As the world battles with the issue of climate change, India has decided to slowly migrate from conventional forms to clean renewable sources of electricity generation. In 2008, the federal and state governments started a major initiative called the National Solar Mission while launching India’s National Action Plan on Climate Change. With its objective to migrate to clean renewable energy, the country has set a target to achieve a capacity of 450GW by 2030. India presently has more than 100GW of installed capacity at renewable energy plants, with about 80GW comprising solar and wind facilities.
India has both federal and unitary structures of governance. Thus, the constitution specifies the distribution of executive and legislative powers between the union and the states. In this separation of powers, electricity features in the concurrent list of the constitution of India. Hence, both the national parliament and the state legislatures have the right to formulate laws on the subject. However, in case of any conflict, the provisions of the central laws shall override the state laws.
The principal legislation that governs the electricity sector in India is the Electricity Act, 2003 (Electricity Act). At present, there is no specific legislation governing renewable energy in India. Since renewable energy is part of the electricity sector, it is governed under the provisions of the Electricity Act, which provides a framework for the generation, transmission, distribution, trading and use of electricity.
The Ministry of Power administers the implementation of the Electricity Act and primarily plays a supervisory role in overseeing the development of the electricity sector in the country. However, the development and growth of renewable energy in India are administered by the Ministry of New and Renewable Energy, which functions as the nodal agency of the government for all matters relating to renewable energy developments.
India is blessed with various sources of renewable energy, among which solar and wind are the most prevalent. Since 2015, the federal government and most of the state governments have issued favourable policies supporting private sector investment (including foreign investment) in the renewable energy sector. The Electricity Act requires the federal government to issue a National Electricity Policy in consultation with the state governments, which lays down the guidelines for the accelerated development of the electricity sector in the country, with the optimal utilisation of resources such as coal, natural gas, nuclear materials, hydro and renewable sources of energy. The last National Electricity Policy was issued in 2005.
The government also notifies a National Electricity Plan once every five years, which lays down a short-term framework for the electricity sector. In May, the government issued a draft National Electricity Policy 2021, which is yet to be notified. The Electricity Act also requires the government to publish a National Tariff Policy, which was first issued in 2006 and was revised in 2016. It is noteworthy that the National Tariff Policy 2016 emphasised the promotion of electricity generation through renewable energy sources, and encouraged private sector participation in setting up renewable energy plants.
In the past, to encourage wind and solar project development, the government had announced a generation-based incentive scheme that entitles generators to monetary incentives for each unit of electricity fed into the grid during the first 10 years of operations. Generators are also entitled to an accelerated depreciation benefit, which allows the commercial and industrial users of solar power in India to depreciate their investment in wind and solar at a much higher rate than general fixed assets. Regulatory commissions set up under the Electricty Act have issued regulations that mandate a minimum level of renewable energy to be purchased by distribution licensees as part of their total demand, to ensure the wider adoption of electricity generated from renewable sources.
Most state governments with the rich potential of renewable energy sources have issued specific policies to attract private investment in wind and solar. These policies provide benefits such as easier access to land acquisition for setting up of projects, faster conversion of land use to suit the development of renewable energy projects, preferential procurement of renewable power by state distribution licensees, preferential allotment of evacuation capacities, and hassle-free transmission infrastructure.
One of the prime incentives that has enabled large-scale growth of solar power in India is the grant of “must-run” status to wind and solar power plants. Unlike the two-part tariff of conventional power plants, both wind and solar power plants have a single-part tariff. Hence, their revenue is linked to generation and onward transmission. The must-run status ensures that the wind and solar plants are not subjected to unwarranted backdown or curtailment due to congestion in grid infrastructure. The Ministry of Power, from time to time by notification, has waived the interstate transmission system charges, through the central grid, of electricity generated from solar and wind sources of energy.
