renewable energy act of 2008 - seven years after

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Renewable Energy Act of 2008 – Seven Years After Introduction With a population of almost 100 million people and annual economic growth averaging between 6 to 7%, the Philippines’ is anticipated to continue to have a robust energy demand. The Government’s refusal to subsidize power, heavy reliance on expensive fossil fuel imports, and added transmission cost because of the country’s archipelagic configuration have resulted in electricity prices being among the highest in the world. Thus, renewable energy projects present a viable business opportunity to resource developers. The business community believes that the introduction of retail competition and open access is the logical move to bring the power industry to the next level and establish a competitive market structure. There is a need to further diversify the energy mix and the government is banking on renewable energy to wean the country from its dependence on fossil fuel. The government through the Renewable Energy Act of 2008 (“RE Act”) sought to address the issues on the absence of a ready and guaranteed market for the output of RE power plants and the recovery of investments through electricity tariffs. Department of Energy While the DOE vowed to speed up support systems for RE development, progress has been slow, as the DOE admitted that implementation of the RE Act policy reforms has been hobbled by regulatory delays. Resistance from many stakeholders governmental, private, and utilities, among others, has caused

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Page 1: Renewable Energy Act of 2008 - Seven Years After

Renewable  Energy  Act  of  2008  –  Seven  Years  After    Introduction    With   a   population   of   almost   100  million   people   and   annual   economic   growth  averaging  between  6  to  7%,  the  Philippines’  is  anticipated  to  continue  to  have  a  robust   energy   demand.   The   Government’s   refusal   to   subsidize   power,   heavy  reliance  on  expensive  fossil  fuel  imports,  and  added  transmission  cost  because  of  the  country’s  archipelagic  configuration  have  resulted  in  electricity  prices  being  among   the   highest   in   the   world.   Thus,   renewable   energy   projects   present   a  viable  business  opportunity  to  resource  developers.    The  business  community  believes  that  the  introduction  of  retail  competition  and  open  access  is  the  logical  move  to  bring  the  power  industry  to  the  next  level  and  establish  a  competitive  market  structure.  There  is  a  need  to  further  diversify  the  energy  mix   and   the   government   is   banking   on   renewable   energy   to  wean   the  country   from   its   dependence   on   fossil   fuel.     The   government   through   the  Renewable   Energy   Act   of   2008   (“RE   Act”)   sought   to   address   the   issues   on   the  absence  of  a  ready  and  guaranteed  market  for  the  output  of  RE  power  plants  and  the  recovery  of  investments  through  electricity  tariffs.        

 Department  of  Energy  

 While   the   DOE   vowed   to   speed   up   support   systems   for   RE   development,  progress  has  been  slow,  as  the  DOE  admitted  that  implementation  of  the  RE  Act  policy   reforms   has   been   hobbled   by   regulatory   delays.   Resistance   from  many  stakeholders   -­‐   governmental,   private,   and   utilities,   among   others,   has   caused  

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further   delays,   which   has   been   the   primary   challenge   in   renewable   energy  development   for   the   country.   The   DOE   still   has   to   come   up   with   renewable  portfolio  standards  which  will  set  the  capacity  needed  from  each  RE  technology,  as  well  as  the  mechanics  to  connect  the  main  grid  to  all  operational  RE  plants.      Status  of  Feed-­‐In  Tariff    The   Energy   Regulatory   Commission   (“ERC”)   only   established   in   July   2012   the  Feed-­‐In  Tariff  (“FIT”)  rates  applicable  to  each  type  of  renewable  energy  resource  but  were   significantly   lower   than   those  applied   for  by   the  National  Renewable  Energy   Board.     The   Philippine   Department   of   Energy   (“DOE”)   approved  installation   “targets”   of   250MW   for   run-­‐of-­‐river   hydro,   250MW   for   biomass,  200MW  for  wind,  50MW  for  solar  PV  and  10MW  for  ocean  technology  in  2011.    In   February   2013,   the   DOE   announced   a   “first   come-­‐first   served”   policy   in  respect  of  entitlement   to   the  FIT   that  was  subsequently  confirmed  through  the  issuance  on  28  May  2013  of  DOE  Department  Circular  No.  DC  2013-­‐05-­‐0009,   or  the  Guidelines  for  the  Selection  Process  of  Renewable  Energy  Projects  under  Feed-­‐In   Tariff   System   and   the   Award   of   Certificate   for   Feed-­‐In   Tariff   Eligibility   (the  “Eligibility  Guidelines”).  

