The Philippines' Current Financial Mechanisms that Support the

Implementation of Utility Based Renewable Energy and Efficiency**

Dr. N. A. Orcullo, Jr.***

Professor, De La Salle University-Dasmariñas,
Cavite, Philippines

1. Background

The energy crisis of the early 1970s made the world realize that development of
nations and volatile market prices of petroleum-based products are intertwined. Leaders of
both developed and developing countries realized that something has to be done to address
this concern and reality. The volatility of market prices of petroleum-based fuels in the global
markets and its used as a political as well as economic tool among the major oil producers
made it clear to world leaders that strategic decisions have to be made to cushion the
implications of erratic prices of crude products and its derivatives.

The Philippine government accepted the reality and in mid-1970s, then President
Marcos reacted by putting in place a government corporation ( Philippine National Oil
Company ) and established Petrophil Corporation ( the successor of Esso Philippines ).
Realizing the importance of energy as a dominant commodity with a pivotal role in
Philippine economy, Presidential Decree was issued creating the Energy Development Board
( EDB ) and PD 1206 creating the Department of Energy ( DOE ) thus having a cabinet-level
post for energy matters. During the administration of the President Marcos, an ambitious
energy plan and policy was put in place and this includes developing alternate sources of
energy such as solar power, wind power, hydro, and geothermal power if only to cushion
impact of high cost of imported oil particularly on the country’s foreign exchange reserve.
Eventually, the National Energy Plan was crafted under the auspices of the DOE and its
attached agencies. The development of the Philippine Energy Plan was institutionalized and it
requires a series and parallel programs/projects to address energy supply amidst threats of
global energy crisis. Non-petroleum energy sources like geothermal and hydro power were
developed to the fullest extent and petroleum exploration in the domestic scene became a
vibrant industry.1

2. Legal mandates established

Over the last three decades commencing in early 1970s when the Philippine
government reacted to the global energy crisis brought by the unilateral moves of oil
exporting countries and the OPEC oil embargo, a number of decrees and laws were put in
place. An enumeration of the relevant decrees and laws that resulted to a number of power
____________________________________________
**
Presented during the APEC workshop on “ Recent Advances in Utility Based Financial Mechanisms
that Support Renewable Energy “ held at the Sheraton Waikiki Hotel, Hawaii, USA, March 30 -
April 1, 2009.

***
Professor, De La Salle University-Dasmariñas, Dasmariñas, Cavite, Philippines

1
A personal account of the author being one of the pioneering technical staff of the Non-conventional Energy
Resources Division of DOE and having been a part of DOE circa 1979 – 1990.

1
 Table 1. Legal mandates and motivating laws and policies

1. Presidential Decree 910 ( Energy Development Board ) – 1976

2. Presidential Decree 1206 ( DOE Charter ) – 1976
3. Presidential Decree 1068 ( NERDP Program ) - 1977
4. Foreign Investment Act ( RA 7042/RA 8719 ) - 1991
5. Executive Order 215 ( BOT projects ) – 1995
6. Executive Order 462/AEO 232 - 1997
7. DOE New Charter ( RA 7638 ) – 1992
8. BOT Law ( RA 6967/RA 7718 ) – 1994
9. Clean Air Act ( RA 1234 ) – 1999
10. Ecological Solid Waste Management Act ( RA 9003 ) - 2000
11. EPIRA Law ( RA 9136 ) - 2001
12. Biofuels Law ( RA 9367 ) - 2006
13. Renewable Energy Law ( RA 9513 ) - 2008

development projects including efforts related to renewable energy development is shown in

Table 1.

In the renewable energy sector, Presidential Decree 1068 was issued in 1977
mandating the wider and organized efforts in the development, promotion and commercial
utilization of non-conventional energy sources. The Non-conventional Energy Resources
Development Program ( NERDP ) of the DOE was in the forefront of the efforts to develop
the potentials of renewable energy technologies triggering research and development projects
dealing with solar, wind energy and biomass energy sources. A number of academic
institutions as well as research organizations were involved in various R & D efforts funded
under the NERDP. A variety of undertakings were pursued from research to technology
promotions all aimed at developing the potentials of biomass-based resources and
technologies eventually popularizing the use of biogas, gasifiers, solar water heaters, wind-
powered pumps, wind power conversion systems, bioethanol, coco-diesel, and most recently
biodiesel in the form of crude methyl ester ( CME ).

The series of efforts led to putting in place administrative and legal frameworks.
Major policy decisions were made by the government leadership and landmark laws were put
in place via a decree during Martial Law period as well as Executive Orders and by acts of
Congress. The Foreign Investment Act ( RA 7042 as amended by RA 8719 ) served as a come
on for many local and foreign investors for the incentives it promises and the investors in the
power generation sectors took advantage of it. The issuance of the Executive Order 215 that
eventually resulted to the enactment of the Build-Operate-Transfer Law ( RA 6957 as
amended by RA 7718 ) resulted to a large number of private sector-financed power generation
plants once a major responsibility and monopoly which later became the budgetary burden of
the government. Moreover, the enactment of the Clean Air Act ( RA 8749 ) and Ecological
Solid Waste Management Act ( RA 9003 ) also gave a push and served as the motivator for
investors to consider green, renewable and clean energy technologies. Furthermore, the
enactment of Electric Power Industry Reform Act ( RA 9136 ), Biofuesl Law of 2006 ( RA
9367 ), and most recently the Renewable Energy Act of 2008 ( RA 9513 ) are developments
2
that further triggered private sector investments in power generation as well as transmission
and many looked at this particular law as a great booster for inviting more local and foreign
investments in renewable energy projects.

Prior to the enactment of the abovementioned laws, investments in energy

projects/ventures were included in the investment priorities program of the Board of
Investments thus entitling investors a number of incentives such as tariff/duty privileges as
well tax holidays. Along with the political will of the government leadership as well as
management initiatives of concerned government agencies, the renewable energy sector is
now a vibrant sector of the economy. Several renewable energy companies are now serving
the market and more conspicuously are the megawatt level business project in wind and solar
photovoltaics that is now part of the electrical grid system.

3. Renewable energy resources and policies 2

The country is endowed with natural resources which allowed it to develop its
potentials and in many ways contributed a lot to the power supply of the country. In a study
released by the New and Renewable Energy Laboratory ( NREL ) of USA, the following
potentials of renewable energy was identified.2

a) Wind resources – over 10,000 km2 with 76,000 MW of potential installed capacity.
b) Micro-hydro applications – potential capacity of at least 500 KW in Luzon
and Mindanao islands
c) Solar radiation nationwide – an annual potential average of 5.0 – 5.1 KWh/m2/day
d) Mini-hydro potential capacity of 1,784 MW capacity for 888 sites
e) Ocean energy resources – potential capacity of about 170,000 MW
f) Biomass ( Bagasse ) total potential of 235 MMBFOE

To enable the development of the potentials of its renewable energy resources, the
Philippine Energy Plan enshrined a commitment to a renewable energy policy development
as follows:

a) Renewable energy policy framework launched in 2003.

b) Policy bias towards the development and utilization of renewable energy:

i) Promote more private sector participation in RE development

ii) Encourage the use of renewable energy in rural and off- grid
electrification
iii) Renewable energy projects given “ priority “ for special incentives

c) Having a renewable energy law to promote development and utilization of

clean energy ( enacted in 2008 as Republic Act 9513 )

Giving substance and concrete meaning, the renewable energy development policy
framework was translated into long-term objectives as follows:
_________________________________________
2
Karunungan, E., Renewable Energy Fuels: Key to Energy Independence and Security, Department of Energy,
Makati City, Philippines, 2008

3
 a) Increase renewable energy-based capacity by 100 % - “ 100 – 10 “
b) Be the number 1 geothermal energy producer in the world.
c) Be the number 1 wind energy producer in Southeast Asia
d) Double hydro electric capacity.
e) Be the solar cell manufacturing hub in ASEAN.
f) New contribution of biomass, solar and ocean energy by more than 100 MW
g) Increase non-power contribution of RE to energy mix by 10 MMBFOE with the
next 10 years.

Giving concrete results to the long-term objectives set forth are the various completed
and on-going undertakings as summarized in Table 2.

4. Market system for electric power

The monopoly of power generation by National Power Corporation under Presidential

Decree was dismantled through a privatization policy. This policy statement tempered with
the enactment of the Electric Power Industry Reform Act or EPIRA Law ( RA 9136 ) resulted
to a new market system for the electric energy sector. The electric power sector in particular
was transformed from a monopolistic market to that of a free market system open to any
interested parties limited only to ownership structure as mandated by the Philippine
constitution.

The developments in the power generation sector resulted to a new market system as
shown in Figure 1. As shown in Figure 1, the National Power Corporation ( NPC ) is still
presented as a power generator or generating company ( GENCO ) pending its full
privatization. However, private sector investments in power generation are now in place as
evidenced by a growing number of independent power producers ( IPPs ). Also a significant

Table 2. Renewable energy development status

Resource Existing Number of plants On-going

capacity (MW) in operation projects
Geothermal 2,027.07 14 geothermal plants 10 projects offered to
private investor ( 300 – 500
MW )thru Contracting
Round
Hydro 3,367.07 21 large hydro, 52 mini- 4 mini-hydros, 14 large
hydro, 61 micro hydro hydro under evaluation

Wind 25.2 33 KW In Ilocos Norte, 5 KW NPDC wind farm, 7 sites

Camarines in 180 KW in on resource assessment
Batanes, 6 KW in Boracay
Solar 5.161 960 KW – CEPALCO, Sunpower Phil Solar
Cagayan e Oro Plant/rural electrification
729 KW Camarines Sur projects

Biomass 20.93 1 MW Isabela

Ocean R & D activities – Demo

projects in Leyte/Mindanao

Source: E. Karunungan ( Department of Energy ), Philippines

4
 Self-generated
New and Renewable
Energy Technologies (NRETs) Power
( Hydro, Geothermal,
Solar, Wind, Methane)
C
O
N
S
Electric power distributors:
U
Electricity grid system - Manila Electric Company M
- Private utilities E
- Electric cooperatives R
S

Traditional
Energy Sources
( Petroleum-based
- NPC/IPPs )

Figure 1. The electricity grid and distribution

system in the Philippines

development in the new market system is that electricity distribution companies ( i. e.,
privately-owned utilities and electric cooperatives ) are now authorized to develop and
produce their electric power thus allowing backward integration opportunities not only for
economic but also for technical reasons as well.

Adding more incentives to both the generators and buyers of electric power is the
provision in the EPIRA Law which mandates the establishment of the Wholesale Electricity
Spot Market ( WESM ). The spot market is a platform that simulates a free market system that
can work to the advantage of both the GENCOs and the distribution companies or in certain
cases, to the contrary. Hopefully, the new market framework illustrated by the diagram shown
in Figure 2 will result to benefits to end users in the form of affordable or cheaper tariffs for
electric power.

The variety of laws and policies set forth by the government ensure and allow the free
market system to work giving market competition to play well. With new and renewable
energy technologies ( NRET ) fitted against petroleum-based power plants with more
incentives favoring the former, it is hoped that new and renewable energy businesses and
industry would emerge and flourish.

5. The electrical grid system

To ensure connectivity and markets for the output of commercial power generation
projects large or small, the country operates an electricity grid system. This grid scheme was
in place even at the time when power generation and region-wide distribution was a
5
 WHOLESALE
ELECTRICITY
Self-generated
SPOT
MARKET power

NATIONAL DISTRIBUTION
GENCO TRANSMISSION COMPANIES End Users
(NPC/IPPs) COMPANY ( MERALCO, ELECTRIC ( Commercial/
(TRANSCO) COOPS, etc. ) Residential )

Generation Transmission Wheeling/Other End user bill

charge charge charges

Figure 2. The power distribution system and WESM

responsibility monopoly of NPC. There is grid for the major islands of Luzon, Visayas and
Mindanao where provincial level power distributors ( e. g., electric cooperatives ) can source
their power for retail to institutional and residential consumers.