In India, electricity is a highly regulated sector. The Electricity Act sets the framework for setting up electricity regulatory commissions at the central and state levels, i.e. the Central Electricity Regulatory Commission and the State Electricity Regulatory Commissions. The commissions enjoy legislative and judicial powers, issue regulations and subordinate legislation, and have judicial powers to preside over disputes between generators and distribution licensees, or distributions licensees and consumers. Central or state commission orders can be appealed before the Appellate Tribunal for Electricity (APTEL), a specialised body to review disputes pertaining to electricity. The decisions of the APTEL may be challenged before the Supreme Court of India.
The central and state commissions discharge various functions including regulating tariffs for sale of electricity (at central and state levels), regulating the nature of procurement of electricity generated from various sources (including renewable sources), adjudicating disputes, regulating electricity transmission and issuing licences. The Electricity Act provides for two methods of tariff discovery – the first is a tariff determined by the central and state commissions under various tariff regulations issued by them, and the second is a tariff discovered through competitive bidding. The competitive bids are conducted under standard bidding guidelines and standard bidding documents issued by the federal government.
The central commission presently fixes generic tariffs for renewable plants based on parameters fixed under the Central Electricity Regulatory Commission (Terms and Conditions for Tariff Determination from Renewable Energy Sources) Regulations, 2017. This regulation defines “renewable energy” as grid quality electricity generated from renewable energy sources. The term “renewable energy sources” has been further defined in the regulation to include small hydro, wind, solar including its integration with combined cycle, biomass, biofuel cogeneration, urban or municipal waste and other sources as approved by the Ministry of New and Renewable Energy.
Similarly, the state commissions, based on fixed generic parameters or cost components set out under tariff determination regulations, arrive at a generic tariff determined through a public hearing process. The generators are free to adopt such tariffs and agree to sell power to a distribution licensee. The power purchase agreements for such projects are further filed before the state commission for consenting and approval. Once approved, a generator is entitled to supply power to the distribution licensee at the tariff agreed under the agreement. In case of a tariff discovered through the competitive bidding route, the act provides that the same shall be adopted by the central or state commission, and the agreement executed between generator and licensee be approved. These power purchase agreements have a very robust payment mechanism secured through a letter of credit issued by the procurer (distribution licensee) in favour of generation.
The federal government introduced the Electricity (Amendment) Bill, 2020, to propose amendments that are focused on growth of renewable energy sector. For instance, the constitution of the Electricity Contract Enforcement Authority that shall have the sole authority to adjudicate disputes emerging from power purchase agreements, make establishment of payment security mechanism under power purchase contracts mandatory, levy of penalty on distribution licensees for not adhering to renewable purchase obligations, and empowering the federal government to notify a National Renewable Energy Policy and prescribe a minimum renewable purchase obligation.
This bill, the draft National Electricity Policy 2021, and other policies are expected to bring about the much needed change to enhance energy efficiency to meet technological advancements and climate change goals.
2/F, Block D, the MIRA
Mathura Road, Ishwar Nagar
New Delhi, 110 065, India
Tel: +91 11 4782 1000
The government of Indonesia has shown a serious commitment to achieve its 23% renewable energy utilisation target in 2025 by giving more relaxed rules and opportunities to investors. The Directorate General of New, Renewable Energy and Energy Conservation (Direktorat Jenderal Energi Baru Terbarukan dan Konservasi Energi, or DJEBTKE) recently announced that Indonesia managed to generate 217MW in the first semester of 2021 from hydro, solar, geothermal and bioenergy-based power plants. The DJEBTKE also states that it is now focusing on promoting a greater use of solar power. Despite its huge solar power potential (up to 207.8GW of potential capacity), the country still shows very low utilisation of solar energy (only 0.1 %).
From a regulatory perspective, the government has set a positive momentum for investments in Indonesian renewable energy-based power generation. For example, the Minister of Energy and Mineral Resources (MEMR) has issued a regulation on rooftop solar power plants connected to the electricity grid of holders of an electricity supply business licence for public interest in August. The MEMR and the State Power Company (Perusahaan Listrik Negara, or PLN) has also stipulated its long-awaited electricity supply business plan for 2021-2030. The government strongly anticipates that the above-mentioned new regulatory framework will effectively stimulate the increased use of clean energy, and eventually investment in the renewable energy sector.
