Renewable energy has expanded rapidly in the Philippines since 2012 on the back of positive policy developments and the increasing price competitiveness of renewables technologies. The policy position in the Philippines is however currently unclear and investors should follow developments closely.
In its 2011 National Renewable Energy Program (NREP), the Philippines set an ambitious target of increasing its renewables capacity by 200% to account for 50% of total installed capacity by 2030. This equates to a target of adding 9865.3 MW of additional renewable energy capacity. See below for the breakdown of this target by technology type.
Renewable Energy Act and feed-in tariffs
The centrepiece of the Philippines’ strategy is the Renewable Energy Act of 2008 (the Act), which provides for a feed-in tariff (FIT) for eligible renewable energy installations. The FIT is funded through a uniform per kWh levy on all electricity consumers save for those eligible for lifeline rate discounts and exemptions.
Though the Act was passed in 2008, opposition from consumer organizations protesting higher rates delayed FIT implementation until 2012 with certain government officials also stating that various incentives would not be granted.
When the political opposition finally abated, administrative bottlenecks, and labyrinthine grid connection authorization procedures meant further delays for many projects. At one point, an estimated US$2.5 billion in potential investments were in limbo. While difficulties were overcome and investment has grown rapidly, opposition may now be reemerging.
The Philippine’s FIT
The key features of the FIT are as follows:
The Philippines has established FITs for wind, solar, hydro, and biomass and will eventually formulate an ocean power FIT. The FIT also covers the renewable energy component of hybrid power systems. Energy generated from these forms of renewable energy further receives priority purchase and transmission to the grid.
FIT awards are limited by the technology installation targets that are set and adjusted periodically by the Philippines' Department of Energy (DOE). It is important to note that FIT awards are first-come, first-served and are conditional on commercial operation. Thus a project that becomes operational after a target is fulfilled is not entitled to a FIT.
Though the Act prescribes a minimum duration of twelve years, the FIT Rules1 provide that the current FITs apply for twenty years. After this period, tariffs will be based on prevailing market prices or whatever other prices IPPs agree with the offtaker. If further FITs are made available, the Energy Regulatory Commission (ERC) may limit the duration of succeeding FITs to twelve years.2
The FIT is structured as a fixed tariff, not as a premium paid on top of market prices.
The ERC is responsible for fixing tariff rates, though it receives recommendations from the National Renewable Energy Board (NREB), which is in charge of monitoring, and recommending specific actions for, the implementation of the NREP. The FIT is paid in Philippine pesos per kwh and the rates last set by the ERC are as follows: P8.69 for solar, P7.40 for wind, P6.63 for biomass, and P5.90 for hydro.
The tariff rates are subject to degression with renewable energy producers paid “degressed” FITs corresponding to the year in which they commence commercial operations.3 In July 2012, the ERC approved the NREB’s recommended degression rate of 6% per year after the first year of the new solar FIT and 0.5% after the second year for all other forms of renewable energy.
While the higher initial rates are intended to encourage early investment and hasten the deployment of renewable energy installations, degression seeks to avoid windfall profits and ensure that unreasonable costs are not passed on to consumers.
The ERC is also mandated to adjust tariffs annually to allow pass-through of foreign exchange rate variations and local inflation.4 The importance of these measures is underscored by FITs elsewhere in South East Asia, which lacking similar mechanisms were undercut by severe inflation and multiple devaluations of the local currency. This adversely impacted investor interest.
The ERC also has the right to review and re-adjust rates:
- when a technology installation target is achieved
- when a technology installation target is not achieved within the period targeted
- when there are significant changes in costs or when more accurate data becomes available, and
- in “other analogous circumstances.”5
The ERC last reviewed the FITs in 2015 when it reduced the tariffs for solar and wind.
Recent developments & future directions
Despite its inauspicious beginnings, the Philippines’ FIT has so far yielded impressive results. Since passing the Act in 2008, renewable energy project numbers in the Philippines have grown from just 22 to 406 (either completed or underway) as of August 2016. One significant project is the 132.5 MW Cadiz Solar Power Plant, which, upon its commissioning in March 2016, became the largest solar facility in Southeast Asia (and seventh largest in the world).
Oversubscription of installation targets
A product of the program’s success has been the oversubscription of wind and solar installation targets. Notably, with respect to solar, the DOE recently indicated that applicants for the solar FIT have exceeded the 500 MW installation target by up to 390 MW.
As the DOE has previously expanded its installation targets, many were hoping that it would do so again and that the ERC would then announce applicable FIT rates. The NREB has recommended that a target of an additional 500 MW for wind and 500 MW for solar be set and proposed that FITs be lowered to P7.66 per kWh for solar and P6.97 per kWh for wind. However, resistance to expanding renewable energy, in particular solar, is strong, and this new round of targets may never be set.
In May, the ERC asked the DOE not to raise the solar target beyond 500 MW until the impact of the FIT on consumers has been studied. Then, in November, the Philippines Energy Secretary, Alfonso Cusi, stated that, in order to ease the burden of consumers, he was inclined to reject a new round of FIT. Cusi has singled out solar, stating that there would be not be a further solar target, because solar had become a burden for consumers. Whether a new round of FIT will be rejected remains to be confirmed. At the time of making his comments, Cusi had not yet discussed the matter with the NREB.
Beyond consumer funded FITs
The NREB believes FITs have succeeded as a policy tool to encourage new investments in renewables in the Philippines. The NREB indicated in November, that it was contemplating eventually phasing the FIT out. The DOE has also stated its intention to transition from a first-come, first-served program to an auction system, which the NREB has recommended be accomplished by 2018.
The NREB is also examining other mechanisms to help fund renewable energy as provided for in the Act, such as a market-based policy requiring utilities and other offtakers to source a portion of their power supply from renewable energy. Other possible options include creating a renewable energy market and empowering electricity consumers to choose renewable energy. The Philippines will also discuss with foreign agencies the possibility of using development aid as an alternative means of funding the FIT.6
Restrictions on foreign ownership
Notwithstanding the potential changes to the FIT, one measure which could facilitate continued accelerated growth in the sector is a proposal by the Philippines’ President, Rodrigo Duterte, to seek a constitutional amendment to relax the 40% restriction on foreign investment relating to the exploration, development, and utilisation of natural resources, which includes renewable energy sources.7 Foreign ownership restrictions have constrained investment in the Philippines and other South East Asia markets. Constitutional change would however be difficult to achieve.
1Resolution No. 16, Series of 2010 Resolution Adopting the Feed-In Tariff Rules
2See section 4 of the FIT Rules
3See section 2.11 of the FIT Rules
4See section 2.10 of the FIT Rules
5See section 7 of the FIT Rules
6For example, the European Union’s Access to Sustainable Energy Programme
7Note that hydro and geothermal IPP projects may be structured to overcome the restriction
This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.