As mandated by the EPIRA Law, the idea of the grid and Grid Code was put in place.
As defined in the EPIRA Law, grid refers to the high voltage backbone system of
interconnected transmission lines, substations and related facilities. The EPIRA Law
espouses a Grid Code referring to the set of rules and regulations governing the safe and
reliable operation, maintenance, and development of the high voltage backbone transmission
system and its related facilities.3

Also forming part of the provisions of the EPIRA Law, a National Transmission
Corporation ( TRANSCO ) is organized to acquire all the transmission assets of the NPC.
TRANSCO was specifically organized to assume the electrical transmission function of NPC,
and have all the powers and functions granted unto it. TRANSCO assumes the authority and
responsibility of NPC for the planning, construction and centralized operation and
maintenance of high voltage transmission facilities, including grid interconnections and
ancillary services.

With regional grid system now in place, sufficient infrastructural provision are also in
place for any generation company ( GENCO ) using renewable energy sources to interconnect
with the electricity grid thus assuring a ready market of its output. It is just a matter for the

____________________________________________
3
Electric Power Industry Reform Act of 2001 ( RA 9513 )

6
renewable energy power generator to deliver an electrical energy output consistent with the
voltage levels of the power grid nearest to it or to the specific demand of its buyer/user should
it opt to directly embed its output to the distribution system of the utility company.

The grid system at the regional level allows the transport of indigenous and renewable
energy-based system to other parts of island in the country thus enhancing efficiency and
maximizing the use of the energy output at the same time providing the electricity supply in
areas with insufficient generation capacity. This is the particular case in Negros island where
excess capacity from geothermal plants was transmitted to Cebu island ( both in the Visayas
region ) using the submarine cable that connects these two islands.

Following the mandate under the EPIRA Law, there is now a Philippine Grid Code
promulgated by the Energy Regulatory Commission ( ERC ) which it approved per
Resolution No. 115.

6. Power sector situationer

The development of various energy sources to produce electricity is one of the lessons
learned by developing countries in reacting to the negative impacts of the unilateral actions of
the major oil producers particularly the Organization of Petroleum Exporting Countries (
OPEC ). The developments in the supply side of the energy sector consistent with the
government policy of diversifying energy sources resulted to an energy supply mix across
various parts of the country. In particular, shown on Figure 3 is the power situationer in the
electric power grid of Luzon showing the capacity and generation mix.

As shown in Figure 3, the combined share of indigenous and renewable energy (

geothermal, hydro ) is already at 26 percent ( in installed capacity ) with a small percentage
from wind energy which is totally zero years ago. The grid capacity and generation mix for
Mindanao region is shown in Figure 4. As shown in Figure 4, the Mindanao grid is largely
hydro-based power sources and it accounts for 51 percent in terms of installed capacity. Also
in Mindanao, solar energy is making a dent both in capacity and generation mix where in fact
years back, it is zero just like wind energy sources. In the coming years, it is hoped that both
wind and solar energy will have substantial number or quantities in the country’s installed
capacity and generation mix.

Indicative of the increasing concerns of the private sector in directly participating in

the supply side of the energy business by way of direct investments is the diagram shown in
Figure 5. As shown in Figure 5, renewable energy-based power sources are expanding in
capacity in the Luzon grid. Wind power project in Burgos ( NorthWind Power Development
Corporation ) is expected to increase to 86 MW by 2011, Pagudpud wind power project is
projected to be generate 20 MW and Pamplona wind power project is expected to install 40
MW.

Projected to be major renewable energy projects also to contribute to the Luzon grid
are the green energy projects expected to be established. The Nueva Ecija biomass project of
20 MW in capacity is projected to be on stream by the year 2011,

In the Visayas grid, the projected contribution of biomass energy is shown in Figure 6.
As shown in Figure 6, private sector initiative is active with a projected energy supply of 36
7
 Installed Capacity
Wind
Hydro
0%
19% Coal
32%
Geothermal
7%
Capacity Mix

Natural Gas Oil-based

24% 18%

11,907 MW

Power Generation
Hydro Wind
12% 0%
Coal
Geothermal
30%
9%

Generation Mix
Oil-based
3%
Natural Gas
46%

Figure 3. Power sector situationer

43,169 GWh
Note: Excluding SPUG generation
2008 Preliminary generation data

Source: Department of Energy

Installed Capacity
Solar Coal
0% 12%

Hydro
51%
Oil-based Capacity Mix
31%

Geothe rmal
6%

1,933 MW

Solar
Power Generation
Coal
0%
19%

Oil-based
Generation Mix Hydro
56% 15%

Geothermal
10%

7,878 GWh

Note: Excluding SPUG generation

Figure 4. Power sector situationer 2008 Preliminary generation data

Source: Department of Energy

8
 Luzon Grid
Green Power
Nueva Ecija Biomass (18 MW)=2011
Pagudpud Wind (40 MW) Pangasinan Biomass 1 (18 MW)=2011
Burgos Wind (86 MW) – 6 MW=2009 Pangasinan Biomass 2 (18 MW)=2013
40 MW=2010
40 MW=2011 Balintingon River (44 MW)-
Northwind pamplona (30 MW)=2015 2015

CFB Phase II (50 MW)-2010 Pagbilao Exp. (400 MW)

Redondo Coal Fired (2x150 MW)-2012 Quezon Power Exp.(500 MW)

Pantabangan Expansion (78

Energy World CCGT
MW)
(2x150 MW) = 2011
Kalayaan CBK Expansion
(360 MW)-2013

2x300 MW Coal-Fired
GN Power (600 MW)
Legend:
2012

Natural Gas
First Gen San Gabriel (550 MW)-2011
Ilijan Expansion (300 MW)
HEP

Tanawon Geo (40 MW)-2011

Geothermal
Rangas Geo (40 MW)-2015
Manito-Kayabon Geo (40MW)-2016
Coal-Fired

CCGT

Figure 5. Private Sector Initiated Power Projects

Source: Department of Energy

Visayas Grid
DMCI Concepcion
Power Corporation
(100 MW) Aklan HEP (41 MW)-2012
2012 Villasiga HEP (8MW)-2013 Toledo Expansion
(246 MW) Southern Leyte Geo
Global Business Phase I-2010 (80 MW)
Power Corp (164 MW) Green Power Panay Phase II-2011 2016
Phase I-2010 (36 MW)-2010
Phase II-2011

Dauin Geo (40 MW)

P A N A Y 2010

Legend:
KEPCO SPC Power
(200 MW)
Biomass
EDC Nasulo 2011
Geothermal
Hydroelectri (20 MW) S
O

2011 N
E
G
R

Geothermal

Coal-Fired

Figure 6. Private Sector Initiated Power Projects

Source: Department of Energy

9
 For the Mindanao grid, the upcoming contribution of biomass-based energy is shown
in Figure 7. A 10 MW power plant of Green Power Biomass is projected to be on stream by
the year 2010.

The historical energy supply mix in the country as facilitated by the grid system is
shown in Table 3. As shown in Table 3, indigenous energy production increased from a share
of 15.49 percent in 1993 to 49.07 percent in 2000 and 55.8 percent by the end of year 2007.
Much of the increase in contribution of indigenous energy supply is accounted for by hydro,
geothermal, solar, wind, and to a certain extent, biodiesel in the form of crude methyl ester (
CME ).

7. The Renewable Energy Act of 2008

Giving inspiration and impetus to the development of the renewable energy sector of
the Philippines are the administrative policies/directors set forth and various laws enacted as
earlier mentioned as well as the political will to undertake the specific programs and projects.

After a series of programs, projects, and a variety of initiatives to develop, promote,

and commercialize the use of renewable energy in the country, a landmark legislation for the
renewable energy sector was put in place by Congress. This is the enactment of the Republic
Act No. 9513 otherwise known as the Renewable Energy Law ( REL ) of 2008.

Mindanao Grid
CEPALCO Cabulig HEP
(8 MW)
Minergy Bunker Fired 2011 Tagoloan HEP(68 MW)
(20 MW)-2010 2012

Green Power
Biomass(18 MW)-2010

HEDCOR Sibulan Inc.

AGUS 3 HEP(225 MW) (42.5 MW)
2011 Oct 2009

Legend: Conal Holding CFTPP

(200 MW)-2011
Sultan Kudarat Coal
Oil-based (200 MW)-2012

EDC Mindanao Geothermal 3 HEDCOR Tamugan.

Hydroelectri
(50 MW) (34.5 MW)-2010
2014
Biomass

Coal-Fired

Figure 7. Private sector initiated power projects

Source: Department of Energy

10
 Table 3. Energy supply mix of the Philippines, MTOE

1993 % Share 1995 % Share 2000 % Share 2005 % Share 2007 % Share

INDIGENOUS ENERGY 15.49 53.07 15.43 46.51 19.48 49.07 21.20 54.57 21.97 55.69

OIL 0.45 1.53 0.13 0.39 0.06 0.14 0.61 1.57 0.63 1.59

NATURAL GAS - 0.00 0.00 0.01 0.01 0.02 2.70 6.95 3.03 7.69

COAL 0.80 2.73 0.68 2.05 0.71 1.80 1.52 3.91 1.80 4.55

Subtotal 16.73 57.33 16.24 48.96 20.26 51.03 26.03 67.01 27.42 69.52

HYDRO 1.25 4.29 1.55 4.68 1.94 4.89 2.09 5.37 2.13 5.41

GEOTHERMAL 4.87 16.70 5.28 15.90 10.00 25.19 8.52 21.92 8.78 22.27

BIOMASS (Bagasse and Other RE) 8.12 27.82 7.79 23.48 6.76 17.02 5.77 14.84 5.56 14.10

SOLAR AND WIND 0.00 0.00 0.00 0.01 0.01

CME 0.00 0.00 0.00 0.03 0.08

Subtotal 14.25 48.81 14.62 44.06 18.70 47.10 16.37 42.14 16.51 41.87

NET IMPORTED ENERGY 13.70 46.93 17.75 53.49 20.22 50.93 17.65 45.43 17.48 44.31

OIL 13.02 44.62 16.84 50.77 16.39 41.30 13.94 35.87 13.40 33.96

COAL 0.67 2.30 0.90 2.72 3.82 9.63 3.71 9.55 4.08 10.34

ETHANOL 0.00 - - 0.00 0.00 0.00 0.01

0.00

TOTAL ENERGY 29.19 100.00 33.18 100.00 39.69 100.00 38.85 100.00 39.44 100.00

GROWTH RATE (Total Energy), % 5.49 2.93 0.10 1.81

Self Sufficiency % 53.07 46.51 49.07 54.57 55.69

Source: Department of Energy

The Renewable Energy Law ( REL ) made a number of significant provisions to

address the development, financing, and marketing electricity as well as incentives for
renewable energy-based power generation systems. Under the provisions of the Renewable
Energy Law, general incentives have been accorded to investors in renewable energy projects
as stipulated under Chapter III of the said act. In particular, the said law provided as follows:

SEC.15. Incentives for Renewable Energy Projects and Activities. – RE developers of

renewable energy facilities, including hybrid systems, in proportion to and to the extent of
the RE component, for both power and non-power applications, as duly certified by the
DOE, in consultation with the BOI, shall be entitled to the following incentives:
(a) Income Tax Holiday (ITH) – For the first seven (7) years of its commercial operations,
the duly registered RE developer shall be exempt from income taxes levied by the national
government.

Additional investments in the project shall be entitled to additional income tax exemption on the
income attributable to the investment: Provided, That the discovery and development of new RE
resource shall be treated as a new investment and shall therefore be entitled to a fresh package of
incentives: Provided, further, That the entitlement period for additional investments shall not be
more than three (3) times the period of the initial availment of the ITH.