Investing in renewable energy
Investments in the renewable energy sector are supervised by the MEMR (together with its Directorate General of Electricity and the DJEBTKE) and the Investment Co-ordinating Board, and regulated under the following:
- Law No. 25 of 2007 on investments;
- Presidential Regulation No. 10 of 2021 on investment business activities (as amended);
- Law No. 30 of 2007 on energy (as amended);
- Law No. 30 of 2009 on electricity (as amended) (Electricity Law); and
- MEMR Regulation No. 50 of 2017 on the utilisation of renewable energy sources for electricity supply (as amended).
The regulatory framework for the renewable energy sector typically includes the following key elements:
(1) Foreign ownership limitation. The government has relaxed certain foreign ownership restrictions. The following power sectors are now open to 100% foreign ownership: (i) power generation with a capacity of more than 1MW for all types of energy (those with a capacity of less than 1MW remain closed to foreign investors); (ii) power transmission; and (iii) power distribution.
(2) The PLN and independent power producers (IPPs). As a general rule, the government does not allow an IPP to sell electricity to end customers directly. Instead, the government gives priority and privilege to the PLN to supply electricity to end customers. The most common business structure in the power sector is that an IPP enters into a power purchase agreement with the PLN to develop, construct and operate a power plant and supply electricity to the PLN. After the PLN receives the electricity from the IPP, it will further distribute and sell it to the public.
(3) Procurement. Except for certain specific circumstances set by the regulation for direct selection or appointment, procurement for public infrastructure must be carried out through public tender. The procedures, requirements and technical procurement documents are specified in the regulation of the board of directors of the PLN on the purchase of electricity from new and renewable energy-based power plants, dated 28 August 2020. An IPP in the renewable energy sector needs to be registered in the selected provider list, a list issued and maintained by the PLN containing preselected goods and service providers. This list helps the PLN to speed up the process of selecting fit and qualified providers, allowing it to shortlist prequalified providers for a limited tender or directly appoint a qualified provider for PLN projects.
(4) Purchase price of renewable energy-based power. The purchase price proposed by an IPP to the PLN is subject to the MEMR’s approval. The purchase price is set based on negotiation between the IPP and PLN, or the maximum benchmark price fixed by the government, which is much dependent on the renewable energy type and the PLN’s generation cost as approved by the MEMR (excluding power distribution costs) at the national and local or regional levels. The government recently set a new benchmark price for power generation cost, which is lower in some regions than the previous benchmark. This could be challenging for investors in the renewable energy-based power generation industry.
(5) Purchasing scheme. The government applies different structures or schemes when purchasing power supplies from IPPs. Unlike the purchase of non-renewable energy-based power, which must be made through the “build, own, operate and transfer” scheme, renewable energy-based power offers a more attractive scheme by allowing “build, own and operate” subject to negotiation with the PLN. The main difference between the two is that in the latter scheme, the IPP is not obligated to transfer the project to the PLN upon the expiry of the power purchase agreement.
With the purchasing scheme for renewable energy-based power generation, investors seem to be adopting a new calculation on the internal rate of return by no longer taking into account the cost component of asset transfers, which may increase project bankability.
For rooftop solar power plants, the most popular business scheme in Indonesia is to adopt an operating lease arrangement. A rooftop solar power plant developer leases its rooftop solar power plant equipment to a consumer, with the rental fee as the underlying tariff payment, on a contractual basis. The MEMR regulation provides further relaxation.
Customers can now receive a 100% credit (previously limited to only 65%) on the excess electricity exported through their installed rooftop solar power plants to the PLN grid, or grid belonging to the holder of power supply for the public interest business licence (izin usaha penyediaan tenaga listrik untuk kepentingan umum, or IUPTLU), leading to a greater reduction in their electricity bills.
Shares transfer restriction. The MEMR regulation prohibits sponsors (other than geothermal-based IPPs) from transferring their shares before the IPP reaches the commercial operation date, except for transfer to an affiliated party in which such sponsors or shareholders hold more than 90% of the shares, subject to PLN approval.