 Department  of  Energy  

 The  20-­‐year  FITs  introduced  in  2012  are  now  considered  among  the  highest   in  the  region.  Wind  projects,  for  example,  receive  PHP8.53/kWh  (US$0.203),  while  solar   attracts   PHP9.68kWh   (US$0.230).   However,   the   cumulative   capacity  eligible  for  FITs  is  capped  with  tariffs  subject  to  review  after  a  three-­‐year  period  or  when  the  cap  is  reached.  FITs  are  available  on  a  ‘first-­‐come,  first-­‐served’  basis,  with   oversubscribed   projects   relying   on   bilateral   agreements   with   an  

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Independent   Power   Producer   or   the   wholesale   spot   market.   Critically   though,  projects   can  only  apply   for   the   fixed   tariffs  once  construction   is  eighty  percent  (80%)   complete.   FIT   values  will   decline   over   time   to   ensure   that   projects   are  moved   and   optimized   rapidly   thereby   protecting   consumers   and   prevent  speculators.  A  significant  impediment  arises  from  the  rules,  which  requires  that  80%  of   the   facility  be  built  before   the  owner  may  even  apply   for   the  FIT,  after  which  the  FIT  could  still  be  denied.    Strong  developer  interest  and  the  growing  power  shortage  prompted  the  ERC  to  rethink   its  position   in  2014.  The  ERC   is   expected   to   further  adjust   the   rates   in  early  2015,  with  new  solar  FIT  rates  projected   to  be  reduced   to  P8.5-­‐9   ($0.18-­‐0.19)   per   KWh.     Large-­‐scale,   reservoir-­‐based   hydropower   and   geothermal  projects  are  not  included  in  the  FIT  scheme  due  to  their  ability  to  economically  match  with  conventional  fossil  fuel-­‐fired  power  plants.    The  DOE  will  continue  the  'first  come,  first  served'  approach.  Under  the  Eligibility  Guidelines,  upon  a  project  being  declared  commercially  viable,  a  developer  must  compete  with  other  project  proponents   in  building  a   renewable  energy   facility  before  being  awarded  a  feed-­‐in  tariff.    However,  the  wisdom  of  the  DOE  adopting  the   ‘first-­‐come,  first-­‐served’  principle  for  certifying  eligibility  is  widely  debated.  Supporters   of   the   guideline’s   principle   argue   that   it   prevents   speculative  developers  that  have  no  intention  of  completing  a  proposed  RE  project  financial  gains   by   selling   the   RE   installation   target   allowances   allocated   to   them   to  genuine   developers   at   an   inflated   price.   The   act   of   allocating   limited   eligibility  certificates   to   developers   provides   the   opportunity   to   speculators,   once   the  installation   target   is   fully   subscribed,   to   arbitrage   the   allowances   as   financial  derivatives   driving   costs   up   and,   passing   it   to   consumers.   However,   the  guidelines   discriminate   against   small   start-­‐up   enterprises   and   support   only  those  large  companies  that  have  the  financial  wherewithal  to  maintain  the  long-­‐term   financing   to   build   an   RE   plant  without   the   assurance   of   eligibility   of   FIT  rates.  With   no   firm   FIT   allocation,   small   developers   have   found   it   difficult   to  obtain  financing  from  banks  given  their  reluctance  to  lend  money  for  projects  in  a   relatively   untested  market.   [The  Philippines:  An  Update   on   the  Country’s  New  Feed-­‐In  Tariff  (2013)].    Consumers  have  started  to  pay  starting  January  2015,  an  additional  P0.0406  per  kilowatt-­‐hour   (kWh)   in   electricity   rates,   representing   so-­‐called   feed-­‐in   tariff  allowance  (FIT-­‐All).    The  rate  will  be  collected  from  electricity  end-­‐users  and  will  be   reflected   in   their  electricity  bills  as  a   separate   item,  as  mandated  by   the  RE  Act.    RE  Attractiveness  Index    In  Ernst  and  Young’s   latest  Renewable  Energy  Attractiveness   Index   published  on  March  2015,  a   looming  energy  crisis   in   the  Philippines   is  providing  an   impetus  on   the   development   of   the   country’s   renewable   energy   resources,   with   high  power  prices,  a  relatively  attractive  FIT  regime  and  liberalized  electricity  market  creating   solid   foundations.    The   country   ranked  32nd  out  of  40   countries  being  monitored   for   macro,   energy   market,   and   technology-­‐specific   drivers.   The  

