10 Wind Power Markets Policies Institutions Philippines

7/30/2019 10 Wind Power Markets Policies Institutions Philippines

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Feasibility Assessment and Capacity Building forWind Energy Development in Cambodia, Philip-

pines and Vietnam

Task 3

Wind Power Markets, Policies and Institutions in the

Philippines

Report Prepared by

Dr. Romeo Pacudan

Risoe National Laboratory

March 2006


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Main project data

Full project title: Feasibility Assessment and Capacity Building for Wind Energy Development inCambodia, The Philippines and Vietnam

Objective: The main objective of the project is to promote wind energy development andfacilitate investments on wind energy projects in The Philippines, Vietnam andCambodia through feasibility assessment and capacity building.

Start: February 2005 End: December 2006

Total effort: 64.5 man-month

Contracting Authority: EC-ASEAN Energy Facility (www.aseanenergy.org/eaef)

Budget / Support: 1 000 000 / 500 000 by European Community

Tasks

Task 1: Wind Resource Assessments RISO + IED; PNOC-EDC; IE (10.5 MM)

Task 2: Power System Analyses RISO + PNOC-EDC; IE (7.5 MM)

Task 3: Policy & Market Studies RISO + IED; Mercapto; PNOC-EDC; IE (9.5 MM)

Task 4: Technical Feasibility Studies RISO + PNOC-EDC; IE (10 MM)

Task 5: Economic Feasibility Studies IED + RISO; PNOC-EDC; IE (7 MM)

Task 6: CDM Project Studies Mercapto + All (5.5 MM)

Task 7: Financial Framework IED + All (5.5 MM)

Task 8: Dissemination RISO + All (4.5 MM)

Project partners

RISO RIS National

Laboratory

Denmark Niels-Erik

Clausen

[email protected]

IED Innovation Energie

Dveloppement

France Anjali Shanker [email protected]

Mercapto Mercapto Consult Denmark Bernt Frydenberg [email protected]

PNOC-EDC

PNOC EnergyDevelopment

Corporation

Philippines Samuel Hernando [email protected]

IoE Institute of Energy Vietnam Pham Khanh Toan [email protected]

MIME Ministry of Industry,Mines & Energy

Cambodia Sovanna Toch [email protected]


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Risoe National Laboratory (Denmark)Innovation Energie Development (France)Mercapto (Denmark)

PNOC-EDC (Philippines)Institute of Energy (Vietnam)Ministry of Industry, Mines and Energy (Cambodia)

ii

Table of Contents

1 INTRODUCTION 12 WIND POWER MARKET 22.1 Wind Power Potential 22.1.1 Theoretical Potential 22.1.2 Economic potential 32.2 Wind Energy Development Activities 82.2.1 Wind energy development contracting 82.2.2 Wind power projects 82.3 Wind Power Markets 112.3.1 Philippine Power Sector 112.3.2 Wind Power Markets 113 WIND POWER DEVELOPMENT POLICIES AND REGULATORY FRAMEWORKS 143.1 Renewable Energy Policy Framework 143.2 Executive Order 262 153.3 Investment Incentives 153.4 The Proposed Renewable Energy Bill 173.4.1 RE Policies 173.4.2 Incentives for RE Projects and Activities 203.4.3 Incentives for RE Commercialization 214 ELECTRICITY SECTOR INSTITUTIONAL FRAMEWORK 234.1 Electricity Sector Legal Framework 234.2 Electricity Supply Industry Governance 244.3 Electricity Sector Regulation 254.4 Wholesale Electricity Spot Market (WESM) 264.5 Grid Code 274.6 Environmental Regulation 274.7 Clean Development Mechanism 294.8 Stakeholder Activities 315 POLICY RECOMMENDATIONS 345.1 Policy and regulatory frameworks 345.2 Specific actions to remove barriers 356 APPENDIX 38


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List of Tables

Table 2-1: Wind Electric Potential (Good-to-Excellent Wind resource at 30 m) (utility scale)....................... 2Table 2-2: Wind Electric Potential (Moderate-to-Excellent Wind resource at 30 m) (utility scale) ................ 3Table 2-3: Economic Wind Electric Potential (Wind power density 500 W/m

2).......................................... 4

Table 2-4: Economic Wind Electric Potential (Wind power density 500 W/m2

and transmission costconstraint)............... ....................................................... ...................................................................... 4

Table 2-5: Indicative Wind Energy Projects...................... .......................................................................... 10Table 3-1: Reduction of Government Sharing Scheme ....................................................... ....................... 19Table 4-1: Philippine Environmental Laws ........................................................ ......................................... 28Table 4-2: Projects and undertakings covered by EIS System............................... .................................... 29Table 5-1: Project Development Barriers and Recommended Action ..................................................... 35Table 5-2: Financial Barriers and Recommended Actions ...................................................... ................... 35Table 5-3: Technical Barriers and Recommended Actions ...................................................... .................. 36Table 5-4: Information Barriers and Recommended Actions............................................................... ....... 36Table 5-5: Policy and Regulatory Barriers and Recommended Actions ..................................................... 37Table 6-1: Electricity Demand in Potential Wind Sites................................................................................ 41

List of Figures

Figure 2-1: Wind Electric Potential (Good-to-Excellent Wind Resource)..................................................... . 5Figure 2-2: Wind Electric Potential (Moderate-to-Excellent Wind Resource) ............................................... 6Figure 2-3: Economic Wind Electric Potential ......................................................... ..................................... 7Figure 2-4: Wind Potential Sites................................................... ................................................................ 9Figure 2-5: Philippine Power Sector ...................................................... ..................................................... 11Figure 2-6: Electric cooperatives and status of electrification........................................................... .......... 13Figure 4-1: Philippine Electricity Supply Industry Structure ....................................................... ................. 23Figure 4-2: Governance of the Electricity Supply Industry Reforms ........................................................... 25Figure 4-3: DNA Structure........................................................... ............................................................... 31Figure 6-1: Approval process for environmentally critical projects.............................................................. 38Figure 6-2: Approval process for projects located in environmentally critical areas ................................... 38Figure 6-3: Approval Process for Large Scale Projects..................................... ......................................... 39Figure 6-4: Approval Process for Small Scale Projects ......................................................... ..................... 40

List of Abbreviations

AGMO Autonomous Group Market Operator

BOI Board of Investments

CAPEX Capital Expenditures

CBRED Capacity Building to Remove barriers to Renewable Energy

CDM Clean Development Mechanism

CER Certified Emissions Reduction

COP Conference of Parties

DAO DENR Administrative Order

DAR Department of Agrarian Reform

DENR Department of Environment and Natural Resources


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DOE Department of Energy

DOF Department of Finance

DOST Department of Science and Technology

DTI Department of Trade and IndustryDU distribution utility

EC electric cooperative

ECA Environmentally Critical Areas

ECP Environmentally Critical Projects

EIS environmental impact Statement

EPIRA Electric Power Industry Reform Act

ERC Energy Regulatory Commission

EO Executive Order

GHG greenhouse gas

GS government share

GW Gigawatt

INEC Ilocos Norte Electric Cooperative

IPP Independent Power Producer

MMBFOE million barrels of fuel oil equivalent

MW Megawatt

MWh Megawatt-hour

NIRC National Internal Revenue Code

NOLCO Net Operating Loss Carryover

NPC-SPUG National Power Corporation Small Utilities Group

NREL National Renewable Energy Laboratory

NRE-IER new and renewable energy with intermittent energy resource

PEMC Philippine Electricity Market Corporation

PhilEXIM Philippine Export Import Credit Agency

RE renewable energy

REC renewable energy credits

REPF Renewable Energy Policy Framework

RETF Renewable Energy Trust Fund

RPS renewable energy portfolio standards

TRANSCO National Transmission Corporation

TSA Transmission Service Agreement

UNDP United Nations Development Program

UNFCCC United Nations Framework Convention on Climate Change

UPSL University of the Philippines Solar Laboratory

QTP qualified third party

WESM wholesale electricity spot market

WWF World Wildlife Fund


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1 Introduction

Cambodia, the Philippines and Vietnam are the main countries in Southeast Asia where windregimes have huge potential for energy generation. The project Feasibility Assessment andCapacity Building for Wind Energy Development in Cambodia, the Philippines and Vietnamaims to promote wind energy development and facilitate investments on grid-connected windenergy projects in these countries.