Local content requirement. The Electricity Law requires the prioritisation of domestic products and services (local content). Therefore, foreign products and potential resources are only allowed if domestic products or resources are not available. Regarding renewable energy-based power generation, the Minister of Industry sets the minimum percentage of local content to be used, depending on the type of renewable energy.
In practice, renewable energy investors often encounter difficulty complying with the prescribed local content policy due to the unavailability of the domestic industry supplying the necessary components. To date, there has been no update on whether the government will loosen the relevant policy anytime soon.
Currently, there are two new regulations for the renewable energy sector pending finalisation by the government, namely a presidential regulation on the purchase of renewable energy-based power by the PLN, and a bill on new energy and renewable energy. Some of the significant points proposed for the new regulations include a change of the purchase price scheme (i.e. from power generation cost-benchmark price to the feed-in tariff), and a better method to calculate the renewable energy generation costs.
Many stakeholders hope that these regulations will directly stimulate renewable energy investment in Indonesia by providing more attractive and bankable power pricing schemes, and promoting a more rapid transition from conventional energy to renewable energy, leading to favourable business opportunities for investors.
The government is also planning to apply carbon pricing instruments (i.e. carbon emissions trading and carbon taxes) to encourage business players to control carbon emissions from their business activities and follow the applicable emission standards. This should be something keenly awaited by businesses in the energy sector.
Walalangi & Partners
(in association with Nishimura & Asahi)
19/F, Pacific Century Place
Jalan Jenderal Sudirman Kav. 52-53, SCBD Lot. 10
Jakarta – 12190, Indonesia
Tel: +62 21 5080 8600
The adoption of renewable energy has been on the uptick in Japan, especially after the feed-in tariff (FIT) system was introduced in 2012, based on the Act on Special Measures Concerning Procurement of Renewable Energy Electricity by Electric Utilities. In June 2020, the act was amended and renamed the Act on Special Measures Concerning the Promotion of the Use of Renewable Energy Electricity, which will come into effect with some exceptions on 1 April 2022. The feed-in premium (FIP) system was added under the amended law.
This article focuses on the treatment of solar power generation. The amended law will be referred to as the “new renewable energy act”, while both laws before and after the amendment will be referred to as the “renewable energy act”.
FIT and FIP systems
FIT is a system where the government guarantees that electricity utilities will purchase power generated by renewable energy sources at a certain fixed price (procurement price) for a certain fixed period. A business operator who obtains certification under the renewable energy act is entitled to conclude a power purchase agreement (specified agreement) with an electricity utility. Based on this specified agreement, the purchase by the electric utility is guaranteed over the procurement period at the procurement price.
Both the procurement price and period are determined each fiscal year by the Minister of Economy, Trade and Industry for each category of renewable energy power generation facilities. The procurement price is determined based on the cost that would normally be required if the project were carried out efficiently, considering price targets, appropriate profit margins, etc. The procurement price for solar power facilities above a certain scale is subject to a bidding system, and determined based on the bidding results.
FIP is a system in which the difference between the standard price (as defined under the new renewable energy act) and the reference price is granted to a business operator as a premium over a certain fixed period (grant period). Under the FIP system, business operators sell electricity in the wholesale power market or through negotiated transactions. The purchase price is also determined in the wholesale power market, or through negotiated transactions. Business operators receive a supply promotion subsidy defined under the renewable energy act, paid monthly by Japan’s Organisation for Cross-regional Co-ordination of Transmission Operators (OCCTO).
As with the procurement price, the “standard price” in the FIP system is determined based on the cost that would normally be required if the project were carried out efficiently, considering price targets and appropriate profit margins, etc. The “reference price” is determined based on the average price in the wholesale electricity trading market. With the FIP system, the price of electricity sold is linked to the market price. A supply promotion subsidy is paid in addition to the price, so there is an incentive to increase supply during peak electricity demand periods when the market price is high. The FIP system is intended to upgrade the renewable energy electricity business and promote its integration into the general electricity market. The FIT and FIP systems will coexist under the new renewable energy act.
