=== pep-2023-2050-vol2-transition-finance-page-123.pdf === • Evaluating the impact of accelerated electrification within the transport sector, taking into account the growing utilization of electric vehicles (EVs) in the Philippines. A higher utilization of EVs could significantly raise the electricity demand and require extensive rehabilitation of power distribution networks increasing investment needs in power supply. • Assessing the implications of energy transition on resilience, including a comprehensive understanding of the geospatial aspects of climate risks and their impact on the expansion of the power system, as well as the costs and benefits of strengthening resilience. This would help enhance power system planning and implementation of suitable risk-mitigation strategies. • Understanding the financial requirements essential for an energy transition and effectively allocating risks between the private and public sectors. Insights into the different sources of capital would help avoid unnecessary delays and costs of inaction. • Leveraging analytics to optimize the planning and execution of initiatives related to renewable energy (RE) and energy efficiency and conservation (EEC). Assessment of the needs and gaps for implementing the NREP should be undertaken to identify critical bottlenecks (transmission capacity and grid flexibility, land use, permits, labor, and skills needs, equipment standards, procurement rules, financing constraints, among others). • Evaluating the effectiveness of carbon pricing as a facilitative tool for advancing the energy transition. The introduction of carbon pricing, either as a carbon tax or an emissions trading system, could incentivize firms and individuals to adopt low-carbon technologies while raising revenues, which could be used to support the energy transition. • Analyzing the socioeconomic implications with the gradual reduction of coal-fired power utilization in the Philippines. The need to conduct a better assessment of the economic, social, and financial risks of stranded assets (not only coal but also natural gas infrastructure). Figure 29. Global Energy Investment in Clean Energy and Fossil Fuels, 2015-2023 Source: International Energy Agency https://www.iea.org/reports/world-energy-investment-2023 According to the International Energy Agency (IEA) Net Zero Emissions by 2050 Scenario (NZE),132approximately 70.0 percent of clean energy investment in the coming decade must be driven by private developers, consumers, and financiers. The rapid escalation of investments in clean technologies is dependent on improving access to affordable financing, particularly in emerging and developing economies. Transitioning to clean energy requires a substantial increase in both equity and debt, with capital structures relying on the broad mobilization of low-cost debt. This is exemplified in the case of new capital-intensive, utilityscale solar projects, which are underpinned by long-term power purchase agreements. 132 https://www.iea.org/reports/world-energy-investment-2023 Vo l u m e 2 113 === pep-2023-2050-vol2-transition-finance-page-124.pdf === Based on the IEA estimates, the world must invest approximately USD 2.8 trillion in energy in 2023, with more than USD 1.7 trillion (Figure 29) allocated to clean energy initiatives. This underscores the need to gradually transition towards a cleaner and more sustainable energy future. The projected USD 1.7 trillion in key investment is comprised of the following components: • • • • • • • RE for power with USD 501 billion (29.0 percent); Nuclear power USD 103 to 125 billion per year133 (6.0 percent); Electricity grids with USD 472 to 600 billion per year134 (28.0 percent); Energy storage with USD 117 billion (7.0 percent); Low-emission fuels135 with USD 194 billion (10.0 percent); Efficiency improvements with USD 232 billion (14.0 percent); and, End-use renewables and electrification with USD 107 billion (6.0 percent): The IEA’s investment projection is based on a scenario that would put the world on track to achieve netzero emissions by 2050. It also aligns with other assessments of the investment costs of the energy transition. The International Renewable Energy Agency (IRENA) estimates136 that the world needs to invest around USD 131.0 trillion in RE by 2050 to achieve a net-zero emission future. Clean Energy Finance Initiatives in the Philippines The Philippines for its part proactively embarked on initiatives to foster investment in clean energy. In the 2023 Climatescope Report by Bloomberg New Energy Finance, the Philippines ranks fourth among the most appealing emerging markets for RE, a testament of the country’s robust clean energy programs and initiatives. The Bangko Sentral ng Pilipinas (BSP), recognizing the risks encountered by financial institutions, introduced the Sustainable Finance Framework137 on 29 April 2020. The framework is intended to be integrated by financial institutions in their sustainability principles and embedded in their corporate governance framework, risk management systems, and strategic objectives. Correspondingly, the Philippine Sustainable Finance Roadmap, formulated through the efforts of the Inter-Agency Technical Working Group for Sustainable Finance (Green Force) and launched on 20 October 2021, takes a comprehensive approach by delineating and facilitating holistic strategies for sustainable finance. The