(b) Duty-free Importation of RE Machinery, Equipment and Materials – Within the first
ten (10) years upon the issuance of a certification of an RE developer, the importation of
machinery and equipment, and materials and parts thereof, including control and
communication equipment, shall not be subject to tariff duties: Provided, however, That the
said machinery, equipment, materials and parts are directly and actually needed and used
exclusively in the RE facilities for transformation into energy and delivery of energy to the
point of use and covered by shipping documents in the name of the duly registered operator
to whom the shipment will be directly delivered by customs authorities: Provided, further,

11
That endorsement of the DOE is obtained before the importation of such machinery,
equipment, materials and parts is made.
Endorsement of the DOE must be secured before any sale, transfer or disposition of the
imported capital equipment, machinery or spare parts is made: Provided, That if such sale,
transfer or disposition is made within the ten (10) -year period from the date of importation,
any of the following conditions must be present:
(i) If made to another RE developer enjoying tax and duty exemption on
imported capital equipment;
(ii) If made to a non-RE developer, upon payment of any taxes and duties due on
the net book value of the capital equipment to be sold;
(iii) Exportation of the used capital equipment, machinery, spare parts or source
documents or those required for RE development; and
(iv) For reasons of proven technical obsolescence.

When the aforementioned sale, transfer or disposition is made under any of the conditions
provided for in the foregoing paragraphs after ten (10) years from the date of importation,
the sale, transfer or disposition shall no longer be subject to the payment of taxes and duties;

(c) Special Realty Tax Rates on Equipment and Machinery. – Any law to the contrary
notwithstanding, realty and other taxes on civil works, equipment, machinery, and other
improvements of a Registered RE Developer actually and exclusively used for RE facilities
shall not exceed one and a half percent (1.5%) of their original cost less accumulated normal
depreciation or net book value: Provided, That in case of an integrated resource development
and generation facility as provided under Republic Act No. 9136, the real property tax shall
only be imposed on the power plant;

(d) Net Operating Loss Carry-Over (NOLCO). – The NOLCO of the RE Developer 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 such loss:
Provided, however, That operating loss resulting from the availment of incentives provided
for in this Act shall not be entitled to NOLCO;

(e) Corporate Tax Rate – After seven (7) years of income tax holiday, all RE Developers shall
pay a corporate tax of ten percent (10%) on its net taxable income as defined in the National
Internal Revenue Act of 1997, as amended by Republic Act No. 9337. Provided, That the RE
Developer shall pass on the savings to the end-users in the form of lower power rates.

(f) Accelerated Depreciation. - If, and only if, an RE project fails to receive an ITH before
full operation, it may apply for Accelerated Depreciation in its tax books and be taxed based
on such: Provided, That if it applies for Accelerated Depreciation, the project or its
expansions shall no longer be eligible for an ITH. 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
twice the rate which would have been used had the annual allowance been computed in
accordance with the rules and regulations prescribed by the Secretary of the Department of
Finance and the provisions of the National Internal Revenue Code (NIRC) of 1997, as
amended. Any of the following methods of accelerated depreciation may be adopted:
i) Declining balance method; and
ii) Sum-of-the years digit method

(g) Zero Percent Value-Added Tax Rate – The sale of fuel or power generated from
renewable sources of energy such as, but not limited to, biomass, solar, wind, hydropower,
geothermal, ocean energy and other emerging energy sources using technologies such as fuel
cells and hydrogen fuels, shall be subject to zero percent (0%) value-added tax (VAT),
pursuant to the National Internal Revenue Code (NIRC) of 1997, as amended by Republic
Act No. 9337.

12
 All RE Developers shall be entitled to zero-rated value added tax on its purchases of local
supply of goods, properties and services needed for the development, construction and
installation of its plant facilities.
This provision shall also apply to the whole process of exploring and developing renewable
energy sources up to its conversion into power, including but not limited to the services
performed by subcontractors and/or contractors.

(h) Cash Incentive of Renewable Energy Developers for Missionary Electrification -- A

renewable energy developer, established after the effectivity of this Act, shall be entitled to a
cash generation-based incentive per kilowatt hour rate generated, equivalent to fifty percent
(50%) of the universal charge for power needed to service missionary areas where it
operates the same, to be chargeable against the universal charge for missionary
electrification;

(i) Tax Exemption of Carbon Credits—All proceeds from the sale of carbon emission credits
shall be exempt from any and all taxes;

(j) Tax Credit on Domestic Capital Equipment and Services. – A tax credit equivalent to one
hundred percent (100%) of the value of the value-added tax and custom duties that would
have been paid on the RE machinery, equipment, materials and parts had these items been
imported shall be given to an RE operating contract holder who purchases machinery,
equipment, materials, and parts from a domestic manufacturer for purposes set forth in this
Act: Provided, That prior approval by the DOE was obtained by the local manufacturer:
Provided, further, That the acquisition of such machinery, equipment, materials, and parts
shall be made within the validity of the RE operating contract.

In addition to the aforementioned incentives under Section 15 of the law, Section 21

provided incentives for commercialization of renewable energy technologies to cover all
manufacturers, fabricators and suppliers of locally-produced RE equipment and components
duly recognized and accredited by the DOE (in consultation with DOST, DOF and DTI),
shall, upon registration with the BOI. This particular provision identified the Renewable
Energy Sector as a priority investment sector that will regularly form part of the country’s
Investment Priority Plan. As such, all entities duly accredited by the DOE under the REL are
entitled to all the incentives such as the following:
(a) Tax and Duty-free Importation of Components, Parts and Materials. – All shipments
necessary for the manufacture and/or fabrication of RE equipment and components shall be
exempted from importation tariff and duties and value added tax: Provided, however, That
the said components, parts and materials are: (i) not manufactured domestically in
reasonable quantity and quality at competitive prices; (ii) directly and actually needed and
shall be used exclusively in the manufacture/fabrication of RE equipment; and (iii) covered
by shipping documents in the name of the duly registered manufacturer/fabricator to whom
the shipment will be directly delivered by customs authorities: Provided, further, That prior
approval of the DOE was obtained before the importation of such components, parts and
materials;

(b) Tax Credit on Domestic Capital Components, Parts and Materials. – A tax credit
equivalent to one hundred percent (100%) of the amount of the value-added tax and custom
duties that would have been paid on the components, parts and materials had these items
been imported shall be given to an RE equipment manufacturer, fabricator, and supplier
duly recognized and accredited by the DOE who purchases RE components, parts and
materials from a domestic manufacturer: Provided, That such components, and parts are
directly needed and shall be used exclusively by the RE manufacturer, fabricator and
supplier for the manufacture, fabrication and sale of the RE equipment: Provided, further,
That prior approval by the DOE was obtained by the local manufacturer;

13
 (c) Income Tax Holiday and Exemption. – For seven (7) years starting from the date of
recognition/accreditation, an RE manufacturer, fabricator and supplier of RE equipment
shall be fully exempt from income taxes levied by the National Government on net income
derived only from the sale of RE equipment, machinery, parts and services; and

(d) Zero-rated value added tax transactions – All manufacturers, fabricators and suppliers of
locally produced renewable energy equipment shall be subject to zero-rated value added tax
on its transactions with local suppliers of goods, properties and services.

8. Feed-in tariff system for renewable energy sources

Assurance of market outlet for renewable power generation project is vital to the
development of renewable energy sector. To have this scenario and to encourage proliferation
of energy from renewable energy sources particularly those intended for connection with the
regional electricity or utility grid, Section 7 of the REL made specific provisions and quoted
herein as follows:
SEC. 7. Feed-In Tariff System. -- To accelerate the development of emerging renewable
energy resources , a feed-in tariff system for electricity produced from wind, solar, ocean,
run-of-river hydropower and biomass is hereby mandated. Towards this end, the ERC in
consultation with the National Renewable Energy Board (NREB) created under Section 27
of this Act shall formulate and promulgate feed-in tariff system rules within one year upon
the effectivity of this Act which shall include, but not limited to the following:
(a) Priority connections to the grid for electricity generated from emerging renewable energy
resources such as wind, solar, ocean, run-of-river hydropower and biomass power plants
within the territory of the Philippines;
(b) The priority purchase and transmission of, and payment for, such electricity by the grid
system operators;
(c) Determine the fixed tariff to be paid to electricity produced from each type of emerging
renewable energy and the mandated number of years for the application of these rates,
which shall not be less than 12 years;
(d) The feed-in tariff to be set shall be applied to the emerging renewable energy to be used
in compliance with the renewable portfolio standard as provided for in this Act and in
accordance with the RPS rules that will be established by the DOE.

The Renewable Energy Market ( REM ) is likewise established to facilitate compliance

with the provisions of the law. The Department of Energy is tasked to establish the REM
and shall direct Philippine Electric Market Corporation (PEMC) to implement changes to
the WESM Rules in order to incorporate the rules specific to the operation of the REM
under the WESM.

9. Net-metering mechanism

To have a sure or captive market for electrical energy output of renewable energy
project particularly in situations where there is an excess power at the level of
institutional consumers who ventured into self-generation, there has to be a mechanism to
address the possibility of selling out extra output to the electrical grid system. This
predicament has been addressed by the provisions of the REL on net metering and this in
fact is one of the unique provisions of the law.

14
 The net-metering scheme provided for under Section 10 reads as follows:

SEC. 10. Net-metering for Renewable Energy. – Subject to technical considerations and
without discrimination and upon request by distribution end-users, the distribution utilities
shall enter into net-metering agreements with qualified end-users who will be installing RE
system.

The ERC, in consultation with the NREB and the electric power industry
participants, shall establish net metering interconnection standards and pricing
methodology and other commercial arrangements necessary to ensure success of the net-
metering for renewable energy program within one (1) year upon the effectivity of this Act.

The distribution utility shall be entitled to any Renewable Energy Certificate

resulting from net-metering arrangement with the qualified end-user who is using an RE
resource to provide energy and the distribution utility shall be able to use this RE certificate
in compliance with its obligations under RPS.

The DOE, ERC, TRANSCO or its successors-in-interest, DUs, PEMC and all
relevant parties are hereby mandated to provide the mechanisms for the physical connection
and commercial arrangements necessary to ensure the success of the Net-metering for
Renewable Energy program, consistent with the Grid and Distribution Codes.

The net metering mechanism stands to benefit electricity distributors and institutional
consumers with potentials for generating their own electricity whose excess power capacity
can be sold back to the gird system. The importance of the net metering scheme lies in the fact
that renewable energy plant capacity can be maximized when done by users and distributors
so that there is a sure market for surplus energy production.

10. Role of government agencies

Under the stated deregulation policy in the energy sector, private investors are given
much leeway and privilege in doing their business particularly with prices of petroleum-based
products which is left to market conditions. Such is not the case however, with the electric
power sector where certain controls and regulations are put in place but giving the investors in
the power generation and distribution business the opportunity to recoup their investments
plus reasonable returns at the same time addressing the concerns of end users of electric
power. This concern is done by way of a series of public or consultative hearings whenever
there are tariff rate changes.

The Electric Power Industry Reform Act of 2001 ( RA 9136 ) has given government
agencies like the Department of Energy ( DOE ) and Energy Regulatory Commission ( ERC )
certain specific mandate. These agencies have substantial authority to protect the various
stakeholders like the investors in the electric power sector including the interests and concerns
of the public at large. Generators of power from whatever sources including renewable energy
resources and systems/technologies has to apply for and be cleared and/or endorsed by the
Department of Energy. Final authority ( i. e., Certificate of Compliance ) to market the output
of generation companies (GENCOs ) as well as distribute the same at certain prices or tariff is
left to the judgment of the ERC guided by the provisions of the EPIRA Law and its
implementing rules and regulations. Deregulated as it is, the electric power industry is fully
monitored by DOE and ERC as diagrammatically shown in Figure 8.

