market (WESM).
Department of Energy
The DOE is the lead agency mandated to implement the RE Act.27 In addition to its functions under existing laws, the DOE shall:
- promulgate the RPS rules;
- establish the renewable energy market (REM) and direct the Philippine Electricity Market Corporation (PEMC) to implement changes to incorporate the rules specific to the operation of the REM under the WESM;
- supervise the establishment of the RE Registrar by the PEMC;
- promulgate the appropriate implementing rules and regulations necessary to achieve the objectives of the GEOP;
- determine the minimum percentage of generation that may be sourced from renewable energy resources available from the National Power Corporation Small Power Utilities Group (NPC-SPUG) or its successors-in-interest or qualified third parties in off-grid areas;
- issue certifications to renewable energy developers, local manufacturers, fabricators, and suppliers of locally produced renewable energy equipment to serve as basis for their entitlement to incentives, as provided for in the RE Act;
- together with relevant government agencies, formulate and implement the NREP;
- administer the Renewable Energy Trust Fund as a special account in any of the government financial institutions identified under Section 29 of the RE Act;
- recommend and endorse renewable energy projects applying for financial assistance with government financial institutions pursuant to Section 29 of the RE Act;
- encourage the adoption of waste-to-energy technologies pursuant to Section 30 of the RE Act;
- determine the mechanisms for the grant of subsidies to electricity consumers of host local government units (LGUs), together with the DOF, ERC and the National Renewable Energy Board (NREB); and
- perform such other functions as may be necessary, to attain the objectives of the RE Act.28
The NREB acts as a collegial body primarily tasked with recommending policies to the DOE and monitoring the implementation of the RE Act. It is composed of government and private members appointed by the President.29
Renewable Energy Management Bureau
The RE Act also established the Renewable Energy Management Bureau under the DOE to develop, formulate and implement policies, plans and programmes to accelerate the development, transformation, utilisation and commercialisation of renewable energy resources and technologies, among other functions.30
The ERC, in consultation with the NREB and the electric power industry participants, establishes net metering interconnection standards and pricing methodologies and other commercial arrangements necessary to ensure the success of net-metering for the renewable energy programme.31
In the performance of its mandate to provide missionary electrification, the NPC-SPUG or its successors-in-interest or qualified third parties in off-grid areas sources a minimum percentage of its total annual generation from available renewable energy resources in the area concerned, as may be determined by the DOE.32
Renewable energy market and certificate-based tracking
To expedite compliance with the establishment of the RPS, the DOE is mandated to establish the REM. The REM is a sub-market of the WESM, where renewable energy certificates (RECs) may be traded.33
RECs showing the energy sourced, produced, and sold or used are issued by the RE Registrar to electric power industry participants. The RE Registrar is mandated to issue, keep, and verify RECs corresponding to energy generated from eligible renewable energy facilities.34
Renewable energy integration with the electricity grid
Section 8 of the RE Act IRRs requires the National Transmission Corporation (TransCo) and the NGCP, which is the grid concessionaire, and all distribution utilities to:
- include the connection facilities required for renewable energy-based power facilities in their transmission and distribution development plans, subject to approval by the DOE; and
- effect connection of renewable energy-based power facilities with the transmission or distribution system upon receipt of a formal notice of approval by the DOE and the start of commercial operations of the renewable energy-based power facilities.
The connection facilities of renewable energy-based power plants, including any extension of transmission and distribution lines are subject only to ancillary services covering such connections, pursuant to the ERC guidelines and Open Access Transmission Service Rules.
The ERC, in consultation with the NREB, TransCo and its concessionaire ,provides the mechanism for the recovery of the cost of connection facilities.
In consultation with stakeholders, the NGCP is also tasked with determining the maximum penetration limit of intermittent renewable energy-based power plants to the grid, through technical and economic analysis.35 Qualified and registered renewable energy generating units with intermittent renewable energy resources are considered to have Must Dispatch status based on available energy and enjoy the benefits of Priority Dispatch status. The PEMC and TransCo or its successors-in-interest implement technical mitigation and improvements in the system to ensure the safety and reliability of electricity transmission.36
The DOE adopts a service contract system for the development of renewable energy projects. Renewable energy developers are required to secure through the President or the Secretary of Energy a renewable energy service contract (RESC) with the Philippine government covering a specified period. During this period, the renewable energy developer has the exclusive right to explore, develop and utilise geothermal, hydropower, wind, ocean and other renewable energy resources within a particular area.37
The DOE Certificate of Registration of the RESC serves as proof of entitlement to incentives under the law.
