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)