Price and period under FIT or FIP of solar power generation
|Scale of Solar Power Generation Facility||FY2021
Procurement Price (FIT)
Procurement Price (FIT) and Standard Price (FIP)
|Procurement Period (FIT) and Grant Period (FIP)|
|1000kW or above||Determined by bidding||FIP system applies, and standard price is determined by bidding||20 years|
|250kW or more and less than 1000kW||Determined by bidding||The FIT or FIP system can be selected
If the FIT system is selected, procurement price is determined by bidding. If the FIP system is selected, the standard price is 10 JPY/kWh
|50kW or more and less than 250kW||JPY11/kWh||The FIT or FIP system can be selected
Procurement price and standard prices are JPY10/kWh
|10kW or more and less than 50kW||JPY12/kWh||The FIT system applies, procurement price is JPY11/kWh||20 years|
|Less than 10kW||JPY19/kWh||The FIT system applies, procurement price is
Note: The description of FY2022 in the table is based on the materials released by the government to date and has not yet been officially determined
Certification of project plan
Project plan. For the FIT or FIP system to apply to a project, a business operator must prepare a renewable energy power generation project plan and obtain a certification from the Ministry of Economy, Trade and Industry. The plan must meet all of the certification criteria. To obtain a certification, it is necessary to secure the project site and determine the facility, such as output, panels and power conditioning system, and basic design. To secure the project site, it is necessary to look into land-related laws and regulations. If an environmental assessment is required, the procedures need to be initiated before applying for certification. It is also necessary to apply to the relevant transmission and distribution utility for a connection study, and then obtain their consent for the grid connection before applying for certification.
Delay in commencement of operation. After certification of the project plan is obtained, the construction of solar power generation will proceed. It should be noted that a delay in the commencement of operation may have negative consequences such as shortened procurement or grant period, and nullification of certification. For solar power generation, the deadline for commencement is three years from the date of certification, with some exceptions. If the operation commences after the deadline, the procurement or grant period will be shortened by the delayed period. Under the new renewable energy act, a certification of the project plan is nullified if the operation of the power generation does not commence within a certain period after the date of certification of project plan.
Changes to project plan. If a certified project plan is to be changed, a certification of change must be obtained, except in minor cases. The procurement price or standard price applicable to a project may be changed for any of the following changes to the project plan: (1) increase in the output of power generation facility; (2) increase (3kW or more, or 3% or more) or decrease (20% or more) in the total output of solar cells; (3) installation of private power generation equipment, etc; and (4) change in the date of the grid connection agreement.
Rules, issues to note
The rules and issues that affect the profitability and cash flow of solar power projects are:
(1) To ensure a reliable reserve for the cost to decommission solar power facilities, all certified solar power generation projects of 10kW or more are required to set aside a reserve. The funds for the reserve will be deducted from the procurement price of the FIT system, or the supply promotion subsidy of the FIP system, and will be maintained at the OCCTO, except in cases where maintaining the reserve internally is allowed.
(2) The utilities may instruct the business operators to curtail output if the electricity supply is expected to exceed the demand, even after taking the prescribed avoidance measures. Solar power projects in any area in Japan for which a grid connection agreement is entered into on or after 1 April 2021 are subject to output control without restriction and compensation.
(3) Wheeling charges have been paid by retail electricity providers to transmission and distribution utilities. Discussions are underway to make the power producer side bear a part of the cost.
Malaysia consists of Peninsular Malaysia and East Malaysia, which comprises Sabah and Sarawak. Each part has its own utility for its respective territory for generating, transmitting and distributing electricity, such as Tenaga Nasional in Peninsular Malaysia, Sabah Electricity in Sabah, and Sarawak Energy in Sarawak.
This article focuses on relevant legislative aspects that a developer or investor should consider when investing in a power generating facility based on renewable resources for electricity supply in the country, particularly in Peninsular Malaysia.
The country’s applicable renewable energy laws are the Electricity Supply Act, 1990, and the Renewable Energy Act, 2011. Under the Renewable Energy Act, renewable resource is defined as “the recurring and non-depleting indigenous resources or technology as set out in the first column of the schedule”, which lists biogas, biomass, small hydropower or solar photovoltaic as the applicable renewable resources. Electricity generated or produced from renewable resources is called renewable energy.
