The Philippines has a partially privatised

The Philippines has a partially privatised power sector which makes it unique compared to the other countries in Southeast Asia. Originally, the sector was state-owned since 1937 when the National Power Corporation (NPC) was given the mandate to undertake power generation, transmission and distribution functions. The severe power crisis in 1990 led to efforts to attract investors to address the issue which included the fuel pass-through provision in power supply contracts that automatically charges end users in case of fuel price hikes to ensure recovery of capital (Ahmed, 2017). NPC through its Small Power Utilities Group continue to operate in small islands and isolated areas while there are still no private investors operating in these areas. Likewise, the Agus-Pulangi Hydropower Complex, which used to provide 50% of electricity in Mindanao before the entry of coal plants, is still owned by the government and operated by NPC.

Key Challenges

** Published April 2021

1. Perception

There is a common perception in the Philippines that renewable energy is expensive. One major reason for this is the Feed-In Tariff (FIT) allowance that appears as a line item in all electricity bills. It gives the impression that paying for the FIT allowance is an additional cost to the electricity consumer. However, all studies by the Philippine Electricity Market Corporation on this issue have concluded that the FIT allowance actually reduces costs to the consumers of distribution utility purchasing from the spot market by enabling the renewable energy power plants that displace the more expensive oil power plants in the grid.

There is another perception that renewables like solar and wind are unreliable because they are not available ’when the sun is down and when the wind does not blow.’ However, individual power sources operate in a power grid that optimises their scheduling and dispatch. Variable power supply from solar and wind are available at practically zero marginal cost while fossil fuel power plants are subject to international fuel prices that have shown to be extremely volatile. Thus, what is needed is a reliable grid. The National Renewable Energy Board therefore stated its findings in the National Renewable Energy Plan (NREP) as follows:

  1. Flexible generation from new power plants is needed to complement new renewable energy power supply; 
  2. No new baseload power plants are needed in the next 20 years. Thus, the least-cost power portfolio recommended by the NREP does not include coal and nuclear power plants.

Based on the above, it seems that the general public and even policymakers do not have a proper view of renewables. Having one of the highest electricity tariffs in Asia, the decarbonisation of the energy sector is the least of their concerns if people are still paying high electricity prices.

Perception and support from policymakers are critical, not only in terms of what energy choices are made but also of their understanding of the co-benefits that are deeply embedded in the energy transition, including long-term affordability, energy security, reliability and efficiency. A whole-of-government approach is the baseline, and for that, public understanding of the economic gains for households and industries is also important.

The changes in the outlook of relevant stakeholders and the general public towards the energy transition is important to allow more dialogue to push for such a transition. Without first changing the general perception, there can be no relevant participation. The change in perception is key to allowing the public to participate in policy processes in a more meaningful and intentional way.

2. Accountability

There are a lot of policies that are already in place to support RE development. However, the issue lies in the effective implementation of the mechanisms over the years. Much of the failure of the policies under the Renewable Energy Act of 2008 comes from the delay and lack of speed or traction with which the policies are implemented. To illustrate, the law was enacted in 2008, but the Renewable Portfolio Standard (RPS) On-grid Rules were only enacted nine years later in 2017.  Similarly, the Green Energy Option Program (GEOP) Rules and Renewable Portfolio Standard (RPS) Off-grid Rules were only enacted in 2018, or ten years after the passage of the law. The Renewable Energy Market (REM) Rules and Amended Net-Metering Rules were issued in 2019 (Energy Literacy Philippines, 2021). The Renewable Energy Act of 2008 created an opportunity for more renewable energy exploration and development. The actual policies, however, were implemented at a slower rate than what was needed and would have been beneficial at the time. Different interpretations of rules and inconsistencies in the policies due to a new administration were cited as issues affecting the implementation of government procedures for RE project development (Rosellon, 2017). In addition, the different perspectives of government officials also hinder the conceptualisation of an energy transition pathway (Verzola, Logarta and Maniego, 2017).

