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Feasibility Assessment and Capacity Building for Wind Energy Development in Cambodia, Philippines and Vietnam

Task 3
Wind Power Markets, Policies and Institutions in the Philippines

Report Prepared by Dr. Romeo Pacudan Risoe National Laboratory March 2006

ASEAN Wind 2005 - Fact Sheet


Main project data
Full project title: Objective: Feasibility Assessment and Capacity Building for Wind Energy Development in Cambodia, The Philippines and Vietnam The main objective of the project is to promote wind energy development and facilitate investments on wind energy projects in The Philippines, Vietnam and Cambodia through feasibility assessment and capacity building. February 2005 64.5 man-month EC-ASEAN Energy Facility (www.aseanenergy.org/eaef) 1 000 000 / 500 000 by European Community End: December 2006

Start: Total effort: Contracting Authority: Budget / Support:

Tasks
Task 1: Wind Resource Assessments Task 2: Power System Analyses Task 3: Policy & Market Studies Task 4: Technical Feasibility Studies Task 5: Economic Feasibility Studies Task 6: CDM Project Studies Task 7: Financial Framework Task 8: Dissemination RISO + IED; PNOC-EDC; IE RISO + PNOC-EDC; IE RISO + IED; Mercapto; PNOC-EDC; IE RISO + PNOC-EDC; IE IED + RISO; PNOC-EDC; IE Mercapto + All IED + All RISO + All (10.5 MM) (7.5 MM) (9.5 MM) (10 MM) (7 MM) (5.5 MM) (5.5 MM) (4.5 MM)

Project partners
RISO IED Mercapto PNOCEDC IoE MIME RIS National Laboratory Innovation Energie Dveloppement Mercapto Consult PNOC Energy Development Corporation Institute of Energy Ministry of Industry, Mines & Energy Denmark France Denmark Philippines Niels-Erik Clausen Anjali Shanker Bernt Frydenberg Samuel Hernando niels-erik.clausen@risoe.dk a.shanker@ied-sa.fr bernt@frydenberg.dk hernando@energy.com.ph

Vietnam Cambodia

Pham Khanh Toan Sovanna Toch

toanpk@fpt.vn mimedet@forum.org.kh

ASEAN Wind 2005

Table of Contents

1 2 2.1 2.1.1 2.1.2 2.2 2.2.1 2.2.2 2.3 2.3.1 2.3.2 3 3.1 3.2 3.3 3.4 3.4.1 3.4.2 3.4.3 4 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 5 5.1 5.2 6

INTRODUCTION WIND POWER MARKET Wind Power Potential Theoretical Potential Economic potential Wind Energy Development Activities Wind energy development contracting Wind power projects Wind Power Markets Philippine Power Sector Wind Power Markets WIND POWER DEVELOPMENT POLICIES AND REGULATORY FRAMEWORKS Renewable Energy Policy Framework Executive Order 262 Investment Incentives The Proposed Renewable Energy Bill RE Policies Incentives for RE Projects and Activities Incentives for RE Commercialization ELECTRICITY SECTOR INSTITUTIONAL FRAMEWORK Electricity Sector Legal Framework Electricity Supply Industry Governance Electricity Sector Regulation Wholesale Electricity Spot Market (WESM) Grid Code Environmental Regulation Clean Development Mechanism Stakeholder Activities POLICY RECOMMENDATIONS Policy and regulatory frameworks Specific actions to remove barriers APPENDIX

1 2 2 2 3 8 8 8 11 11 11 14 14 15 15 17 17 20 21 23 23 24 25 26 27 27 29 31 34 34 35 38

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List of Tables
Table 2-1: Wind Electric Potential (Good-to-Excellent Wind resource at 30 m) (utility scale)....................... 2 Table 2-2: Wind Electric Potential (Moderate-to-Excellent Wind resource at 30 m) (utility scale) ................ 3 2) Table 2-3: Economic Wind Electric Potential (Wind power density 500 W/m .......................................... 4 Table 2-4: Economic Wind Electric Potential (Wind power density 500 W/m2 and transmission cost constraint)............................................................................................................................................ 4 Table 2-5: Indicative Wind Energy Projects................................................................................................ 10 Table 3-1: Reduction of Government Sharing Scheme .............................................................................. 19 Table 4-1: Philippine Environmental Laws ................................................................................................. 28 Table 4-2: Projects and undertakings covered by EIS System................................................................... 29 Table 5-1: Project Development Barriers and Recommended Action ..................................................... 35 Table 5-2: Financial Barriers and Recommended Actions ......................................................................... 35 Table 5-3: Technical Barriers and Recommended Actions ........................................................................ 36 Table 5-4: Information Barriers and Recommended Actions...................................................................... 36 Table 5-5: Policy and Regulatory Barriers and Recommended Actions ..................................................... 37 Table 6-1: Electricity Demand in Potential Wind Sites................................................................................ 41

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

List of Abbreviations
AGMO BOI CAPEX CBRED CDM CER COP DAO DAR DENR Autonomous Group Market Operator Board of Investments Capital Expenditures Capacity Building to Remove barriers to Renewable Energy Clean Development Mechanism Certified Emissions Reduction Conference of Parties DENR Administrative Order Department of Agrarian Reform 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 Industry DU 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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Introduction

Cambodia, the Philippines and Vietnam are the main countries in Southeast Asia where wind regimes have huge potential for energy generation. The project Feasibility Assessment and Capacity Building for Wind Energy Development in Cambodia, the Philippines and Vietnam aims to promote wind energy development and facilitate investments on grid-connected wind energy projects in these countries. Task 3 of this project study covers wind power markets, policies and institutions. The aim of this task is to address policy, institutional and market barriers to development and implementation of wind power projects in Cambodia, the Philippines and Vietnam. The market study reviews market potential of wind power in electricity markets. The policy study reviews policies, strategies, instruments and measures while the institutional study reviews 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 significant with theoretical potential of 76 GW. The economic potential is around one-tenth of the theoretical potential. At present, the Philippine government is involved in various activities promoting private investments on wind power. Wind contracting rounds had been organized in the past 2 years. With the transition of the electric supply industry in the country, various options exist for wind power developers for their generated power. They could sell the power to distribution utilities, to the wholesale electricity spot market or to the Small Power Utilities Group of the National Power Corporation. Alternatively, the developer could operate a mini-grid in rural areas as a qualified third party (QTP). Section 3 reviews the renewable energy policy framework, the current investment incentives and the proposed Renewable Energy Bill. The policy framework defines policy objectives, goals, strategies and long term targets. The government however relies mainly on investment incentives to stimulate private investments on wind power projects. The Renewable Energy Bill considers more advanced policy instruments such as portfolio standards and green electricity pricing which is consistent with the liberalized electricity markets. It also proposes the establishment of renewable energy fund and investment incentives to projects and activities as well as to local manufacturers and suppliers of technologies. Section 4 presents the electricity sector institutional framework. The section reviews the legal framework, governance, and regulation of the electricity supply industry. It also briefly outlines the wholesale electricity spot market, the grid code, environmental regulation, and the countrys participation in the clean development mechanism. The Electric Power Industry Reform Act of 2001 defines the industrys legal and regulatory frameworks as well as organizational arrangements. Section 5 identifies gaps in policies and institutional arrangements. Despite the current efforts of the government and changes of the power industry structure, actual investments in wind power projects remain relatively low. The government must passed the Renewable Energy Bill, which contains relevant regulatory frameworks and incentives, into law in order to stimulate massive deployment of wind power projects. Furthermore, country specific measures to address existing barriers have also been identified.

