Harnessing the elements: Further investment and reform to help boost renewable capacity

Already a regional leader in terms of renewable energy, the Philippines is looking to stimulate a new wave of investment in the sector with the implementation of an incentive scheme, scheduled to be introduced in the first half of 2012. Although the government has already enacted legislation to boost the sector through the Renewable Energy Act of 2008, a law establishing a feed-in tariff (FIT) system for renewable producers is expected to spur further development in a sector which still has vast untapped resources.

According to the Philippines Department of Energy (DoE), potential green electricity production in the country is in excess of 250 GW. Of this, 170 GW is categorised as ocean power – a little-utilised and often prohibitively expensive technology to date.

Wind power potential is listed at 76.6 GW, followed by hydropower with 10 GW, geothermal with 4 GW and biomass with 500 MW. Solar power potential is also estimated at 5 KWh per sq metre per day.

FIT FOR EXPANSION: According to the National Renewable Energy Board (NREB), the FIT would allow renewable energy developers to recover their investments with more certainty and provide them with acceptable returns on investment during the FIT period. The FIT will also accelerate the domestic development of competitive renewable energy technologies while not unduly burdening the consumers with heavy pass-on charges. Successfully deployed in many European countries, the highly anticipated FIT provides renewable energy producers guaranteed payments based on a fixed rate per KWh for a set period of time.

The FIT framework was developed starting in 2010 by the country’s Energy Regulatory Commission, with the NREB submitting its recommendations of tariff rates. As of November 2011 the tariff rates as recommended by the NREB are as follows: solar power projects should be granted rates of P19.96 ($0.45) per KWh produced, followed by thermal and mechanical ocean generation, with P17.65 ($0.40) per KWh. Wind power off-take rates were set at P10.37 ($0.24) per KWh, biomass at P7 ($0.16) and hydro at P6.15 ($0.14). There are other technical qualification caveats that restrict FIT eligibility, including stipulations that hydropower projects must be run-of-river power plants (as opposed to reservoir systems) with installed capacity between 1 MW and 10 MW; solar projects must be ground-mounted with capacity of 500 KW or greater; and biomass power plants must be powered by solid rather than liquid fuel. Large-scale, reservoir-based hydropower projects are purposefully omitted from the scheme, due to their ability to compete head-to-head economically with traditional conventional power generation, such as diesel or even coal, depending on import prices.

RATE DEBATE: The final FIT rates are still under debate as the rapidly decreasing cost of renewable generation technology – for solar photovoltaic in particular – has muddled the waters as to exactly how much assistance is necessary to stimulate investment. Since June 2010 proposed rates have fluctuated. Rates for biomass energy, for example, have vacillated between P7 ($0.16) and P11.48 ($0.26) per KWh while solar prices ranged from P17.95 ($0.41) to P23.81 ($0.54) and wind from P10.37 ($0.24) to P11.92 ($0.27) per KWh. The primary concern in deciding upon a figure is to provide just enough incentive to make power generation economically viable for investors, while not creating an undue burden of increased energy costs on final consumers. For potential investors, these rates compare favourably to the current average grid generation costs of around P5.20 ($0.12) per KWh established by the government. It is the difference in this cost and the tariff rate which will ultimately be borne by consumers.

Qualified renewable power generators will be eligible for their respective FIT rates for a period of 20 years. However, to boost the country’s renewable portfolio as fast as possible, tariff digression rates have also been included in the framework. This means that once the law is enacted, companies will have a grace period in which they can begin operations to receive the full value of the FIT rates, after which their incentives will decline. Projects that start producing electricity after the established grace period following the scheme’s implementation will have their FIT rates further reduced each successive year they delay. Digression rates and grace periods vary depending on the generation technology. Biomass power generators, for example, have a digression rate of 0.5%, which sets in after the second year of implementation. This means that any generator beginning operations within the first two years of the law’s implementation will receive the full P7 ($0.16) per KWh FIT, but a company beginning operations in year three would only be eligible for P6.97 ($0.16) after the 0.5% digression rate is subtracted. An additional 0.5% is then added each subsequent year for new entrants. The same digression rates applied to biomass also apply to hydro and wind power, with solar digression rates exhibiting a much steeper curve of 6% after year one due to the more rapid decline in installation costs expected in the industry.

