Renewable energy attractiveness: How we fared

SUITS THE C-SUITE By Ernesto Cissus C. Pascual

First Published in Business World (08/11/2014)

AMID growing concerns over the country’s power supply, it is comforting to know that the Philippine renewable energy (RE) sector continues to pique investor interest. Last June, the Philippines made its debut into an annual global index that tracks 40 RE investment locations. The country’s increasing energy requirements, coupled with its incentives regime, encourage investors to take a closer look.

The Philippines is among the newest entrants in EY’s latest Renewable Energy Attractiveness Index, placing 35th out of 40 countries being monitored for macro, energy market, and technology-specific drivers. Each parameter is measured using indicators which include economic and political stability, ease of doing business, prioritization of renewables, availability of finance, strength of natural resource and technological maturity. The overall ranking puts the Philippines ahead of neighboring Indonesia (39th) and even RE heavyweight Finland (36th).

The Philippines was among those cited in the EY report due to three factors, namely: its “ambitious renewables targets, stable incentive regime, and high energy demand driven by a large and growing population.”

For its targets, the Philippines has set a goal of 15,304 megawatts (MW) of RE capacity by 2030 based on the 2011-2030 Philippine Energy Plan. This is almost triple the 5,438-MW capacity measured in 2010. As of 2012, RE accounted for 32% of the total installed generating capacity, while coal cornered the largest share at 33%.

This is reflected in the Philippines’ sub-rankings in the EY index. The Philippines placed highly in terms of the “technology-specific” performance of geothermal (8th out of 40 countries), marine (8th), hydro (21st), and solar (22nd) resources. These rankings are based on indicators which take into consideration the abundance of the natural resource, attractiveness of power offtake, quality of technology, forecast growth and pipeline, among others.

The geothermal capacity of the Philippines is said to be the second largest in the world, next only to the United States. The Philippines has also been reported to place 5th in the world in terms of annual investment in geothermal power capacity in 2013 according to REN21, a global RE policy multi-stakeholder network.

Meanwhile, in terms of the country’s incentives regime and government support, the government includes RE in the Philippine Energy Plan. Furthermore, incentives abound for RE investors as provided by the Renewable Energy Act of 2008 (Republic Act 9513).

The fiscal incentives for RE developers include:

• Income Tax Holiday (ITH) for the first seven (7) years of commercial operations. Additional investments in the RE project can be entitled to additional ITH of not more than 3x the period of the initial ITH availment;

• Duty-free importation of RE machinery within the first 10 years upon issuance of a certification of entitlement to incentives;

• Special tax rates on realty and other taxes on civil works, equipment, machinery, and other improvements of a registered RE developer actually and exclusively used for RE facilities not to exceed 1.5% of their original cost less accumulated normal depreciation or net book value;

• Net Operating Loss Carry-Over (NOLCO) during the first three (3) years from the start of commercial operation which had not been previously offset as deduction from gross income shall be carried over as a deduction from gross income for the next seven (7) consecutive taxable years immediately following the year of that loss;

• After the ITH, a preferential corporate income tax rate of 10% on net taxable;

• Accelerated Depreciation of plant, machinery, and equipment that are reasonably needed and actually used for the exploration, development and utilization of RE resources may be depreciated using a rate not exceeding 2x the rate which would have been used;

• Zero percent (0%) Value — Added Tax (VAT) on sales of fuel or power generated from renewable sources;

• Tax Exemption on all proceeds from the sale of carbon emission credits; and

• Tax Credit equivalent to 100% on the value of the value-added tax and customs duties that would have been paid on the RE machinery, equipment, materials and parts had these items been imported.

The government is also preparing non-fiscal incentives, which include:

• Renewable Portfolio Standard (RPS) — This is a market-based policy that requires electricity suppliers to source an agreed portion of their energy supply (in on-grid systems) from eligible RE sources

• Feed-in Tariff (FIT) — This is an RE policy that offers guaranteed payments on a fixed rate per kilowatt-hour (kWh) for emerging RE sources, excluding any generation for own use.

Finally, the country’s high energy demand vis-à-vis its low power supply strengthens the business case for RE investors.

As the country’s population and economy grow, an increase in demand for energy follows. It has been reported that consumers could expect another round of rotating brownouts in 2015 due to low reserves, and expectations that upcoming power plants will not start operations on time. According to International Energy Consultants, the energy rate per kWh in the Philippines is currently one of the highest in the world. In 2012, the Philippines ranked the highest in South East Asia and 2nd only to Japan in Asia. This could be partly remedied by RE projects. The World Wide Fund for Nature (WWF) reportedly claims that geothermal energy is the most economical if all costs were truly considered. Among the eight sources cited, hydro, which is among the country’s main sources of energy, is ranked 5th cheapest.

It is hoped that the mention of these three factors for the Philippines in the EY index will energize and boost RE investment in the country. The index is a good indicator of the positive outlook for the local RE sector. Nevertheless, more action is still needed to fulfill the country’s RE potential. Failing to rise to the challenge of energy development and the inability to optimize the country’s RE resources would have dire consequences for our people and economy. The public and private sectors must unite to unleash the sector’s true capacity in any or all the areas of biomass, geothermal, hydro, marine, solar, or wind, since the Philippines is blessed to have them all.

Ernesto Cissus C. Pascual is a Senior Director of SGV & Co.

This article 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.