Perhaps the biggest contradiction and failure of the EPIRA to implement its policy of promoting “the utilisation of indigenous and new and renewable energy resources in power generation” lies in its tolerance of automatic fuel cost pass-through provisions in power purchase agreements. This tolerance, which allows power generators using fossil fuels to pass on fuel costs to consumers, makes it harder for renewable energy developers to compete since they “absorb all the risks inherent to using renewable energy sources” (AsianPower, 2017).

It is also a consideration that power supply agreements with new capacity are “inherently long-term” and usually span 20-25 years (ADB, 2018), which could make it harder to shift to renewable sources of energy, given the lock-in period of power supply agreements utilising coal. It is observed that policies are not fully integrated as intended. For example, there are provisions in EPIRA that still have not been fully implemented to this day but will be available in the Wholesale Electricity Spot Market (WESM) 2.0.

3. Power grid infrastructure

The Philippines has focused on meeting rising power demand primarily through the installation of coal-fired baseload power supply. These power plants are inherently inflexible and require stable dispatch at or near their capacities. New technologies such as solar and wind have variable generation, which affect the real-time dispatch in the grid. 

Even prior to the pandemic, the historical hourly power loads have been subject to large variations mainly due to weather. The pandemic highlights the need for more flexible generation as electricity demand fell dramatically during the lockdown period (Ahmed and Dalusung III, 2020b). Several baseload power plants had to shut down as they could not operate at their minimum stable load. The fact that shutting down a coal power plant can take many hours or even days, depending on its age and design, has shown to be an additional issue.

There is also the matter of having a more distributed power supply that will be more resilient in the event of common events such as typhoons. Large coal power plants impose a higher requirement for reserve capacity that smaller distributed power plants can avoid.

The grid will have to be enhanced to be able to handle more variable supply sources and take advantage of end-user demand response and digitalisation of the power infrastructure. It can be approached firstly by implementation of existing laws through the execution of the mechanisms identified in those laws; and second by helping regulatory agencies recognise the value and benefit of shifting to the least-cost power supply options and having a broader framework with sufficient analytical depth with the help of better planning.

4. Investment

One essential factor in the energy transition narrative is the investment in fossil fuels such as coal. International financing is veering away from coal investments by constituting formal coal exit policies to reduce risks and avoid stranded costs. Stranded assets detailed the country’s heavy dependence on coal which in the future will turn into more than US$ 20 Billion worth of stranded assets (Ahmed, 2019). Likewise, it puts forth the question of whether the financial sector is taking into account the additional risks once a robust energy competition policy is implemented. 

The challenge is to help the financial institutions and investors understand the growing shift towards merchant power sales and green energy markets. Additional presence of international finance in the transactions that target and support the more sustainable power supply options will give more comfort to local financial institutions. There is also a need for power developers to share the market risks instead of placing it all on the shoulders of end-users (Ahmed and Dalusung III, 2020a). In return, policymakers and regulators must consider the stranded cost of coal plants and ensure that most of the risks and additional costs will not be passed on to the ratepayers. The current practice of coal power developers passing on market risks to end-users may be precisely the reason why renewable energy technologies have a harder time penetrating the market. Renewable energy technologies may not be necessarily adept at competing with power purchase agreements that virtually shield power developers from costs and allow said developers to pass the risk to consumers through automatic pass-through provisions. 

Aside from this, renewable energy development projects cannot be one hundred percent foreign-owned due to restrictions in the Philippine Constitution. All sources of potential energy and other natural resources as well as their exploration, development, and utilisation are owned and under the full control and supervision of the State. As such, the State may enter into joint venture agreements for the exploration, development, and utilisation of natural resources with only Filipino citizens or with corporations whose capital stock is owned at least sixty percent by Filipino citizens. This restriction on foreign ownership may be a stumbling block to foreign investment in renewable energy technology. A positive development is the recent issuance of the DOE of a Department Circular which allows 100% foreign ownership of large-scale geothermal project or those with minimum investment of US$ 50 million.