RETURN ON INVESTMENT: Given the FIT rates granted in other comparable countries in the region, the Philippines’ framework should provide adequate incentive for investors to explore the market. Malaysia, for example, offers a biomass tariff per KWh of between P3.31 ($0.08) and P3.45 ($0.08), hydro tariffs ranging from P3.31 ($0.08) to P5.04 ($0.11), and solar from P12.23 ($0.28) to P18.28 ($0.42), assuming an exchange rate of P14.39 ($0.33) per Malaysian ringgit, according to the NREB. At these rates, the NREB projects equity internal rates of return for biomass projects to be the greatest at 18.5%; followed by hydro, wind and ocean projects at 17%; and solar at 16%. Project costs are estimated at $12,637/KW for ocean power generation projects, followed by sharp drop-off to hydro power at $3365/KW, $3400 for solar, $3039 for biomass and $2758 for wind power.

With more than 7000 islands, the Philippines also presents a unique opportunity to compete with traditional power generation in more isolated areas. Even with a feed-in rate of P17 ($0.39) per KWh, solar generation could make significant inroads into these communities due to volatility in the cost of diesel and heavy fuel oil, which are currently used to generate power.

The Philippine incentive scheme differs from that of many existing models in that the FIT is optional for renewable energy generators. Power producers may opt to employ standard bilateral contracts if the pricing becomes more beneficial in the future. Although the law was originally to come into effect at the end of 2011 or early 2012 pending a public hearing, its status remained uncertain at the time of publication due to legal challenges issued in December 2011.

BUILDING ON THE PAST: These new fiscal incentives are expected to bolster measures outlined in the 2008 Renewable Energy Act, which was given a mandate to accelerate the development of the country’s renewable energy resources by providing fiscal and non-fiscal incentives to private sector investors and equipment manufacturers. Some of the non-fiscal incentives enacted under the law include net metering and the green energy option, which provides end-users with the option of choosing to consume only renewable energy. This is now available in conjunction with open access of distribution lines instituted through the 2001 Electric Power Industry Reform Act. Net metering gives end-users a greater ability to determine their use of renewables by granting them incentives to generate their own electricity on-site for eligible renewable energy projects (generally roof-top solar installations), with excess production delivered to the local grid.

INCENTIVES: Other incentives that are also applicable to renewable energy developers include a seven-year income tax holiday followed by a 10% corporate tax rate upon expiration of the tax holiday, duty-free imports, a special real estate tax rate of less than 1.5%, accelerated depreciation of assets, tax exemption on carbon credits, and tax credits on domestic capital equipment and services. In addition to the financial benefits, generators are also assured priority access to grid connections, as well as the purchase and transmission of their electricity by the grid-system operator.

One aspect which has yet to be determined are the portfolio standards for renewable energy, which are still in the process of being completed by the NREB. Intended to promote diversification of the energy supply, reduce greenhouse gas emissions and most practically to ensure compliance from power generators, the standards set targets of how much renewable energy generation should be supplied to the grids. This system is widely employed in the US and Europe.

Investors have already shown considerable interest in the sector, having proposed new renewable projects with a total combined capacity of 1809 MW as of November 2010. The NREB had approved 830 MW of these projects as of April 2011. These include 250 MW of biomass and hydropower plants, 220 MW of wind, 100 MW of solar and 10 MW of ocean-power generation. With a range of incentives on offer, further investment seems likely, and any facilities built as part of this will add to a strong renewables sector, accounting for 33.25% of the country’s installed generating capacity.