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2.1
2.1.1

Wind Power Market


Wind Power Potential
Theoretical Potential

The US National Renewable Energy Laboratory (NREL) had conducted the most comprehensive wind resource assessment study in the Philippines in the late 1990s. The study identified a total land area of more than 11,000 km2, 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 and wind speeds of more than 6.4 m/s) (Table 2-1). These areas are estimated to support 76,600 MW of potential installed capacity and could generate electricity of around 195,200 GWh per year. 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 various factors that affect the exploitation of the wind resource such as accessibility and existing transmission infrastructure. If areas with moderate wind resource potential (wind power density ranging from 200 to 300 W/m2) 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 at least 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 Resource Utility Scale Good Excellent Excellent Excellent Total Wind speeds are based on a Weibull k value of 2.0 Assumptions: Turbine size 500 kW Hub height 40 m Rotor Diameter 38 m Turbine Spacing 10D by 5D Capacity/km2 6.9 MW Source: NREL, 2001 Wind Power 2 W/m 300 400 400 500 500 700 700 1250 Wind Speed m/s 6.4 7.0 7.0 8.0 8.0 8.8 8.8 10.1 Total Area km2 5 541 2 841 2 258 415 11 055 Total Installed Capacity MW 38 400 19 700 15 600 2 900 76 600 Total Power GWh/year 85 400 52 200 47 900 9 700 195 200

The study also identified 6 regions with best wind energy resources, and these are the following: 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 Islands).

Table 2-2: Wind Electric Potential (Moderate-to-Excellent Wind resource at 30 m) (utility scale)
Wind Resource Utility Scale Moderate Good Excellent Excellent Excellent Total Wind speeds are based on a Weibull k value of 2.0 Assumptions: Turbine size 500 kW Hub height 40 m Rotor Diameter 38 m Turbine Spacing 10D by 5D 2 Capacity/km 6.9 MW Source: NREL, 2001 Wind Power W/m2 200 300 300 400 400 500 500 700 700 1250 Wind Speed m/s 5.6 6.4 6.4 7.0 7.0 8.0 8.0 8.8 8.8 10.1 Total Area km2 14 002 5 541 2 841 2 258 415 25 057 Total Installed Capacity MW 97 000 38 400 19 700 15 600 2 900 173 600 Total Power GWh/year 165 800 85 400 52 200 47 900 9 700 361 000

2.1.2

Economic potential

From the gross economic potential estimated by NREL, the University of the Philippines Solar Laboratory (UPSL) calculated the medium to long-term economic potential based on NRELs data. 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 levelized cost of the combined generation and transmission.

Taking into account areas with wind speeds greater than 8 m/s (power densities greater than 500 W/m2), 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 per year. Applying the transmission constraint, the number of sites further decreases to more than 1,000 and the potential goes down to 7,404 MW. The estimated annual generation of this capacity is around 23,000 GWh (Table 2-4). Figure 2-3 shows the location of the identified sites.

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Table 2-3: Economic Wind Electric Potential (Wind power density 500 W/m2)
Luzon Number of sites Total area, km Potential Mwe Estimated GWh/y
2

Visayas 360 385 2 527 7 865

Mindanao 64 66 455 1 397

Philippines 2 092 2 206 14 363 44 699

1 668 1 755 capacity Generation 11 381 35 437

installed Annual

Source: WWF (Philippines)/UPSL, 2003

Table 2-4: Economic Wind Electric Potential (Wind power density 500 W/m2 and transmission cost constraint)
Luzon Number of sites Total area, km2 Potential Mwe Estimated GWh/y installed Annual capacity Generation 686 753 4 900 15 277 Visayas 305 330 2 168 6 738 Mindanao 47 49 336 1 032 Philippines 1 038 1 132 7 404 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
2.2.1

Wind Energy Development Activities


Wind energy development contracting

The DOE launched the Wind Power Investment Kit in June 2004 which contains information on government policies and laws, potential sites for investments, wind power market, requirements in the development of wind energy projects, fiscal and non-fiscal incentives as well as financial assistance 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 following companies: Philippine Hybrid Energy Systems, Inc (PHESI) for the development of 4 wind power projects: 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, assess and develop the 25 MW wind potential in Sual, Pangasinan.

A second round of wind power contracting is scheduled in November 2005, and the Department of Energy is offering 18 sites for development: 10 sites in Luzon, 7 in Visayas, and 1 in Mindanao. The Philippine government also sent trade missions to Europe to generate international funding support for wind power projects. The governments of Germany and Spain had responded with funding provisions for various projects in the country. Germany committed 40 million for the investment requirements of viable wind prospect areas in Surigao, Ilocos and Panay. A grant-in-aid of 450,000 was also secured from the Study and Experts Fund of German Financial Cooperation (through KfW) for wind resource 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 in Camiguin, Siargao and Dinagat Island in Mindanao and feasibility studies for winddiesel hybrid projects in Catanduanes, Marinduque, Masbate, Romblon and Mindoro.

2.2.2

Wind power projects


1.18 MW wind-diesel hybrid system in Batan Island, Batanes. The project is a joint initiative among the Department of Energy, National Power Corporation, Department of Science and Technology and First Philippine Energy Corporation. The project consists of 3 wind turbine generators with capacities of 60 kW each and 2 500 kW capacity diesel generators. 25 MW Northwind Power Development Corporation in Bangui, Bay Ilocos, Norte. The wind farm comprises of 15 units of 1.65 MW turbines arranged in single row along the on-shore of Bangui Bay.