three (3) pillars that focus on policy, financing, and investment are: • Creating a conducive environment that aims to strengthen policies in improving transparency on climaterelated finance, develop policies to promote sustainability risk management, conduct capacity building to raise awareness regarding sustainable finance, and enhance reporting of green and climate finance flows; • Mainstreaming development finance which encourages sustainable financial products via penalties and incentives, leverage on available financing, and establishing a sustainable insurance mechanism; and • Developing a sustainable pipeline whose purpose is to establish a sustainable pipeline database for the public and private sectors, monitor progress, and provide regular updates, including linking the sustainable pipeline to SDGs, Philippine Development Plan (PDP), and Nationally Determined Contribution (NDC) targets. It is noteworthy that each pillar lays out specific strategic plans consistent with current initiatives and policies regulated. https://www.iea.org/energy-system/electricity/nuclear-power https://www.iea.org/energy-system/electricity/smart-grids “Low-emission fuels” include modern liquid and gaseous bioenergy, low-emission hydrogen, and low-emission hydrogen-based fuels; “Other end use” refers to renewables for end use and electrification in the buildings, transport, and industrial sectors. 136 https://www.irena.org/publications/2021/Jun/World-Energy-Transitions-Outlook 137 BSP Circular No. 1085 series of 2020 133 134 135 114 Philippine Energy Plan === pep-2023-2050-vol2-transition-finance-page-125.pdf === The Securities and Exchange Commission (SEC) is one of the government agencies that aligned its efforts with the Sustainable Finance Roadmap. As oversight of corporations and securities including capital market institutions and its participants, it issued corresponding guidelines to promote good governance and support the deepening of the capital market through sustainable investment products. These guidelines include SEC Memorandum Circular (MC) No. 4 s. 2019 or the Sustainability Reporting Guidelines for Publicly Listed Companies (PLCs) and SEC MC No. 11 s. 2022 or the Rules on Sustainable and Responsible Investment Funds. The former primarily aids PLCs in assessing its non-financial performance and monitoring of its contributions towards achieving universal targets of sustainability set by various initiatives (i.e., UN SDGs). The latter sets the guidelines for the newly formed and existing investment companies that are qualified as Sustainable and Responsible Investment (SRI) Funds. In 2023, the SEC issued MC No. 3. s. 2023 or the Guidelines on the Issuance of Sustainability-Linked Bonds under the ASEAN SustainabilityLinked Bond Standards (SLBS) in the Philippines. The guidelines intend to primarily govern the issuance of the sustainability-linked bonds138 where the proceeds are to be used for general purposes. In December 2022, the Philippines issued USD 6.58 billion of Green, Social and Sustainability (GSS) bond as part of the initiatives on Green and Sustainable Capital Market. Said amount accounted for 21.0 percent of the total ASEAN-Labelled GSS of USD 30.64 billion in the same year.139 The other SEC initiatives related with sustainable finance are its involvement in the ASEAN Capital Markets Forum (ACMF) and ASEAN Taxonomy Board. The Philippine Guarantee Corporation (PHILGUARANTEE), as part of its mandate, provides credit guarantees for financial to support trade and investment, infrastructure, agricultural modernization, and energy, among others. PHILGUARANTEE extends such for financing sustainable energy projects including those under the National Renewable Energy Program (NREP) through the Sustainable Energy Credit Guarantee Facility (SEGF).140 Sustainable Finance Roadmap The Roadmap along with its Guiding Principles for the adoption of low-carbon energy solutions is expected to stimulate investments that will support the country’s NDC and align financial and economic strategies with environmental objectives. It underscores the activities for both the greening of the financial system and the financing of sustainable activities, with a focus on climate change as a critical contributor to the achievement of the SDGs. It also provides the strategic action plan of the government to promote sustainable finance in the Philippines and address climate change and other environmental and social risks. It was prepared to: • • • • Outline the goals that will support the current initiatives and policies to create a supportive environment for the widespread adoption of sustainable finance in the country; Determine priority areas and acknowledge the basis for improvements relating to sustainable finance; Provide strategic direction and recommendations to accelerate sustainable finance; and, Provide investment and policy signals to support the transition to a sustainable economy. Sustainability-linked bonds are any type of bond instrument for which the financial and/or structural characteristics can vary depending on whether the issuer achieves predefined sustainability/environmental, social, and governance objectives. Issuers are thereby committing explicitly to future improvements in sustainability outcomes within a predefined timeline. Sustainability-linked bonds are also forward looking. The sustainability/ESG objectives are measured through predefined key performance indicators (KPIs) and assessed against predefined sustainability performance targets (SPTs) (ASEAN Capital Markets Forum. 