Land use permits
LGUs have the power to reclassify lands pursuant to Section 20 of the Local Government Code. Classification of agricultural lands refers to their legal use (whether agricultural, residential, commercial or industrial) as contained in the land use plan and is subject to the requirements of Joint Memorandum Circular MC-54-1995 issued by the Department of Agrarian Reform (DAR), the Department of Agriculture, the Department of the Interior and Local Government, and the Housing and Land Use Regulatory Board.
In addition, any change in the current physical use of agricultural land for siting purposes must be approved by the DAR through the land use conversion process. This applies to all agricultural lands, including those awarded pursuant to RA 6657 or the Comprehensive Agrarian Reform Law.38
The RESC gives the renewable energy developer the exclusive right to explore, develop or utilise a particular renewable energy contract area. It is divided into two stages, which are indicative of expected time frames:
- The pre-development stage involves the preliminary assessment and feasibility up to the financial closing of the renewable energy project. Validity of the pre-development RESC is in general limited to two years.
- The development or commercial stage involves the development, production or utilisation of renewable energy resources, including the construction and installation of relevant facilities, up to completion of the commissioning of the power plant. Validity of the development RESC is in general limited to five years.
However, the experience of developers may vary depending on the location of the site.
Certain energy projects may benefit from Executive Order 30 issued by the President on 30 June 2017, requiring concerned government agencies to act within 30 days on permit applications involving energy projects of national significance (EPNS). If no decision is made within that time frame, the application is deemed approved. To be considered an EPNS, power generation and transmission projects must show:
- a capital investment of at least 3.5 billion Philippine pesos;
- a significant contribution to the country's economic development;
- significant consequential economic impact;
- a significant potential contribution to the country's balance of payments;
- a significant impact on the environment;
- complex technical processes and engineering designs; or
- significant infrastructure requirements.
Indigenous people's rights
The Indigenous People's Rights Act of 1997 requires developers to ensure that the rights of the indigenous peoples located in the proposed renewable energy service area are protected. This is achieved either by a determination by the National Commission on Indigenous People that the project does not overlap with or affect an ancestral domain or that the affected indigenous people have given their free and prior informed consent to the project (following notices and hearings).
Under the Expanded National Integrated Protected Areas System Act of 2018 (the NIPAS Act),39 renewable energy projects may be allowed within a protected area but should be outside the 'strict protection zones'.
The NIPAS Act describes these zones as:
possessing some outstanding ecosystem, features and species of flora and fauna of national scientific importance that should be maintained to protect and preserve nature in its undisturbed state and to preserve ecologically representative examples of the natural environment to ensure their availability for scientific study, environmental monitoring, education, and for the maintenance of genetic resources in a dynamic and evolutionary state.
Renewable energy projects outside the strict protection zones are nonetheless required to adopt reduced-impact technologies to prevent damage to the ecosystem. The proponent is required to post a bond with the DENR, in an amount sufficient to cover the estimated cost of damage upon the project's decommissioning or cost of rehabilitation of the area.
Renewable energy project development
i Ownership structures used in the project financing of renewable energy projects
The following are typical ownership structures used in the project financing of renewable energy projects:
- ownership by project developer who initially funded the pre-development of the project (i.e., securing permits and regulatory approvals);
- ownership by a private equity fund or an equity sponsor (usually to finance the equity portion of the construction cost with the intent of selling the completed project to an operator); and
- ownership interest held by the engineering, procurement and construction (EPC) contractor, whereby the contractor, in taking on equity risk in the project, may be said to be an equity sponsor and no longer simply a supplier.