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

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

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Several wind power projects are undergoing various stages of development. The projects awarded during the first contracting round are programmed to come on stream before the end of the decade. The UNDP-assisted project, Capacity Building to Remove Barriers to Renewable 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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Table 2-5: Indicative Wind Energy Projects


Region Project Location Capacity Potential (MW) 40 40 40 15 25 50 25 50 10 20 5 5 5 10 20 20 30 15 425 Year Available 2006 2008 2009 2010 2010 2008 2008 2008 2010 2010 2008 2012 2012 2012 2010 2010 2006 2008

Northern Luzon Phase 1 Northern Luzon Phase 2 Northern Luzon Phase 3 PNOC-EDC Sual Wind

Ilocos Norte Ilocos Norte Ilocos Norte Ilocos Norte Pangasinan Nueva Ecija Laguna Quezon Occidental Mindoro Oriental Mindoro Marinduque Romblon Masbate Aklan Antique Antique Negros Surigao del Sur

III IV-A

Carranglan Caliraya Mauban

IV-B

NPC SPUG Bulalakaw Marinduque Tablas Island

V VI

Masbate PNOC-EDC Pandan San Remegio Smithbell

CARAGA Total

PNOC-EDC

Source: CBRED (2005)

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2.3
2.3.1

Wind Power Markets


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 the peak demand was recorded at more than 9 GW. The transmission sector, which is responsible for high voltage transport, comprises around 21 thousand circuit-kilometers. The transportation of 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 of the industry are recognized to be competitive while the transmission and distribution segments to be natural monopolies. All these market segments are being unbundled. The generation sector is liberalized and the generation assets of the state-owned National Power Corporation are being privatized. The National Transmission Corporation (TRANSCO) was established under the Act which is responsible for the high voltage transport of electricity. A competitive electricity market is also being introduced. Wholesale electricity competition will be realized through the introduction of the Wholesale Electricity Spot Market (WESM). In the long term, partial retail competition will also be introduced with consumers with large power demand 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 power developers in the Philippines. Wind power developers could arrange electric power sales with the following:

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Distribution companies. As shown in Figure 2-5, there are at present 146 companies involved in electricity distribution in 13 regions of the country. Of these, 119 are electric cooperatives, 17 are private distribution companies and 10 companies are owned by local 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, has signed 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 in Table 6-1 of the Appendix. Wholesale Electricity Spot Market (WESM). WESM is a mechanism for electricity trading and determination of the market price of electricity. In the soon to be implemented Philippine WESM, electricity will be traded electronically on an hourly basis. Under WESM Rules, intermittent renewable energy generators will be given priority dispatch. The Price Determination Methodology of WESM specifies that new and renewable energy with intermittent energy resource (NRE-IER) providers such as wind power generators will be required to submit their respective forecast generation ahead of schedule as practicable and consistent with the WESM timetable. These forecast levels of NREIER providers will then be netted out of supply requirements needed to meet the load requirements for the relevant time intervals. Adequate reserves within relevant zones will be provided by the market to take into account the probability of NRE-IER providers not being able to fulfil its schedule. National Power Corporation Small Utilities Group (NPC-SPUG). NPC-SPUG is a unit of the National Power Corporation tasked by Electric Power Industry Restructuring Act to provide electricity services in remote (missionary) areas not covered by electric cooperatives. Its operation is subsidized by ratepayers through the non by-passable universal charge. To promote private investments in electricity services in missionary areas, the Department of Energy issued a circular prescribing the rules and procedures for private sector participation in Small Power Utilities Group areas. The Small Power Utilities 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 Assets and Liabilities Management Corporation and National Power Corporation have engaged a transaction advisor to assist in the development of appropriate privatisation program and selection of new power provider. Distribute power directly to unenergized villages as a qualified third party (QTP). The Electric Power Industry Restructuring Act allows the opening up of remote and unviable areas to qualified third parties if the franchise holder distribution utility is unable to serve until June 2004 (3 years from the effectivity of the Act). The Department of Energy had issued 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 villages as unviable areas and open for the provision of electric service by qualified third parties and/or through private sector participation. Currently, the Department of Energy is finalizing another circular prescribing the participation guidelines, which include subsidy policies. In order to attract private investors, the Department of Energy developed a cluster of un-energized villages as market packages to create a critical mass of base customers.

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Figure 2-6: Electric cooperatives and status of electrification

Source: NEA, 2006

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Wind Power Development Policies and Regulatory Frameworks


Renewable Energy Policy Framework

3.1

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 development of renewable energies including wind energies in the country. The national vision for the promotion of the development of renewable energies remains stable over the past decades, and these are: To reduce the countrys dependence on imported energy To broaden energy resource base with an indigenous, inexhaustible and environmentally 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 10 MMBFOE.

To achieve these targets in 2013, the government aims to: Increase the geothermal power capacity by 1200 MW and become the number one geothermal energy producer in the world. Install 417 MW wind power capacity and become the number one producer of wind energy 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 131 MW.

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

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3.2

Executive Order 262

The legal basis of private sector participation in the development of wind energy resources is embodied in the Executive Order (EO) 462: Enabling Private Sector Participation in the Exploration, Development, Utilization and Commercialization of Ocean, Solar and Wind Energy Resources for Power Generation and Other Uses. Under the Philippine Constitution, natural resources in lands of the public domain are owned by the state, and its exploration, development and utilization are under the full control and supervision of the state. Recognizing the abundance of wind energy resources and its potential contribution to meet the countrys goal of selfsufficiency in energy, the Philippine Government issued the Executive Order (EO) 462 in 1997 allowing private investors to participate in the exploitation, development and commercialization of ocean, solar and wind energies in public lands under a production sharing arrangement through public bidding or negotiation. Projects situated in a private domain is not covered by the production sharing contract but will be appropriately regulated. The DOE will regulate projects with more than 1 MW capacity in accordance with the power generation accreditation system, while those with below 1 MW capacity, 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 from various sectors and was considered to create disincentive to investments on renewable energy projects, particularly wind farm projects in the country. The government share (tax) under the production sharing arrangement includes signature and production bonuses. To address these issues, the government issued EO 232, amending EO 462. Major revisions incorporated in EO 232 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 and wind resources in lands of the public domain and/or offshore waters within the Philippine territory, contiguous zone and exclusive economic zone will be subject to production 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 production-sharing contractor. Also, the production bonus will be applied only after the project has 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-fiscal incentives, including registration as a pioneer industry under the BOI and securing of access to lands and offshore areas where ocean, wind and solar resources will be harnessed.