2022. ASEAN Sustainability-Linked Bond Standards. Available at https://www.theacmf.org/sustainable-finance/ publications/asean-sustainability-linked-bond-standards) 139 In Dec 2023, the Philippines issued USD10.11 billion of GSS, about 22.0 percent of total ASEAN-Labelled GSS. Securities and Exchange Commission. https://www.sec.gov.ph/cmsustainable-2022/sustainable-finance-market-update-as-of-december-2022/#gsc.tab=0 140 Sustainable Energy Credit Guarantee Facility (SEGF). (n.d.). Philippine Guarantee Corporation. https://www.philguarantee.gov.ph/programs/guarantee-programs/corporate-msme/ sustainable-energy-credit-guarantee-facility-segf/ 138 Vo l u m e 2 115 === pep-2023-2050-vol2-transition-finance-page-126.pdf === The heightened interest in pursuing green projects, as well as adherence to the 11-Point Sustainable Central Banking Strategy, prompted the BSP to scale up sustainable finance in the country with the issuance of the BSP Circular 1185 series of 2023 on 13 December 2023. The policy amended the regulation on credit exposure limits to a single borrower and rates of required reserves as provided under Sections 362 and 251 of the Manual of Regulations for Banks (MORB). Specifically, the said Circular stipulated the following: a) grant of additional single borrower’s limit (SBL) of 15.0 percent of net worth of loans, credit accommodation, and guarantees for the purpose of financing eligible green or sustainable projects including transitional activities to decarbonization; and b) gradual reduction of the reserve requirement (RR) rate to zero percent against new and outstanding sustainable bonds issued by banks. The objective of these measures is to assist in the financing of eligible projects that contribute to the government’s climate commitments and SDGs as articulated in the PDP and NDC. In support of the commitments outlined in the roadmap, the BSP through the Financial Sector Forum (FSF)141 issued the Philippine Sustainable Finance Taxonomy Guidelines (SFTG) through BSP Circular No. 1187 series of 2024 on 21 February 2024. The SFTG serves as a tool for determining whether an economic activity is environmentally and socially sustainable, as well as guides stakeholders in their investment and financing decisions. The SFTG is a dynamic document denoting that it is responsive to changes and can be subjected to periodic review. It also adopted a phased approach, designed for inclusivity, and relates to key government policies and regional frameworks. A phased approach allows for effective, iterative, cooperative, and user-focused development. It is inclusive in the sense that it offers direction to the financial sector and other potential users with respect to categorizing sustainable finance and investment activities. Moreover, inclusivity means that the taxonomy can be continuously tested, adjusted, and improved to better fit the demand of users. It also offers a more detailed technique for evaluating economic operations based on the criteria outlined in the Philippine Sustainable Finance Guiding Principles (shown in Table 59). Further, the SFTG aims to direct and increase capital flows to economic activities including greenhouse gas (GHG) emission reduction and building climate resilience, which promotes transparency and credibility by minimizing the risk of greenwashing and supports a just transition to a sustainable economy. The guideline also highlights the country’s key priorities for reducing GHG emissions and lessening the effects of climate change. It encompasses various objectives for both adaptation and mitigation of climate change. Table 59. The Philippine Sustainable Finance Guiding Principles Guiding Principle 1: Climate Change Mitigation and Adaptation Guiding Principle 2: Promoting Transition to a Low-Carbon Economy Guiding Principle 3: Resilient Food Systems Guiding Principle 4: Sustainable Cities Guiding Principle 5: Sustainable and Resilient Infrastructure for Inclusive Growth and Poverty Reduction Guiding Principle 6: Environmental Management and Conservation Guiding Principle 7: Prohibited Activities The FSF is a voluntary interagency body comprised of the Bangko Sentral ng Pilipinas (BSP), Securities and Exchange Commission (SEC), Insurance Commission (IC), and the Philippine Deposit Insurance Corporation (PDIC) aimed at (i) facilitating consultations and exchange of information among its members on matters relating to the supervision and regulation of financial institutions, and (ii) coordinating the regulatory and supervisory policies and efforts of the member agencies. 