15
 ENERGY REGULATORY COMMISSION

Generation Transmission Wheeling/ End user

charge charge Other charges rate/Monthly bill

NATIONAL DISTRIBUTION
GENCOs TRANSMISSION COMPANY END USER
COMPANY ( MERALCO/ ( Industrial/
(NPC/IPPs)
ELECTRIC COOPS ) Residential)
(TRANSCO)

DEPARTMENT OF ENERGY

Figure 8. The electric power industry of the Philippines

10.1 The role of ERC in the EPIRA regime

Among others, the privatization policy of the government gave the private sector
privilege and rights to invest in the power generation sector under the Build-Operate-Transfer
( BOT ) Law particularly in the early 1990s when the country experienced an acute power
outages. This scenario gives the distributors and users of electric power an option from whom
to buy or source their electricity which they will eventually distribute in their respective
franchise or service areas. This scenario has also given some power distributors to go into
horizontal and backward integration options thus making the price of electric power and
object of competition hopefully to the benefit of the end users.

Added to this scenario is the creation of Wholesale Electricity Spot Market ( WESM )
which further give the institutional buyers ( i. e., utility companies/electric cooperatives ) the
option where the buy or source their power at any given time of day which they believed is
advantageous. This scenario is diagrammatically explained by Figure 9.

Given the liberalized scenario in power generation and the options available to
distributors of electricity at end user level, ERC plays a critical role given its mandate to
address the interest of the consumer - the pubic at large – without jeopardizing the return on
investment and profit motives of the generation companies and the investors in general.

Under the EPIRA Law, prices charged by a generation companies is not categorically
stated as subject to regulation by ERC, however, generation companies are required to submit
their financial statements ( to ERC ) to address market power abuse or anti-competitive
behavior. Unlike generation companies, transmission of electric power is a regulated common

16
 Independent Self
Power generated
Producers NRET power
(IPPs)

WHOLESALE DISTRIBUTION End users

GENCO ELECTRICITY COMPANIES (Commercial/
TRANSCO (MERALCO/
(NPC) SPOT MARKET Residential
CEPALCO/INEC)
( WESM ) consumers)

Generation Transmission Wheeling/ End user bill

charge charge Other charges

Figure 9. Power sourcing options for electric power distributors

electricity carriers and subject to ratemaking powers of the ERC. The distribution of
electricity ( by private utilities and electric cooperatives ) to end users/consumers is subject to
regulation by ERC hence tariff rates and other charges has to be approved by ERC.
Diagrammatically, the role critical role played by ERC and the electricity rate or tariff making
process is shown in Figure 10.

10.2 Role of WESM in electricity trade

The EPIRA Law established the Wholesale Electricity Spot Market ( WESM ) giving
further options to concerned parties get the most out of the benefits of a free market
enterprise. As referred to under the EPIRA Law, DOE is mandated to established a wholesale
electricity spot market composed of the wholesale electricity spot market participants.

As provided for under the EPIRA Law, the DOE facilitated the creation of the
Philippine Electricity Market Corporation (PEMC). The PEMC undertook the preparatory
work and initial operation of the WESM. PEMC was established to maintain, operate and
govern an efficient, competitive, transparent and reliable market for the wholesale and
purchase of electricity and ancillary services in the Philippines in accordance with applicable
laws, rules and regulations. The Articles of Incorporation and By-laws of the PEMC were
finalized in collaboration with the WESM Technical Working Group. PEMC is a duly
incorporated non-stock non-profit corporation registered with the Securities and Exchange
Commission (SEC) on 18 November 2003.

17
 ENERGY REGULATORY COMMISSION

Generation Transmission Wheeling/ End user rate

charge charge Other charges

TRANSMISSION DISTRIBUTION
GENCOs COMPANY End Users
COMPANY ( Commercial/
(NPC/IPPs
(NPC/IPPs)) ( MERALCO/ELECTRIC
(TRANSCO) COOPS ) Residential )

Scenario 1: GENCOs submits generation rates charges to ERC

Scenario 2: TRANSCO petitions ERC for transmission charges to distributors/utilities.
Scenario 3: Distributors/Utilities petitions ERC for tariff rates to consumers/end users.
Scenario 4: Other stakeholders petitions ERC regarding tariff matters.
Note: In all scenarios, ERC involves all stakeholders in tariff setting process.

Figure 10. Electricity tariff setting process in the Philippines

Simply put, the WESM mechanism runs similar to a stock market wherein instead of
trading shares of stocks, electric commodity is placed on the trading floor for any interested
parties to grab. WESM shall provide the mechanism for identifying and setting the price of
actual variations from the quantities transacted under contracts between sellers and
purchasers of electricity.

10.2.1 Membership in WESM

To be a player in the wholesale spot market, both generation companies ( GENCOs )

and distributors ( private utilities and electric cooperatives ) have to be accredited with PEMC
who runs/manages the wholesale electricity spot market.

To date, the parties directly and indirectly involved in WESM operations is shown in
Table 4. As shown in Table 4, 30 generators have been accredited with WESM to sell their
electricity. Seven (7 ) electric power distributors/retailers comprising of Manila Electric and
Light Company ( MERALCO ) have been accredited to source their power using the WESM
market system. Four (4) generators and 1 supplier have expressed their intension to be
accredited with WESM. Nine (9) organizations have filed their applications with WESM.4
__________________________________________________________
4
www.wesm.ph

18
 Table 4. List of accredited WESM participants

1. Generators 30
2. Distribution utilities 1
3. Electric cooperatives 6
4. Suppliers 5
5. Indirect participants 16
6. Intending WESM participants 5
7. Applicants 9

Source: www.wesm.ph ( 13 March 2009 )

10.2.2 How does WESM work?

WESM is a system of electronically connected market players who sell and buy their
need for electricity at any time of day. WESM does this by scheduling electricity generation
and dispatch while balancing with demand at all times. A typical trade is as follows:

Step One: Trading participants submit hourly bids stating their price of, and demand for,
electricity. Bids are submitted to the Market Operator (MO). Price bids reflect only the
energy costs.

Step Two: The MO matches bids using the Market Dispatch Optimization Model (MDOM),
which takes into account market requirements and physical system constraints. As such, the
MO first dispatches generators with the lowest offers until demand is fully met at the market
clearing price.

Step Three: The MO submits the dispatch schedule to the System Operator (SO) for
implementation.

Step Four: Suppliers and buyers settle respective payments through the WESM. Under its
price determination methodology, the total cost of electricity is computed using the market
clearing price (spot price), market fees, and charges for ancillary services. In the case of
bilateral power supply contracts however, the involved trading participants have the option
of settling directly with their contracting parties.

This system allows for transparency wherein electricity is provided at its true cost,
based on the economic principles of supply and demand.

19
11. Cagayan Electric Power and Light Company, Inc.

Cagayan Electric Power and Light Company ( CEPALCO ) is based in Cagayan de

Oro City in Northeastern Mindanao. The company is one of those enterprising and socially
conscious organizations who took advantage of the benefits of a deregulated electric power
sector and by generating electricity using renewable energy technologies like hydro as well as
solar energy sources.

The company began its operations in 1952 with a modest power later generating
capacity of 5000 KW and a customer base of only 750. The company was granted
congressional franchise back in June 17, 1961. Today, CEPALCO has over a hundred
thousand residential, commercial and industrial customers within its franchise area that covers
the City of Cagayan de Oro and the Municipalities of Tagoloan, Villanueva and Jasaan, all in
the Province of Misamis Oriental, including the 3,000-hectare PHIVIDEC Industrial Estate.5

CEPALCO is now the 3rd largest electric distribution company in the Philippines
outside of Manila Electric and Light Company ( MERALCO), the biggest distributor. The
company’s growth in energy consumption has consistently been among the highest in the
country. Modern facilities and equipment as well as efficient service network have made
CEPALCO one of the most reliable electric service companies in the country. The company’s
distribution network includes 138KV, 69KV, 34.5KV and 13.8KV systems.

The company is a closely held company, where the Abaya family is the founding and
the major shareholder. The combined four top shareholders ( Fullmax Philippine
Development, LLC, Abaya Investments Corporation, Breavel, Inc., and the Abaya family)
together own 63.1% of the company.

11.1 CEPALCO's renewable energy development initiatives

CEPALCO has been very active in developing alternative and indigenous resources
for power generation to meet its increasing demand requirements and to augment the
increasingly non-dependable central generation facilities of its major power supplier. Among
these indigenous resources are renewable resources, which include hydro resources, solar
photovoltaic and biomass-fired generation facilities. The 7MW Bubunawan River hydro plant
in the municipalities of Libona and Baungon, Bukidnon is the first hydro commissioned by
CEPALCO in 2001 through its subsidiary company, the Bubunawan Power Co., Inc. (BPC)
while the 1MWp solar photovoltaic plant located in Indahag, Cagayan de Oro City is the
developing world’s largest when it was commissioned by CEPALCO in 2004.

In the area of hydropower development as well as biomass-based technologies,

following are projects and initiatives undertaken by CEPALCO:

_________________________________________
5
www.cepalco.com.ph

20
11.1.1 Cabulig river hydro project

The Cabulig River is located in Claveria, Misamis Oriental, around 45 minutes east of
Cagayan de Oro City. The feasibility study was completed in October 2006 with financial
assistance from the EC – ASEAN Energy Facility. The plant technical design was completed
by IT Power of UK while the environmental studies and evaluation were performed by
Centric International of Austria; the financial analysis was performed by EEEC of Thailand.
The Cabulig River hydro project is expected to supply CEPALCO with not less than 40
million kWh annually starting 2011. The proposed 8MW plant features 2 x 4MW Francis
turbines, an open canal water conveyance system of around 3 km and a head of around 55
meters.

11.1.2 Culaman River Hydro Project

The proposed Culaman River Hydroelectric power project is located in the

municipalities of Sumilao and Manolo Fortich in Bukidnon, approximately 50 km southeast
of Cagayan de Oro. CEPALCO’s reconnaissance activities in the Culaman River during the
early part of 1990s resulted to a feasibility study indicating a hydroelectric power potential of
up to 10 MW at full supply water level of 425 meter ASL and tailwater level of 200 meter
ASL and discharge of 5.6 cms. Other estimates indicate that mean annual flow can go as high
as 10.8 cms. The proposed hydro plant features two horizontal Francis type turbine and two
synchronous generators to maximize electricity production even during low flow.

The feasibility study of the plant which was conducted in 1998 is currently being
updated. The Culaman River hydroelectric power plant is expected to help satisfy the growing
electricity requirements of CEPALCO beyond 2010.

11.1.3 Lower Bubunawan Hydro Project

The proposed Lower Bubunawan hydroelectric power project is located in the

municipality of Baungon, Bukidnon and around 1.5 km downstream of the existing 7MW
Bubunawan Power Plant. The proposed hydroelectric power project still needs a full blown
feasibility study (including geotechnical and environmental studies) but pre-investment
investigations indicate a potential of up to 20MW

11.1.4 Biomass-fired energy facilities

The area around the service territory of CEPALCO is pre-dominantly agricultural and
a number of agro-industrial facilities exist within the 100 km radius from Cagayan de Oro.
Further, Cagayan de Oro is a fast growing, highly urbanized area where the volume of the
municipal solid waste is growing tremendously each year. Recognizing that these agricultural
as well as municipal solid wastes are potential sources of energy, CEPALCO embarked into
waste-to-energy studies, some of which are discussed below.

21
11.1.5 Cagayan de Oro Landfill Gas-to-Energy (LFGE) Conversion Project

Together with its foreign partners (based in Czech Republic and in Thailand), a
reconnaissance study was conducted by CEPALCO in late 2005 at Cagayan de Oro’s landfill
site at Calaanan, which has been the dump site of Cagayan de Oro’s garbage for more than 25
years. A pre-feasibility study, made part of the EAEF-funded "Increasing Access to Local
Sources of Financing for Renewable Energy Investment and Design of Innovative Financing
Instruments", was completed in early 2007.