Equity financing may be split between common stock and preferred stock. The preferred stock may or may not have a dividend coupon but is typically redeemable. The purpose of the redeemable preferred stock is to allow a cash sweep of funds trapped in the project company when there are no retained earnings available for dividend payments.
ii Principal documentation for renewable project finance
The principal documentation for securing project finance from lenders is simply the typical omnibus term loan agreement or a syndicated loan agreement for large projects.
iii Tenor for term debt for renewable energy projects and the security structures
The maximum tenor offered by Philippine banks is 15 years or less depending on the project's underlying offtake contract. Banks will generally not lend for a period longer than the life of the offtake. Typical security arrangements include:
- real estate mortgage over the project land and structures;
- pledge over shares in the project company;
- deed of assignment over the power supply agreement or cash flows or bank accounts; and
- joint and solidary surety or corporate guarantee from the project sponsor.
iv Unique features of renewable project financing
While terms are generally similar to those in other project financing, there may situations when banks introduce modifications based on the economics of the project:
- Interest rate: for projects that have a long construction period, the spread over the benchmark tenor is higher while the project is being constructed but steps down when the project is operational.
- Equity refinancing: as banks tend to be conservative when the project does not have a PSA, they may choose to lend only half of their funding commitment during construction and lend the balance on completion. This means that the project sponsor will have to finance the majority of the project cost during construction, which would then be 'refinanced' by the bank after construction.
v Project finance participants and providers
Project participants are:
- an equity or project sponsor;
- a project developer (who typically gets a free carried interest in the project);
- a bank lender;
- an EPC contractor; and
- deal advisers (financial, technical and legal).
Project finance is principally provided by development banks such as the Development Bank of the Philippines and Landbank. Alternatively, commercial banks typically tap into green bonds or wholesale lending facilities offered by multilateral banks such as the International Finance Corporation or the Asian Development Bank.
vi Distributed renewable energy
To facilitate the entry of distributed energy resources into the transmission and distribution systems, the ERC moved to create an additional category of licences (or certificates of compliance (COCs)) to cover distributed generation companies or those providing distributed energy resources (DERs) (with this licence category referred to as 'COC-DER').
On 7 June 2017, the ERC issued the draft 'Licensing Rules for Distributed Energy Resources and Microgrid Systems' (the DER Licensing Rules), which serve as an addendum to the 2014 Revised COC Rules.40
DERs are smaller power sources that could be aggregated to provide power necessary to meet regular demand. DERs also include demand- and supply-side resources that can be deployed throughout the system of an electric utility to meet the energy and reliability needs of the customers served by the system, including, but not limited to, renewable energy facilities, managed loads (including electric vehicle charging), energy storage and other measures necessary to incorporate renewable generation resources.
The proposed DER Licensing Rules cover generation companies that own or operate any of the following:
- a DER installed in the premises of, and directly connected to, the load side of an end user with no interconnection to the transmission or distribution system;
- a DER installed in the premises of, and directly connected to, the load side of an end user with an existing interconnection to the transmission or distribution system; and
- a microgrid system or a localised grouping of distributed energy sources, loads and storage mechanisms that can operate both as part of the central grid or independently as an 'island'.41
In October 2019, the ERC released a draft of the rules that includes distributed energy resources and hybrid energy systems among those needing prior certification from the agency before they can operate commercially.
vii Energy storage systems
The DOE is also putting together a 'smart grid' road map to modernise the national electric system. Energy storage systems will be one of the 'key elements'.
In relation to this, the DOE issued Department Circular No. DC2019-08-0012, Providing a Framework for Energy Storage in the Electric Power Industry on 1 August 2019.
Most projects are funded by non-recourse project finance, but it is possible for banks to require corporate guarantees or recourse to the parent, especially where the renewable energy project is not supported by a long-term contract.
Renewable energy manufacturing
All manufacturers, fabricators, and suppliers of locally produced renewable energy equipment and components shall be entitled to the following privileges:42
- importation free of tax and duty, including VAT;
- a tax credit on domestic capital components, parts, and materials;
- an income tax holiday and exemption; and
- zero-rated VAT transactions.