141 116 Philippine Energy Plan === pep-2023-2050-vol2-transition-finance-page-127.pdf === One of the significant aspects of the SFTG is the “Traffic Light” Classification System which uses a set of guidelines, questions, and decision trees to evaluate activities and assign a classification of “Green,” “Amber” or “Red” as shown in Figure 30. This principle-based method of activity classification seeks to provide simplicity by first applying the Essential Criteria, followed by a qualitative evaluation of an entity's activity in relation to the pertinent Environmental Objectives (EO). These classifications are intended to accommodate various SFTG users. When an activity is categorized as “Red”, it does not necessarily indicate that the activity is unsustainable, but rather it failed to meet the SFTG sustainability ambition or pass the “do no significant harm” (DNSH) or “minimum social safeguards” (MSS) tests. Figure 30. Traffic Light Classification System Green Amber Red Note: EO - Environmental Objectives - DNSH - Do No Significant Harm; MSS - Minimum Social Safeguards Accordingly, intergovernmental organizations, such as the Organization for Economic Cooperation and Development (OECD) initiated programs such as the Sustainable Infrastructure Programme in Asia (SIPA)142 wherein the Clean Energy Finance and Investment Mobilisation (CEFIM) Programme is one of its outputs that centers on sustainable finance of clean energy projects particularly renewables and energy efficiency. Clean Energy Finance and Investment Mobilisation Program The CEFIM Program serves as the energy arm of SIPA. It aims to help accelerate finance and investment in emerging economies (including the Philippines) in RE and energy efficiency (clean energy) projects. In support of its implementation and to strengthen domestic enabling conditions for both sectors, the DOE issued Department Order (DO) 2022-02-0003143 and Special Order (SO) 2022-02-0005144 creating the CEFIM Philippine Steering Committee (PSC) and the Technical Working Groups (TWGs) for RE and EEC. The PSC is headed by the DOE Undersecretary for Planning, while NEDA serves as the Vice-Chairperson. The members include the BSP, Department of Finance (DOF), Department of Environment and Natural Resources (DENR), Board of Investments (BOI), Development Bank of the Philippines (DBP), Philippine Economic Zone Authority (PEZA), and SEC. Meanwhile, the TWGs for RE and EEC are led by the Directors of DOE’s Renewable Energy Management Bureau (REMB) and Energy Utilization Management Bureau (EUMB). SIPA is an ambitious policy support and capacity development program that aims to support selected Central and Southeast Asian countries channel investment flows into infrastructure investments aligned with their climate goals, international standards, and SDGs. 143 Issued on 21 February 2022. 144 Issued on 21 February 2022. 142 Vo l u m e 2 117 === pep-2023-2050-vol2-transition-finance-page-128.pdf === The PSC and TWG Members with OECD during the 1st CEFI ConsultationWorkshop held on 31 May 2022 at Makati Diamond Hotel, Makati City The CEFIM Program aims to develop a Clean Energy Finance and Investment (CEFI) Roadmap for the Philippines, which will bring government and private sector stakeholders together to agree upon a clear action plan that identifies and addresses bottlenecks complicating or constraining finance and investment in the country’s clean energy sector. This also complements the financial sector’s priorities to promote sustainable practices through corporate social responsibility and business responsibility reporting. Through the CEFI roadmap, innovative financing solutions and effective investment actions will be identified to deepen local capital markets, bring in investors, and attract international capital on clean energy, specifically for the two (2) clean energy thematic areas: i) Offshore Wind (OSW) power and ii) energy efficiency focusing on the public building sector. Two consultation workshops were jointly organized by the DOE and OECD under the CEFIM Program, held in May and November 2022 in Makati City and Panglao, Bohol, respectively. The first workshop identified and discussed key barriers to scaling up finance and investment for clean energy in the Philippines, while the second workshop identified potential policy and financial solutions, including actions to unlock finance and investment in OSW and EEC in public buildings. Clean Energy Finance Framework In recent years, the Philippines significantly ramped up its endeavors to gradually transition the country’s energy system. In April 2021, the government took a notable step by submitting its initial NDC target, pledging to achieve a 75.0 percent reduction in emissions from 2020 to 2030. While the Philippines does not have a specific net-zero GHG goal, the conditional commitment of the NDC is well-aligned with the stringent one point five degrees Celsus (1.5°C) limit established in the Paris Agreement. 118 Philippine Energy Plan === pep-2023-2050-vol2-transition-finance-page-129.pdf === The 2nd CEFI Consultation Workshop held on 24 November 2022 in Panglao, Bohol brought together key public and private stakeholders. The government is actively fostering RE adoption through the implementation of RA 9513 or the RE Act of 2008, and the NREP 2020-2040. The policy and program initiatives are directed towards bridging a notable deficiency in the low-carbon energy spectrum, with a goal of achieving a 35.0 percent RE contribution to the power generation mix by 2030, and 50.0 percent by 2040 onwards (2050) under the Reference Scenario (REF), while the Clean Energy Scenario (CES) adopts an aggressive target of more than 50.0 percent RE share by 2050. Energy efficiency also holds a pivotal role in the country’s emission reduction efforts. The government deems that effectively implementing EEC measures lead to a decrease in the energy intensity of the production of goods and services and lower GHG emissions across various sectors. The adoption of the Government Energy Management Program (GEMP) also advances