There is also the possibility that continued investments and financing in coal and fossil fuels could mean a breach of the fiduciary duties of the members of the Board of lending or financial institutions. The Board of Directors is supposed to pursue the profitability of the company and act in the shareholders’ best interests; these fiduciary duties are owed to the corporation and stockholders. Continued investment in coal and fossil fuels carries with it the corollary risk of stranded assets (Ahmed and Dalusung III, 2020b). The stranding of assets posed by coal investments should affect the risk appetite of banking and financial institutions. The need for a shift in investments towards greener energy is stagnated by the reliance on the automatic fuel pass-through provision, which allows risks and additional costs to simply be passed on to consumers. Thus, the removal of the automatic pass-through provision and the shift in perspective of financial institutions to greener investments must happen synergistically in order to fully support the energy transition.

Overall, the full commitment of the government to the energy transition process is the only way the rest of the challenges can be fully addressed. It is imperative that renewables are recognised as an alternative that is not expensive or unable to support baseload needs. A holistic approach to understanding the full potential of renewables, on the part of the government, key stakeholders, and the general public, is key to pushing for the energy transition.

Windows of Opportunity

The National Renewable Energy Program (NREP) is a national program that outlines the policy framework of the Philippines’ Renewable Energy Act of 2008. These goals include accelerating the exploration and development of renewable energy resources and encouraging their development and utilisation to effectively prevent or reduce harmful emissions. The proposed NREP for 2021 – 2040 focuses on meeting energy self-sufficiency and is set to meet at least 35% of renewable energy share target by 2030. It further outlines that this is achievable if “the Renewable Portfolio Standards (RPS) level is maintained at its current 1% level for 2020-2022 and increased to 2.52% for 2023-2040.” The implications of this could mean at least 5.8 GW of renewable energy capacity by 2030 and at least 22.4 GW by 2040. This proposed NREP was prepared by the National Renewable Energy Board (NREB) under the Department of Energy (DOE). 

To focus on the development of the energy sector, the Philippine Energy Plan (PEP) is a plan that seeks to mainstream access to reliable and affordable energy services for local productivity and countryside development (PH DOE, 2012, 2021). The main goal is to promote better quality of life through the delivery of secure, sustainable, sufficient, affordable, and environment-friendly energy. The updated PEP for 2018 – 2040 has the following objectives: a) increase the production of clean and indigenous sources of energy to meet the growing economic development of the country; b) decrease the wasteful utilisation of energy through the use of energy efficiency tools and strategies; and c) ensure the balance between provision of reliable and reasonably priced energy services, support for economic growth, and protection of the environment. The PEP affirms the DOE’s commitment to pursue national development through attaining energy independence and implementing power market reforms (PH DOE, 2021). NREP targets will be used later on as a basis of development plans by the DOE and NEDA. 

Overarching all of the plans from various government agencies, the Philippine Development Plan (PDP) is central when it comes to development planning. The PDP is a five-year plan anchored on the 0–10 point Socioeconomic Agenda, while taking into account the country’s international commitments. It is founded on three pillars: regaining peoples’ trust in public institutions and among fellow Filipinos, inequality-reducing transformation through increasing opportunities for growth of output and income; and increasing potential growth through sustaining and accelerating economic growth. Government agencies are mandated to align their respective programs and activities with the current PDP for 2017 – 2022 (PH DOE, 2012, 2021).

The Philippines recently submitted its Nationally Determined Contributions (NDCs), the governments’ contribution to global climate action and collective effort to limit warming to 1.5 to 2 degrees Celsius above pre-industrial levels. The NDC embodies the efforts of each country to reduce national emissions and achieve the long-term goals of the Paris Agreement. 

Based on a multi-stakeholder consultation done on 03 February 2021, the Department of Energy mentioned that it is working closely with the Department of Finance regarding the maximisation of green energy funds. There was discussion on exploring alternative energy sources but it must be