Approval and licence
Under the Renewable Energy Act, a person who wishes to generate and supply electricity from renewable resources is required to submit an application for a feed-in approval to become a feed-in approval holder. The size of the power generating plant can range from 1MW to 30MW for biogas, biomass and small hydropower, while for solar photovoltaic it can range from 1kW to 30MW.
The act is only applicable for power plants that generate electricity from renewable resources up to 30MW. A feed-in tariff approval can be obtained by submitting the application to the Sustainable Energy Development Authority (SEDA), which is established under the Sustainable Energy Development Authority Act, 2011.
For a power generating plant using renewable resources above 30MW, the developer is required to obtain its licence under the Electricity Supply Act from the Energy Commission, which is established under the Energy Commission Act, 2001. The authors’ experience has shown that the conditions applicable to a developer for its power plant are typically provided comprehensively in the licence issued by the Energy Commission.
Renewable Energy Act
The SEDA is the regulator for the feed-in tariff payable to the developer for electricity generated from a renewable energy installation under a renewable energy power purchase agreement (RePPA) with Malaysian electricity company Tenaga Nasional.
Under the Renewable Energy Act, the following are the key matters that a developer or investor who is successful in its application needs to know:
(1) The feed-in approval is personal to the feed-in approval holder and cannot be assigned or transferred to any other person except with the prior written approval of the SEDA;
(2) A feed-in approval holder shall enter into an RePPA. The typical duration for power generated from biogas or biomass is 16 years, while that from small hydropower or solar photovoltaic is 21 years under their respective RePPAs from the feed-in tariff commencement date;
(3) The SEDA administers and implements a paid feed-in tariff based on the feed-in tariff system. The feed-in tariff rates are provided under the third column of the schedule of the act;
(4) The feed-in tariff is subject to an annual degression rate on 1 January;
(5) The feed-in tariff is subject to technical and operational requirements prescribed by the SEDA with the concurrence of the Energy Commission;
(6) The SEDA may, at any time, impose additional conditions, or vary or revoke any conditions already imposed on a feed-in approval, subject to giving prior notice of such an intention together with a draft copy of the imposition, variation or revocation of conditions;
(7) The SEDA may, from time to time, issue directions requiring compliance or non-compliance of conditions imposed to which a feed-in approval holder may object by way of written submissions. After due consideration by the SEDA, it may require a person to take such specified action as necessary to ensure that the person does not contravene any conditions of its feed-in approval or the provisions of the act. Once the directions are finalised, the feed-in approval holder is required to comply with such directions;
(8) The SEDA may also make rules for various other matters, e.g. technical and operational requirements, criteria for installation, or any other matter for which the act has empowered the SEDA.
Electricity Supply Act
As stated above, any developer or investor who wishes to establish a power generating plant above 30MW and based on renewable energy is required to obtain a licence under the Electricity Supply Act and, subject to the size of the power plant and its location, comply with other legislation. The Energy Commission has an active role as a regulator over any licensee generating electricity under the act, and can invoke its powers under various subsidiary regulations and guidelines.
Recently, as part of Malaysia’s push towards increasing its footprint of electricity generated from renewable resources, the Energy Commission issued a request for proposals (RFP) for large-scale solar photovoltaic plants up to 100MW. Since 2017, the commission has issued three RFPs, and the programme is now in the fourth cycle, called large-scale solar photovoltaic bidding cycle 4.
Any person may submit a bid under the large-scale solar programme subject to complying with the requirements of the RFP, which will typically include a draft power purchase agreement (PPA). A bidder may comply fully with the RFP or, as part of its proposal, submit deviations from any provisions of the draft PPA that, if the bidder is successful, may be negotiated with the utility. The PPA generally provides a moratorium period for the transfer of equity ownership at both direct or indirect levels unless otherwise approved in writing by the government of Malaysia. The selection of successful bidders under the large-scale solar programmes is based on a competitive tariff.