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Philippines  was  among  those  cited  in  the  report  due  to  three  factors,  namely:  its  “ambitious  renewables  targets,  stable  incentive  regime,  and  high  energy  demand  driven  by  a  large  and  growing  population.”      The   report   further   stated   that   a   sixteen   percent   (16%)   increase   in   generating  capacity  has  failed  to  keep  pace  with  a  fifty  percent  (50%)  rise  in  consumption,  prompting   a   major   power   shortfall   expected   in   2015.   FITs   for   renewables  projects   are   among   the   highest   in   the   region   but   are   subject   to   relatively  stringent  conditions  and  caps.  It  noted  however  that  a   forty  percent  (40%)  cap  on  foreign  ownership  has  deterred  some  investments  to  date.      Challenges    The   permitting   process   and   transmission   capacity   remain   to   be   the   biggest  challenge   in   the   RE   industry.   There   is   a   pending   legislative   proposal   to  amend  the   Electricity   Power   Industry   Reform   Act   (“EPIRA”)   to   address   the  skyrocketing   power   rates.     According   to   the   Chair   of   the  House   Committee   on  Energy,   “While   the   Executive   is   empowered   by   the   EPIRA   to   ensure   power  supply  security,   it   is   incumbent  upon  Congress,  exercising   its  oversight  powers  through   the   Joint   Congressional   Power   Commission,   to   conduct   a   thorough  review  of  the  implementation  of  EPIRA,  the  rules  and  regulations  of  the  Energy  Regulatory  Commission,  and  the  Wholesale  Electricity  Spot  Market  (“WESM”).”      However,   the   business   community   believes   that   amending   EPIRA   is   not   the  solution  to  the  high  cost  of  electricity.    They  believe  that  amendment  of  the  law  will  make  the   investors/lenders  wary  and  uneasy,  as   it  will  project  volatility   in  the   regulatory   environment.     Recommendations   made   by   business   groups  include   reviewing   or   modifying   the   WESM   Rules   and   strengthening   the  capability  of  the  market  regulators  like  the  DOE  and  ERC.    The  slow  process   for  approval  of  power  projects  under  the  single  buyer  Power  Purchase   Agreement-­‐based   regime   can   be   addressed   by   shortening   the  procedures   and   requirements   for   permitting.   Based   on   industry   experience   it  takes   the   National   Grid   Corporation   of   the   Philippines   at   least   18   months   to  finish   a   Grid   Impact   Study,   the   Department   of   Environment   and   Natural  Resources   at   least   2-­‐3   years   to   issue   an   Environmental   Compliance   Certificate  and   ERC   around   12   months   to   process   the   review   of   the   Power   Supply  Agreement.     In   addition   the   government   needs   to   address   the   perceived   veto  powers   on   energy   and   power   projects   of   indigenous   peoples   under   the  Indigenous   Peoples   Rights   Act   and   local   government   units   under   the   Local  Government  Code.    The  clearances,  permits  and  endorsement  procedures  under  these  two  laws  also  add  to  the  transaction  cost.    The   Philippines   archipelagic   geography   means   that   the   transmission   and  distribution   of   electricity   is   expensive.     The   lack   of   available   transmission  capacity   has   been   a  major   impediment   to   building   new   generation.   Any  major  power  plant  must   take  on   the  cost,   risk  and  responsibility   for  building   its  own  connection   to   the   grid   without   adequate   assurance   of   repayment.   Often,   this  aspect  of  the  project  is  more  challenging  than  constructing  the  power  plant  itself,  