Task 3 of this project study covers wind power markets, policies and institutions. The aim ofthis task is to address policy, institutional and market barriers to development and implementa-tion of wind power projects in Cambodia, the Philippines and Vietnam.

The market study reviews market potential of wind power in electricity markets. The policystudy reviews policies, strategies, instruments and measures while the institutional study re-views the commercial, legal and regulatory frameworks supporting wind power development.

Section 2 of this report reviews the wind energy resources, wind energy development activities,and the wind power markets in the Philippines. The resource potential in the country is signifi-cant with theoretical potential of 76 GW. The economic potential is around one-tenth of thetheoretical potential. At present, the Philippine government is involved in various activities pro-moting private investments on wind power. Wind contracting rounds had been organized in thepast 2 years. With the transition of the electric supply industry in the country, various optionsexist for wind power developers for their generated power. They could sell the power to distri-bution utilities, to the wholesale electricity spot market or to the Small Power Utilities Group ofthe National Power Corporation. Alternatively, the developer could operate a mini-grid in ruralareas as a qualified third party (QTP).

Section 3 reviews the renewable energy policy framework, the current investment incentivesand the proposed Renewable Energy Bill. The policy framework defines policy objectives,

goals, strategies and long term targets. The government however relies mainly on investmentincentives to stimulate private investments on wind power projects. The Renewable Energy Billconsiders more advanced policy instruments such as portfolio standards and green electricitypricing which is consistent with the liberalized electricity markets. It also proposes the estab-lishment of renewable energy fund and investment incentives to projects and activities as wellas to local manufacturers and suppliers of technologies.

Section 4 presents the electricity sector institutional framework. The section reviews the legalframework, governance, and regulation of the electricity supply industry. It also briefly outlinesthe wholesale electricity spot market, the grid code, environmental regulation, and the countrysparticipation in the clean development mechanism. The Electric Power Industry Reform Act of2001 defines the industrys legal and regulatory frameworks as well as organizational arrange-ments.

Section 5 identifies gaps in policies and institutional arrangements. Despite the current effortsof the government and changes of the power industry structure, actual investments in windpower projects remain relatively low. The government must passed the Renewable Energy Bill,which contains relevant regulatory frameworks and incentives, into law in order to stimulatemassive deployment of wind power projects. Furthermore, country specific measures to ad-dress existing barriers have also been identified.


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2 Wind Power Market

2.1 Wind Power Potential

2.1.1 Theoretical Potential

The US National Renewable Energy Laboratory (NREL) had conducted the most comprehen-sive wind resource assessment study in the Philippines in the late 1990s. The study identified atotal land area of more than 11,000 km

2, representing around 3.34 % of the total land area, with

good-to-excellent wind resource potential (wind power densities of more than 300 W/m2

andwind speeds of more than 6.4 m/s) (Table 2-1). These areas are estimated to support 76,600MW of potential installed capacity and could generate electricity of around 195,200 GWh peryear. The study also identified 47 provinces (out of 73) with at least 500 MW and 25 provinces

with at least 1,000 MW potential (Figure 2-1). These figures however do not consider variousfactors that affect the exploitation of the wind resource such as accessibility and existing trans-mission infrastructure.

If areas with moderate wind resource potential (wind power density ranging from 200 to 300W/m

2) are to be considered, the total wind power potential increases to around 174,000 MW

with annual electricity generation of 361 GWh (Table 2-2). The number of provinces with atleast 1,000 MW wind potential increases to 51 while those with at least 500 MW rises to 64(Figure 2-2).

Table 2-1: Wind Electric Potential (Good-to-Excellent Wind resource at 30 m) (utility scale)

Wind ResourceUtility Scale

Wind PowerW/m

2

Wind Speedm/s

Total Areakm

2

Total InstalledCapacity MW

Total PowerGWh/year

Good 300 400 6.4 7.0 5 541 38 400 85 400

Excellent 400 500 7.0 8.0 2 841 19 700 52 200

Excellent 500 700 8.0 8.8 2 258 15 600 47 900

Excellent 700 1250 8.8 10.1 415 2 900 9 700

Total 11 055 76 600 195 200

Wind speeds are based on a Weibull k value of 2.0

Assumptions:Turbine size 500 kWHub height 40 mRotor Diameter 38 m

Turbine Spacing 10D by 5DCapacity/km2

6.9 MWSource: NREL, 2001

The study also identified 6 regions with best wind energy resources, and these are the follow-ing:

The Batanes and Babuyan islands north of Luzon;

The northwest of Luzon (Ilocos Norte);

The higher interior terrain of Luzon, Mindoro, Samar, Leyte, Panay, Negros, Cebu,Palawan, eastern Mindanao, and adjacent islands;


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Well-exposed east-facing coastal locations from Northern Luzon southward to Samar;

The wind corridors between Luzon and Mindoro (including Lubang Island), and;

Between Mindoro and Panay (including Semirara Islands and extending to the Cuyo Is-lands).

Table 2-2: Wind Electric Potential (Moderate-to-Excellent Wind resource at 30 m) (utility scale)

Wind ResourceUtility Scale

Wind PowerW/m

2

Wind Speedm/s

Total Areakm

2

Total InstalledCapacity MW

Total PowerGWh/year

Moderate 200 300 5.6 6.4 14 002 97 000 165 800

Good 300 400 6.4 7.0 5 541 38 400 85 400

Excellent 400 500 7.0 8.0 2 841 19 700 52 200

Excellent 500 700 8.0 8.8 2 258 15 600 47 900

Excellent 700 1250 8.8 10.1 415 2 900 9 700

Total 25 057 173 600 361 000

Wind speeds are based on a Weibull k value of 2.0

Assumptions:Turbine size 500 kWHub height 40 mRotor Diameter 38 mTurbine Spacing 10D by 5DCapacity/km

2 6.9 MW

Source: NREL, 2001

2.1.2 Economic potential

From the gross economic potential estimated by NREL, the University of the Philippines SolarLaboratory (UPSL) calculated the medium to long-term economic potential based on NRELsdata. Two screening criteria were used to estimate this potential:

Sites with wind power densities greater than 500 W/m2;

Cost of transmitting power to the nearest substation not to exceed 25% of the levelizedcost of the combined generation and transmission.

Taking into account areas with wind speeds greater than 8 m/s (power densities greater than500 W/m

2), the total number of sites decreases to 2,092 and the wind potential reduces to

around 14 MW (Table 2-3). This potential could generate almost 45,000 GWh of electricity peryear.

Applying the transmission constraint, the number of sites further decreases to more than 1,000and the potential goes down to 7,404 MW. The estimated annual generation of this capacity isaround 23,000 GWh (Table 2-4). Figure 2-3shows the location of the identified sites.


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Table 2-3: Economic Wind Electric Potential (Wind power density500 W/m2)

Luzon Visayas Mindanao Philippines

Number of sites 1 668 360 64 2 092

Total area, km2

1 755 385 66 2 206

Potential installed capacityMwe

11 381 2 527 455 14 363

Estimated Annual GenerationGWh/y

35 437 7 865 1 397 44 699

Source: WWF (Philippines)/UPSL, 2003

Table 2-4: Economic Wind Electric Potential (Wind power density500 W/m2

and transmissioncost constraint)

Luzon Visayas Mindanao Philippines

Number of sites 686 305 47 1 038

Total area, km2

753 330 49 1 132

Potential installed capacityMwe

4 900 2 168 336 7 404

Estimated Annual GenerationGWh/y

15 277 6 738 1 032 23 047

Source: WWF (Philippines)/UPSL, 2003


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Figure 2-1: Wind Electric Potential (Good-to-Excellent Wind Resource)


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Figure 2-2: Wind Electric Potential (Moderate-to-Excellent Wind Resource)


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Figure 2-3: Economic Wind Electric Potential


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2.2 Wind Energy Development Activities

2.2.1 Wind energy development contractingThe DOE launched the Wind Power Investment Kitin June 2004 which contains information ongovernment policies and laws, potential sites for investments, wind power market, requirementsin the development of wind energy projects, fiscal and non-fiscal incentives as well as financialassistance available. Sixteen sites were identified with a total capacity of 345 MW (Figure 2-4).