efficiency in the way the public sector consumes electricity and petroleum. Given the promising potential of OSW and EEC in achieving the government's aspiration of a sustainable supply and curbing demand, it is critical to establish a Clean Energy Finance Framework to instigate development and unlock investments that can deliver benefits to local communities and the economy. The framework as shown in Figure 31 is built around four (4) cornerstones: attaining energy security, supporting environmental sustainability, encouraging technological development, and providing access to financing and investments, capitalizing on the potential commercial applications of OSW and EEC. It also encourages private sector investment through the establishment of funding channels and support programs by leveraging smart local and global relationships. Figure 31. Clean Energy Finance Framework Ensuring Energy Security. Energy security has emerged as a significant global concern due to the rising demand for energy, geopolitical tensions, and the environmental repercussions associated with conventional energy sources. Addressing the challenge requires RE and EEC measures as these are critical in reducing dependence on imported fuels and enhancing the economy’s energy utilization. Supporting Environmental Sustainability. Recognizing the potential of OSW and EEC measures as contributory to the path towards attaining a low-carbon future, it is essential to enable the mobilization of financial resources and investments toward achieving clean energy targets and sustainable finance goals. These will aid in reducing carbon footprints and achieving the target RE contribution to the power generation mix. Promoting Technological Development. Pursuing technological advancement is deemed to drive innovation and improve the use of efficient technologies. Technological progress can be achieved through continuous research and development (R&D) and collaboration with local and foreign institutions. Vo l u m e 2 119 === pep-2023-2050-vol2-transition-finance-page-130.pdf === Encouraging Financing and Investment. The major impediments to funding RE and EEC projects in the public building sector include the absence of standards, issues with adequate work staff capacity, a dearth of skills, and budgetary constraints of the local government units (LGUs). Thus, increased access to capital and investment is necessary to mobilize the financial resources required for these projects. This will accelerate the development of clean energy projects, as well as promote potential job creation for Filipinos. One effective approach is to benchmark foreign investors' programs and consider issuing ordinances or circulars that encourage banks to invest in local projects. Mobilizing Finance and Investment Roadmap The CEFI Roadmap outlines critical actions to help unlock finance and investment in the Philippines for the identified thematic areas. Ensuring a sound policy framework and investment environment are essential to mobilize domestic and foreign sources of capital to a level commensurate with the country's clean energy ambitions. Enabling Finance and Investment in Offshore Wind Power The Philippines, with its extensive coastlines and favorable wind conditions, stands as a nation with significant potential for OSW development. This technology emerged as a frontrunner in the pursuit of clean, reliable, and abundant energy generation. As countries worldwide commit to achieving climate objectives and curbing carbon emissions, the importance of financial investment in OSW has taken center stage. Figure 32 outlines the key actions to ensure the rapid development of OSW in the country. • Long-term vision and common guiding principles. The creation of an all-inclusive OSW strategy should encompass a vision for local supply chain infrastructure development, cost reduction plans, and improved incentives to encourage private initiatives. The formulation of clear, specific, and time-bound targets can enable both the government and the industry to make informed investment decisions on the country’s future electricity mix. Different targets and roles for fixed-bottom and floating OSW technologies can be considered to reflect the different stages of maturity, cost structures, and revenue potential for both technologies. • Enhanced cross-government collaboration is needed to convert the high OSW potential into bankable projects and broader socio-economic benefits for the Philippines. Strengthening the coordination between the different government agencies can also guarantee supply chain resilience, develop the needed onshore support infrastructure, and facilitate economies of scale. Defining a clear role for fixed-bottom and floating OSW in the future generation mix can guide target-setting for installed capacity over the planning period. Quantifiable targets ensure that development plans, which include the provisions for licensing, permitting, grid connection, and supply chain infrastructure (such as ports, roads, and manufacturing capacity), are coherent and well-coordinated. It is important that this coherence is reflected in aligned Maritime Spatial Planning, Power Development Plan, and Transmission Development Plan, and NREP. 120 • Data collection and integration with the permitting process. In collaboration with the National Mapping and Resource Information Authority (NAMRIA), an inter-departmental