Europe-PH News

Rules keep on changing – and worse, many underpinning policies (i.e. the Renewable Portfolio Standards) are still lacking.

No wonder then that many investors feel like they are spinning in a whirlpool when it comes to tracking and understanding the patchwork of fickle policies being laid down for the country’s nascent renewable energy (RE) sector.

All right, many of them may already be aware of an industry context constantly traversing unwanted policy modifications or what some may just lark on at times as “predictably inconsistent” business environment.

But the announcement of Energy Secretary Carlos Jericho Petilla on the post-construction availment of feed-in-tariff (FIT) for RE projects still came with a resounding thud – and setting off major frustration among prospective project developers. First-time foreign investors, who are not yet familiar with Philippine country risks, were jolted too with the declared policy shift.

The energy secretary might have a valid reason for that decision, but will he not take a pause and at least consider first the arguments being presented by investors and the lenders?

Under such circumstances, RE developers contend that the economics and risk profile of projects will change; and lenders will waver on extending project financing.

It’s not much of a puzzle then why the country’s power industry hurtles from a crisis to power investment boom – and then on again to the next bust of brownouts. It’s an oft-repeated cycle – yet we never learned.

‘Post-construction rule’

The “post-construction” FIT availment was still anchored on the “first come, first served” rule set out by the Department of Energy. But there was a major tilt – instead of giving guarantees to projects on FIT availment at pre-construction or shovel-ready phase, the reverse will become the norm.

Projects can only be endorsed and stamped with FIT availment upon completion of construction and declaration of the facility’s commercial operation, the energy department averred.

The FIT, which is a fixed 20-year tariff incentive for RE projects, will be instituted so investors and lenders will have a tangible way of assessing project risks and returns. As such, equity and debt will be relatively easy to obtain, and investment-dollars will be stimulated.

There are installation limits to FIT that can be awarded across technologies: 250 megawatts for run-of-river hydro; 250 megawatts for biomass; 200MW for wind and 50MW for solar. The original goal would be to widen the base of players, but for technologies which could be built on a bigger scale, like wind or solar, the energy chief noted that he is also willing to give it to a single developer.

Mr. Petilla argued that the post-construction FIT endorsement will ensure that the promised RE capacity will come on-line as committed by developers. He noted further that the policy is the department’s way of “getting rid of the flippers.”

His challenge to developers: “If you are serious, then show it to us that you can construct your project without guaranteed FIT.” Mr. Petilla considers that a diversion from the manner of granting FIT subsidies merely hinged on arbitrary goals or illusory project implementations.

Beyond the FIT, Mr. Martial Beck, vice president of the European Chamber of Commerce of the Philippines (ECCP), offered a wider perspective as to prescribed policies and regulatory levers that will be up-to-snuff and which can entice investors to make required capital outlays.

“For (foreign) companies to consider exploring opportunities in the Philippines, the whole package is important: The political framework conditions have to be good, the economical framework has to be right and the ecological conditions have to be there,” he says, emphasizing that “the FIT alone is not a driving force.”

‘Big boys’ reign

Lenders share the “uncomfortable sentiment” of many developers. Mr. Jesse O. Ang, resident representative of the International Finance Corporation (IFC) of the World Bank group, is most forthright in saying that the policy will favor the “big boys” – because they can lean on their strong balance sheets, not to mention that they also have relatively superior incumbent positions.

“This favors the ‘big guys’… some projects will happen, but it favors them (big firms) because they are the ones with the balance sheet. Clearly, without assurance of FIT, you also have to find another way to have an assurance, so the cheaper technologies like hydro will have an advantage over the wind and solar sectors which really need FIT rates because they are very expensive,” Mr. Ang opined.

Ms. Edna Tatel, policy advocacy officer of the Philippine Sugar Millers Association Inc. (PSMA) which aggregates prospective biomass energy developers, noted that the bid of investors was actually for a ‘conditional REPA (renewable energy payment agreement) to be underwritten by the National Transmission Corporation (TransCo), on its capacity as the anointed FIT Administrator.

“We need something concrete to show to the banks that our projects will be eligible for FIT… of course, that will be upon our compliance on the DOE conditions for declaration of commerciality,” she explained further.

The National Renewable Energy Board (NREB) throws full support to the industry’s plea that when feasible, the Energy Secretary’s policy pronouncement be abrogated and for it to revert to the original plan of extending “conditional FIT guarantees to projects” before they move into construction.

Under the proposed scheme, NREB chairman Pete H. Maniego Jr. intimated that “the DOE can impose very strict timeline on FIT-eligible RE projects – and once they failed in their targets, their FIT allocations can be given to other developers.”

Manifestly though, the appeal has not gained traction. Instead, Mr. Petilla took a more hard-line stance on his proclaimed rule. “It has been the policy, and it will always be the policy,” he stressed.

Soon after, some project developers have started announcing project construction timelines – seemingly to put their projects commercially on-line on or before the 2015 cut-off prescribed for the initial batch of FIT-underpinned RE developments.

Most publicized had been the construction timeline set by the Lopez-run Energy Development Corporation (EDC) for its 87-MW wind power project in Burgos, Ilocos Norte. The proposed facility is similarly designed for expansion, by up to 150MW, before 2015.

While other players are feeling betrayed, EDC can’t be blamed either because such is the nature of the biz – for companies to always find ways to get ahead in the competition.

Legal contortions

As if the premature policy tweaks are not torturous enough, foreign investors also need to contend with Constitutional restrictions on exploitation of inalienable resources – as has been the classification of RE developments.

British Ambassador to the Philippines Stephen Lillie crystallized that view, when he commented to media on the sidelines of a UK-supported Renewable Energy Conference, that “unfortunately, the 40% equity cap (for foreign investors) is unhelpful.”

He enthused that the Philippine government was made aware of that “ownership limit concern” and was sounded off via forums undertaken by the British Chamber of Commerce as well as the Joint Foreign Chambers, but no solutions or clear policy pathways have been offered until this time.

“I think the Philippine government is well-aware of that view. The business sector has made many submissions to the government to make clear its view that that is one of the regulations that needs to be tackled to create a better business environment in the Philippines,” Mr. Lillie stressed.

Article XII Section 2 of the 1987 Philippine Constitution identifies “all forces of potential energy” as resources that are not alienable, hence, subject to the 40-percent foreign ownership ceiling. At least, that was the interpretation of the framers of the Renewable Energy Act – and that is not entirely without logical or historical basis. But of course its validity can still be tested in court.

DOE Director Mario Marasigan admitted that the nationality requirement for RE projects is a “difficult issue to resolve” because it goes beyond the scope of the powers of the Executive Branch to scour for much-needed legal remedies. (To be continued)

Source: Manila Bulletin; Business Bulletin; 5 April 2013