E-book for Norwegian investors: Navigating new cycle of energy investing in PH

Published May 24, 2021, 12:47 PM

by Myrna M. Velasco

The Philippines is traversing its second wave of massive renewable energy (RE) developments; and providentially, local and foreign investors’ alike have their sights focused anew on this market.

Cover photo of the E-Book that shall guide Norwegian investors on investing in the energy sector of the Philippines that was prepared by Norconsult Mgt Services, Phils. Inc. for the Royal Norwegian Embassy in Manila.

The first investment rollouts in the 2014-2016 timeframe had been underpinned by the feed-in-tariff (FIT) perks, but as the country’s honeymoon with that incentive scheme had already been over, the next round of RE installations will have to lean mainly on other market sweeteners — primarily the Renewable Portfolio Standards (RPS), net metering program, Green Energy Option Program (GEOP), as well as the envisioned trading of RE certificates via the Wholesale Electricity Spot Market (WESM).

Among the leagues of foreign investors being enticed to inject fresh capital in the Philippine RE market are the Norwegians – and no less than Norway Ambassador to the Philippines Bjørn Staurset Jahnsen had sounded that off recently to the country’s energy leaders and policymakers.

Norway Ambassador to the Philippines Bjørn Staurset Jahnsen

Yet, as in the rest of investors scouting for opportunities in ‘green energy’ markets globally, the Norwegians have also clearly laid down their ‘wish list’ via an e-book that had been presented to the Philippine government and other key stakeholders, so those fresh round of capital could flow into the Philippine energy market.

As dissected by Per Christer Lund, who is leading the Innovation Norway Singapore, a team that has been exploring for investment opportunities for diligent Norwegian companies in the energy space within the Asian region and Australia, their interests are spread across technology spectrums – not just in renewables, but also in natural gas, electrification in the domains of power generation, distribution and transmission; decarbonization of energy systems that shall include the deployment of hydrogen as well as carbon capture and storage (CCS) solutions; and then trading opportunities in energy markets.

“Our contribution is to gather and disseminate market information, to build channels to governments and stakeholders and at least to establish arenas and communities for Norwegian companies to interchange experience, sharing information and define synergies and basis of cooperation and to move together into these very exciting markets with these opportunities,” Lund said.

In the RE space, he emphasized that Norwegian firms have their attention pivoting on continuing hydropower installations, solar and floating solar ventures, offshore wind as well as investment synergies in the liquefied natural gas (LNG) and hydrogen as these two technologies are known as the ‘best match’ to the intermittency predicaments of solar and wind farm generation.

“We are very, very enthusiastic and engaged to see these opportunities in many countries, just like in the Philippines… we saw Norwegian interest, for example, offshore wind has taken off in China, and in Japan after the 2011 Fukushima nuclear disaster; and propagated now to Korea, Taiwan, Vietnam and moving towards the Philippines,” he said.

Lund added “the next frontier that we see coming out is on floating solar, usually offshore floating solar where we have many companies interested.”

Per Christer Lund

Nevertheless, he acknowledged that there are risks and challenges yet to be addressed by policymakers and regulators in the Philippine market – including those on: enhancing ancillary services in system operations and expansion of the power transmission network to support the massive integration of RE installations in power grids; addressing consumer resistance to incentive schemes like the FIT and RPS especially on the cost pass-on aspect; and more importantly, the Constitutional and legal restriction of foreign ownership on RE developments, primarily for solar and wind technologies.

Navigating PH’s energy investment cycle

To comprehensively guide Norwegian investors in navigating the new cycle of RE as well as the wider scale of prospective ventures in the Philippine energy sector, the e-book that was put together by Norconsult Mgt. Services Philippines Inc. in collaboration with the Norwegian Embassy in the Philippines, was launched early this month, and this shall serve as a compendium and their guidepost to investments.

Norconsult Mgt. Services President Rodolfo “Ozone” T. Azanza Jr., who is the prime mover of the e-book project, has chronicled the energy investment rhythm in the Philippines from the time that the electricity market was deregulated with the passage of the Electric Power Industry Reform Act (EPIRA) in 2001; then recounted the reforms that happened through the various phases of metamorphosis of the country’s energy market – chiefly the privatization of the assets of state-owned National Power Corporation (NPC), in which among the pioneer investors in the hydro sector is Norwegian company SN Power (now known as Hydropower Asia Scatec ASA).

Norconsult Mgt. Services President Rodolfo “Ozone” T. Azanza Jr.,

He is likewise aiding Norwegian investors into getting their grasp on other market reforms and policies; such as the establishment and commercial operation of the WESM in 2006; the introduction of competitive market (via the Retail Competition and Open Access or RCOA policy) that unchained consumers’ never-ending yoke over high electricity rates and had subsequently allowed them to exercise their ‘power of choice’ in contracting and patronizing certain suppliers in their energy services; then the passage of the RE Act in 2008 and the packaging of FIT incentives for the initial round of solar, wind, biomass and run-of-river hydropower projects that mainly flourished in 2014-2016 (with corresponding FIT incentive extensions for biomass until 2019 and hydro until to-date); and ultimately, the well-anticipated upcoming raft of investments in the ambitious ‘green energy sweep’ of the Philippines.