On a base case scenario, the proposed LFGE project is estimated to produce around
89,000 kWH of electricity per day during its 15-year lifetime at a power plant capacity of
around 4.1 MW. This volume of electricity will replace fossil fuels and reduce carbon
emissions while at the same time capture the environmentally hazardous methane that
naturally comes out of the landfill.

11.1.6 Cogeneration ( Combined Heat and Power) projects

Combined Heat and Power requirements of some agro-industrial plants increase the
value of the energy generated by a waste-to-energy cogeneration facility (a cogeneration
facility produces heat as well as electrical energy). In 2006 CEPALCO conducted studies for
a cogeneration facility that will satisfy the heat or steam requirements of a local
manufacturing facility for its food processing while at the same time provide the electricity
requirements of its equipment. The cogeneration facility shall use a mixture of biomass
feedstock, which includes the manufacturing facility’s own waste products, wood wastes and
rice hulls.

The proposed 4.2 MW cogeneration plant is estimated to produce not less than 24
million kWh of electricity per year and a steam generation of around 260,000 tons per year.
The proposed plant will also displace the bunker diesel used by the food processing plant for
its conventional boilers.

CEPALCO also considered a biomass-fired facility running on full-condensing mode

(electricity generation only) and using feedstock available within Misamis Oriental and from
the nearby provinces (e. g., bagasse, wood waste and rice hull). Estimated volume of these
agricultural wastes can supply the fuel requirement of plant with a capacity of not less than
10MW and an annual electricity generation of not less than 68 million kWh.

A bagasse-fired cogeneration facility of Crystal Sugar in Maramag, Bukidnon is

presently generating an excess power of not less than 5MW, especially during off-milling
season. In line with CEPALCO’s renewable energy initiatives and its thrust of utilizing
indigenous resources to supply its growing electricity requirements, CEPALCO is considering
the addition of the 5 MW bagasse-fired power capacity into its power supply portfolio.

11.1.7 The solar photovoltaic ( PV ) plant

CEPALCO made a major and innovative decision by venturing into investments in

renewable energy technology particularly on the photovoltaic ( PV) facility. The site of the
PV plant is a 2-hectare property and construction of the photovoltaic power plant was handled
22
by Sumitomo Corporation and it started in August 2003. The PV plant was finished in April
of the succeeding year. It is this particular project of CEPALCO that shoots up the publicity
of company not only in the Philippines but globally as it puts the country among the major
generator of solar power from among developing countries.

The plant’s 1 MW capacity consists of 6,480 Sharp ND-Q7E6Z photovoltaic

modules/panels and was designed to provide up to 1,500 MWh of electricity annually. The
solar PV modules are manufactured by Sharp Japan with inverters manufactured by Sansha
with all the other components locally made.

The PV plant of CEPALCO started its commercial operations in September 26, 2004.
After a period of 3 years of commercial operations, International Finance Corporation (IFC)
of the World Bank reported that the PV plant has operated with greater expected annual
energy production. Since its commercial operations, the plant has exported to CEPALCO a
total of 4,169,100 KWh. At its current generating capacity, the PV plant supplies the
equivalent requirement of not less than 900 CEPALCO residential customers.

The CEPALCO photovoltaic power plant generates 1.1 MW of power and is currently
the 133rd largest solar power plant in the world. The PV plant puts the Philippines at number
9 among the countries in the world having the largest solar power plants! The Philippines is
behind solar powerhouse Germany (who has 64 out of the top 100 largest solar power plants),
Portugal, Spain, Japan, USA, Italy, the Netherlands, and South Korea.

11.1.7.1 Project cost of the photovoltaic plant

The total project cost of the photovoltaic plant of CEPALCO is about US$ 7-8 million
in funding from Global Environment Facility ( GEF ) through the International Finance
Corporation of the World Bank in the about of US $ 4 million ( inclusive of grant component
). The GEF support is a loan that turns into a grant after five years of successful operations of
the plant by CEPALCO. Co-financing component of the project from CEPALCO is about US
$ 3 – 4 million.

According to International Finance Corporation (IFC), the purpose of the project was
to demonstrate solar PV’s effectiveness ( through a conjunctive-use application ) in
addressing distribution capacity issues. The IFC funds were used to build 1 MW distributed
generation solar PV plant, which is integrated into the 80 MW distribution network of
CEPALCO, and operated in conjunction with an existing 7 MW mini-hydro electric plant.
The plant was operated without incident since its inauguration in 2004. It appears to have
been successful in proving solar PV to be an effective and technically reliable technology to
address peak-load energy supply issues. IFC reported that the CEPALCO solar PV plant has
made a strong technical case for reliability or a utility scale solar PV power plants and the
project has resulted in a significant reduction in greenhouse gas emissions.6

The PV project is categorized by World Bank’s International Financing Corporation (

WB/IFC ) as a Category B project according to the Procedure for Environmental and Social

______________________________________
6
World Bank/International Finance Corporation ( IFC ) – Project No. 502486

23
Review of Projects because a limited number of specific environmental and social impacts
may result which can be avoided or mitigated by adhering to generally recognized
performance standards, guidelines or design criteria. The project was funded in the context of
technical, environmental and social information submitted by the company.

11.1.7.2 Generation cost of the PV plant

The photovoltaic power plant is a project of CEPALCO as part of its investment. As

such, and having no separate organization as well as personnel for the PV plant itself, the
generation cost of PV facility on a per watt or kilowatt basis is somehow unique to compute
or estimate and matters deemed to be private at this time. Given the fact that as a private
business organization, financial data are deemed confidential. As commercial organization,
however, it is presumed that the operation of the PV facility is deemed to be a profitable
business proposition given the fact that similar project is to be replicated on a larger scale.

11.1.7.3 Non-energy benefits from the PV plant

The electrical energy output of CEPALCO’s PV plant may be considered small

compared with other sources like large-scale hydropower plant and petroleum-based power
plants. However, the contribution of the PV plant to the climate change initiatives is somehow
substantial. The solar PV plant of CEPALCO is expected to displace 24,000 tonnes of CO2
over its lifetime.

Being one of a kind, CEPALCO’s PV Plant has already been visited by over 13,000
students and visitors both local as well as foreign renewable energy enthusiasts since it started
operations.

The facility was even visited by the judges of the Court of Appeals in the hope that the
agency can consider the project one of it models or inputs in the construction of its upcoming
building.

11.1.8 Energy supply mix of CEPALCO

CEPALCO is doing every possible effort to improve the company’s independence

from its major electricity supplier ( NPC ) and this is explained by the fact that the company
has now four sources of power ( refer to Figure 11), three of which are from their own power
plants. The entrepreneurial decision of the management of CEPALCO management to venture
into PV project resulted to a variety of energy sources and flexibility. The energy supply mix
of CEPALCO is diagrammatically shown on Figure 11. As shown in Figure 11, CEPALCO
sources its power externally ( from NPC/TRANSCO Mindanao Grid ) and also internally,
from its own electric generating facility, mini-hydro plant and the 1 MW photovoltaic facility.

24
 CEPALCO
IPPs GENERATING
PLANT

NATIONAL
GENCO End users
TRANSMISSION
(NPC/ COMPANY CEPALCO (Commercial/
IPPs) Residential
(TRANSCO) consumers)

1 MW 7 MW

CEPALCO CEPALCO
PHOTOVOLTAIC MINI-
MINI-HYDRO
PLANT PLANT

Figure 11. The CEPALCO energy supply sources

11.1.9 Expansion of the PV plant

Given the positive and encouraging experience from the existing PV facility,
CEPALCO now plans to embark unto an even larger solar park within its service territory.
The envisioned solar park shall make use of a 30-hectare lot within the First Cagayan de Oro
Business Park in Villanueva Oriental, some 30 minutes east of Cagayan de Oro City, its base
of operation.

Pre-feasibility study of the proposed PV plant expansion indicates that it will be able
to supply the CEPALCO distribution network with no less than 14,000,000 KWH of
electricity annually, which is equivalent to not less than 30,000 barrels of fuel oil per year.
The proposed PV plant, with a total installed capacity of at least 10MWp, shall be constructed
over a period of at least five years and shall use the best available solar technology in the
market. The phased-in construction strategy will enable CEPALCO to capitalize on the
increasing efficiency but decreasing costs of solar cells which currently command not less
than 60 percent of the PV plant’s installed costs. It will also cushion the impact of generation
costs on CEPALCO’s customers.

If implemented according to plans, the first phase of the proposed 30-hectare solar
park shall be commissioned by 2012 to augment the expected shortfall of firm capacity in
Mindanao Grid.

12. NorthWind Power Development Corporation ( NPDC )

The Philippines has been found to have potential wind power of 76,600 MW, leading
other wind power-producing countries like Germany (14,000 MW potential wind power),
25
Spain and the US ( 6,000 MW each), Denmark ( 3,000 MW ) and India ( 2,100 MW). A wind
mapping study conducted by the United States National Renewable Energy Laboratory has
found Bangui Bay in Ilocos Norte to be one of the areas across the country where 10,000 sq.
km. of windy land exists with good to excellent wind resource potential.

NorthWind Power Development Corporation ( NPDC ) is a relatively new business

organization involved in power generation but capitalizing on wind potentials in the Bangui
Bay off Ilocos Norte in Northern Luzon. The wind farm project in Ilocos Norte was drawn in
1996 though a wind resource analysis and mapping study conducted for the Philippines by the
National Renewable Energy Laboratory (NREL). The study showed that various areas spread
in the Philippines are receptive to wind power installations. These areas include Bangui and
Burgos towns in Ilocos Norte, Batanes and Babuyan islands also north of Luzon and the
higher interior terrain of Mindoro, Samar, Leyte, Panay, Negros, Cebu, Palawan and eastern
Mindanao.

NorthWind Power Development Corporation ( NPDC ) took advantage of the wind

power potentials of the country particularly the Ilocos region by investing into the first wind
farm in the country and in Southeast Asia. The wind farm established by NDPC in Bangui,
Ilocos Norte uses wind turbines arranged on a single row stretching on a three-kilometer
shoreline off Bangui Bay facing the South China Sea. The wind farm uses a 1.65 MW Vestas
V82 wind turbines supplied by Vestas Asia Pacific A/S, the leading supplier of wind turbines
in the world. The turbines are on-shore and arranged in an arc spaced about 326 meters apart.
Other technical details of the wind turbines are shown in Table 5.

Table 5. Specifications of wind power system of NPDC

Turbine’s hub height*** - 70 meters

Blade length - 41 meters
Rotor diameter - 82 meters
Windswept area - 5,281 square meters
*** Ground level to center of nacelle
The turbine are oriented facing the sea, effectively eliminating windbreaks and
achieving terrain roughness of class 0.

Annual generation capacity - 74,482 MWh

Wind turbine arrangement - Single row
Spacing - 326 meters
Orientation - North
Prevailing wind direction - Northeast

26
 Harnessing the strong winds coming from the north-northeast of the country, the wind
farm is the largest wind power project in Southeast Asia. A first in Southeast Asia, the wind
power plant is now composed of 20 turbines, each standing 70 meters or equal to the height of
a 23-story building. The wind farm can generate a maximum capacity of 33 MW. The
company is considering another 40-megawatt wind-power project in Cagayan province also in
Northern Luzon in the next two years.

The first phase of the project started with 15 wind turbines in 2000 with an aggregate
capacity of 25 Megawatt and a 69-kilometer transmission line to the Ilocos Norte Electric
Cooperative in Laoag City. In June 2008, NPDC added five more turbines, raising the wind
farm’s capacity to 33 MW.