During the Wind Summit in December 2004, 6 wind power contracts were awarded to the fol-lowing companies:

Philippine Hybrid Energy Systems, Inc (PHESI) for the development of 4 wind powerprojects: 5 MW plant in Marinduque, 5 MW in Baleno, Masbate, 10 MW in Abra de Ilog,Mindoro Oriental, and 10 MW in Mindoro Occidental.

San Carlos Wind Power, a unit of Smith Bell RESCO to tap and develop the 30-MW

wind power potential in San Carlos City, Negros Occidental.

Trans-Asia Renewable Energy Corporation, a unit of PHINMA group to explore, assessand develop the 25 MW wind potential in Sual, Pangasinan.

A second round of wind power contracting is scheduled in November 2005, and the Departmentof Energy is offering 18 sites for development: 10 sites in Luzon, 7 in Visayas, and 1 in Min-danao.

The Philippine government also sent trade missions to Europe to generate international fundingsupport for wind power projects. The governments of Germany and Spain had responded withfunding provisions for various projects in the country.

Germany committed 40 million for the investment requirements of viable wind prospectareas in Surigao, Ilocos and Panay. A grant-in-aid of 450,000 was also secured fromthe Study and Experts Fund of German Financial Cooperation (through KfW) for windresource assessment studies in Manoc-manoc (Boracay), Bayog (Ilocos) and Nubenta(Surigao).

Spain also pledged to provide US$ 105 million for the implementation of wind projects inCamiguin, Siargao and Dinagat Island in Mindanao and feasibility studies for wind-diesel hybrid projects in Catanduanes, Marinduque, Masbate, Romblon and Mindoro.

2.2.2 Wind power projects

At present, two wind power projects had been commissioned in the country. These are:

1.18 MW wind-diesel hybrid system in Batan Island, Batanes. The project is a joint ini-

tiative among the Department of Energy, National Power Corporation, Department ofScience and Technology and First Philippine Energy Corporation. The project consistsof 3 wind turbine generators with capacities of 60 kW each and 2 500 kW capacitydiesel generators.

25 MW Northwind Power Development Corporation in Bangui, Bay Ilocos, Norte. Thewind farm comprises of 15 units of 1.65 MW turbines arranged in single row along theon-shore of Bangui Bay.

The PNOC Energy Development Corporation is also developing a 40-MW wind farm in Bur-gos, Ilocos Norte. The project is funded by the loan from the Japanese Government throughJapan Bank of International Cooperation (JBIC). The construction of the project will commenceat the end of 2005.


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Several wind power projects are undergoing various stages of development. The projectsawarded during the first contracting round are programmed to come on stream before the endof the decade. The UNDP-assisted project, Capacity Building to Remove Barriers to Renew-able Energy Development (CBRED) has identified 18 projects with total capacity of 425 MW to

come on stream during the period 2006-2012. These projects are listed in Table 2-5.

Figure 2-4: Wind Potential Sites

Source: DOE (2005)


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2.3 Wind Power Markets

2.3.1 Philippine Power Sector

The Philippine electricity supply industry consists of 3 main grids: Luzon, Visayas and Mindanao(Figure 2-5). These grids are interconnected at various islands with varying transfer capacities.The total installed capacity of the generation sector reached more than 15 GW in 2004 while thepeak demand was recorded at more than 9 GW. The transmission sector, which is responsiblefor high voltage transport, comprises around 21 thousand circuit-kilometers. The transportationof low voltage electricity is carried out by 146 distribution utilities.

The industry is currently being liberalized and competitive electricity market is being introduced.This is implemented through the enactment of the Electric Power Industry Reform Act of 2001(This is further elaborated in Section 4 of this report). The generation and supply segments ofthe industry are recognized to be competitive while the transmission and distribution segmentsto be natural monopolies. All these market segments are being unbundled. The generationsector is liberalized and the generation assets of the state-owned National Power Corporation

are being privatized. The National Transmission Corporation (TRANSCO) was establishedunder the Act which is responsible for the high voltage transport of electricity.

A competitive electricity market is also being introduced. Wholesale electricity competition willbe realized through the introduction of the Wholesale Electricity Spot Market (WESM). In thelong term, partial retail competition will also be introduced with consumers with large powerdemand can freely select their own electricity suppliers.

Figure 2-5: Philippine Power Sector

Source: Department of Energy

2.3.2 Wind Power Markets

With the current changes in the electricity supply industry, various options exist for wind powerdevelopers in the Philippines. Wind power developers could arrange electric power sales withthe following:


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Distribution companies. As shown in Figure 2-5, there are at present 146 companiesinvolved in electricity distribution in 13 regions of the country. Of these, 119 are electriccooperatives, 17 are private distribution companies and 10 companies are owned by lo-cal government units. Figure 2-6 shows the geographic location of electric cooperatives

and the status of electrification. The 25 MW Northwind Power Project, for example, hassigned an electricity sales agreement with Ilocos Norte Electric Cooperative (INEC).The potential market of the 16 sites promoted by the Department of Energy is given inTable 6-1of the Appendix.

Wholesale Electricity Spot Market (WESM). WESM is a mechanism for electricity trad-ing and determination of the market price of electricity. In the soon to be implementedPhilippine WESM, electricity will be traded electronically on an hourly basis. UnderWESM Rules, intermittent renewable energy generators will be given priority dispatch.The Price Determination Methodology of WESM specifies that new and renewable en-ergy with intermittent energy resource (NRE-IER) providers such as wind power gen-erators will be required to submit their respective forecast generation ahead of scheduleas practicable and consistent with the WESM timetable. These forecast levels of NRE-

IER providers will then be netted out of supply requirements needed to meet the loadrequirements for the relevant time intervals. Adequate reserves within relevant zoneswill be provided by the market to take into account the probability of NRE-IER providersnot being able to fulfil its schedule.

National Power Corporation Small Utilities Group (NPC-SPUG). NPC-SPUG is a unitof the National Power Corporation tasked by Electric Power Industry Restructuring Actto provide electricity services in remote (missionary) areas not covered by electric co-operatives. Its operation is subsidized by ratepayers through the non by-passable uni-versal charge. To promote private investments in electricity services in missionary ar-eas, the Department of Energy issued a circular prescribing the rules and proceduresfor private sector participation in Small Power Utilities Group areas. The Small PowerUtilities Group has recently identified 8 provinces to be the first group to be opened for

private investments. More recently, the Department of Energy, Power Sector Assetsand Liabilities Management Corporation and National Power Corporation have engageda transaction advisor to assist in the development of appropriate privatisation programand selection of new power provider.

Distribute power directly to unenergized villages as a qualified third party (QTP). TheElectric Power Industry Restructuring Act allows the opening up of remote and unviableareas to qualified third parties if the franchise holder distribution utility is unable to serveuntil June 2004 (3 years from the effectivity of the Act). The Department of Energy hadissued in June 2004 a circular prescribing the qualifications of the qualified third parties.In March 7, 2005, the Department of Energy issued a public notice declaring 428 vil-lages as unviable areas and open for the provision of electric service by qualified thirdparties and/or through private sector participation. Currently, the Department of Energyis finalizing another circular prescribing the participation guidelines, which include sub-

sidy policies. In order to attract private investors, the Department of Energy developeda cluster of un-energized villages as market packages to create a critical mass of basecustomers.


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Figure 2-6: Electric cooperatives and status of electrification

Source: NEA, 2006


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3 Wind Power Development Policies and Regulatory

Frameworks

3.1 Renewable Energy Policy Framework

The Renewable Energy Policy Framework (REPF) launched by the Department of Energy(DOE) in 2003 embodies the national policy objectives, goals and strategies for the develop-ment of renewable energies including wind energies in the country. The national vision for thepromotion of the development of renewable energies remains stable over the past decades, andthese are:

To reduce the countrys dependence on imported energy

To broaden energy resource base with an indigenous, inexhaustible and environmen-

tally desirable option

To save foreign exchange from energy imports

To reduce pollutant emissions resulting from power generation.

