renewable energy act of 2008 - seven years after
TRANSCRIPT
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
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
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
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,
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
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.
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.