The Department of Justice (DOJ) recently clarified that the exploration, development and utilisation of solar, wind, hydro and ocean or tidal energy are not subject to the 40% foreign equity limitation under the Philippine Constitution, which governs the exploitation of natural resources in the country. This clarification was in DOJ Opinion No. 21, issued on 29 September 2022 at the request of the Department of Energy.
For reference, section 2, article XII, of the constitution provides that: “All lands of the public domain, waters, minerals, coal, petroleum and other mineral oils, all forces of potential energy, fisheries, forests or timber, wildlife, flora and fauna, and other natural resources are owned by the state.
“With the exception of agricultural lands, all other natural resources shall not be alienated. The exploration, development, and utilisation of natural resources shall be under the full control and supervision of the state.
“The state may directly undertake such activities, or it may enter into co-production, joint venture or production-sharing agreements with Filipino citizens, or corporations or associations at least 60% of whose capital is owned by such citizens. Such agreements may be for a period not exceeding 25 years, renewable for not more than 25 years, and … in cases of water rights for irrigation, water supply, fisheries or industrial uses other than the development of water power, beneficial use may be the measure and limit of the grant.”
The latest opinion now states that solar, wind, hydro and ocean or tidal energy should not be subject to the 40% foreign equity limitation of the constitution because such energy resources are beyond the scope of the terms “natural resources” and “all forces of potential energy” as contemplated under the constitutional provision.
In 2008, the Renewable Energy Act was passed to promote the development, utilisation and commercialisation of renewable energy resources, including but not limited to biomass, solar, wind, hydro, geothermal and ocean energy resources. In 2009, the implementing rules and regulations of the Renewable Energy Act were issued by the Department of Energy, interpreting state ownership provision of all forces of potential energy in the constitution to include kinetic energy from water, marine, current and wind, and thermal energy from solar, ocean, geothermal and biomass.
The Water Code provides a specific framework regarding the appropriation and control of water resources in the Philippines. The Water Code limits the appropriation of hydro and ocean or tidal energy sources to Filipino citizens if directly harvested from the source.
Under DOJ Opinion No. 21, “natural resources” as referenced in the constitution pertains to properties that can be owned and acquired by the state, pursuant to its power of dominium, and all lands of public domain that belong to the state, pursuant to the Regalian Doctrine, such as lands, fisheries, forests and wildlife. But this does not include the sun, wind or ocean, which are not subject to appropriation.
The DOJ clarified that DOJ Opinion No. 21 must be understood in the context of:
- The implementing rules and regulations of the Renewable Energy Act, which include inexhaustible natural resources as the term is used in section 2, article XII of the constitution. The implementing rules and regulations include kinetic energy from water, marine current and wind, and thermal energy from solar, ocean, geothermal and biomass in terms of “all forces of potential energy”.
- The Water Code and applicable jurisprudence, which limits the appropriation of hydro and ocean or tidal energy sources to Filipino citizens if directly harvested from the source.
Opinion No. 21 states that unless the implementing rules and regulations of the Renewable Energy Act are amended, and the Water Code and pertinent jurisprudence are repealed or reversed, the current foreign equity restrictions shall remain in effect.
On 24 October, the DOJ issued two further opinions on the matter:
- DOJ Opinion No. 23, in response to the Department of Trade and Industry’s proposal to amend Resolution No. 01 series of 2022 of the Economic Development Centre supporting 100% foreign participation in the generation of electricity from renewable and inexhaustible resources; and
- DOJ Opinion No. 24, at the request of the Department of Finance, also in connection with recommendations to clarify that solar, wind and tidal energies are not covered by the constitutional prohibition and could therefore be fully liberalised.
In both opinions, the DOJ reiterated its position that solar, wind, hydro and ocean or tidal energy sources are beyond the ambit of the term “natural resources” in the constitution, and the term “all forces of potential energy” is to be understood in its technical sense, which necessarily excludes kinetic energy. Thus, the exploration, development and utilisation of solar, wind, hydro and ocean or tidal energy should not be subject to a 40% foreign equity limitation.
However, the DOJ clarified that with respect to hydropower or hydroelectric power, the Water Code and jurisprudence continue to prevail unless repealed or reversed. The DOJ explained that the generation of hydroelectric power entails the use of a dam or diversion structure to alter the flow of a river or any inland body of water to generate kinetic energy from the rush of water as it flows downstream through the dam.
Under the Water Code, only Filipino citizens and entities can directly appropriate such waters, such as by using a dam for purposes of power generation. The DOJ further opined that this nationality requirement is understandable because rivers, lakes, streams and other inland bodies of water can dry up in extreme weather conditions or climate change (as opposed to sea and ocean) – and can therefore be considered exhaustible resources.
However, once water passes through the dam and rushes downstream, the energy produced by it is considered kinetic energy, which is not within the ambit of the term “natural resources” as used in the constitution. Therefore, the constitutional limitation on foreign equity participation does not cover exploration, development and utilisation of such kinetic energy for power generation. Following these DOJ issuances, the Department of Energy issued a circular on 15 November 2022 that amended section 19 of the implementing rules and regulations of the Renewable Energy Act, which took effect on 8 December 2022.
Section 19(b) clarifies: “The state may directly undertake the exploration, development, production and utilisation of renewable energy resources, or it may enter into renewable energy service or operating contracts with Filipino and/or foreign citizens or Filipino and/or foreign-owned corporations or associations.”
Although the liberalisation of renewable energy sources has taken a step forward, the following activities relating to renewable energy are still reserved for Filipino citizens, or corporations or associations, at least 60% of whose capital is owned by Filipinos:
- Appropriation of water direct from a natural source;
- Exploration, development and utilisation of geothermal resources, except for financial or technical assistance agreements covering large-scale exploration, development and utilisation of geothermal resources; and
- Utilisation of timber and non-timber forest products originating from lands of public domain and private lands where the collection, harvesting and processing of timber or wood are permitted, or the utilisation of naturally occurring flora on lands of the public domain.
Despite the DOJ’S recent progressive opening of 100% of renewable energy sources in the Philippines to foreign investors, there remain other energy areas that other departments of the executive branch may want to clarify. One example is a geothermal energy. Since passage of the Renewable Energy Act, with its associated rules, regulations and guidelines, numerous geothermal renewable service contracts have been awarded to developers in various areas.
But development of geothermal energy in the country still faces impediments, such as the need to harmonise provisions of the National Integrated Protected Areas System of 1992, and Indigenous People’s Rights Act of 1997, with relevant energy policies and programmes more comprehensively responding to environmental and sociocultural concerns. As conceded by the Department of Energy, harmonisation is a critical factor in exploring and developing geothermal resources, especially in protected areas.
In early October 2022, the Secretary of Energy warned that the Philippines’ power supply for 2023 is likely to be difficult, considering that some hydro plants are expected to be unable to deliver electricity.
As the country remains dependent on fossil fuels for electricity, it is hoped that DOJ Opinion No. 21 will open more renewable energy projects, particularly to foreign investment. This is consistent with the 2023-2040 action plan of the Department of Energy, and increases flexibility in power generation.
In this context, the amendment to the implementing rules and regulations of the Renewable Energy Act is a positive step towards allowing greater foreign investment in renewable energy generation projects. Nevertheless, it is just a first step.
CRUZ MARCELO & TENEFRANCIA
9-12/F, One Orion,
11th Avenue corner University Parkway
Bonifacio Global City, Taguig City – 1634,
Metro Manila, Philippines