Under the Electricity Supply Act, a single buyer is a unit, department or division of Tenaga Nasional and is empowered to discharge its functions for electricity supply from renewable and non-renewable resources in Peninsular Malaysia. The single buyer also functions under the purview of the Energy Commission. The single buyer oversees the negotiation and implementation of PPAs.
Foreign investment policy
The government of Malaysia permits a foreign investor to hold up to 49% equity ownership in a company incorporated in the country that intends to become a developer for a power generating facility, be it from a renewable source or otherwise.
Based on the authors’ experience, most developers, whether under the Renewable Energy Act or Electricity Supply Act, generally obtain debt financing from Malaysian financial institutions, and entirely in Malaysian ringgit. The debt repayment period is typically 12-15 years. The insurance programme is also based on Malaysian ringgit.
Much of the civil works is typically carried out by Malaysian contractors. The equipment supply may be sourced from foreign suppliers, i.e. original equipment manufacturers, or locally available through licensed distributors.
The future for the generation of electricity from renewable resources in Malaysia will increase mainly from solar photovoltaic and, to a lesser extent, hydropower. The state of Sarawak has a large number of hydropower plants due to its climatic conditions.
The above is intended to provide the reader with an overview of specific renewable energy laws in Malaysia. Invariably, other aspects of the law will also affect a transaction from the development stage until commercial operations, which the developer should properly consider as a matter of diligence.
In past years, the Philippines has gained notoriety for having among the highest electricity prices in Asia. Its reliance on traditional energy resources and power plants has been criticised for spiking electricity bills and causing rotating brownouts. As of 2020, the Philippines operates with a power generation energy mix of 57.2% coal, 2.4% oil, 19.2% natural gas and 21.2% renewable energy.
On the road towards energy security, the Department of Energy (DOE) recently released its Philippine Energy Plan 2020-2040, establishing the country’s goal for renewable energy to reach 35% of its power generation mix by 2030 and 50% by 2040. Philippine law has established a legal framework that is intended to attract the required predevelopment investments to finance this audacious goal.
Renewable Energy Act
Renewable energy development in the Philippines is primarily governed by the Renewable Energy Act. Philippine law defines renewable energy resources as “energy resources that do not have an upper limit on the total quantity to be used, and which include, among others, biomass, solar, wind, geothermal, ocean energy and hydropower, conforming with internationally accepted norms and standards on dams, and other emerging renewable energy technologies.”
General framework for renewable energy development. The Philippine constitution has adopted a modification to the principle of the regalian doctrine, which holds that the state is the owner of its natural resources. Effectively, all sources of energy are owned by the Philippine state. Pursuant to section 2 of article XII of the Philippine constitution, the state is empowered to exercise full control and supervision over the exploration, development and utilisation of natural resources and renewable energy sources, which the state may undertake directly or in a joint venture with Filipino citizens, or corporations with at least 60% of their capital owned by Filipinos.
To implement the above-mentioned, the Renewable Energy Act mandates the DOE to enter into contracts with qualified renewable energy developers. Renewable energy contracts are generally effective for 25 years, and renewable for another 25 years.
Fiscal Incentives. The Renewable Energy Act offers a host of incentives for eligible renewable energy developers. The fiscal incentives include:
- Seven-year income tax holiday;
- Duty-free importation of renewable energy machinery, equipment and materials;
- Special realty tax rates on equipment and machinery;
- Net operating loss carry-over;
- 10% corporate income tax rate after the income tax holiday;
- Accelerated depreciation;
- 0% value-added tax rate on renewable energy sales and purchases;
- Cash incentive for missionary electrification;
- Tax exemption of carbon credits;
- Tax credit on domestic capital equipment and services; and
- Exemption from the universal charge provided for under the Electric Power Industry Reform Act (EPIRA).
Other incentives and opportunities. The following non-fiscal incentives and opportunities to encourage investment in renewable energy are either currently being enjoyed or are soon to be implemented:
(1) Feed-in tariff (FIT). The Renewable Energy Act mandates establishing a FIT system for electricity produced from wind, solar, ocean, run-of-river hydropower and biomass. The FIT refers to a policy requiring electric power industry participants to source electricity from qualified emerging renewable energy sources at a guaranteed fixed rate per kWh for a given period.