The renewable energy policy goals or targets were defined reflecting energy sector objectives.These objectives are:

Ensure sufficient, stable, secure, accessible and reasonably-priced energy supply;

Pursue cleaner and efficient energy utilization and clean technologies adoption;

Cultivate strong partnership and collaboration with key partners and stakeholders;

Empower and protect welfare of various energy consumers.

REPFs long-term (2013) renewable energy targets are the following:

Increase renewable energy-based capacity by 100% by 2013, and

Increase non-power contribution of renewable energy to the energy mix by 10MMBFOE.

To achieve these targets in 2013, the government aims to:

Increase the geothermal power capacity by 1200 MW and become the number onegeothermal energy producer in the world.

Install 417 MW wind power capacity and become the number one producer of wind en-ergy in Southeast Asia.

Double the hydro capacity with installed capacity to increase by 2950 MW

Expand contribution of biomass, solar and ocean energies with new capacities of 131MW.

The REPF encourages private sector participation in the development of renewable energies.Currently, the Philippine Government relies on investment incentives to stimulate private sectorparticipation, but new mechanisms to enhance investments on renewable energies are beingconsidered under the proposed Renewable Energy Bill. These are discussed in the followingsections.


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3.2 Executive Order 262

The legal basis of private sector participation in the development of wind energy resources isembodied in the Executive Order (EO) 462: Enabling Private Sector Participation in the Explora-

tion, Development, Utilization and Commercialization of Ocean, Solar and Wind Energy Re-sources for Power Generation and Other Uses. Under the Philippine Constitution, natural re-sources in lands of the public domain are owned by the state, and its exploration, developmentand utilization are under the full control and supervision of the state. Recognizing the abun-dance of wind energy resources and its potential contribution to meet the countrys goal of self-sufficiency in energy, the Philippine Government issued the Executive Order (EO) 462 in 1997allowing private investors to participate in the exploitation, development and commercializationof ocean, solar and wind energies in public lands under a production sharing arrangementthrough public bidding or negotiation.

Projects situated in a private domain is not covered by the production sharing contract but willbe appropriately regulated. The DOE will regulate projects with more than 1 MW capacity inaccordance with the power generation accreditation system, while those with below 1 MW ca-

pacity, it will be regulated by local governments in accordance with local energy plans.Given the existing terms and conditions of production sharing contract for geothermal energy,the production sharing approach for ocean, solar and wind energies had drawn criticisms fromvarious sectors and was considered to create disincentive to investments on renewable energyprojects, particularly wind farm projects in the country. The government share (tax) under theproduction sharing arrangement includes signature and production bonuses. To address theseissues, the government issued EO 232, amending EO 462. Major revisions incorporated in EO232 are the following:

Renewable energy projects below 1 MW rated capacity is exempted from the said EO.For projects with rated capacity greater than 1 MW which harness ocean, solar andwind resources in lands of the public domain and/or offshore waters within the Philip-pine territory, contiguous zone and exclusive economic zone will be subject to produc-

tion sharing contracts. The government waived the signature bonus of the production sharing contract on the

first project to reduce pre-operating cost burden on the solar, wind and ocean produc-tion-sharing contractor. Also, the production bonus will be applied only after the projecthas fully recovered its pre-operating expenses and capped at 15% of the net proceeds.

Ocean, wind and solar developers will be allowed to charge the cost of assessment,field verification and feasibility studies of other sites to its current commercial projects.

The government will assist developers in obtaining all applicable fiscal and non-fiscalincentives, including registration as a pioneer industry under the BOI and securing ofaccess to lands and offshore areas where ocean, wind and solar resources will be har-nessed.

3.3 Investment Incentives

The legal framework for investment incentives to promote the development and utilization of REsystems were also issued through government directives. The following sections present thespecific incentives being provided for renewable energies as presented in the Renewable En-ergy Policy Framework (REPF).

3.3.1.1 Executive Order 226

Renewable energy has been identified as a priority investment under the 2004 Investment Pri-orities Plan (IPP) and upon registration with the Board of Investments (BOI). Fiscal and non-


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fiscal incentives are granted to qualified enterprises which will invest in a preferred area of activ-ity as listed in the IPP. The IPP which is issued on a yearly basis identifies the priority invest-ment areas which are eligible for incentives specified under EO No. 226 (Omnibus InvestmentCode of 1987), as amended. The following are the incentives available as stipulated in EO

2263.

Income Tax Holiday

The BOI-registered enterprise shall be exempted from income taxes levied by the NationalGovernment for a number of years, depending on the type of the project, reckoned from thescheduled start of commercial preparation. The types of projects and the corresponding numberof years entitlement for income tax holiday are as follows:

New projects with a pioneer status for six (6) years;

New projects with non-power status for four (4) years;

Expansion projects for three (3) years (as a general rule, exemption is limited to incre-mental sales revenue/volume);

New or expansion projects in less developed areas for six (6) years, regardless ofstatus.

New registered pioneer and non-pioneer enterprises and those located in less-developed areasmay avail themselves of an ITH bonus year in the following cases:

The ratio of total cost of imported and domestic capital equipment to the number ofworkers for the project does not exceed US$10,000 to one (1) worker; or

The total cost of indigenous raw materials used in the registered operation is at leastfifty percent (50%) of the total cost of raw materials for the preceding years prior to theextension unless the Board prescribes a higher percentage.

Additional Deduction for Labor Expense

For the first five (5) years from date of registration, the enterprise shall be allowed an additionaldeduction from taxable income of fifty percent (50%) [one hundred percent (100%) if the projectis located in a less developed area] of the wages corresponding to the increment in the numberof direct labor for skilled and unskilled workers in the year of availment as against the previousyear if the ratio of the cost of capital equipment to the number of workers does not exceedUS$10,000 to one worker and provided that this incentive shall not be availed of simultaneouslywith income tax holiday.

Unrestricted use of consigned equipment

For a period of ten years from the date of registration, the enterprise may import consignedmachinery, equipment and spare parts which shall not be subject to restrictions as to period ofuse provided that an appropriate re-export bond is posted and that such consigned equipment

shall be for the exclusive use of the registered activity.Employment of foreign nationals

The enterprise may employ foreign nationals in supervisory, technical or advisory positions for aperiod not exceeding five (5) years from registration. If the majority of the capital stock of theenterprise is owned by foreign investors, the positions of president, treasurer and general man-ager or their equivalents shall not be subject to the foregoing limitations.

Additional deduction for necessary and major infrastructure works

An enterprise located in a less developed area or in an area deficient in infrastructure, publicutilities and other facilities may deduct from its taxable income an amount equivalent to the ex-penses it incurred in the development of necessary and major infrastructure works.


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The application for BOI registration should be endorsed by the Department of Energy. The DOEendorsement should include the project.s compliance with world-class environmental standards.A project may qualify for pioneer status if it meets the following criteria:

The project utilizes new technology as endorsed by the DOE It complies with Article 17 of EO 226, which defines a pioneer enterprise, or meets the

minimum investment cost of the Philippine peso equivalent of US$1.25 million if it is anon grid wind energy project. (There is no minimum project cost required for off-grid windenergy project for rural electrification.)

3.3.1.2 Executive Order 31

A registered enterprise may also enjoy until 6 June 2006 reduced duty rates for its importationof capital equipment, spare parts and accessories as provided under Executive Order No. 313.Under the said EO, any importation of machinery and equipment, spare parts and accessoriesclassified under AHTN chapters 40, 59, 68, 69, 70, 73, 76, 82, 83, 84, 85, 87, 89, 90, 91 and 96

of the Tariff and Customs Code of the Philippines, except those covered under the Motor Vehi-cle Development Program, shall be subjected to only one percent (1%) duty rate upon the issu-ance by the BOI of a Certificate of Authority; provided the following conditions are met:

The machinery and equipment, spare parts and accessories are not manufactured do-mestically in sufficient quantity, of comparable quality and at reasonable prices;

They are reasonably needed and will be used exclusively by the enterprise in its regis-tered activity; and

The approval of the BOI for such importation was obtained by the registered enterprise.