12.1 Funding the NPDC project

Initially, the funding that was provided by NPDC for 5 turbines, which is equivalent
to 8 megawatts. Eventually, the Danish International Development Agency ( DANIDA)
partially funded the first phase of the Bangui Bay project. All 15 wind turbines under Phase 1
project are connected to the Luzon grid, and have been delivering power to the Ilocos Norte
Electric Cooperative. The second phase comprising of additional five turbines is an additional
investment of NPDC amounting to US$13 million and total project cost now amounted to
US$ 50 million.7

In all, DANIDA shelled out $29.35 million of the $50-million project cost through a
zero-interest mixed-credit facility, which was complemented by a guarantee from the
Philippine Export-Import Credit Agency. About $10.5 million came from grants, while the
balance was put in by NPDC shareholders. NorthWind's major shareholders include Moorland
Phils., Phildane Resources Corp. and Fabmik Construction and Equipment Corporation.

12.2 NPDC expansion and creation of a new subsidiary

To handle its expansion project, NPDC has created a new subsidiary to take charge of
its expansion program in the Cagayan area worth $95 million. NPDC will put up a 40-
megawatt (MW) wind farm project in Aparri, Cagayan this year ( 2009 ). The company is
bullish in expanding their capacity with the passage of the Renewable Energy Law. For its
expansion project, NPDC may tap the Danish government and other investors and creditors
for the Cagayan wind project. The company also expects to tap Japanese and Spanish
investors and creditors. Former Energy Secretary Vincent Perez now of Alternergy said with
the growing interest in renewable power sources, an increase in foreign investment is
projected for renewable projects in emerging countries. Perez, who is also chairman of energy
advisory firm Merritt Partners and managing director of renewable power developer
Alternergy, said that investments in renewable energy sources such as wind, hydro and solar
power is expected to pick up. After an extensive road show in the US, Middle East and
Europe, Perez group were able to identify $150 million in equity commitment into Alternergy
from foreign investors primarily for wind power development.

______________________________________
7
www.northwindpower.com

27
12.3 Sale price of NPDC power output

The only market for now of the electricity output of NPDC is the Ilocos Norte
Electric Cooperative ( INEC ) with which is has existing Renewable Energy Sales
Agreement ( RESA ). The distribution system of NPDC’s wind farm is embedded in the
INEC grid and thus negated the power-delivery charges of the National Transmission
Corporation ( TRANSCO ) and it is considered a savings for INEC. NPDC has a pending
accreditation with WESM where other than INEC as a market, excess power output of NPDC
can be sold in the spot market being administered by WESM.

As stated in the RESA, NPDC will extend a 7-percent discount to INEC benchmarked
against rate of the National Power Corporation ( NPC ). This pricing scheme will reduce the
power charges being paid by Ilocos residents. The wind energy produced by the Bangui wind
farm of NPDC translates to a 7 percent reduction in power costs from prevailing rates or a 5
percent discount of the weighted average price in the wholesale electricity spot market
(WESM).

On top of reduced power rates, the wind farm will pave the way for the entry of
additional investment opportunities whose operations depend on good power quality. The
province’s unstable power would force the Coca-Cola Bottlers’ Company to avoid switching
to INEC’s power line due to low voltage between 5 to 10 p.m. The bottling company is one of
the few huge power-dependent companies in the province.

The Bangui Bay wind farm project sells electricity to the Ilocos Norte Electric
Cooperative and it now provides 40 percent of the power requirements of the province of
Ilocos Norte and gradually increasing by 70 percent once Phase II is completed.

12.4 Carbon credit for NPDC

The electricity that NPDC generates will displace green house gas emissions such as
carbon dioxide by approximately 65,000 tons per year. It is the first to be registered with the
executive board of the United Nations Framework Convention on Climate Change- Kyoto
Protocol. When carbon credits are duly accredited and issued the appropriate Certificate of
Emissions Reduction ( CER ), the same can be traded in the carbon market. CERs are the
carbon offset credits generated under the UN Clean Development Mechanism (CDM) for
emissions reduction investment in developing countries. CERs are bought by developed
countries and their firms to count towards their own domestic emissions targets.

The prices of Certified Emissions Reductions (CERs) in the global carbon markets
ranges from US$ 10 – US$ 30 per tonne. In the Europe carbon, price was around €9.60 as of
December 2008.8

_______________________________________

8
http://www.carbonpositive.net/viewarticle.aspx?articleID=137

28
 If the CER of NPDC is sold at low market price of US$ 10 per tonne, the annual
carbon equivalent production of NPDC translates around US$ 650,000 per year or estimated
to be about US$ 6.5 million over a 10 years period.

The ERC lauded NPDC for investing in eco-friendly renewable energy projects for
cheaper electricity service as well as clean and green environment. With its compliance to the
technical, financial and environmental standards set by law, electricity consumers in the area
are assured that the ERC has carefully reviewed the safety and reliability of the NPDC’s wind
farm facilities.

12.5 LGU efforts paid off

The electricity supply from NPDC was a welcomed development by the local
government unit ( LGU ) and the provincial officials. Already, business developers have
started discussing potential industries with the provincial government ranging from glass to
cement plant in eastern Ilocos Norte towns. It was Ilocos Norte Gov. Ferdinand Marcos, Jr.,
who, as a congressman back in the 1990s, pursued aggressively the development of a power
plant in the province. The governor had previously disclosed that Ilocos Norte had let loose
potential investors in the past due to poor power quality in the province. Governor Marcos
had always complained then from NPC to do something about its power service, but to no
avail. At present, Ilocos Norte is most affected during power outages because it is found at the
end of the power grid coming all the way from Bauang, La Union.

12.6 Contribution of NPDC to the grid

NPDC’s aggregate installed capacity of 33 MW is only 0.33 percent and 0.25 percent
of the Luzon grid and the national grid, respectively. This share provided by wind energy in
terms of generation capacity is way below the current limit set by the ERC. These figures may
be considered miniscule but when one looks at the fact that the electricity production of
NPDC supplies 40 percent of the power needs of INEC with potentials to supply up to 70
percent of the province’s need, the contribution of NPDC is substantial.

The ERC must ensure that a generating company does not exceed the market-share
limitations in the grid set at 30 percent where it operates and in the national grid set at 25
percent. The ERC determines the compliance of a generating company to the market-share
limitations by determining the maximum load-carrying capability of the facility operated by
the generation companies on a yearly basis. To prevent anti-competitive behavior, the ERC
ensures that an electricity generation company does not exceed the market share limitations in
the grid ( set at 30 percent ) where it operates and in the national grid, which is set at 25
percent.

29
12.7 NPDC awards

For its pioneering efforts in the area of wind power development, NPDC has been
accorded a number of recognition and awards both by local and international bodies. Among
these awards and recognition are the following:

a) Green Energy Award. For Renewable Energy On-Grid Electrictricity Generation.

Awarded by the Department of Energy and the Center of Excellence for sustainable
energy in Southeast Asia. Mandarin Oriental Manila, 2006.

b) Green Energy Award. Special citation: For exemplary achievement as a pioneer

commercial wind farm in the Philippines, the largest in Southeast Asia, and for being
the first Philippine Renewable Energy Project to be covered with an Emission
Reduction Purchase Agreement (ERPA). Mandarin Oriental Manila, 2006.

c) 2005 ADFIAP Development Award for Local Economic Development. Given

to Philippine Export-Import Credit Agency (Phil-Exim) recognizing their support for
the realization of the 25MW Northwind Bangui Bay Project.

d) Model Corporate Citizen Award. Given by the Governor of the Province of

Ilocos Norte. Laoag City Provincial Capitol, 2006.

e) Renewable Energy Project Competition. 1st Runner Up: On-grid Category.

Awarded by the ASEAN Center for Energy. Vientiane, Lao PDR, 2006.

Other than the abovementioned citations, the World Bank (WB) has cited the success
of NorthWind Power Development Corporation in generating electricity through the wind
power technology in Bangui Bay, Ilocos Norte.

13. Ilocos Norte Electric Cooperative

Ilocos Norte Electric Cooperative ( INEC ) is consumer-level electric power provider

in the northern-most province of Luzon province once sourcing its electricity from the
National Power Corporation ( NPC ). INEC has a power demand of 32,425 KW ( substation
capacity ) with a load factor or 58.76 percent. As of February 29, 2008, INEC has energized
all the 21 municipalities of Ilocos Norte including Laoag City and City of Batac posting a
record of 100 percent energization of the province and 100 percent of the province’s 557
villages ( barangays ).

The electric cooperative used to source its power from the Luzon grid of the National
Power Corporation ( NPC ) who provide electric power to all over the Philippines. In 2001,
INEC linked up with the NorthWind Power Development Corporation ( NPDC ) – the first
wind-power producer in the Philippines. At the time of initial link up in 2001, NPDC had a
rated capacity of 24.75 MW from its 15 wind turbines. This capacity increased to 33 MW
with the addition of 5 turbines more. The Bangui bay wind farm of NPDC generates power at
wind speeds averaging 7 meters per second. NPDC’s wind farm can help reduce INEC's
system loss by improving its stability, electric quality and reinforce its transmission system
through a 50-kilometer, 69,000-volt line constructed by NPDC.

30
13.1 Energy supply mix of INEC

The availability of wind power-based electricity provided by NPDC made it possible

for INEC to diversify its power sources aside from NPC and its own mini-hydro power plant.
As of the year end 2005, the energy supply mix of INEC is shown in Figure 12. As shown in
Figure 12, from zero contribution in the early part of 2005, the contribution of wind power
rose to 25 percent by year end 2005. As power from INEC sourced from wind resources
increased to 25 percent, electric power sourced from NPC reduced to only 71 percent from 93
percent in early 2005 ( refer to Table 5 ).9

The details of the energy supply mix of INEC is shown on Table 5. As Shown in
Table 5, the energy sourced from its own mini-hydro plant appeared to be fluctuating, and in
fact, reducing in term of share. Clearly increasing in terms of magnitude and per cent share is
the energy supplied by wind power thru NPDC indicating the critical role played by wind
energy technology.

13.2 INEC benefits from wind power

It is indeed a blessing for INEC to be the beneficiary of the electricity from wind
sources owing to the following benefits:

a) An electricity source cheaper in acquisition cost about 7 percent lower than its
usual energy source ( i. e., National Power Corporation ). This lower rate is passed
on to the consumers of INEC’s electric power;
b) Savings on the part of INEC on account of transmission cost usually budgeted or
paid to TRANSCO. NPDC’s power output in embedded into the INEC
transmission system thus negating TRANSCO fees. The connection and power
sourcing from the wind-farm project generated a savings of approximately $2.54
million for the consumers of the INEC in 2006 and 2007. The savings happened
since NPDC was embedded in the INEC grid and thus negated the power-delivery
charges of the National Transmission Corporation ( TRANSCO ).
c) An assurance of localized energy source with potentials to displace up to 70
percent of INEC’s power demand and hopefully means more long-term monetary
benefits to INEC and its customers;
d) The energy from the wind farm of NPDC supplies the energy needed by INEC
thus addressing the voltage fluctuation problem in the INEC service area which in
the past they complain about.

