“Harnessing renewable energy” by Raquel T. Ros (July 18, 2011)

SUITS THE C-SUITE By Racquel T. Ros
Business World (07/18/2011)

In recent months, the volatility in the Middle East has led to equal volatility in crude oil prices in the world market.

Coupled with increased awareness of global warming and similar issues, it is no wonder that many countries have revived their interest in renewable energy sources to ease dependence on oil imports and ensure adequate future supply of energy.

There are even continuing efforts to develop a technology that will collect sunlight in space and beam it down for use on Earth.

The Philippines, of course, is still decades away from achieving that level of sophistication.

Nonetheless, Congress laid the foundation for achieving the country’s long-term goal of developing sustainable sources of renewable energy when it approved the Renewable Energy Act (Republic Act No. 9513) in December 2008.

The fact, though, is that more than two years since the effectivity of RA 9513, the country is not quite close to “accelerating the exploration and development of renewable energy resources through the adoption of sustainable energy development strategies.”

While the Energy department has issued the implementing rules and regulations for what has been tagged as the most comprehensive piece of local legislation on renewable energy in Southeast Asia, stakeholders are still awaiting actual implementation.

The industry, however, may soon reach a milestone.

Just last May, draft rates for renewable energy subsidies were submitted to the Energy Regulatory Board for approval.

These rates, included in the “feed-in tariff system,” are the fixed charges for electricity end-users that will cover the cost of producing energy from renewable sources.

The scheme effectively spreads the cost of clean power among customers.

Under Section 7 of RA 9513, a feed-in tariff system is required for electricity produced from wind, solar, ocean, run-of-river hydropower and biomass.

Based on the proposal, the lowest feed-in tariff is for “run-of-river” hydroelectricity at P6.15 per kilowatt-hour (kWh), while the highest is for ocean and solar power at P17.65/kWh and P17.95/kWh, respectively.

The feed-in tariff is crucial as it affects the installation of renewable energy facilities.

More attractive rates may prompt investors to prefer certain types of renewable energy projects.

Renewable energy (RE) resources include, among others, biomass, solar, wind, geothermal, ocean energy and hydropower conforming with internationally accepted norms and standards on dams and other emerging renewable energy technologies.

Such resources are renewable on a regular basis, with a relatively rapid renewal rate that makes them available for development and consumption over an indefinite period.

Since it does not deplete Mother Nature’s finite resources, the utilization of renewable energy is the only solution to sustaining our needs and fueling our progress.

Investment in renewable energy exploration equipment, however, is still significantly higher than those used in conventional energy generation.

Recognizing the financial burden on investors, the government has granted several tax and fiscal incentives to RE developers.

The government has reinforced the importance of harnessing renewable energy projects in the 2011 Investment Priorities Plan, which was published in newspapers just last Tuesday.

The development of renewable energy facilities is recognized as a strategic factor in economic growth.

Here are some of the most important tax incentives granted by the Renewable Energy Act of 2008:

• income tax holiday (ITH) for the first seven years of commercial operations, and — subject to certain conditions — regular corporate income tax of 10% on net taxable income, thereafter;

• duty-free importation of RE machinery, equipment and materials that are directly and actually needed and used exclusively in RE facilities (in the first 10 years from issuance of certification of an RE developer);

• zero percent value-added tax (VAT) rate on the sale of fuel or power from renewable sources of energy;

• zero-rated VAT on RE developers’ purchases from local suppliers of goods, properties and services needed for the development, construction and installation of power plant facilities;

• special property tax rates (on equipment and machinery that are actually and exclusively used for RE facilities) not exceeding 1.5% of the original cost, less accumulated normal depreciation or net book value;

• net operating loss carry-over of the RE developer in the first three years from start of commercial operations which had not been previously utilized shall be carried over as a deduction from gross income for the next seven consecutive taxable years;

• accelerated depreciation of plant, machinery and equipment that are reasonably needed and actually used for the exploration, development and utilization of RE resources (if the RE project fails to receive an ITH before full operation);

• cash incentive for RE developers involving missionary electrification projects;

• tax exemption of all proceeds from the sale of carbon emission credits; and

• tax credit equivalent to 100% of the value of the VAT and customs duties that would have been paid on the RE machinery, equipment, materials and parts had these items been imported, provided that the domestic manufacturer had obtained prior approval from the Department of Energy.

These incentives look substantial enough to be able to attract potential investors to RE projects.

However, investors need more clarity, particularly on the specifics and actual implementation of the tax incentives.

This concern will definitely be addressed once the Department of Finance issues the implementing rules and regulations…hopefully soon.

RA 9513 is a strong statement that the Philippines is ready to take on a major role in the renewable energy industry.

The country hopes to bag a substantial portion of foreign investments in this area which will hopefully free us from long-term dependence on the volatile global oil market.

If properly implemented, the long-term economic benefit to our country will far outweigh foregone revenues from the incentives enumerated above.

As a country blessed with an unbelievable abundance of natural resources, the proper implementation of the Renewable Energy Act of 2008 is crucial to our survival as a nation. Lessons from our recent calamities should forever remind us that renewable energy may be the country’s only option now.

(Racquel T. Ros is a Tax Senior Director of SGV & Co.)

This article was originally published in the BusinessWorld newspaper. It is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.