3.4 The Proposed Renewable Energy Bill

The Renewable Energy Bill is being deliberated at the Philippine Congress to promote the in-tensive development, utilization and commercialization of RE sources to attain the governmentsgoal of transforming the energy sector to a sustainable energy system. The RE Bill supports thekey strategy of shifting from fossil fuel sources to renewable forms of energy through aggressivepromotion of RE sources in view of their environmental and social objectives.

The bill consists of several policies that are expected to boost the widespread utilization of REsystems.

3.4.1 RE Policies

3.4.1.1 Renewable Portfolio Standards

The Renewable Portfolio Standards (RPS) requires electric utilities to meet a portion of theirenergy supply needs with eligible forms of RE such as geothermal, hydro, wind, solar and bio-mass. The RPS sets specific numeric targets for the supply of RE and applying these targets toretail electricity suppliers, thus creating competition among renewable energy developers tomeet the targets in a least cost manner.

Under the RPS policy, the power generating facilities can meet their RE requirements eitherthrough generating their own power or through bilateral purchases of RE from independentgenerators. In some cases, the power generating facilities can use renewable energy certifi-cates (RECs) or renewable energy credits to comply with their RPS requirements. An REC canbe obtained when megawatt-hour of RE is generated and can be traded separately from under-lying electricity generation, much like tradable carbon emissions. REC transactions can provide


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additional revenue stream for RE generators and allow power generating facilities to demon-strate compliance with the RPS by purchasing RECs in lieu of directly generating renewableelectricity.

As stipulated in the proposed RE Bill, the DOE through the WESM shall establish the RE Regis-trar to issue, keep and verify RECs corresponding to energy generated from eligible REsources. As mentioned, REC is equivalent to one MWh of electricity generated from RE whichrepresents one less MWh of power generated from conventional sources, most of which burnfossil fuels.

If RPS is mandated to new and existing power generation companies and using the projectionsmade in the Philippine Energy Plan on the power energy mix, 20-27 percent RPS compliance isrecommended. This level would certainly fast tract the realization of the RE indicative projectsas indicated in the PEP.

3.4.1.2 Green Energy Option

The Green Energy Option shall be opened to all end-users with an average peak demand of ateast 100 kW. Under the proposed bill, end-users have the option to choose RE resources anday directly contract for the supply of RE-based energy. The use of the Green Energy Optionmechanism offers several benefits which include environmental, social, financial and economic.

Environmental benefits include the avoidance of environmental hazards brought by non-REpower generation. Financial benefits take into account the price stability of electricity purchase,fuel supply disruptions and avoidance of penalty for emitting hazardous emissions. Social bene-fits comprise of the improvement in corporate social responsibility while economic benefits in-clude the savings in foreign exchange, stimulation of local economies, and increase in fuel di-versity and market transformation.

One of the barriers identified for the implementation of the Green Energy Option policy is therelatively higher cost of RE than traditional forms of energy. However, with the right policy envi-

ronment supported with the development of RE technologies, demand for RE will grow andcosts and prices will start to fall making the Green Energy Option a viable alternative to conven-tional power.

The Green Energy can be procured from the power grid, RE power facility, through purchase ofRECs from the Renewable Energy Registrar and on-site renewable power generation.

3.4.1.3 Reduction in Government Sharing Scheme

Presently, there are several laws that are specifically targeted towards providing the parametersfor the development of specific RE-based projects, including:

Executive Order 232, .Amending EO 462 (Appendices 3 and 4) - Enabling Private Sec-tor Participation In The Exploration, Development, Utilization And Commercialization Of

Ocean, Solar And Wind Energy Resources For Power Generation And Other EnergyUses.

Presidential Decree 1442 (Appendix 5), .An Act To Promote The Exploration And De-velopment Of Geothermal Resources.; and,

Republic Act 7156 (Appendix 6), .An Act Granting Incentives To Mini-HydroelectricPower Developers And For Other Purposes.

The above laws provide for such schemes as the sharing of revenues from the use of stateresources (e.g., geothermal steam), summarized in Table 3-1. It has been proposed that thissharing scheme be revised to reduce the effective percentage share to be received by the gov-ernment.


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Table 3-1: Reduction of Government Sharing Scheme

Law Targeted RE Salient Provisions

EO 232/462 Ocean, Solar,and Wind

Government share (GS) shall be determined throughbidding or negotiation between the DOE and the con-tractor and shall include a signature bonus and pro-duction bonus

Production bonus shall be applied only after the projecthas fully recovered its pre-operating expenditures

To protect the welfare of electricity consumers, the GSshall be limited so that it shall not result in electricityprices higher than the contracted selling rates to elec-tric utility in the locality

The production bonus shall not exceed 15% of net pro-ceeds where net proceeds is equal to the sum of grosssales less operating and maintenance costs

PD 1442 Geothermal The service contractor may be paid an amount 40% ofthe balance of the gross value of the geothermal op-erations after deducting the necessary expenses in-curred in the operations.

RA 7156 Mini-hydro Special privilege tax rate shall be 2% of their gross re-ceipts from the sale of electric power.

Source: Draft Electricity Pricing Study, Daruma Technologies Incorporated, 2005.

3.4.1.4 Setting up an RE Trust Fund

The RE Trust Fund shall be established to enhance the development and greater utilization ofRE. The RETF shall be administered by the DOE as a special account in any government fi-nancing institution and shall be used exclusively for the following purposes:

Research and development, demonstration and promotion of the widespread productiveuse of RE systems for power and non-power applications;

Development and operation of new RE sources to improve their competitiveness in themarket. The grant shall be provided through a competitive and transparent manner;

Conduct of nationwide resource and market assessment studies for biomass, solar,wind, hydro, tidal current and ocean energy;

Propagation of RE knowledge by accrediting, tapping, training and providing benefits to

institutions, entities and organizations which can extend the promotion and dissemina-tion of RE benefits to the national and local levels; and

Provision of funds for activities necessary or incidental to the attainment of the objec-tives of this Act.

Support for the development and operation of new RE resources may consist of financial assis-tance for the following:

Ancillary charges for RE

Setting up of Renewable Energy Market as a sub-market under WESM which would in-clude the setting up of the RE Registrar


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Support for end-users of Green Energy Option Policy

Support for Capital Expenditures (CAPEX) for Missionary Electrification

RE ongoing projects and development programs

It has been proposed that the RETF shall come from the proceeds from the emission fees col-lected from generating facilities; 1.5 percent of the net annual income of the Philippine CharitySweepstakes Office; 1.5 percent of the net annual income of the Philippine Amusement andGaming Corporation; 1.5 percent of the net annual dividends remitted to the National Treasuryof the PNOC; contributions, grants and donations; 1.5 percent of the proceeds of the govern-ment share collected from the development and use of indigenous energy sources; Php0.01 perliter of the excise tax collected on bunker fuels; any revenue generated from the utilization ofRETF; and proceeds from the fines and penalties imposed under this Act.

3.4.1.5 Imposition of RE Utilization for NPC-SPUG and New Providers in Off-Grid Areas

The missionary electrification of SPUG is funded by the revenues from sales in the missionaryareas and from the universal charge collected from electricity end-users as determined by theEnergy Regulatory Commission (ERC). It is proposed in the RE Bill that the SPUG source aminimum percentage of its total annual generation from RE sources. One implication of theimposition of RE utilization in SPUG areas is the increase in the universal charge being col-lected from all electricity end-users.

3.4.2 Incentives for RE Projects and Activities

The proposed RE bill grants incentives for developers of RE facilities, including hybrid systems,in proportion to their RE component, for both power and non-power applications, as duly certi-fied by the DOE. The following are the privileges provided by the proposed bill.

3.4.2.1 Tax Zero and Duty-free Importation of RE Machinery, Equipment andMaterials

Within the first ten (10) years of an RE operating contract, importation of machinery and equip-ment, and materials and parts thereof, including its control and communication equipment, shallnot be subject to tariff duties and value-added tax provided that that the said machinery, equip-ment, materials and parts are:

not manufactured domestically nor locally available in reasonable quantity and quality;

directly and actually needed and used exclusively in the RE facilities for transformationinto energy, and transmission of electric energy to the point of use; and

covered by shipping documents in the name of the duly registered Operator to whomthe shipment will be directly delivered by customs authorities.