3.3

Investment Incentives

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

3.3.1.1

Executive Order 226

Renewable energy has been identified as a priority investment under the 2004 Investment Priorities 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 activity as listed in the IPP. The IPP which is issued on a yearly basis identifies the priority investment areas which are eligible for incentives specified under EO No. 226 (Omnibus Investment Code 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 National Government for a number of years, depending on the type of the project, reckoned from the scheduled start of commercial preparation. The types of projects and the corresponding number of 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 incremental sales revenue/volume); New or expansion projects in less developed areas for six (6) years, regardless of status.

New registered pioneer and non-pioneer enterprises and those located in less-developed areas may 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 of workers 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 least fifty percent (50%) of the total cost of raw materials for the preceding years prior to the extension 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 additional deduction from taxable income of fifty percent (50%) [one hundred percent (100%) if the project is located in a less developed area] of the wages corresponding to the increment in the number of direct labor for skilled and unskilled workers in the year of availment as against the previous year if the ratio of the cost of capital equipment to the number of workers does not exceed US$10,000 to one worker and provided that this incentive shall not be availed of simultaneously with income tax holiday. Unrestricted use of consigned equipment For a period of ten years from the date of registration, the enterprise may import consigned machinery, equipment and spare parts which shall not be subject to restrictions as to period of use 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 a period not exceeding five (5) years from registration. If the majority of the capital stock of the enterprise is owned by foreign investors, the positions of president, treasurer and general manager 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, public utilities and other facilities may deduct from its taxable income an amount equivalent to the expenses 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 DOE endorsement 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 an on grid wind energy project. (There is no minimum project cost required for off-grid wind energy 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 importation of 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 accessories classified 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 Vehicle Development Program, shall be subjected to only one percent (1%) duty rate upon the issuance 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 domestically in sufficient quantity, of comparable quality and at reasonable prices; They are reasonably needed and will be used exclusively by the enterprise in its registered 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 intensive development, utilization and commercialization of RE sources to attain the governments goal of transforming the energy sector to a sustainable energy system. The RE Bill supports the key strategy of shifting from fossil fuel sources to renewable forms of energy through aggressive promotion 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 RE systems.

3.4.1 3.4.1.1

RE Policies Renewable Portfolio Standards

The Renewable Portfolio Standards (RPS) requires electric utilities to meet a portion of their energy supply needs with eligible forms of RE such as geothermal, hydro, wind, solar and biomass. The RPS sets specific numeric targets for the supply of RE and applying these targets to retail electricity suppliers, thus creating competition among renewable energy developers to meet the targets in a least cost manner. Under the RPS policy, the power generating facilities can meet their RE requirements either through generating their own power or through bilateral purchases of RE from independent generators. In some cases, the power generating facilities can use renewable energy certificates (RECs) or renewable energy credits to comply with their RPS requirements. An REC can be obtained when megawatt-hour of RE is generated and can be traded separately from underlying 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 demonstrate compliance with the RPS by purchasing RECs in lieu of directly generating renewable electricity. As stipulated in the proposed RE Bill, the DOE through the WESM shall establish the RE Registrar to issue, keep and verify RECs corresponding to energy generated from eligible RE sources. As mentioned, REC is equivalent to one MWh of electricity generated from RE which represents one less MWh of power generated from conventional sources, most of which burn fossil fuels. If RPS is mandated to new and existing power generation companies and using the projections made in the Philippine Energy Plan on the power energy mix, 20-27 percent RPS compliance is recommended. This level would certainly fast tract the realization of the RE indicative projects as 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 at east 100 kW. Under the proposed bill, end-users have the option to choose RE resources and ay directly contract for the supply of RE-based energy. The use of the Green Energy Option mechanism offers several benefits which include environmental, social, financial and economic. Environmental benefits include the avoidance of environmental hazards brought by non-RE power generation. Financial benefits take into account the price stability of electricity purchase, fuel supply disruptions and avoidance of penalty for emitting hazardous emissions. Social benefits comprise of the improvement in corporate social responsibility while economic benefits include the savings in foreign exchange, stimulation of local economies, and increase in fuel diversity and market transformation. One of the barriers identified for the implementation of the Green Energy Option policy is the relatively higher cost of RE than traditional forms of energy. However, with the right policy environment supported with the development of RE technologies, demand for RE will grow and costs and prices will start to fall making the Green Energy Option a viable alternative to conventional power. The Green Energy can be procured from the power grid, RE power facility, through purchase of RECs 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 parameters for the development of specific RE-based projects, including: Executive Order 232, .Amending EO 462 (Appendices 3 and 4) - Enabling Private Sector Participation In The Exploration, Development, Utilization And Commercialization Of Ocean, Solar And Wind Energy Resources For Power Generation And Other Energy Uses. Presidential Decree 1442 (Appendix 5), .An Act To Promote The Exploration And Development Of Geothermal Resources.; and, Republic Act 7156 (Appendix 6), .An Act Granting Incentives To Mini-Hydroelectric Power Developers And For Other Purposes.

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

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Table 3-1: Reduction of Government Sharing Scheme Law EO 232/462 Targeted RE Ocean, Solar, and Wind Salient Provisions Government share (GS) shall be determined through bidding or negotiation between the DOE and the contractor and shall include a signature bonus and production bonus Production bonus shall be applied only after the project has fully recovered its pre-operating expenditures To protect the welfare of electricity consumers, the GS shall be limited so that it shall not result in electricity prices higher than the contracted selling rates to electric utility in the locality The production bonus shall not exceed 15% of net proceeds where net proceeds is equal to the sum of gross sales less operating and maintenance costs The service contractor may be paid an amount 40% of the balance of the gross value of the geothermal operations after deducting the necessary expenses incurred in the operations. Special privilege tax rate shall be 2% of their gross receipts from the sale of electric power.

PD 1442

Geothermal

RA 7156

Mini-hydro

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 of RE. The RETF shall be administered by the DOE as a special account in any government financing institution and shall be used exclusively for the following purposes: Research and development, demonstration and promotion of the widespread productive use of RE systems for power and non-power applications; Development and operation of new RE sources to improve their competitiveness in the market. 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 dissemination of RE benefits to the national and local levels; and Provision of funds for activities necessary or incidental to the attainment of the objectives of this Act.