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and  remains  a  major  cause  of  concern  for  lenders,  especially  with  respect  to  the  timely  acquisition  of  rights-­‐of-­‐way.  To  meet  the  challenges  brought  about  by  lack  of   transmission   infrastructure,   delays   in   grid   connection,   and   curtailment   of  output   in   locations   where   current   policies   and   grid   management   systems  undermine   integration,   government   guarantees   on   electricity   dispatch   or  priority  connection  must  be  put  into  place. Most  lenders  and  many  investors  will  require   evidence   of   executed   generation   interconnection   and/or   transmission  service   agreements   as   a   condition   of   financing.   A   loan   guarantee   program   for  electric  transmission  infrastructure  expansion  would  support  large-­‐scale  capital  investment   and   would   serve   as   a   cost   reduction   and   risk   mitigation   tool. [Geothermal  Risk  Mitigation  Strategies  Report,  Deloitte  Development  LLC  (2008)]    Institutional   coordination   and   technical   capacity   are   the   main   non-­‐financial  barriers.    The  challenge  will  be  to  properly  mobilize  all  stakeholders  involved  in  the   sector   through   engagement   and   public   participation.   In   addition,  coordinating  decision  making  and  project  planning  processes,  and  ensuring  the  technical   and   human   capacity   exists   by   involving   beneficiaries   in   the  development  stages,  operation  and  maintenance  of  projects  will  help  strengthen  the  sector.   [Meeting  Renewable  Energy  Targets:  Global  Lessons  From  the  Road  to  Implementation,   The  World  Wide   Fund   for   Nature   (WWF)   in   collaboration  with  World  Resources  Institute  (2013)]    Policy  Consideration  for  RE  Regulators    As   with   any   major   resources   venture,   the   path   from   concept   to  completion/operation  is  an  arduous  exercise,  which  remains  especially  true  for  RE  developers   in   the  Philippines.  The  DOE’s   initiative   in  pushing   for  a   law  that  will   recognise   projects   of   national   significance   is   a  welcome   development   as   a  number  of  energy  projects  such  as  exploration  contracts  and  transmission  lines  cannot  move   forward  because  of   local  opposition.  Congress  must  promulgate  a  new  law  in  extreme  urgency  that  will  set  the  parameters   for  “energy  project  of  national   significance”.     Government   should   also   give   assurance   that  expropriation  measures   are   available   as  may   be   necessary,   over   private   lands  relevant  to  the  project  electricity  transmission.  The  energy  agencies  need  to  take  a  more   cross-­‐sectoral   approach   to   involve   other   departments   and   institutions.  Laws  are  in  place  but  implementation  is  weak.  There  is  also  a  tendency  for  laws  to  be  subjected  to  conflicting  interpretations  among  turf-­‐protecting  government  agencies.    Efforts   must   address   the   administrative   bottlenecks   and   allegedly   weak  enforcement  of  antitrust  laws  that  have  slowed  both  market  reform  and  the  pace  of   deployment.     Market   barriers   affect   RE   development   due   to   inequitable  market  and  policy  structures.  Fossil   fuel  power  generation  does  not   internalise  full  social  and  environmental  costs.  A  serious  barrier  is  the  fact  that  deployment  of   fossil   fuel  plants  have  a   shorter   lead   time  making   them  more  attractive   to  a  power-­‐hungry  economy  but  with  no  allowance   for  environmental  externalities.  This   places   RE   at   a   commercial   disadvantage   but   this   can   be   resolved   by  regulating   and   internalising   the   associated   cost   of   greenhouse   gas   emissions,  noise   and   air   pollution.   The   government   should   also   expand   the   efforts   of  

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multilateral   and   bilateral   aid   organisations   to   address   economic   and   non-­‐economic  barriers,  as  renewables  must  often  compete  against  ‘hidden’  subsidies  for  conventional  fuels.    Foreign  ownership   issues  have   also  dampened   enthusiasm   in   some   large-­‐scale  investments.  Government  must  be  unequivocal  in  easing  ownership  restrictions  to  foreign  capital  and  exert  more  political  will  in  its  efforts  to  mitigate  social  and  environmental   concerns.   Government   policy   should   be   open   to   fast-­‐paced  development  of  technology  in  providing  the  legal  cover  and  additional  incentives  to   private   investors   and   ultimately   induce   the   much-­‐needed   developmental  growth.      Conclusion    RE   investments   in   the   country   will   be   driven   by   the   combination   of   a   strong  energy   supply   imperative,   increasingly   liberalized   energy   sector,   ambitious  capacity   targets   and   a   relatively   stable   renewable   energy   off-­‐take  mechanism.    However,  the  government  may  have  been  overly  optimistic   in   its  projections  of  additional  potential  capacity  of  proposed  RE  projects  under  the  new  contractual  regime  in  the  RE  Law.    These  may  be  due  to  the  over-­‐estimation  of  the  resources  or   failure   to   take   into   consideration   the   regulatory   delays   and   the   permitting  process  involved  in  putting  the  projects  on-­‐stream.    The   Philippine   resources   bureaucracy   is   perceived   as   one   prone   to   create  political   barriers   associated   with   regulatory   and   policy   issues,   which   causes  market   uncertainty   and   cautious   investment   approaches.   Lack   of   policy  continuity   creates   an   ambiguous   view   of   economic   certainty.   Any   investment  made   under   lingering   policy   issues   is   exposed   to   the   numerous   reviews   and  potential   changes,  which  may   take  place  during   the   lifetime  of   the  project.  The  regulatory   uncertainty   makes   financing   difficult.   Needless   to   say,   good  governance  goes  hand  in  hand  with  investment  promotion.    Inviting  participants  to  the  RE  sector  is  not  the  end.    What  is  more  important  is  for  the  government  to  assure   investors   that   they   are   able   to   access   the   resources   within   the   time  frames  set  under  the  contracted  work  programmes.    

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   Fernando  “Ronnie”  Penarroyo  is  the  Managing  Partner  of  Puno  and  Penarroyo  Law  ([email protected]).   He   has   been   involved   in   numerous   renewable  energy  projects  acting  on  behalf  of  local  and  foreign  energy  companies.