3.4.2.2 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 andcustom duties that were paid on the RE machinery, equipment, materials and parts had theseitems been imported shall be given to a RE operating contract holder who purchases machin-ery, equipment, materials and parts from a domestic manufacturer with prior approval by theDOE. Further, the acquisition of such machinery, equipment, materials, and parts shall be madewithin the validity of the RE operating contract.


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3.4.2.3 Special Realty Tax Rates on Equipment and Machinery

Any law to the contrary notwithstanding, realty and other taxes on civil works, equipment, ma-chinery, and other improvements of a registered RE developer actually and exclusively used for

RE facilities shall not exceed two and a half percent (2.5%) of their original cost.

3.4.2.4 Income Tax Holiday and Exemption

For the first six (6) years of its commercial operations, the RE operating contract holder shall beexempt from income taxes levied by the National Government. The RE developer, however,shall comply with the following: (1) large capital investments or sizeable employment genera-tion, or (2) use high level of technology or (3) located in less developed areas.

3.4.2.5 Net Operating Loss Carryover (NOLCO)

The net operating loss of the RE developer during the first three (3) years from the start of com-

mercial operation which had not been previously offset as deduction from gross income shall becarried over as a deduction from gross income for the next five consecutive taxable years im-mediately following the year of such loss. The operating loss resulting from the availment ofincentives provided for shall not be entitled to NOLCO. RE developers availing of the incometax holiday as in this Act provided shall not be entitled to avail of the NOLCO.

3.4.2.6 Accelerated Depreciation

Accelerated depreciation of plant, machinery, and equipment that are reasonably needed andactually used for the exploration, development and utilization of renewable energy resourcesmaybe depreciated using a rate not exceeding twice the rate which would have been used hadtheannual allowance been computed in accordance with the rules and regulations prescribedby theSecretary of Finance and the provisions of the National Internal Revenue Code (NIRC) of1997,as amended.3.4.2.7 Exemption from the Universal Charge

Power and electricity generated through the RE for the generators own consumption and/or forfree distribution in the off-grid areas shall be exempted from the payment of the UniversalCharge provided for under Section 34 of Republic Act No. 9136.

3.4.3 Incentives for RE Commercialization

Manufacturers, fabricators and suppliers of locally-produced RE equipment and componentsduly recognized and accredited by the DOE, in consultation with DOST, DOF and DTI, shall beentitled to the following privileges as stipulated in the proposed RE Bill:

3.4.3.1 Tax and Duty-free Importation of Components, Parts and Materials

All shipments necessary for the manufacture and/or fabrication of RE equipment and compo-nents shall be exempted to importation tariff and duties and value added tax provided that thesaid components, parts and materials are: (a) not manufactured domestically in reasonablequantity and quality at competitive prices; (b) directly and actually needed and shall be usedexclusively in the manufacture/fabrication of RE equipment; and (c) covered by shipping docu-ments in the name of the duly registered manufacturer/fabricator to whom the shipment will bedirectly delivered by customs authorities. Prior approval of the DOE should be also obtainedbefore the importation of such components, parts and materials were made.


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3.4.3.2 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 andcustom duties that were paid on the components, parts and materials, had these items been

imported shall be given to a RE equipment manufacturer, fabricator, and supplier duly recog-nized and accredited by the DOE, who purchases RE components, parts and materials from adomestic manufacturer. Such components, materials and parts shall be directly needed andshall be used exclusively by the RE manufacturer, fabricator and supplier for the manufacture,fabrication and sale of RE equipment. Prior approval by the DOE should be obtained by thelocal manufacturer.

3.4.3.3 Income Tax Holiday and Exemption

For six (6) years starting from the date of recognition/accreditation, an RE manufacturer, fabri-cator and supplier of RE equipment shall be fully exempt from income taxes levied by the Na-tional Government.


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4 Electricity Sector Institutional Framework

4.1 Electricity Sector Legal Framework

The Philippine electricity supply industry is in transition towards a competitive industry. Initially,the Government issued the Executive Order 215 in 1987 which facilitated entry of independentpower producers into the wholesale electricity market. In 2001, the Republic Act No. 9136 orRA 9136, the Electric Power Industry Restructuring Act was passed. There are two major re-forms embodied in the Republic Act No. 9136, namely, the restructuring of the electricity supplyindustry and the privatization of the National Power Corporation.

Prior to the liberalization process, the Philippine electricity supply industry was characterized asvertically integrated industry in generation and transmission. The National Power Corporation,a wholly government-owned corporation, was the sole organization responsible for generation

and high-voltage electricity transport. Electricity distribution in major cities was undertaken byprivate distribution utilities and by electric cooperatives in rural and less urbanized cities.

The restructuring of the electricity industry called for the separation of the different functions ofthe power sector namely, generation, transmission, distribution and supply, and the establish-ment of the wholesale electricity spot market (WESM) and introduction of retail competition.Generation and supply represent the competitive segment of the industry while transmissionand distribution constitute the natural monopoly segment. On the other hand, the privatizationof the National Power Corporation involved the sale of the state-owned power firms generationand transmission assets (e.g., power plants and transmission facilities) to private investors.These reforms were aimed at encouraging greater competition and at attracting more private-sector investments in the power industry. A more competitive power industry will in turn resultin lower power rates and a more efficient delivery of electricity supply to end-users. The new

electricity supply industry structure is shown in Figure 4-1.

Figure 4-1: Philippine Electricity Supply Industry Structure

Source: Philippine Electricity Market Corporation

Note:

A) The figure on the left represents the industry structure during the transition phase. The National PowerCorporation (NPC) and Independent Power Producers (IPPs) are the main producers of electricity. At thewholesale level, NPC is the main buyer of electricity though some distribution utilities (DUs) are sourcing

IPPNPC

GenCoNPC

GenCoIPP

NPC

TRANSCO

DU EC Direct DU

Customer

IPP IPP IPP IPP

WESM

TRANSCO

DU Supplier Direct DU

Customer

SO


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directly from IPPs. The electricity generated by these entities is transported through the high voltagetransmission network system operated by the National Transmission Company (TRANSCO). Electricitydistribution and supply are undertaken by distribution utilities (DUs) and electric cooperatives (ECs)through their low voltage networks. These utilities sourced their wholesale power mainly from NPC. Some

customers with high demand level directly purchase electricity from either NPC or IPPs.B) The figure on the right shows the industry structure envisaged by the Electric Power Industry Act. Thegeneration and supply functions are competitive segments of the industry while the transmission and dis-tribution functions represent the natural monopoly segments. The generation function will be in the handof the private sector (the generating assets of NPC will be privatized). The transport of high voltage elec-tricity will be through the privatized TRANSCO networks, who will be also responsible for network systemoperation. The electricity exchange will be facilitated by the wholesale electricity spot market (WESM),which will be managed by a non-profit market operator. Distribution utilities operate the low voltage net-work systems. Customers with high electricity demand (contestable customers) are free to select theirelectricity suppliers while those with relatively low demand level (captive customers) will remain captive bythe distribution utilities.

Under the new liberalized industry, electric cooperatives have the option to convert into eitherstock cooperatives or stock corporation. Cooperatives who choose to become stock coopera-

tives will be governed by the Cooperative Code of the Philippines, those who opt to becomestock corporations will be covered by the Corporation Code while those who opt to retain itsnon-stock cooperative status will remain under the supervision of the National ElectrificationAdministration. This transformation could strengthen the overall performance of electric coop-eratives.

4.2 Electricity Supply Industry Governance

Six government bodies are responsible for the transition and governance of the restructuredpower industry (Figure 4-2). These are the Joint Congressional Power Commission for guide-lines and overall framework; Department of Energy for policy; Energy Regulatory Commissionfor economic regulation; Power Sector Assets and Liabilities Management Corporation for priva-tization programme; National Power Corporation through its Small Power Utilities Group for

missionary electrification; and the National Electrification Administration for rural electrificationpromotion. The Energy Regulatory Commission and the Power Sector Assets and LiabilitiesManagement Corporation were created by the Electric Power Industry Restructuring Act whileadditional functions were defined by the said law for the remaining agencies.