Support for the development and operation of new RE resources may consist of financial assistance for the following: Ancillary charges for RE Setting up of Renewable Energy Market as a sub-market under WESM which would include 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 collected from generating facilities; 1.5 percent of the net annual income of the Philippine Charity Sweepstakes Office; 1.5 percent of the net annual income of the Philippine Amusement and Gaming Corporation; 1.5 percent of the net annual dividends remitted to the National Treasury of the PNOC; contributions, grants and donations; 1.5 percent of the proceeds of the government share collected from the development and use of indigenous energy sources; Php0.01 per liter of the excise tax collected on bunker fuels; any revenue generated from the utilization of RETF; 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 OffGrid Areas

The missionary electrification of SPUG is funded by the revenues from sales in the missionary areas and from the universal charge collected from electricity end-users as determined by the Energy Regulatory Commission (ERC). It is proposed in the RE Bill that the SPUG source a minimum percentage of its total annual generation from RE sources. One implication of the imposition of RE utilization in SPUG areas is the increase in the universal charge being collected 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 certified 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 and Materials

Within the first ten (10) years of an RE operating contract, importation of machinery and equipment, and materials and parts thereof, including its control and communication equipment, shall not be subject to tariff duties and value-added tax provided that that the said machinery, equipment, 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 transformation into 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 whom the 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 and custom duties that were paid on the RE machinery, equipment, materials and parts had these items been imported shall be given to a RE operating contract holder who purchases machinery, equipment, materials and parts from a domestic manufacturer with prior approval by the DOE. Further, the acquisition of such machinery, equipment, materials, and parts shall be made within 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, machinery, 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 be exempt from income taxes levied by the National Government. The RE developer, however, shall comply with the following: (1) large capital investments or sizeable employment generation, 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 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 five consecutive taxable years immediately following the year of such loss. The operating loss resulting from the availment of incentives provided for shall not be entitled to NOLCO. RE developers availing of the income tax 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 and actually used for the exploration, development and utilization of renewable energy 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 Finance and the provisions of the National Internal Revenue Code (NIRC) of 1997, 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 for free distribution in the off-grid areas shall be exempted from the payment of the Universal Charge 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 components duly recognized and accredited by the DOE, in consultation with DOST, DOF and DTI, shall be entitled 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 components shall be exempted to importation tariff and duties and value added tax provided that the said components, parts and materials are: (a) not manufactured domestically in reasonable quantity and quality at competitive prices; (b) directly and actually needed and shall be used exclusively in the manufacture/fabrication of RE equipment; and (c) covered by shipping documents in the name of the duly registered manufacturer/fabricator to whom the shipment will be directly delivered by customs authorities. Prior approval of the DOE should be also obtained before 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 and custom 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 recognized and accredited by the DOE, who purchases RE components, parts and materials from a domestic manufacturer. Such components, materials and parts shall be directly needed and shall 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 the local manufacturer.

3.4.3.3

Income Tax Holiday and Exemption

For six (6) 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.

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4
4.1

Electricity Sector Institutional Framework


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 independent power producers into the wholesale electricity market. In 2001, the Republic Act No. 9136 or RA 9136, the Electric Power Industry Restructuring Act was passed. There are two major reforms embodied in the Republic Act No. 9136, namely, the restructuring of the electricity supply industry and the privatization of the National Power Corporation. Prior to the liberalization process, the Philippine electricity supply industry was characterized as vertically 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 by private 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 of the power sector namely, generation, transmission, distribution and supply, and the establishment of the wholesale electricity spot market (WESM) and introduction of retail competition. Generation and supply represent the competitive segment of the industry while transmission and distribution constitute the natural monopoly segment. On the other hand, the privatization of the National Power Corporation involved the sale of the state-owned power firms generation and transmission assets (e.g., power plants and transmission facilities) to private investors. These reforms were aimed at encouraging greater competition and at attracting more privatesector investments in the power industry. A more competitive power industry will in turn result in 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
IPP NPC GenCo NPC GenCo IPP IPP IPP IPP IPP

WESM NPC
TRANSCO

TRANSCO

SO

DU

EC

Direct

DU

DU

Supplier

Direct

DU

Customer

Customer

Source: Philippine Electricity Market Corporation Note: A) The figure on the left represents the industry structure during the transition phase. The National Power Corporation (NPC) and Independent Power Producers (IPPs) are the main producers of electricity. At the wholesale level, NPC is the main buyer of electricity though some distribution utilities (DUs) are sourcing

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directly from IPPs. The electricity generated by these entities is transported through the high voltage transmission network system operated by the National Transmission Company (TRANSCO). Electricity distribution 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. The generation and supply functions are competitive segments of the industry while the transmission and distribution functions represent the natural monopoly segments. The generation function will be in the hand of the private sector (the generating assets of NPC will be privatized). The transport of high voltage electricity will be through the privatized TRANSCO networks, who will be also responsible for network system operation. 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 network systems. Customers with high electricity demand (contestable customers) are free to select their electricity suppliers while those with relatively low demand level (captive customers) will remain captive by the distribution utilities.

Under the new liberalized industry, electric cooperatives have the option to convert into either stock cooperatives or stock corporation. Cooperatives who choose to become stock cooperatives will be governed by the Cooperative Code of the Philippines, those who opt to become stock corporations will be covered by the Corporation Code while those who opt to retain its non-stock cooperative status will remain under the supervision of the National Electrification Administration. This transformation could strengthen the overall performance of electric cooperatives.

4.2

Electricity Supply Industry Governance

Six government bodies are responsible for the transition and governance of the restructured power industry (Figure 4-2). These are the Joint Congressional Power Commission for guidelines and overall framework; Department of Energy for policy; Energy Regulatory Commission for economic regulation; Power Sector Assets and Liabilities Management Corporation for privatization programme; National Power Corporation through its Small Power Utilities Group for missionary electrification; and the National Electrification Administration for rural electrification promotion. The Energy Regulatory Commission and the Power Sector Assets and Liabilities Management Corporation were created by the Electric Power Industry Restructuring Act while additional functions were defined by the said law for the remaining agencies. To implement the Electric Power Industry Restructuring Act, the integrated assets of the National Power Corporation were broken down and its generating assets were prepared for privatization by Power Sector Assets and Liabilities Management Corporation. In 2004, five small hydro power plants (total installed capacity of 8.5 MW) and a large coal-fired power plant (600 MW capacity) were successfully sold out. The remaining generating assets will be scheduled for privatization in 2005-2006. The National Transmission Company was created by the reform law to carry out high voltage transmission and sub-transmission functions. The National Transmission 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 retain their functions and will be required to provide open and non-discriminatory access to users of distribution wires and charge wheeling rates, to be determined by the Energy Regulatory Commission. To prepare for the operations of the wholesale electricity spot market, the Philippine Electricity Market Corporation was established in 2003. With the current pace of technical preparation, the earliest commercial operation of the wholesale electricity spot market in the Luzon Grid is anticipated to be in December 2005. Meanwhile, the implementation of retail competition and distribution network open access in Luzon Grid is set by the Energy Regulatory Commission to be in July 2006. The initial demand level of the contestable market is at 1 MW peak 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 is yet 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 Commission PSALM Power Sector Assets and Liabilities Management Corporation DOE Department of Energy NPC National Power Corporation JCPC Joint Congressional Power Commission SPUG Small Power Utilities Group NEA National Electrification Administration WESM Wholesale Electricity Spot Market GENCOs Generating Companies TRANSCO National Transmission Company DU distribution utilities PU private utilities EC electric cooperatives

