National Geothermal Association of the Philippines

Renewable Energy Act of 2008: Legal and Fiscal

Implications to Philippine Geothermal Exploration and

Development Atty. Fernando S. Peñarroyo

Trustee, National Geothermal Association of the Philippines

Presentation Outline

Legal Framework pre-RE Law- Philippine Constitution of 1987- Presidential Decree No. 1442

Important Features of RE Law Potential Issues and Risk Factors

Constitution

All water, minerals, all forces of potential energy, and other natural resources are owned by the state. The exploration, development and utilization of these natural resources are under the full control and supervision of the State.

Constitution

The State has the option of entering into co-production, joint venture or production sharing agreements with Philippine citizens of Philippine corporations or associations (at least 60% of the capital owned by Filipinos).

If an investor wishes to acquire the right to extract or develop natural resources, he must enter into an agreement with State. PD 1442 laid out the legal framework for geothermal energy agreements.

Presidential Decree 1442

Introduced production sharing in geothermal resource development

“service contractor” shall furnish technical and financial services subject to direct supervision of the gov’t

Profit sharing of 60-40 of net proceeds Cost recovery of 90% of gross income;

capital expenditures depreciated over 10 years

35% income tax paid out of gov’t share

Other Important Laws Related to Geothermal Energy Development Indigenous Peoples Rights Act (“IPRA”) Environmental Impact Statement

(“EIS”) System Local Government Code of 1991 National Integrated Protected Area

System (“NIPAS”) Law

IPRA Grants to indigenous cultural

communities certain preferential rights to their ancestral domains and all resources found therein.

Royalty and right to benefits No agreement shall be approved unless:

- There is prior certification from NCIP that area does not overlap ancestral domain or- Prior free and informed consent has been obtained from the ICC/IP concerned

EIS System under Presidential Decree No. 1586 Project proponent of environmentally

critical projects and projects within environmentally critical areas must obtain an environmental compliance certificate prior to commencement

EMB/DENR as lead agency DAO 2003-30 Implementing Rules and

Regulations

Local Government Code

Geothermal energy exploration proponents are required to conduct consultations with legislative councils of LGUs concerned

E.R. No. 1-94 prescribed direct benefits to LGUs hosting energy resource development projects and/or energy generating facilities within their territorial jurisdiction. Generation facility shall allocate one centavo per kilowatt-hour of the electricity sales as direct benefits to host LGU.

NIPAS Law

Survey of energy resources in protected areas solely for data gathering

Exploitation and utilization of energy resources found within NIPAS allowed only through passage of law by Congress

Renewable Energy Law

Signed on 15 December 2008 Implementing Rules and Regulations

issued by DOE Secretary on 23 May 2009 (DOE Circular No. DC2009-05-0008)

First open and competitive selection process for awarding Geothermal RE Service Contracts on 23 Oct. 2009 under DC2009-07-0011.

DOE granted 21 GRESC under RE Law

Important Features of RE Law

Definition of geothermal as mineral resource paving the way for the entry of 100% foreign ownership

Declaration of RE sector as a priority investment sector that will regularly form part of the Philippine investment priority plan to qualify for fiscal incentives

Provision allowing ECCs to be issued from the appropriate DENR regional office

Institutionalize LGU share

Geothermal Defined as Minerals

Exception to the nationality requirement: The Constitution authorizes the President to enter into agreements with foreign-owned corporations involving either financial or technical assistance, for large- scale exploration, development and utilization of minerals, petroleum and other mineral oils.

Renewable Portfolio Standard

RE Law provides for establishment of an RPS system requiring electricity suppliers to source a certain amount of their energy supply from RE resources.

The National Renewable Energy Board shall set the minimum percentage of generation from eligible sources and determine to which sector RPS shall be imposed on a per grid basis.

RPS will also be complemented by a feed-in tariff system but geothermal energy has been excluded.

Fiscal Incentives

Seven (7) years income tax holiday, corp. tax rate of 10% after 7 year ITH

Duty-free importation of RE machinery, equipment and materials

1.5 % Special Realty Tax Rates on Equipment and Machinery on original cost

Net operating loss carryover (NOLCO) Accelerated Depreciation Zero percent VAT rate

Fiscal Incentives

Tax exemption on carbon credits 100% tax credit on VAT and custom

duties on domestic capital equipment and services

Tax incentives to manufacturers, fabricators and suppliers of locally produced RE equipment

Exemption from Universal Charge Financial assistance from Gov’t

Financial Institutions

Government Share

Integrated geothermal operation: 1.5% based on gross income from sale of electricity

Steamfield dev’t and production only: 1.5% based on gross income from sale of geothermal steam

Geothermal power plant only: 1.5% based on gross income from sale of electricity

Gov’t share distribution: 60% national gov’t and 40% LGU paid directly on a quarterly basis

Shortcomings of RE Law

No provisions that will facilitate the acquisition by RE developers of auxiliary rights like timber rights, water rights, easement rights and entry into private lands and concession areas - complicated approval and permitting process

Geothermal resource development in protected areas

Potential Issues with LGU

Law is silent on whether LGU consent is needed for exploration

Local government veto/moratorium on geothermal exploration and development

Integration of geothermal energy development into local development land use and resources use plans

Potential Issues on Gov’t Share

National government should develop a transparent system of accounting for and allocation of sharing of revenues and taxes with LGUs.

Expedite and streamline the release of LGU share on revenues and taxes through a simplified process with timeframe requirements to lessen local opposition to geothermal projects.

Potential Issues with IPRA

Lack of clear cut rules on how to arrive at a decision making process of IPs

Preferential rights of IPs RE Law is silent on share of ICCs on

geothermal revenue

Risk Factors

Foreign equity ownership Availability of geo-scientific information

and professionals Area status and clearance, conflict with

other land use Surface/land Ownership Procedural efficiency and clarity between

DOE and DENR Opposition by NGOs – Rules of Procedure

for Environmental Cases

About the Lecturer BS Geo, Bachelor of Laws (UP), Master of

Laws (Univ. of Melbourne) Managing Partner, Manalo Puno Law Trustee and Secretary, Philippine Mineral

Exploration Association Trustee, National Geothermal Association of

the Philippines Director, Clean Rock Renewable Energy

Resources Corp. (Natib and Daklan areas) Professorial Lecturer, UP and De La Salle-FEU