effort would be beneficial to locate, consolidate, and publish existing bathymetric and geological data collected from previous offshore oil and gas field projects, The database can be supplemented with other relevant topographical data, such as information about exposure to earthquake or typhoon risks. Further, spatial maps of areas currently unavailable for commercial development, including shipping or trade routes, military zones, and areas already under contract, should be included, especially if they are not already accessible on NAMRIA digital platforms. • Offshore wind permitting, planning and one-stop shop. The integration of OSW into the country’s Energy Virtual one-stop-shop (EVOSS) and the creation of a unified permitting process can simplify early project development, avoid the risk of permit duplication, and reduce administrative barriers to entry. A clear configuration of roles and responsibilities for all the government agencies involved in OSW planning and permitting would allow for its successful rollout in the EVOSS. Likewise, investing in digital tools, human resources and talent development for the OSW one-stop shop will ensure that the process is efficient, transparent, and consistent. Philippine Energy Plan === pep-2023-2050-vol2-transition-finance-page-131.pdf === Figure 32. Offshore Wind Roadmap Short Term Medium Term Long-term Vision and Common Guiding Principles • Creation of an all-inclusive offshore wind strategy that incorporates a vision for a local supply chain infrastructure development plans to achieve cost reductions and refined to encourage private inititatives. • Specific and time-bound targets for offshore wind generation and installed capacity, with a clearly defined role for fixed-bottom and floating technologies. Enhanced Cross-government Collaboration • Improved planning between agencies, as well as between central government and local level. • Integrating supply chain planning early on in its key industrial trade policies. • Coherent plans and revision horizons, calibrated against each other and re-aligned with high-fixed and floating offshore wind potential. Data Collection and Resource Assessment • Allocate offshore wind development zones would rely on spatial, bathymetric and geological data. • Government to collect and publish other relevant spatial, topographical, and economic data. • The information can be unified under a digital data room for investors, hosted under the DOE, and offers as a service to potential investors. Offshore Wind Permitting • Creation of specific mechanisms for auctioning the next rounds of offshore wind service contracts designed for deep water projects, embedding incentives for first movers to benefit from any cost reductions arising from the operation of the learning effects, and site developing multi-purpose industrial hubs and onshore support facilities. • Revised WESC guidelines and timeframes to accommodate offshore wind specific activities. • The one-stop shop approach can benefit from a broader review with all required agencies involved in permitting and planning, including grid connection permits, to set clear and binding roles, responsibilities, and decision timelines. • Invest in digital and human resources to streamline processes under the offshore wind one-stop shop whilst keeping an open dialogue with the industry. Auction Design and Regulatory Framework Transmission Planning • Offshore wind can also be included in the Green Energy Auction Program (GEAP), while considering in parallel an open-door policy alongside auctions for a developer led market. • As with the other auctioned technologies under GEAP, a separate band can also be created for offshore wind. Moreover, auction schedules can be frontloaded to provide investors across the entire supply chain with medium term visibility. • To create sufficient power demand, projects can also be allowed to sell part of the output via corporate power purchase agreements (CPPAs), alongside the policy support. • Power procurement contract (PSAs, CPPAs) can be improved by i) establishing clear and unambiguous rules, roles, and responsibilities for each of the contracting part; ii) introducing some flexibility in these contracts with a minimum and maximum price range. • Include offshore wind in the Competitive Renewable Energy Zones (CREZ) • Clarify asset boundary classifications under the grid code could provide some transparency on the transmission line ownership and, when applicable, the recovery mechanism by TransCo. • Include adequate transportation and port terminals, storage and assembly point for components, training areas, as well as dedicated areas related to operation and maintenance facilities. • To conduct an assessment of the readiness of the ports and more broadly the onshore supporting infrastructure of the Philippines in collaboration with the Department of Transport (DOT). Onshore Support Facilities and Port Upgrades Financial Considerations • Reform and diversify the process of selecting projects for the transmission development plan. • To inform and guide the transmission development plans, a comprehensive and independent grid study can be conducted on the current state of grid networks and how will the grid infrastructure in the Philippines (both transmission and distribution) needs to evolve to meet the country’s climate and energy ambitions. • Provide timely concessional finance in the early projects that will crowd-in commercial finance. • Explore partnerships-based financing mechanisms to pool domestic and international capital • Require banks to be relatively more familiar with projects when providing debt. Capacity Building Vo l u m e 2 • Dedicated financial instruments based on first-loss guarantees can incentivize commercial finance and lower the cost of capital. • To focus on retraining the local workforce for careers in offshore wind across all the supply chain (advisers, technicians, financiers, government agencies, other support staff), combined with the incentives to attract overseas Filipino professionals to bring their international experience. 