To implement the Electric Power Industry Restructuring Act, the integrated assets of the Na-tional Power Corporation were broken down and its generating assets were prepared for privati-zation by Power Sector Assets and Liabilities Management Corporation. In 2004, five smallhydro power plants (total installed capacity of 8.5 MW) and a large coal-fired power plant (600MW capacity) were successfully sold out. The remaining generating assets will be scheduledfor privatization in 2005-2006. The National Transmission Company was created by the reformlaw to carry out high voltage transmission and sub-transmission functions. The NationalTransmission Company will be privatized through concession, which is a 25-year lease of all the

transmission assets and automatically renewable for another 25 years.Distribution utilities, consisting of private distribution utilities and electric cooperatives, will retaintheir functions and will be required to provide open and non-discriminatory access to users ofdistribution wires and charge wheeling rates, to be determined by the Energy Regulatory Com-mission. To prepare for the operations of the wholesale electricity spot market, the PhilippineElectricity Market Corporation was established in 2003. With the current pace of technicalpreparation, the earliest commercial operation of the wholesale electricity spot market in theLuzon Grid is anticipated to be in December 2005. Meanwhile, the implementation of retailcompetition and distribution network open access in Luzon Grid is set by the Energy RegulatoryCommission to be in July 2006. The initial demand level of the contestable market is at 1 MWpeak demand, which will be reduced to 750 kW after 1 year. Thereafter, ERC will review and


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determine the appropriate demand level of contestable consumers. To-date, the Commission isyet to issue guidelines concerning the licensing of electricity suppliers and aggregators.

Figure 4-2: Governance of the Electricity Supply Industry Reforms

Source: Department of Energy

Note:ERC Energy Regulatory CommissionPSALM Power Sector Assets and Liabilities Management CorporationDOE Department of EnergyNPC National Power Corporation

JCPC Joint Congressional Power CommissionSPUG Small Power Utilities GroupNEA National Electrification AdministrationWESM Wholesale Electricity Spot MarketGENCOs Generating CompaniesTRANSCO National Transmission CompanyDU distribution utilitiesPU private utilitiesEC electric cooperatives

4.3 Electricity Sector Regulation

The Electric Power Industry Restructuring Act mandated the creation of the Energy RegulatoryCommission (ERC), an independent, quasi-judicial regulatory body that is tasked to promote

competition, encourage market development, ensure customer choice and penalize abuse ofmarket power in the electric power industry. The initial budget of the Commission, set atPhP150 million, was based on the existing budget of (the defunct) Energy Regulatory Board.

The ERC was established from the abolished Energy Regulatory Board (ERB). Though therewere initial changes with its leadership, it retained the expertise and experience of the Boardstechnical staff. With the new changes in the electricity supply industry, the Electric Power In-dustry Restructuring Act however specified areas that needed further strengthening. These are:evaluation of technical performance and monitoring of compliance with service and performancestandards, performance-based rate setting reform, environmental standards and other areasthat will enable the Commission to adequately perform its duties and functions.

The key functions of ERC as specified in the Act are summarized below:


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Enforce the implementing rules and regulations of the Act,

Promulgate and enforce a national grid code and a distribution code

Enforce rules and regulations governing the operations of the electricity spot market

Determine the level of cross subsidies in the existing retail rate

Establish and enforce a methodology for setting transmission and distribution wheelingrates and retail rates for the captive market of a distribution utility

Remove cross subsidies between grids, within grids, or between classes of customers

Fix user fees for ancillary services to all electric power industry participants

Set lifeline rate for marginalized end-users

Penalize abuse of market power, cartelization, and anti-competitive or discriminatorybehaviour by any electric power industry participant

Monitor activities in the generation and supply of the electric power industry Act on applications for or modifications of certificates, licenses or permits of franchised

electric utilities

Act on applications for cost recovery and return on demand-side management projects

4.4 Wholesale Electricity Spot Market (WESM)

The Electric Power Industry Restructuring Act mandates the Department of Energy (DOE) toestablish the WESM within one (1) year from its effectivity. The Act also mandates the DOE,jointly with the electric power industry participants, to formulate the detailed rules for the WESM.The DOE promulgated the WESM Rules in 2002.

The WESM is the market where trading of electricity will be made. It will be governed by thePhilippine Electricity Market Board (PEM Board). The PEM Board will provide the policies andguidelines of the WESM contained in the Implementing Rules and Regulations of the Act,WESM Rules, and such other relevant laws, rules and regulations.

The Market Operator, a non-stock, non-profit organization, will administer the operation of theWESM in accordance with the WESM Rules. For the first year, the Market Operators functionswill be provided by the Autonomous Group Market Operator (AGMO) under the administrativesupervision of the National Transmission Corporation (TRANSCO). After the first year, the Mar-ket Operator will be an independent entity. Thereafter, the administrative supervision of theTRANSCO over such entity will cease.

The DOE constituted the Philippine Electricity Market Corporation (PEMC), an autonomousgroup market operator with equitable representation from electric power industry participants.The PEMC, a non-stock non-profit corporation, was duly incorporated by the Securities andExchange Commission on 18 November 2003. Under Section 30 of the EPIRA, the PEMC shallundertake the preparatory work and initial operation of the WESM. As the governing body of theWESM, it shall establish, maintain, operate and govern an efficient, competitive, transparentand reliable market for the wholesale and purchase of electricity and ancillary services in thePhilippines in accordance with laws, rules and regulations.

The 15-member Board of the PEMC is a combined stakeholder and independent Board withmajority coming from the generation, transmission, and distribution sectors. The first organiza-tional meeting of the Board was held on 18 December 2003.

The WESM will allow generators, distributors and large electricity users to buy and sell electric-ity without the need to negotiate bilateral contracts with one another. Electricity generators will


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bid into a market to be allowed to generate for a particular trading period. Each day will be di-vided into 24 one-hour trading period. Generators are dispatch depending on their bid price,thus the total cost of electricity paid by the purchasers is minimized. The dispatch schedule willprepared by the Market Operator.

Intermittent renewable energy generators such as wind power generators are not required to bidfor dispatch since their ability to generate cannot be foreseen in advance. The WESM rulesrequire that such generators will need to advise the market in advance of their expected level ofgeneration for a given trading period. This will assist the market operator to schedule expectedgeneration and reserve requirements.

As of the end of 2005, PEMC had undertaken 5 phases of its Trial Operations Program. Thesephases are: i) participant interface, ii) system operation interface, iii) metering interface, iv) set-tlement interface, v) final tests.

4.5 Grid Code

The Electric Power Industry Restructuring Act mandates the Energy Regulatory Commission(ERC) to promulgate and enforce, in accordance with law, a national grid code and a distribu-tion code.

The national grid code and distribution code contains performance standards for the NationalTransmission Company (TRANSCO) and its operations and maintenance concessionaire, dis-tribution utilities and suppliers, and financial capability standards for the generating companies,the TRANSCO, distribution utilities and suppliers. The grid code and distribution code also pro-vide rules, requirements, procedures and standards that ensure safe, reliable, secured andefficient operation, maintenance and development of the high voltage backbone transmissionsystem and of the distribution systems in the Philippines. ERC adopted the national grid codeand distribution code in 2001.

The national grid code and distribution codes requirements for power generators, including windpower generators, are the following:

New generators shall conform to the requirement of grid connection requirement of R.A.9136 Grid Code/Distribution Code.

Construction of transmission line from the generator site to the nearest interconnectionfacility shall be the responsibility of the generator owner regardless of the length of theline. Per ERC approved guidelines, this will soon be classified as connection facilities.

New generating units must be submitted for Grid Impact Study which shall be per-formed by Grid Owner.

Transmission Service Agreement (TSA) shall be executed between Grid Owner andGenerator Owner prior to the actual connection to the grid. Must identify off-taker (bi-lateral contract or electricity pool).