13.3 INEC’s concerns on the spot market

The EPIRA Law calls for the establishment of the Wholesale Electricity Spot Market
(WESM) wherein electric requirements of electric cooperatives has to purchase from the spot

_______________________________________
9
www.erc.gov.ph – ERC Case No. 2005 019 RC, p. 9

31
 NORTHWIND
POWER

Power rate
25%
lower by 7%

NATIONAL
DISTRIBUTION End users
GENCO TRANSMISSION
COMPANY (Commercial/
(NPC) COMPANY 71% ( INEC ) Residential
(TRANSCO) consumers)

4%

INEC
MINI-
MINI-HYDRO
PLANT

Figure 12. The INEC energy supply mix ( as of December 2005 )

Table 5. Energy supply mix of INEC ( 2005 )

Mini Hydro % % NorthWind %

Months (kWh) share NPC (kWh) share (kWh) share Total (kWh)

January 906,220 7% 11,961,974 93% 0 0.00% 12,868,194

February 587,200 4% 12,743,614 96% 0 0.00% 13,330,814
March 657,670 5% 11,943,508 95% 0 0.00% 12,601,178
April 450,060 3% 15,762,013 97% 20,789 0.13% 16,232,862
May 249,180 1% 15,660,217 93% 849,165 5.07% 16,758,562
June 201,600 1% 14,500,913 91% 1,268,114 7.94% 15,970,627
July 138,600 1% 13,738,983 87% 1,850,940 11.77% 15,728,562
August 195,300 1% 13,487,345 87% 1,769,442 11.45% 15,452,087
September 174,300 1% 12,795,817 86% 1,826,552 12.34% 14,796,669
October 137,600 1% 11,176,063 78% 3,037,368 21.16% 14,351,031
November 319,200 2% 11,497,740 76% 3,404,884 22.37% 15,221,824
December 621,600 4% 9,930,433 71% 3,442,196 24.60% 13,994,229

Total 4,638,530 155,198,620 17,469,450 177,306,600

Average 2.75% 87.51% 9.74%

Source: Energy Regulatory Commission./ www.erc.gov.ph

32
market through electronic bidding. In its initial implementation, INEC has applied as one of
the pilot electric distribution utilities and the first electric cooperative to participate in the
WESM. However, INEC appears to be not so excited about this possibility.

As per the WESM rules, electric cooperatives are required to purchase at least 10% of
their energy requirements from the spot market. At present, INEC’s energy requirements are
purchased from the National Power Corporation ( NPC ) and NPDC as well as INEC’s own
Mini-hydro Power Plant. During the trial operation by INEC personnel with the WESM
system, it was observed that there are times that the price of electricity in the spot market is
higher than the NPC price but there are also times that the price of electricity is lower. In the
WESM operation, distribution utilities are required to submit their bids for their energy
requirements one hour ahead, thus, the price of electricity that INEC will purchase from the
spot market will change every hour. To closely monitor the prices of electricity in the spot
market, there is a need to man the INEC Energy Trading Office for 24 hours. This project is a
new concept in the Philippine electricity industry but it aims to reduce the rate of electricity
because of the competitive bidding. To date, several assets of NPC have already been
privatized, the most recent of which is Magat Hydroelectric in the province of Isabela
acquired by the Aboitiz Group of Companies. Given this scenario, it is possible that the 7
percent discount rate from NPDC and the spot market prices WESM as well as renewable
energy sales agreements with NPDC may have complications that can potentially jeopardize
the concern of INEC to serve its customers through affordable prices.10

According to the ERC legal office, there is now a legal case filed by NPDC and this
concerns the refusal of INEC to settle the entire bill submitted by NPDC to INEC.11

14. Montalban Methane Power Project

Other than the solar photovoltaic plant of CEPALCO and wind-powered generation
system of NPDC, the Philippines takes pride in the methane-powered facility that is
connected to the distribution utility ( MERALCO). In previous years, the country had a
number of biogas/methane project considered commercial in scale but now of these projects
was ever connected to the electricity grid. The Montalban Methane Power Corporation (
MMPC ) is a project of First Balfour, Inc., one of the power/energy companies belonging to
the Lopez Group. The project makes use of the garbage from Metro Manila that is dumped at
the landfill facility located in Montalban, Rizal. MMPC has secured an agreement with the
local government of Rizal Province to put up the country's first waste-to-energy power plant
in Rodriguez ( formerly Montalban ) landfill site. MMPC will capture the landfill gas or
methane from the 14-hectare landfill to produce electricity enough to provide 15,000
households with power. The methane-powered facility operationalized in July 2008 and no
less that President Gloria Macapagal Arroyo launched the project.

The project is a build-own-and operate ( BOO ) project and Monark Equipment

Corporation (MEC) was commissioned to put up the power plant for the project. First Balfour
______________________________________
10
www.inec.gov.ph

11
Per phone conversation with Atty. Adriano of ERC Legal Office ( 23 March 2009 )

33
will be responsible for the installation of nine (9) units of generator set with 2MW capacity
each but derated at 850 KW using methane as fuel. The project scope included construction of
the powerhouse building, equipment foundations, piping works for fuel/gas header,
condensate and cooling water, cabling works, small power and lighting, plumbing, ventilation
system and monitoring system.12

Methane-based project in the Philippines is not really new in the country but this
particular scale and kind of project is the first of its kind in the Philippines and one of the
largest in Asia. With an estimated construction cost of $30 million, it is expected to generate
15 megawatts of power over 10 year. MMPC officials said that at least 1,500 metric tons of
garbage would be needed to sustain the plant’s operations. Increasing the volume of trash to
2,500 metric tons can extend production to 10 years instead of just five years.

The company plans to sell its power to Manila Electric Co. and the Wholesale
Electricity Spot Market. The project expects to generate an income of US$ 50 Million. In
addition, it can earn some more once it qualifies as a Clean Development Mechanism project
under the United Nations Kyoto Protocol, and will generate at least 500,000 Certified
Emission Reductions.

The methane gas facility of MMPC follows the Kyoto Protocol of the United Nations
Framework Convention on Climate Change (UNFCCC) initiative and provides carbon credits
for developed countries under category of projects that reduce emissions in developing
economies under the Clean Development Mechanism. Furthermore, the power plant project is
a candidate for a Gold Standard (GS) Clean Development Mechanism status.

15. More wind power projects

San Carlos Wind Power Corporation, a Filipino-Danish joint venture, is investing

P2.987 billion for the construction of a 30-megawatt wind power project. This is the third new
and renewable energy project approved by the Board of Investments. The project would be
located around Mount Malindog in Barangays Linubagan and Prosperidad, San Carlos City,
Negros Occidental, which is 700-800 meters above sea level. BOI approved the project on a
pioneer status having met the minimum investment requirement for wind technologies at
$1.25 million.

For the development of the project, the partnership between Smith Bell Wind
Technologies, Inc. and Global Renewable Energy Partners was put together to establish and
organize the San Carlos Wind Power Corporation. San Carlos wind farm will comprise of 16
to 20 wind turbine generators each with a capacity of 1.5 to 2 MW with a total rated capacity
of 30 MW. When operational, San Carlos intends to sell the generated power to the electric
distribution facilities in the Negros and Panay sub-grids. Of the total cost, the firm intends to
spend P1.7 billion for the acquisition of turbine, while the rest will be used for the
construction and development of the facilities. Bulk of the cost at P2.2 billion is expected to
come from loans, while the rest from equity. The project is also seeking Danish foreign aid in
the form of grant on interest payments, and from European banks.
__________________________________________
12
www.firstbalfour.com

34
 San Carlos is the third wind power project to be registered with the BOI. The other
two projects, also approved on pioneer status, are the 40-MW Northern Luzon Wind Project
of PNOC-Energy Development Corp. and the of North Wind Power Development
Corporation.

16. Wind Power Contracting Round

To further entice investors in renewable energy technologies, the Department of

Energy has employed creative means fashioned after the oil concessionaire system. DOE
has launched the Wind Power Contracting Round that offered 16 wind sites. Three
companies earlier awarded pre-commercial contract (PCC) to harness the country's wind
energy are now conducting actual wind assessment under their respective work programs.
Philippine Hybrid Energy Systems, Inc. was awarded three PCCs for wind projects in
Marinduque; Baleno, Masbate; and Tablas, Romblon with a combined 30MW of
capacity. Trans-Asia Renewable Energy Corporation was also awarded a contract for a
potential 30-MW wind project in Sual, Pangasinan and San Carlos Wind Power Corp. in
San Carlos City, Negros Occidental for a 25MW wind farm. Companies that bid for the
11 other sites are now in the process of securing PCC at the Department of Energy.13

17. Financial support mechanism for NRETs

With many renewable energy technologies now in mature and commercial stage
particularly solar and wind technologies, the next constraints and obstacle to its widespread
use is more of financial and economic considerations.

It is, therefore, important to provide a financial support scheme and incentive to

address investors concerns. It is along this premise that renewable energy development
programs in the Philippines has given substantial emphasis on the financial support scheme
particularly on credit availability as well as incentives in the form of duty-free importations
and tax holidays. Aside from the pre-operating incentives, renewable energy projects in
commercial operations are given additional incentives when the project is covered by the
Incentives Act or the Investment Priorities Plan ( IPP ) being administered by the Board of
Investments.

The above concerns are even more emphasized and concretized in the form of
financial support schemes as well as incentive measures are enshrined under the Renewable
Energy Law of 2008. Following are some of the elaborations in this regard.

17.1 Financial support under the RE Law

To encourage investors to venture into renewable energy projects, the Renewable

Energy Las made specific provisions on financing commercial projects as provided for under
Section 29 which reads as follows:

____________________________________________
13
Department of Energy, 2008

35
 SEC. 29. Financial Assistance Program. – Government financial institutions such as the
Development Bank of the Philippines (DBP), Land Bank of the Philippines (LBP), Phil-Exim
Bank and other government financial institutions shall, in accordance with and to the extent
allowed by the enabling provisions of their respective charters or applicable laws, provide
preferential financial packages for the development, utilization and commercialization of RE
projects as duly recommended and endorsed by the DOE.

The Development Bank of the Philippines has financing packages under its Wind
Energy Financing Program, RE Project Preparation Revolving Fund, Rural Power
Project for Type A Beneficiaries, Rural Power Project for Type B Beneficiaries and
CDM Initiatives.

Philippine Export-Import Credit Agency ( PhilExim ), for its part, provides loan
guarantees to selected wind power projects such as the Bangui Bay wind farm.

17.2 Available financing from private sector

Even prior to the enactment of the Renewable Energy Law, the commercial banking
system in the Philippines has available commercial loans and financing schemes given the
fact that products of energy-based project are always in demand.

It is a matter of practice among private commercial banks to support and finance

renewable energy projects that are bankable or who cash flow and income stream cash
support the business venture and it appears some these technologies are already in the stage.

17.3 Financial support from external parties

Large-scale or commercial renewable energy-based power generation technologies

are somehow expensive and come with techno-economic apprehensions. Hence, support of
external parties, both from bilateral and multi-lateral sources are considered of great help.

Other than the availability of domestic funds from the banking and financial system,
international or foreign-based sources also offer financial assistance such as the Global
Environment Facility ( GEF ) and International Finance Corporation of the World Bank
(WB/IFC ) who provided the funds for the photovoltaic power plant of Cagayan Electric
Power and Light Company ( CEPALCO ) in Cagayan de Oro City.

The United Nations Development Programme-Global Environment Facility

(UNDP-GEF) also offers assistance in project preparation and in securing loan guarantee for
the project.

Developed countries and donor organizations noticed the growing energy demand
hence the Asian Development Bank and its development partners are setting up a facility that
would provide seed capital for renewable energy and energy efficiency projects in the Asia-
Pacific region.