121 === pep-2023-2050-vol2-transition-finance-page-132.pdf === • Auction Design and Regulatory Framework. The Green Energy Auction Program (GEAP) serves as a valuable tool in fostering a competitive procurement environment for OSW projects. Enhancing its effectiveness hinges on granting the industry clear insights into timing, project volumes, and pricing. Parallel to this, the government may also adopt an open-door policy for a developer-driven market contingent upon proper planning and permitting for projects. Achieving economic viability for capital-intensive OSW projects requires revenue stabilization measures during the initial stages of market development to attract affordable and long-term financing. The entry of early projects is facilitative in building the supply chain, establishing a track record, and instilling investor confidence, all of which contribute to lowering the financing cost. In this context, it is essential to establish a transparent costing methodology for offshore wind prior to setting the ceiling prices (Green Energy Auction Reserve / GEAR Price) in the current auction design. Moreover, maintaining an inflationindexed tariff is vital to mitigate some of the macroeconomic risks associated with projects. In addition to policy support, corporate Power Purchase Agreements (PPAs) can serve as supplementary revenue stabilization tools. However, it is imperative that the policies governing these contracts provide clear, unambiguous rules, roles, and responsibilities for the contracting parties. • Transmission planning. Efforts in developing OSW must be complemented by advancements in transmission grid infrastructure. Expediting grid expansion and optimizing its utilization is of paramount importance for integrating OSW into the generation mix as it mitigates congestion, reduces curtailed power, and enhances the economic viability of OSW projects. This is dependent upon the timely realization of the centralized national grid project which interconnects the three main grids of the country. Further, simplifying the process of project inclusion in the Transmission Development Plan and ensuring the DOE and National Transmission Corporation’s (TransCo) active participation in its formulation can prevent delays in connections. Proactive grid planning, jointly undertaken by the DOE, TransCo, and the National Grid Corporation of the Philippines (NGCP), for accommodating larger volumes of OSW capacity additions can result in reduced project costs and lessen the required investments for onshore grid upgrades. • Onshore support facilities and Port Upgrades. Investing in onshore support facilities including port infrastructure will assist in unlocking the country’s OSW potential. This encompasses the development of efficient transportation systems and well-equipped port terminals as well as establishing storage and assembly facilities (for wind components), training areas, and dedicated spaces for operation and maintenance facilities. Conducting assessments to gauge the readiness of these ports and the broader onshore support infrastructure can be undertaken in collaboration with the Department of Transportation (DOTr). Such assessments should be factored into the future planning and development of policies for offshore-related infrastructure. • Financial Considerations. An inclusive project finance mechanism is crucial for achieving the optimization required to lower the cost of finance and capital. Bringing in a variety of financiers with diverse risk profiles at different stages of project development can support the industry in recycling capital and freeing up resources for new projects. Multilateral development banks (MDBs), international financial institutions (IFIs), and Export Credit Agencies (ECAs) are key in advancing OSW development. Success relies on their complementary and collaborative efforts. The Regional MDBs can bridge the investment gap in enabling infrastructure and onshore support facilities, 122 Philippine Energy Plan === pep-2023-2050-vol2-transition-finance-page-133.pdf === while the IFIs can establish first-loss guarantee145 financial instruments to stimulate private sector investments. On the other hand, the ECAs can intervene at the project level to enhance the risk absorption structure of transactions. • Capacity Building. A well-trained workforce with the requisite skills enhances the competitiveness of the OSW sector and fosters local supply chain growth. Both government and international organizations can augment these efforts by offering support for human capacity development (i.e., rightskilling and retraining of Filipino workers to prepare them for careers across the OSW supply chain). Additionally, incentives