4.3

Electricity Sector Regulation

The Electric Power Industry Restructuring Act mandated the creation of the Energy Regulatory Commission (ERC), an independent, quasi-judicial regulatory body that is tasked to promote competition, encourage market development, ensure customer choice and penalize abuse of market power in the electric power industry. The initial budget of the Commission, set at PhP150 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 there were initial changes with its leadership, it retained the expertise and experience of the Boards technical staff. With the new changes in the electricity supply industry, the Electric Power Industry Restructuring Act however specified areas that needed further strengthening. These are: evaluation of technical performance and monitoring of compliance with service and performance standards, performance-based rate setting reform, environmental standards and other areas that 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 wheeling rates 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 discriminatory behaviour 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) to establish 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 the Philippine Electricity Market Board (PEM Board). The PEM Board will provide the policies and guidelines 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 the WESM in accordance with the WESM Rules. For the first year, the Market Operators functions will be provided by the Autonomous Group Market Operator (AGMO) under the administrative supervision of the National Transmission Corporation (TRANSCO). After the first year, the Market Operator will be an independent entity. Thereafter, the administrative supervision of the TRANSCO over such entity will cease. The DOE constituted the Philippine Electricity Market Corporation (PEMC), an autonomous group market operator with equitable representation from electric power industry participants. The PEMC, a non-stock non-profit corporation, was duly incorporated by the Securities and Exchange Commission on 18 November 2003. Under Section 30 of the EPIRA, the PEMC shall undertake the preparatory work and initial operation of the WESM. As the governing body of the WESM, it shall establish, 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 laws, rules and regulations. The 15-member Board of the PEMC is a combined stakeholder and independent Board with majority coming from the generation, transmission, and distribution sectors. The first organizational meeting of the Board was held on 18 December 2003. The WESM will allow generators, distributors and large electricity users to buy and sell electricity 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 divided 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 will prepared by the Market Operator. Intermittent renewable energy generators such as wind power generators are not required to bid for dispatch since their ability to generate cannot be foreseen in advance. The WESM rules require that such generators will need to advise the market in advance of their expected level of generation for a given trading period. This will assist the market operator to schedule expected generation and reserve requirements. As of the end of 2005, PEMC had undertaken 5 phases of its Trial Operations Program. These phases are: i) participant interface, ii) system operation interface, iii) metering interface, iv) settlement 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 distribution code. The national grid code and distribution code contains performance standards for the National Transmission Company (TRANSCO) and its operations and maintenance concessionaire, distribution utilities and suppliers, and financial capability standards for the generating companies, the TRANSCO, distribution utilities and suppliers. The grid code and distribution code also provide rules, requirements, procedures and standards that ensure safe, reliable, secured and efficient operation, maintenance and development of the high voltage backbone transmission system and of the distribution systems in the Philippines. ERC adopted the national grid code and distribution code in 2001. The national grid code and distribution codes requirements for power generators, including wind power 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 interconnection facility shall be the responsibility of the generator owner regardless of the length of the line. 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 performed by Grid Owner. Transmission Service Agreement (TSA) shall be executed between Grid Owner and Generator Owner prior to the actual connection to the grid. Must identify off-taker (bilateral contract or electricity pool). Generators shall be charged for the ancillary service which will be provided by other generators in support of each other requirement e.g. variation from scheduled output to maintain frequency at 60 Hz. Grid Owner and Distribution Utilities (DUs) prohibits small unit generators to synchronize 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 and Natural Resources (DENR). The legal and regulatory frameworks for the protection of the environment 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 and those located in environmentally critical areas (Table 4-2). The approval process and procedures are specified by the law and shown in Figure 6-1 and Figure 6-2 of 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 United Nations Conference on Environment and Development (UNCED) commitments, signed 19 August 2000. DENR Memorandum Order No. 47. Directing the strengthening and the operationalization and localization of Philippine Agenda 21 and monitoring its implementation. DENR Memorandum Order No. 399. A memorandum directing the operationalization of the Philippine Agenda 21 and monitoring its implementation, signed on 26 September 1996. Executive Order No. 370. An executive order strengthening the Philippine Council for Sustainable 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 Development, signed on 01 September 1992. Presidential Decree No. 1152. A decree establishing a Philippine Environment Code of the Philippines, 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 For Programmatic Compliance Procedures Within The Environmental Impact Statement (EIS) System. 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 including 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 ecological solid waste management program, creating the necessary institutional mechanisms and incentives, declaring certain acts prohibited and providing penalties, signed on 26 January 2001. DENR Administrative Order No. 49, Series of 1998. Technical Guidelines For Municipal Solid Waste Disposal Republic Act No. 6969. Toxic Substances and Hazardous and Nuclear Wastes Control Act. An act 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 Pollution and Environmental Control Laws.

Water

Republic Act No. 8041, National Water Crisis Act. An act to address the National Water Crisis and 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 consolidating 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 1975