i Exemption from tariff duties
The importation of machinery and equipment and materials and parts thereof, including control and communication equipment, by a renewable energy developer, shall be exempt from tariff duties in the first 10 years following the issuance of the developer's certificate of registration, subject to certain conditions:
- the machinery and equipment are directly and actually needed and shall be used exclusively in the renewable energy facilities for the transformation of and delivery of energy to the point of use;
- the importation of materials and spare parts shall be restricted to component materials and parts for the specific machinery or equipment authorised to be imported;
- the kind of capital machinery and equipment to be imported must be in accordance with the approved work and financial programme of renewable energy facilities; and
- the importation shall be covered by shipping documents in the name of the duly registered renewable energy developer or operator to whom the shipment will be directly delivered by customs authorities.43
ii Tax credits
A tax credit equivalent to 100 per cent of the value of the VAT and customs duties that would have been paid on the renewable energy machinery, equipment, materials and parts had those items been imported shall be given to all registered renewable energy developers who purchase machinery, equipment, materials and parts from a domestic manufacturer, fabricator or supplier subject to the following conditions:
- the equipment, machinery and spare parts are justifiably needed and shall be used exclusively by the registered renewable energy developer in its registered activity;
- the purchase of the equipment, machinery and spare parts is made from an accredited or recognised domestic source, in which case prior approval by the DOE should be obtained by the local manufacturer, fabricator or supplier; and
- the acquisition of the machinery, equipment, material and parts shall be made within the validity of the renewable energy service or operating contract.44
Conclusions and outlook
The Philippines is facing tight electricity supplies in the near future, with demand increasing and an absence of new generation capacity.
Coal is still the most heavily used energy source. The fact that it is an imported resource contributes to higher electricity costs.
While renewable energy initiatives have been put in place precisely to lower electricity costs and reduce dependence on imported fuel, the Philippines currently lags behind its neighbours in terms of renewable energy penetration. Renewable energy development tends to be challenging given the numerous and sometimes confusing regulatory hurdles and consequently project funding can be hard to come by.
These challenges notwithstanding, many factors, including the country's growing economy, attractive fiscal and non-fiscal incentives, and the wealth of available renewable resources, combine to make the Philippines one of the most attractive destinations for renewable energy project development. Identifying the right partner and obtaining the right advice are key.
1 Ronald B Dime and Edward Albert E Eviota are partners at Dime & Eviota Law Firm. The authors wish to thank attorney Mary Salgado and John Balce of FTI Consulting Inc for their contributions to the research.
2 Republic Act No. 9513.
3 Republic Act No. 9136.
4 Republic Act No. 9367.
5 Republic Act No. 9729.
6 DOE, Power Development Plan, 2017–2040.
8 Fitch Solutions, 'Philippines Power Expansion To Continue Being Driven By Coal' (20 August 2019); https://www.fitchsolutions.com/corporates/utilities-power/philippines-power-expansion-continue-being-driven-coal-20-08-2019.
10 The 2020 Power Statistics report of the Philippine Department of Energy (DOE).
14 The 2020 Power Statistics report of the Philippine Department of Energy (DOE).
17 Rule 3 Section 18, RE Act IRRs.
18 Article XII, Section 2 of the Philippine Constitution.
19 Rule 6 Section 19, RE Act IRRs.
20 Republic Act No. 7160.
21 Republic Act No. 8371.
22 GIZ, Solar PV Guidebook Philippines (2014).
23 Section 7, RE Act.
24 Section 6, RE Act.
25 Section 10, RE Act.
26 Section 9, RE Act together with Section 31e, EPIRA.
27 Section 5, RE Act.
28 Rule 8 Section 22, RE Act IRRs.
29 Section 27, RE Act.
30 Section 32, RE Act.
31 Section 10, RE Act.
32 Rule 4 Section 12, RE Act IRRs.
33 Rule 3 Section 10, RE Act IRRs.
34 Rule 3 Section 11, RE Act IRRs.
35 Section 20, RE Act.
36 Rule 5 Section 17, RE Act IRRs.
37 Section 3.29, Department Circular No. DC2019-10-0013 or the Omnibus Guidelines Governing the Award and Administration of Renewable Energy Service and Operating Contracts and the Registration of Renewable Energy.
38 Department of Justice Opinion No. 44, series of 1990.
39 Republic Act No. 11038.
40 2014 Revised Rules for the Issuance of Certificates of Compliance for Generation Companies, Qualified End-Users and Entities with Self-Generation Facilities.
42 Rule 5 Section 15, RE Act IRRs.
43 Rule 5 Section 13(B), RE Act IRRs.
44 Rule 5 Section 13(I), RE Act IRRs.