(2) Renewable portfolio standards are a market-based policy that requires electricity suppliers to source an agreed portion of their energy supply from eligible renewable energy resources. The relevant regulations require distribution utilities (DUs), electricity suppliers, generating companies supplying directly connected customers and mandated energy sector participants to source or produce a certain share of electricity from eligible renewable energy resources, which include biomass, waste-to-energy technology, wind, solar, hydro, ocean, geothermal and other technologies later identified by the DOE.
(3) Green energy option programme is a mechanism to empower end users consuming at least 100kW of power to meet their energy requirements from renewable energy by sourcing their supply from qualified retail electricity suppliers (RES), which purchase electricity from renewable energy generators.
(4) Net metering is a system appropriate for distributed generation, in which a distribution grid user has a two-way connection to the grid and is only charged for his net electricity consumption, and is credited for any overall contribution to the electricity grid. Under this system, qualified customers may generate their electricity through renewable energy facilities with a capacity of up to 100kW. Such participants may then export excess power to DUs for credits that can be used to offset their electricity bills.
(5) Renewable energy market. The act also mandates the establishment of the renewable energy market where the trading of renewable energy certificates (RECs), equivalent to an amount of power generated from renewable energy resources, is to be transacted.
EPIRA and power industry
Aside from the Renewable Energy Act, renewable energy developers are largely governed by the EPIRA Law, which regulates the entire Philippine electric power industry and its participants.
Generation. The EPIRA clarifies that power generation is not considered a public utility operation, so a national franchise to operate as a power generation company is not required. Under the EPIRA rules, a generation company must secure a certificate of compliance (COC) to operate facilities used in the generation of electricity from the Energy Regulatory Commission (ERC). The COC shall be secured from the ERC before commercial operations of a new generation facility, and renewed periodically (every five years). Notably, the EPIRA requires power generation companies or their holding companies to offer and sell to the public a portion of not less than 15% of their common shares of stock.
Transmission. Connection to the grid shall be required for generation companies to inject power into the grid, the high-voltage backbone system of interconnected transmission lines, substations and related facilities to convey bulk power. Currently, the National Grid Corporation of the Philippines (NGCP) is responsible for operating, maintaining and developing the country’s state-owned power grid. Before connecting to the grid, several steps must be accomplished, including conducting a grid impact study, executing a connection agreement with the NGCP, and approval from the ERC of the proposed connection.
Distribution. To provide electricity to the captive market, a generation company must enter into a power supply agreement (PSA) with a DU for the supply of capacity and/or energy intended for the DU’s captive market. A PSA shall be awarded to the winning generation company following a successful, transparent and competitive selection process. The rate to be charged under the PSA is subject to approval by the ERC.
Retail electricity supply. Under the retail competition and open access regime, electricity end users meeting certain thresholds shall be considered part of the contestable market allowed to source their electricity requirements from entities duly licensed as an RES by the ERC. Unlike in PSAs with DUs, which are subject to rate approval by the ERC, the rates chargeable by an RES under its retail supply agreements are not regulated by the ERC.
The wholesale electricity spot market is a centralised venue for buyers and sellers to trade electricity as a commodity where prices are determined based on actual use (demand) and availability (supply). The market provides the mechanism for identifying and setting the price of actual variations from the quantities transacted under contracts between sellers and purchasers of electricity. The market is operated by the Independent Electricity Market Operator of the Philippines and governed by the Philippine Electricity Market Corporation, primarily through the corporation’s board of directors and the market’s governance committees.
Other significant considerations for renewable energy developers in the Philippines are laws relating to land ownership and use or rights, the Indigenous Peoples Rights Act and other related laws, environmental laws, and local government laws and regulations.
Finally, there are a number of proposed bills and legislative initiatives that aim to ease restrictions further and simplify complex requirements in the power and energy industry, with a particular focus on growing the renewable energy sector.
VILLARAZA & ANGANGCO (V&A Law)