“A lot has improved since the early days of the EPIRA. The first power assets’ privatization contract that came out of PSALM (or the state-owned asset seller Power Sector Assets and Liabilities Management Corporation) were not that bankable,” he narrated, but investors’ appetite were eventually whetted because “PSALM was willing to listen to bidders as to how the contracts can be improved.”

Such account of the government’s willingness to address challenges in the privatization of the NPC assets then, he enthused, primarily ushered in the successes attained in the market transformation of the country’s power sector – specifically in PSALM’s privatization exercise because “it was willing to let the prospective bidders spell out what contractual issues matter most and how investment risks can be spread out so that they are borne by the party who can best manage them.”

Back then, Azanza evinced that “we also had a chance to participate in the PPP (Public Private Partnership) Center’s ‘market sounding’ initiatives, wherein they did the rounds with prospective investors to get a feedback on which issues are most pressing or important to bump up the willingness to invest in the country.”

That kind of collaborative approach when it comes to dangling carrot to investors had not exactly changed since then, he said, and it is also an effective strategy that Philippine regulators and policymakers can draw on again to provide succor to fresh batch of energy investments – be it in the RE sector, LNG, hydrogen and other technology innovations that foreign investors like the Norwegian firms can play their part in.

Disentangling policy and regulatory hurdles

According to Azanza, “one of the trickiest issues that can really hound RE investment is having to deal with LGUs (local government units),” given that leadership rotation in that government level changes every 3 years.

He thus noted that “a guided strategy to make LGUs a real partner in RE development is paramount, but the problem is how.”

From their end, he indicated that one of the recommendations they are advancing is for LGUs to put up equity in project constructions – and that can be concretized by way of financing innovation that shall “allow for all future real estate and other real estate taxes coming from RE projects to be computed at their net present value and securitized as equity into the project,” and that can be executed by having a special purpose vehicle or SPV that “will operate like a local GOCC (government-owned and controlled corporation), whose heads or general managers would have office terms longer than the Governors or Mayors.”

Through that policy step, the Norconsult executive asserted that LGUs can be amalgamated into the project development equation as “real investors in RE projects in their provinces or municipalities without really putting up any cash upfront.”

He professed though that some stakeholders still weigh up that proposition as “too radical,” but in Azanza’s view, it makes sense that government “should look into this idea of securitization of future taxes, and craft a structure or enabling policy so that LGUs will have legal basis for pursuing such an arrangement.”

Another ‘Gordian knot’ in RE investments terrain in the Philippines is the very lengthy process of project permitting – primarily land conversion arrangement for solar projects that could take eight (8) months or longer, as well as land ownership underlying hydropower assets and wind farm developments. And while some of the facets of project permitting are now being addressed through the Energy Virtual One-Stop Shop (EVOSS) platform; much, much more have to be done to comprehensively ease the entire permitting task chain.

“The ownership of land underlying the power assets is really more pressing for RE fuel types like hydros and wind, where the location is so tied to the availability of water (especially for hydros)…biomass and solar can be more flexible in terms of location and they can even cherry pick in order to locate where grid connections will present the least concern,” he reckoned.

By comparison, when it comes to project permitting, he stated that Vietnam has the advantage because “power is more centralized, such that when the national government (which is still led by Vietnamese leaders or families who fought and won the war against the United States) makes a decision, the local lenders tend to fall in line.”

On the protracted legal concern of foreign ownership limitation on RE projects (fundamentally for solar and wind technologies), the Norwegians unequivocally view this as a complex and tricky policy matter – and this was explicitly conveyed by no less than Ambassador Jahnsen to the Philippine energy leaders.

Lund, for his part, has echoed that “the Constitutional and legal restrictions for investments in the RE sector, except for biomass — this needs to be removed for huge renewables potential.”

Azanza further enunciated that “our Constitutional ownership limitation is hinged in the act of extracting natural resources in its raw form. It clearly was meant to apply to more tangible natural resources, like minerals. Maybe, water too. But wind and the sun?”

Given that constraint, he deemed that other Southeast Asian markets have been gaining advantage, because their foreign ownership rules are less restrictive. “Thailand, for example, does not have foreign ownership restrictions for RE facilities as power generation is not a restricted business activity under its Foreign Business Act (FBA). What they do have is limitation on land ownership.”

Beyond the challenges, the Norconsult executive articulated that the Philippines, for now, can still bank on its array of incentives to corner those much needed investment dollars that would help it achieve its ‘low carbon energy pathway’ moving forward.

Distinctly for the RPS policy that will provide alternative market to RE capacities post-FIT regime because of a mandate for the distribution utilities to source part of their supply from these technologies, Azanza manifested the prudent step that the Philippine government can seriously consider is increasing the yearly increment to 2.5-percent instead of the currently proposed 1.0-percent annually.

“These are great incentives for sure. They (companies) can hasten investment decision as investors see their financial models improve based on the incentives, rather than wait until technology drives down their capital investment costs,” he explained.

Another investment tract that he sees Norwegian companies to have particular interest on is the propounded trading of RE certificates, with Azanza citing that “this is something that they will be excited about.”

Even so, he cautioned that Norwegian investors would first need to see that the RE market is working, with him stressing that “the architecture for it is not rocket science, but as in many trading markets, there has to be a good number of participants for it to work well.”

Azanza opined that one market that the Philippines can take its reference on will be India, because that Asian energy giant  “has a well-functioning system for registration and trading of RE certificates.”