Air

DENR Administrative Order No. 81, Series of 2000. Implementing Rules and Regulations for RA 8749, "The Philippine Clean Air Act of 1999. Republic Act No. 8749, Clean Air Act. An Act providing for a comprehensive air pollution control policy, signed on 23 June 1999. Executive Order No. 446. Mandating the Phase-out of Leaded Gasoline as one of the means of solving 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 sanctuaries Areas set aside as aesthetic potential tourist spots Areas which constitute the habitat for any endangered or threatened species of indigenous Philippine wildlife (flora and fauna) Areas of unique historic archaeological or scientific interest Areas which are traditionally occupied by cultural communities or tribes (indigenous cultural communities) 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 under 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 development in developing countries. The UNFCCC is an international treaty formulated in 1992 and entered into force in 1994, which sets a goal of stabilizing atmospheric concentration of greenhouse gases at safe levels. The UNFCCCs supreme body, the Conference of Parties (COP), supervises the activities towards the achievement of the Conventions goals. During the bodys third meeting in Kyoto, Japan, the supreme body set a legally binding requirement for Annex-1 countries to trim down their greenhouse gas emissions to an average of 5.2% below their 1990 emissions levels. This legally binding commitment is also known as the Kyoto Protocol. The Clean Development Mechanism is a project-based mechanism where Annex 1 countries can purchase or claim CERs from projects implemented in developing countries (non Annex 1 countries) to be used for meeting their emissions reduction targets. Projects that qualify for CDM include the following: end-use energy efficiency, supply-side energy efficiency, renewable energy, fuel switching, agriculture, industrial processes, solvent and other product use, waste management, and sinks (afforestation and reforestation). These projects must also satisfy two main conditions set by the protocol: additionality and contributions to sustainable development. The additionality condition states that projects must result in reductions in emissions that are additional to any that would occur in the absence of the project activity, and that the projects must lead to real, measurable and long term benefits. The sustainability condition states that projects must assist developing countries in achieving their sustainable development goals. There is however no guideline provided by the Protocol except that each country must develop its own criteria and assessment procedures.

For developing countries to participate in CDM, the Protocol requires that each country must establish a national authority responsible for CDM, ratify the Kyoto Protocol and participate voluntarily. Wind energy projects in the Philippines could potentially benefit from CDM by quantifying and registering 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. The Government 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 the National Authority for CDM in the country. The DNA structure is given in Figure 4-3. The DENR 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. The order was published in September 5 and 7, 2005. The sustainable development criteria for CDM established by the Philippine DNA consist of the following principles: Adheres to the antipoverty goals articulated in the Philippine Agenda 21 and Medium Term Philippine Development Plan by upholding project activities that: o o o o provide livelihood and economic opportunities provide new financial resources for GHG reducing activities promote use of cleaner, more efficient and environment-friendly technologies provide proper safety nets and compensatory measures

Recognizes that ecological integrity is a key pillar of Philippine sustainable development by pushing CDM project activities that: o o promote sustainable use of natural resources improve local environmental quality

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comply with national environmental policies and standards

Works toward instituting social order based on fairness and provision of support systems that look after the welfare of every Filipino by supporting CDM project activities that: o o o provide education & training to build capacities of local stakeholders enhance access to local resources and services for vulnerable groups promote local participation in the project

The Philippine DNA also drafted the project assessment procedures and approval processes. These are shown in Figure 6-3 and Figure 6-4 of the Appendix. Figure 4-3: DNA Structure

DENR Secretary
TEC for Energy-Related Project Activities

DOE

CDM Steering Committee


Chairperson DENR USec and an alternate Members and alternates: DOE, DOST, Private Sector, NGO

TEC for Afforestation & Reforestation Project Activities

FMBDENR

CDM Secretariat
Source; J. Goco, 2005

EMBDENR

TEC for Waste Management Project Activities

EMBDENR

4.8

Stakeholder Activities

To develop a wind power project and to access various investment incentives in the Philippines, licenses, permits and endorsements need to be secured by the project proponent. The authorization processes involve several agencies. The following outlines key activities of project developers in obtaining authorization for various aspects of the project. 1) Exploitation of Wind Energy Resources in Public Lands a. Pre-qualification for Executive Order 462. In the pre-qualification process, the Department of Energy (DOE) ensures that potential project developer has the technical capacity and financially able to carry out the project activities. b. Pre-commercial contract with the DOE. Once pre-qualified, the project developer could enter a pre commercial contract with the DOE to undertake wind resource assessment, field verification, harnessing, and feasibility study for the development of an appropriate project.

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c.

Pre-negotiated commercial contract with the DOE. To pursue the development of the project, the developer could enter a pre-negotiated commercial contract with the government under a production sharing agreement.

2) Feasibility Study and Grid Impact Study a. As part of the feasibility study requirement, the developer must undertake a grid impact study of the project. The wind power developer could engage the services of the National Transmission Company (TRANSCO) to undertake the system impact study of the project. 3) Transmission Service Contract a. If the wind power developer uses the transmission facilities of TRANSCO, a transmission service contract with the company is required. 4) Environmental Compliance Certificate a. While wind power project is not considered as one of the environmentally critical projects, wind farm sites could be located in environmentally critical areas. Environmental impact assessment and environmental compliance certificate are required by the Department of Environment and Natural Resources (DENR) for wind power projects. 5) Special Land Use Permit a. A special land use permit is required if the wind power project is to be located on a public land. The special land use permit can be obtained from DENR. 6) Application for Investment Incentives a. To access investment incentives specified in the Investment Priorities Plan, the wind energy project must be endorsed by the DOE. The DOE could issue an endorsement letter to the Board of Investments. 7) Sovereign Guarantees a. Under the current investment priorities of the government, wind power projects can be guaranteed by the Philippine Export Import Credit Agency (PhilEXIM). PhilEXIM can provide 100 percent of the debt component of a project from any bank/financial institution on a 70:30 debt to equity ratio. A pre-clearance application is required by the PhilEXIM. 8) Electricity Sales Agreement a. As discussed in the Section 2, the wind power developer could sell its generated electricity to distribution utilities (mostly electric cooperatives), NPC-SPUG, wholesale electricity spot market (WESM), or directly to the consumers as qualified third party to operate in remote and missionary areas. At present, since the WESM is not yet operational, the most attractive option for developers is to sell the generated power to electric cooperatives. 9) Certified Emissions Reductions (CERs) a. The project developer can also maximize the benefits of the wind power project by quantifying and trading the emissions reductions generated by the project. The developer must demonstrate that the project is additional and promote sustainable development. To do this, it needs to engage designated operational entities to prepare the project design document, monitoring plan and verify the emissions reductions.

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b. The developer needs an approval from the designated national authority (DNA) of the clean development mechanism (CDM) under the DENR. c. The developer must also negotiate directly with the international buyers of certified emissions reductions.

d. The PDD must be submitted to the CDM Executive Board for methodology check. Once approved the project must be registered for issuance of the certified emissions reductions (CERs).