Generators shall be charged for the ancillary service which will be provided by othergenerators in support of each other requirement e.g. variation from scheduled outputto maintain frequency at 60 Hz.

Grid Owner and Distribution Utilities (DUs) prohibits small unit generators to synchro-nize to the grid without the proper clearances from itself (DUs and grid owner/operator).

4.6 Environmental Regulation

Environmental regulation in the Philippines is bestowed on the Department of Environment andNatural Resources (DENR). The legal and regulatory frameworks for the protection of the envi-ronment and sustainable development are contained in various environmental laws (Table 4-1).


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The most important legal framework for wind power developers is the Philippine EIS System.Projects and undertakings covered by the Philippine EIS law are those critical projects andthose located in environmentally critical areas (Table 4-2). The approval process and proce-dures are specified by the law and shown in Figure 6-1 and Figure 6-2of the Appendix.

Table 4-1: Philippine Environmental Laws

Sustainable Development and Environmental Policy

Memorandum Order No. 110. Directing the PCSD to make a ten year review of the 1992 UnitedNations Conference on Environment and Development (UNCED) commitments, signed 19 Au-gust 2000.

DENR Memorandum Order No. 47. Directing the strengthening and the operationalization and lo-calization of Philippine Agenda 21 and monitoring its implementation.

DENR Memorandum Order No. 399. A memorandum directing the operationalization of the Phil-ippine Agenda 21 and monitoring its implementation, signed on 26 September 1996.

Executive Order No. 370. An executive order strengthening the Philippine Council for Sustain-

able Development, signed on 26 September 1996.

DENR Memorandum Order No. 288. A memorandum directing the formulation of the Philippines'Agenda 21 and activating its formulation process, signed on 05 July 1995.

Executive Order No. 15. An executive order creating a Philippine Council for Sustainable Devel-opment, signed on 01 September 1992.

Presidential Decree No. 1152. A decree establishing a Philippine Environment Code of the Phil-ippines, signed on 06 June 1977.

Presidential Decree No. 1151. The Philippine Environmental Policy, signed on 06 June 1977.

Environmental Impact System

DENR Administrative Order No. 05, Series of 2000. Revising DENR Administrative Order (DAO)

No. 94-11, Supplementing DENR Administrative Order No. 37, Series of 1996, And Providing ForProgrammatic Compliance Procedures Within The Environmental Impact Statement (EIS) Sys-tem.

DENR Administrative Order No. 37, Series of 1996. Revising DENR Administrative Order No. 21,Series of 1992, to further strengthen the Implementation of the Environmental Impact Statement(EIS) System.

Presidential Decree 1586. A decree establishing an Environmental Impact Statement System in-cluding other environmental management related measures, signed on 11 June 1978.

Waste Management

Republic Act No. 9003, Ecological Solid Waste Management Act. An act providing for an eco-logical solid waste management program, creating the necessary institutional mechanisms andincentives, declaring certain acts prohibited and providing penalties, signed on 26 January 2001.

DENR Administrative Order No. 49, Series of 1998. Technical Guidelines For Municipal SolidWaste Disposal

Republic Act No. 6969. Toxic Substances and Hazardous and Nuclear Wastes Control Act. Anact to control toxic substances and hazardous and nuclear wastes, signed on 26 October 1990.

Presidential Decree No. 1160. A decree vesting authority in Barangay Captains to enforce Pollu-tion and Environmental Control Laws.

Water

Republic Act No. 8041, National Water Crisis Act. An act to address the National Water Crisisand for other purposes, approved on 07 June 1995.


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Presidential Decree No. 1067, Water Code. A decree instituting a Water Code, revising and con-solidating the laws governing the ownership, appropriation, utilization, exploitation, development,conservation and protection of water resources, issued on 31 December 1976.

Presidential Decree No. 856, Sanitation Code. Approved on 23 December 1975Air

DENR Administrative Order No. 81, Series of 2000. Implementing Rules and Regulations for RA8749, "The Philippine Clean Air Act of 1999.

Republic Act No. 8749, Clean Air Act. An Act providing for a comprehensive air pollution controlpolicy, signed on 23 June 1999.

Executive Order No. 446. Mandating the Phase-out of Leaded Gasoline as one of the means ofsolving air pollution

Table 4-2: Projects and undertakings covered by EIS System

Environmentally Critical Projects (ECPs)

Heavy industries

Resource extractive industries

Infrastructure projects

Golf course projects

Projects located in Environmentally Critical Areas (ECAs)

All areas declared by law as national parks, watershed reserves, wildlife preserves, and sanctuar-ies

Areas set aside as aesthetic potential tourist spots

Areas which constitute the habitat for any endangered or threatened species of indigenous Phil-ippine wildlife (flora and fauna)

Areas of unique historic archaeological or scientific interest

Areas which are traditionally occupied by cultural communities or tribes (indigenous culturalcommunities)

Areas frequently visited and/or hard-hit by natural calamities (geologic hazards, floods, typhoons,volcanic activity, etc.)

Areas with critical slopes

Areas classified as prime agricultural lands

Recharged areas of aquifers

Water bodies

Mangrove areas

Coral reefs

4.7 Clean Development Mechanism

The Clean Development Mechanism (CDM) is one of the flexible mechanisms established un-der the Kyoto Protocol of the United Nations Framework Convention on Climate Change(UNFCCC) to assist industrialized countries in meeting their emissions reduction obligations at


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lower cost and at the same time to stimulate investments that promote sustainable developmentin developing countries. The UNFCCC is an international treaty formulated in 1992 and enteredinto force in 1994, which sets a goal of stabilizing atmospheric concentration of greenhousegases at safe levels. The UNFCCCs supreme body, the Conference of Parties (COP), super-

vises the activities towards the achievement of the Conventions goals. During the bodys thirdmeeting in Kyoto, Japan, the supreme body set a legally binding requirement for Annex-1 coun-tries to trim down their greenhouse gas emissions to an average of 5.2% below their 1990emissions levels. This legally binding commitment is also known as the Kyoto Protocol.

The Clean Development Mechanism is a project-based mechanism where Annex 1 countriescan purchase or claim CERs from projects implemented in developing countries (non Annex 1countries) to be used for meeting their emissions reduction targets. Projects that qualify forCDM include the following: end-use energy efficiency, supply-side energy efficiency, renewableenergy, fuel switching, agriculture, industrial processes, solvent and other product use, wastemanagement, and sinks (afforestation and reforestation). These projects must also satisfy twomain conditions set by the protocol: additionality and contributions to sustainable development.

The additionality condition states that projects must result in reductions in emissionsthat are additional to any that would occur in the absence of the project activity, and thatthe projects must lead to real, measurable and long term benefits.

The sustainability condition states that projects must assist developing countries inachieving their sustainable development goals. There is however no guideline providedby the Protocol except that each country must develop its own criteria and assessmentprocedures.

For developing countries to participate in CDM, the Protocol requires that each country mustestablish a national authority responsible for CDM, ratify the Kyoto Protocol and participate vol-untarily.

Wind energy projects in the Philippines could potentially benefit from CDM by quantifying andregistering the emissions reductions the projects generate. The Philippine Government is quick

to recognize CDM as a new instrument in financing renewable energies in the country. TheGovernment signed the Kyoto Protocol in April 15, 1998 and ratified it in November 20, 2003.The Government issued Executive Order No. 320 in June 25, 2004 designating DENR as theNational Authority for CDM in the country. The DNA structure is given in Figure 4-3. TheDENR issued in August 31, 2005 an administrative order, DENR Administrative Order (DAO)No. 2005-17 specifying the rules and regulations governing the implementation of EO 320. Theorder was published in September 5 and 7, 2005.

The sustainable development criteria for CDM established by the Philippine DNA consist of thefollowing principles:

Adheres to the antipoverty goals articulated in the Philippine Agenda 21 and MediumTerm Philippine Development Plan by upholding project activities that:

o provide livelihood and economic opportunitieso provide new financial resources for GHG reducing activities

o promote use of cleaner, more efficient and environment-friendly technologies

o provide proper safety net

10 Wind Power Markets Policies Institutions Philippines

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