Opening up: Renewable energy has enjoyed its most productive year to date

Forces coalesced in 2014 to grant the Philippines’ renewable energy industry its most productive year to date. Spurred on by mounting concerns over the looming energy shortfall, the Energy Regulatory Commission (ERC) has opened the sector to investment by boosting the renewable capacity approved for the renewable energy incentive scheme ten-fold in many cases. However, with solar, wind, biomass and small hydro contributing only 153 MW of installed capacity at end-2013, further investment will be needed to achieve the government’s target of 15,304 MW of by 2030. As Ernesto B Pantangco, executive vice-president of the Energy Development Corporation, told OBG, “The energy sector does not have subsidies, but the government can target priority areas, like export-oriented firms, with subsidised rates to maintain competitiveness.”

GRANTING INCENTIVES: Originally passed in 2008, the Renewable Energy Act grants incentives to renewable projects through a feed-in-tariff (FIT) system that provides approved producers an additional revenue stream for each hour of renewable energy produced. The act also established the Philippines' National Renewable Energy Board (NREB), tasked with the administration, regulation and promotion of renewable energy resources development in the country. Broken down by generation technology, the act targets a 75% increase in geothermal capability, along with a 160% boost in hydropower capacity by 2030. The less well-established technologies of wind and solar are projected to add 2345 MW and 1528 MW, respectively, alongside an additional 277 MW of biomass power plants and the country’s first ocean-powered generation facility.

Since being established in 2010, FIT rates have fluctuated as the ERC performed an ongoing balancing act to find the optimal price points to create investor interest while keeping a lid on consumer prices. Rates were reduced significantly from the early levels projected by the NREB in 2008 to the first implementation in 2012. When the scheme finally commenced operations, the rates were P9.68 ($0.22) per KWh for solar, P8.53 ($0.19) per KWh for wind, P6.63 ($0.15) per KWh for biomass off-take and P5.9 ($0.13) per KWh for hydropower. Other caveats restricting FIT eligibility include stipulations that hydropower projects must be run-of-river plants (as opposed to impoundment facilities) with installed capacity of 1-10 MW; solar projects must be ground mounted with 500-KW capacity or greater; and biomass power plants must be powered by solid, not liquid fuel.

Large-scale, reservoir-based hydropower projects are omitted from the scheme due to their ability to compete head-to-head economically with conventional power generation. Rates are expected to be further adjusted by the ERC in early 2015, with new solar FIT rates projected to be reduced to P8.5-9 ($0.18-0.19) per KWh. Another measure is the decline in FIT value over time. This is meant to protect consumers and encourage investors to focus their efforts earlier, thereby avoiding speculators. This provision progressively reduces the tariff rate to ensure that rapid movers benefit more than slower-developing projects.

CONSUMER COSTS: Due to the continued revision of FIT rates and the cap on eligible capacity, some unpopular consequences, such as excessive rates of return and spiralling consumer cost, have largely been avoided. “The total impact of FIT is only around 1-2% of the wholesale price on the Wholesale Electricity Spot Market,” said Don Mario Dia, director of renewable power developer Bronzeoak Philippines. “In fact, the price should decrease in the long run if you replace all the dirty and expensive diesel power with renewable.” Other incentives include a seven-year income tax holiday followed by a 10% corporate tax rate, duty-free imports, a special real estate tax rate of below 1.5%, accelerated depreciation of assets, tax exemption on carbon credits, and tax credits on domestic capital equipment and services. Generators are also assured priority access to grid connections, and the purchase and transmission of their electricity by the grid-system operator.

FIT SCHEME PARTICIPATION: Participation in the scheme was initially capped for each technology due to concerns that excessive uptake could lead to unacceptably steep price spikes in the consumer market. These ceilings limited competing developers to a total of 250 MW each for run-of-river hydro and biomass, 200 MW for wind farms, 50 MW for solar farms and 10 MW for ocean thermal energy conversion power.

However, strong developer interest and the growing power shortage prompted the ERC to rethink its position in 2014. Proposed solar photovoltaic projects that exceeded 1 GW in combined capacity were planned as of early 2014, and several FIT-approved projects came on-line in the beginning of the year. With the original 50-MW threshold to be abolished by mid-year, the ERC (following NREB’s recommendation) moved to boost this figure to 500 MW through end-2015. This was followed by a decision by NREB in October 2014 to expand the wind power cap from 200 MW to 500 MW. With these obstacles now removed, developers are rushing in to fill the gap and take advantage of the numerous incentives available to qualified power producers.

Even so, many small developers have found it difficult to obtain financing from local banks given reluctance to lend money for projects in a relatively untested market, particularly for smaller players. A significant impediment arises from the act, 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. This uncertainty leads to considerable variation in initial business plans and the return on investment projections. As a result, the majority of projects have been funded by other means. “Awarding the FIT once almost 80% of a renewable project has been completed allows for the real players to come in and develop projects,” K. K. Ralhan, the group chairman of Kaltimex Energy, told OBG, “However, banks need to understand that they need to finance projects under these conditions to really create the opportunities to develop projects.”

MOVING QUICKLY: Although progress in the sector has been moving at a fairly slow pace since the incentives were first proposed in 2008, clarification of secondary legislation and permitting processes have recently opened the door for more renewable developments. According to NREB, the FIT policy has attracted over $800m in direct investments and aided rural economies by creating over 3500 construction jobs across the Philippines as of February 2014. This includes 638 separate projects awarded under the renewable energy law, with a combined total installed capacity of more than 10 GW. Of this, 2350 MW was installed as of October 2014, according to the DoE. That said, the majority of this capacity is derived from geothermal power plants, which accounted for 79.4% of output (1866 MW) and are not FIT eligible – though geothermal producers are able to take advantage of other non-FIT incentives.

In terms of FIT recipients, biomass plants, primarily located in sugar plantations, led all technologies with 291 MW of installed capacity (148 MW of grid connected and 143 MW of own-use power) of total approved potential of 343 MW spread over 78 grid and own-use projects. Grid-connected small hydro was the second-largest contributor, with 119 MW of installed power, though this is just a fraction of its awarded potential, with 394 projects totalling 6199 MW. Wind projects contributed another 52 MW of installed capacity out of 55 awarded projects, tallying 1548 MW.

PHOTOVOLTAIC POTENTIAL: The Philippines successfully commissioned its first solar photovoltaic farm in 2014, with 22 MW of installed capacity, and 74 on- and off-grid solar farms totalling 1204 MW have been approved for development. Developers have also received the go-ahead to build the country’s first ocean energy plants, with 25 MW spread over five projects.

Despite the overcapacity of approved renewable projects as compared to the cap of FIT-eligible capacity, investors have continued to show an interest in the segment, including another 135 projects currently pending approval under the renewable energy law, equivalent to 1256 MW of potential capacity and a further 698 MW of installed hydropower capacity. Meanwhile, other potential projects are expected to include 107 hydro projects with a combined 869 MW; 15 solar projects totalling 221 MW; five biomass projects totalling 99 MW; two new geothermal plants totalling 60 MW; and a 6-MW ocean energy project.

One of the major impediments to building new generation – including renewables – is the lack of available transmission capacity. This is a direct result of the privatisation of the transmission system, which created a long lag in investment in the system. At present, any major power plant under consideration must also 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. At the wind farms in Northern Luzon, for example, while the proponents were able finished their respective transmission lines on time, most of the energy was still excluded from the grid due to the National Grid Corporation of the Philippines’ unfinished lines.