Asian Development Bank said it would develop the Seed Capital Assistance Facility
that would be initially funded by a $4.2-million grant from the Global Environment Facility, a

36
global partnership established in 1991 to help developing countries fund projects that protect
the global environment. The seed capital assistance facility would be jointly managed by
ADB and United Nations Environment Programme. The ADB said the facility would
“provide technical assistance to private equity fund managers and entrepreneurs to develop
sustainable clean energy funds and financing for the early stages of such projects, share in the
costs of development and transactions, and encourage taking riskier portfolios through a seed
capital return enhancement offered on a per-project basis. It further noted that the facility
would increase access to financing at the early stages of sustainable energy enterprises and
projects around the Asia-Pacific region. With increased experience among financiers in
investing in small-scale renewable energy and energy efficiency projects, mainstream energy
investors would be encouraged to invest more in clean energy enterprises and projects.14

18. Technical and economic efficiency

Renewable energy technologies in general suffer the perception of relatively low

technical efficiency and hence the economic/financial efficiency as well. Technical efficiency
for solar photovoltaic system stands at just a little above 10 percent with wind energy
conversion systems limited by Betz coefficient that leads to a maximum theoretical efficiency
below 60 percent. Adding demerit to this low technical efficiency is the fact that these
systems produce direct current (DC) type of electricity as against the alternating current (AC)
type of current demanded by the grid and system loads. Output of solar photovoltaic and wind
power system have to be converted to AC electricity thus increasing initial system costs and
thus affecting financial/economic efficiency computations even as the inputs ( sun and wind )
is available for free courtesy of Mother Earth.

The policy of the Philippine government, as enshrined it the Renewable Energy Law
and other laws earlier enacted makes it attractive to renewable energy power system
generators. Outputs of renewable energy systems can be connected to the regional electricity
grids hence allowing the supply of NRET-generated power to be distributed or sold elsewhere
too far away from the point of power production – realities which could have been too costly
for alternative/renewable power generation system due to technical losses. This
interconnection scenario, therefore, takes care of the limitations and low competitiveness of
the NRETs vis-à-vis the traditional petroleum-based power generation system. It is in this
light that renewable energy-based power generation system becomes somehow competitive as
it can even serve a balancer to voltage instability in some areas served by the grid as in the
case of the situation of Ilocos Norte province.

With the output of the photovoltaic plant of CEPALCO forming part of the power
supply and distribution lines of the company as well as the electric power output of NPDC
embedded in the distribution grid of INEC, the question of low technical efficiency is now a
foregone issue as in fact, the output of these facilities serves as voltage stabilizers aside from
the financial/economic benefits it provides on top saving some operating expenses on account
of savings from wheeling charges from TRANSCO.

___________________________________________
14
www.adb.org

37
18.1 Margin advantage for NRET electricity

Unlike tariff rates charge by distribution utilities and electric cooperatives which are
explicitly regulated under the provisions of the EPIRA Law and other ERC regulations,
electricity outputs or rates of power generators from renewable energy sources is some treated
differently though implied to be considered regulated under the rate setting mandate of ERC.
As such, the profitability of operations of renewable energy-based companies is not controlled
or curtailed hence very much attractive and motivating for investors. It can be said then that
potentially or in reality, financial/economic attractiveness or efficiency is expected to be
relatively high on account of the expected higher return on investment levels that it can set as
compared to electricity distribution business – and this scenario favors the investors in NRET-
based projects.

The above notion is explained by the current situation of both CEPALCO and INEC.
The photovoltaic system of CEPALCO is part of its power plant as distribution utility at the
same time as generating company. The company owns and operates hydro and photovoltaic
plant whose output is part of the electricity it supplies to its institutional/residential
consumers. This being the case, CEPALCO is not necessarily required to divulge the costs
and returns of the PV generation facility hence there is really no way of knowing whether the
priced charge by the PV facility is sky high or not. The same is true with the electric power
out of NPDC which is sold to INEC by way of an Energy Sales Agreement ( ESA ). The ESA
assures NPDC a market outlet and guaranteed price benchmarked against the NPC rate at a
discount rate of 7 percent. It was INEC who petition and clear up with ERC the ESA who
eventually approved the 20-year ESA between INEC and NPDC. When NPC is fully
privatized, the same discount rate will apply but benchmarked against the going electricity
rate in the province as the buyer of NPC interest inherits the provisions in the ESA. What is
not factored in the determination of cost of electricity sold by NPDC to INEC is money
equivalent of the CERs which NPDC can sell to the carbon market. This is somehow a gray
area which in the view of the author is favorable to the renewable energy generators like
CEPALCO and NPDC.

A very important aspect and motivating factor in constructing and operating a

renewable energy-based company is that aside from sales from electricity, the generator can
earn substantial income from the sale of carbon credits if the firm is duly certified by
appropriate bodies to be qualified for Certificate of Emissions Reductions ( CER ). These
reality is substantial if not more than enough to offset whatever inefficiencies NRET
technologies may have. This appears to be an advantage that redounds to economic or
financial efficiency and advantage as it steps up early recovery of investment apart from
helping the host country improve its contribution to the Kyoto Protocol.

20. More investments renewable energy needed and expected

Envisioning a goal of having 4,500 megawatts of new renewable energy capacity in

the next 10 years, the renewable energy sector will need some $8.5 billion in fresh
investments. This investment required is even an estimate on the conservative side. Director
Mario Marasigan of the Department of Energy’s energy utilization and management bureau,
expressed confidence saying that that investors would find the renewable energy sector quite
lucrative, particularly when the implementing rules and regulations for RA 9513, or the
Renewable Energy Act of 2008, is finalized by June.
38
 Right now, DOE may not have an exact handle on the number of investors that were
seriously interested in investing in renewable energy projects. What the department knows at
this point are the renewable energy projects that are most attractive to potential investors, he
said. Most of these investors are looking at wind, hydro, geothermal and biomass, including
solid waste-to-energy concepts, and biofuels. At least one company is interested in ocean
energy thermal conversion.15

The finalization of the Implementing Rules and Regulations ( IRR ) for the Renewable
Energy Law should prompt potential investors to finalize their investment plans in the sector.
The IRR is expected to be completed by June 2009,ahead of the July deadline set by the law.
The law is widely expected to spur investments in the renewable energy sector, due mainly to
incentives that are offered to potential investors. Some of these incentives are exemptions
from tariff duties and zero-rated value-added tax for the importation of machinery and
equipment for the first 10 years of an operating contract, as well as tax credit on domestic
capital equipment and services. Special realty tax rates will also be imposed on equipment and
machinery to be used for renewable energy development. An income tax holiday will also be
granted to potential investors for the first seven years of operations.15

21. Success factors in the Philippines NRET programs/projects

Whatever experiences and successes as well as failures the Philippines may have on
NRET matters is a combined products and results of political will in developing the National
Energy Plan that it keeps to continually update. This would have been impossible where it not
for a variety of legislatives and administrative provisions to support the attainment of the
vision set forth in the energy plan.

The global developments and the volatility of the global markets for petroleum
products was a dilemma but in some ways served as untiring reminder on the need to
continually pursue efforts on developing the potentials of renewable energy sources as a
potent component of the projected generation capacity and eventually the energy supply mix.
The efforts made in the area of commercializing the gasification technology, commercial
experiences in biogas technology, the progress made in developing coconut-based fuel from a
pure CNO-diesel fuel mix to coconut methyl esters ( biodiesel ), the initial failures in small-
scale wind power projects as well as the pilot projects in the area of photovoltaics all
contributed to the initiation and commercial-scale ventures in solar and wind power projects
that is now generating megawatt-level capacities already connected to the grid system.

To name a few then, the following factors may have greatly contributed to the
commercial use and megawatt level power generation projects using renewable energy
sources:

a) Availability and abundance of natural resources ( e. g., solar, wind, biomass );

b) Political will and government policy pronouncements on private sector
participation in the area of power generation resulting to privatized power
generation system.

___________________________________________
15
Ho, A., $8.5B in renewable energy investments needed, Philippine Daily Inquirer, March 23, 2009

39
 c) Commitment to pursue research and development as well promotional
development efforts to popularize and commercialize the use of renewable
energy sources;
d) Existence of a number of laws and administrative interventions principally
incentive schemes thus favoring investments and private business ventures in
the power sector;
e) Availability of foreign/local financing support schemes (e. g., loans and grants
from DBP, LBP, WB/IFC, DANIDA, etc.) to augment local financial
limitations;
f) Existence of guaranteed or captive markets as well as government assurance
to ensure reasonable returns to private investors;
g) Support of local government units in concretizing the intents and purposes
built into the national energy plan;
h) External pressures in terms of volatile global markets and environmental
concerns ( e. g., Kyoto Protocol, etc. ) that favorably offsets the economic
disadvantage of some renewable energy technologies;
i) Existence of mature and commercial technologies using renewable energy
sources;
j) Willingness of local and foreign investors as well as concerned entrepreneurs
who cares for clean energy and environment-friendly power generation
technologies.

22. Summary

If there is any success in the development of renewable energy technologies in the

Philippines resulting to establishment of megawatt-level capacity power plants, this can
be traced to a number of incentives and mandatory provisions of laws as well as series of
efforts done by the government commencing back in the late 1970s all the way to present
time. The variety of laws like the Investment Act, BOT Law, Biofuels Law, EPIRA Law,
Clean Air Act, Ecological Solid Waste Management Act, and most recently, the
Renewable Energy Law, are indications of the commitment of the Philippine government
to make renewable energy take a role in the country’s energy generation capacity down to
the energy supply mix. These efforts appear to have been well received by the private
sectors such that ownership and management of power generation is now largely in the
hands of the private sector. A number of investments has been made by foreign or
international organizations including the World Bank’s International Finance Corporation
who supported the CEPALCO photovoltaic project and DANIDA who partly financed
NPDC’s wind power project.

The 33-MW production of NPDC using wind energy potentials of Bangui in

Ilocos Norte is the biggest in Southeast Asia and the first venture accredited with a
Certificate of Emissions Reduction ( CER ). Its connection to the electricity grid with
potentials to supply up to 70 percent of the electricity demand of the province of Ilocos
Norte is worth noting and encouraging for other prospective investors. The company’s
plan to put up more wind generators of 40 MW in Cagayan province also in Luzon is a
living proof that the wind energy conversions system is indeed a mature technology and
one that is now tested successfully in the Philippines.

40
 For solar energy technology by photovoltaics, the 1 MW solar photovoltaic plant
is another first of a kind in Southeast Asia that is also connected to the grid and now
playing a key role in supplying the electricity needs of the service area of CEPALCO. No
less than World Bank’s IFC has given positive endorsement of the project for its success.
The plan of CEPALCO to put up a much bigger solar park capable of generating 10 MW
is an indication of an encouraging financial returns to the company.

Being a new project and unique in the sense that power generation is part of
CEPALCO business activity and with RESA scheme to guarantee a market for the
electricity output of NPDC, true costs and returns figures of the two NRET power plants (
by CEPALCO and NPDC ) remain confidential given the fact that these organizations are
private commercial ventures. Nonetheless, the expansionary attitude these companies are
doing is indicative of a bright future for these ventures giving the fact that outputs of their
plants can be easily sold or disposed through the electricity grid system.

The climate change mitigation contribution of the 3 major projects mentioned is

an annual carbon generation of 65,000 tonnes equivalent for NPDC. Throughout the
projects life, MMPC projects to produce an equivalent of 500,000 tonnes with
CEPALCO which stand to produce 10,000 tonnes equivalent. When traded in the carbon
exchange market, it means additional income for the 3 companies which also mean
compliance to the Kyoto Protocol on the part of the Philippines. Investment wise, it
meant an investment of about US$ 88 million for the 3 NRET-based power project alone.

All the 3 renewable energy projects ( CEPALCO, NPDC, MMPC ) connected to

the electricity grid are all supported by private investors with funding support from
international financing institutions ( e. g., WB/IFC and DANIDA ) and local investors as
well. This is an indication that even without financial support from Government Financial
Institutions ( GFIs ) as mandated by the Renewable Energy Law, renewable energy
projects connected to the electricity grid can take off, and in fact, the existing projects are
into expansionary ventures.

In the meantime, the full implementation of the Renewable Energy Law with its
Implementing Rules and Regulations (IRR) now being discussed and given the fact that
the law mandates government financial institutions to make available its financial
resources along with a variety of incentives to private investors, there is a reason to be
optimistic both at the end of the local and foreign investors and the government as well.

**********************************

41
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