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5
5.1

Policy Recommendations
Policy and regulatory frameworks

The Philippine Renewable Energy Policy Framework has specified policy goals, objectives and strategies for renewable energy development. Long-term renewable energy targets were also defined. The legal frameworks for the exploitation of wind energy resources and for the provision of incentives have been established. At present, the Philippines relied mainly on investment incentives to promote renewable energy development, and these instruments have been put in place for over 5 years. Actual investments in renewable energy projects however remain modest. To stimulate further investments on renewable energies, the government must introduce various mechanisms that enhance the development of the renewable energy markets. Introduction of instruments that enhance renewable energy development. Key instruments that have stimulated renewable energy investments in developed and other developing countries are portfolio standards, feed-in tariffs and tradable renewable certificates. It must be mentioned that these types of instruments are consistent with liberalized electricity markets. Portfolio standards and green electricity pricing are being proposed in the RE Bill. Like in many developed countries that successfully promoted massive investments in renewable energies, a mixed of policy instruments should be considered by the government. The portfolio standard and green electricity pricing mentioned above should be reinforced by investment incentives such as taxes and duties exemptions and credits, income tax holidays, and other instruments. The proposed RE Bill provides incentives for both renewable energy projects and activities as well as for local manufacturers and suppliers of renewable energy technologies. These include income tax holidays, duty free in the importation of the equipment, tax credits on domestic capital equipment and services, special realty tax rates, net operating loss carry over, and accelerated depreciation. A country specific incentive which is also considered in the RE Bill is the exemption of renewable energy projects to contribute in the universal charge imposed under the Electric Power Industry Restructuring Act. A Fund dedicated for the promotion of renewable energies is extremely important particularly in the Philippines. The RE Bill also proposes to establish a renewable energy Trust Fund. The fund will be used to finance activities related to research, development and demonstration, provide grants to new sources of renewable energies, support resource and market studies, and finance awareness raising and capacity building activities. The process of getting permits and licenses for wind power development involves various agencies and often lengthy. The Department of Energy can increase the productivity of the administrative process and at the same time reduce costs for project developers by establishing a one-stop agency for the approval process of the wind park project. This agency will coordinate the approval activities of all involved public agencies. The national grid code and distribution code as well as the Wholesale Electricity Spot Market (WESM) Rules provides legal framework for wind power developers access to the grid and access to electricity markets. At present, the market rules have considered priority dispatch for intermittent renewable energy generators. Specific issues may arise that needs to be addressed at the policy level once the WESM is put into operation.

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5.2

Specific actions to remove barriers

Barriers to wind power development have been identified and actions to be undertaken have been recommended by various task groups working on wind power investment promotion. The following presents the summary of barriers and recommended actions. Table 5-1: Project Development Barriers and Recommended Action
Issues and Barriers 1. Absence of reliable data at pre-identified potential sites by the NREL study 2. Arduous process in land acquisition: government restrictions on Comprehensive Agrarian Reform Program lands; land conversion and zoning; significant cost of land from the perspective of investors considering that wind farms require vast areas on open fields Activities to be undertaken/possible solution Appoint a wind energy resource assessment expert to manage the program and see to it that the program is sustained For Comprehensive Agrarian Reform Program lands, DAR must allow joint use of lands For a land conversion and zoning issues, land conversion must not be imposed considering that wind turbines only occupy a small portion of the land and that the operation of the turbines will not hamper but support existing land-use. DOE should assist in seeking LGUs to declare wind potential sites as wind farm zones. Undertake aggressive information promotion drives Tax and duty free incentives for the importation of exploration and all other related equipment Seek grants from sponsor nations to conduct technical trainings, conferences and other technology transfer program in the country Clarify criteria for assessing technical and financial capability of wind power developers, ie selective issuance of exclusive rights to a particular wind farm developer for a potential wind farm site on public domain Effectivity of pre-commercial contract should be shortened to maximum of three years Privately owned land should be exempted from the policy Right to install and gather data on a site should not be made exclusive

3. Not in my backyard (NIMBY) mentality 4. Lack of specific incentives for exploration or resource assessment 5. Few local experts to assist in the wind exploration campaign

6. First come first served reservation policy on public domain hinders legitimate developers to start on highly potential areas

Table 5-2: Financial Barriers and Recommended Actions


Issues and Barriers 1. Wind power projects are not financially viable if funded substantially by commercial loans. Activities to be undertaken/possible solution Ideal funding mix may make it financially viable such as a mix of ODA loans, grants,

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equity and carbon finance. 2. Sites for wind power projects are often far from the grid and heavy costs of transmission lines rachet the high upfront investment costs 3. High interest rate from lenders 4. Lack of financing for wind power project preparatory activities which results to very few projects that are ready for financing. Prioritize on-site development Study the least cost existing interconnection facilities TRANSCO should shoulder the cost of high voltage transmission lines Source appropriate funding facility for the wind project Source available funding to augment existing funding for project activity preparation

Table 5-3: Technical Barriers and Recommended Actions


Issues and Barriers 1. Intermittent supply of electricity Activities to be undertaken/possible solution DOE must ensure to include in the WESM rules a provision for priority dispatch (must run, must accept) for wind power generation. Wind power generation must be netted out of the supply requirements needed to meet the demand The Energy Regulatory Commission must enable power developers or the distribution utilities to recover the cost of interconnection facilities through stranded assets recovery or passing on to the end consumers.

2. Grid interconnection investments

Table 5-4: Information Barriers and Recommended Actions


Issues and Barriers 1. Lack of awareness and capacities on wind energies Activities to be undertaken/possible solution Policy level Support the Department of Energy for the immediate passage of RE Bill and other policy initiatives. Share lessons learned worldwide

Project development Promote technical, financial and organizational development trainings Collaborate with partners in promoting wind energy technologies Prioritize information campaign in 25 target areas

Technical Coordinate with electric cooperatives in the planning and consultation process

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Finance

Organize wind forum for all stakeholders Popularize technical reports

Support government financial institutions in investment promotions

Table 5-5: Policy and Regulatory Barriers and Recommended Actions


Issues and Barriers 1. Lack of policies and regulatory frameworks Activities to be undertaken/possible solution Department of Energy Mandating all generators or distributors to source out 2% of its total electricity generation and its distributed generation from renewable sources (such as wind, ocean, biomass solar and mini-hydro Or generators to implement their own RE power plants.

Energy Regulatory Commission ERC to implement provisions of the EPIRA and the promotion of renewable energy and energy efficiency: access to grid; tariff structure of RE; dispatch of RE

Support for R&D/Technology development of RE equipment manufacturing (DOST) RE Bill provision of RE trust fund and push for incentives Coordination of DOE/DOF on VAT imposed on capital equipment

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Appendix

Figure 6-1: Approval process for environmentally critical projects

Figure 6-2: Approval process for projects located in environmentally critical areas

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Figure 6-3: Approval Process for Large Scale Projects

Approval Process for Small Scale Projects

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Figure 6-4: Approval Process for Small Scale Projects

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Table 6-1: Electricity Demand in Potential Wind Sites

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