can be introduced to facilitate the transfer of skills from the oil and gas sector leveraging existing expertise. Another approach is to incentivize overseas Filipino professionals to return home, bringing their valuable international experience to contribute to the domestic offshore wind industry. These measures collectively contribute to a well-prepared and skilled workforce in the sector. Innovative Funding and Business Models for Energy Efficiency in Public Buildings In line with the country’s dedication to achieving sustainable development goals and complying with the Paris Agreement, the government continues its commitment to executing programs and advocating for the merits and advantages of EEC, particularly in the building sector. This approach aims to expedite financial support and investments in the sector. To facilitate these endeavors, Figure 33 outlines essential actions and recommendations, forming the cornerstone of the CEFI Roadmap on EEC in public buildings. • Enhanced Cross-Government Collaboration and Integrated Planning. An enhanced collaboration and integrated planning between national and local government should be guided with a clear statement of targets and goals, as well as a strategy that involves relevant stakeholders that can help mainstream implementation of EEC strategies. The creation of a working group focused on EEC in public buildings can facilitate this thereby strengthening the foundation of EEC plans and programs, expanding performance standards, fostering innovation, and unlocking new opportunities and networks. • Regulatory Reforms. One of the primary objectives of regulatory reform is to enhance the efficiency and effectiveness of national economies, resulting in improved productivity and services that benefit both consumers and industries. Thus, the adjustment of public procurement and accounting rules and regulations in the Philippines serve as a crucial mechanism to encourage energy efficiency projects within public buildings. This can be achieved through the implementation of specific carve-outs or by revisiting procurement rules to accommodate projects that enable the use of mixed contracts, such as Energy Performance Contracts (EPCs). This flexibility allows service providers to independently fund the initial outlays without depending on mobilization payments. Likewise, to effectively monitor the benefit of the reforms, a broader assessment of EEC regulations may be implemented to evaluate if the sub-sector coverage and standards are compatible with the Philippines’ ambition. First loss guarantee is a technique commonly used in the securitization of assets to provide credit enhancement where a third party agrees to indemnify holders for a given amount or percentage of any losses from the asset pool. 145 (https://booksgooglecomphbooks?id=xyL2Uw0sc5IC&pg=PA223&lpg=PA223&dq=First+loss+guarantee+is+a+technique+commonly+used+in+the+securitization+of+assets+to+ provide+credit+enhancement+where+a+third+party+agrees+to+indemnify+holders+for+a+given+amount+or+percentage+of+any+losses+from+the+asset+pool.&source= bl&ots=NEC88gfUvu&sig=ACfU3U3Z5RZJSCN3XDRj_861WKWEbVt_-w&hl=en&sa=X&ved=2ahUKEwiiq6GJtqyEAxVSe_UHHcJDAIoQ6AF6BAgJEAM#v=onepage&q=First%20 loss%20guarantee%20is%20a%20technique%20commonly%20used%20in%20the%20securitization%20of%20assets%20to%20provide%20credit%20enhancement%20 where%20a%20third%20party%20agrees%20to%20indemnify%20holders%20for%20a%20given%20amount%20or%20percentage%20of%20any%20losses%20from%20the%20 asset%2pool.&f=false) Vo l u m e 2 123 === pep-2023-2050-vol2-transition-finance-page-134.pdf === Figure 33. Energy Efficiency and Conservation Roadmap Short Term Enhanced CrossGovernment Collaboration and Integrated Planning • Improved planning between agencies as well as between central government and local level, can help develop an implementation strategy in partnership with the most relevant stakeholders. Regulatory Reforms • Revising procurement and accounting rules for public authorities to facilitate energy efficiency projects. • Liberalizing public procurement restrictions to allow for the provision of mixed contracts, such as Energy Performance Contracts (EPCs) Access to Finance • Increase budget for Local government Unit • Address the LGU awareness on existing credit facilities from public or private banks through campaigns, informative sessions and training. Data Collection and Transparency Capacity Building • Implement capacity building programmes in key area. • The next rounds of pilot schemes could incorporate the lessons from the previous round. Energy Savings Insurance (ESI) • Allow multilateral development banks and the financial services industry, authorized by the DOE, to trial ESI for the Philippine LGUs. • Medium Term • To have an assessment on the energy efficiency regulatory regime to evaluate if the sub-sector’s coverage and standards are compatible with the country’s climate ambitions. • Building the ESCO regulatory environment in the Philippines, to establish a project pipeline for energy efficiency investments in the public sector via a designated aggregator entity. • Improve trust in the business model and strengthen knowledge about energy efficiency benefits through data collection and sharing about energy efficiency potential, performance, payback time and other parameters. Access to Finance. Budgetary constraints represent a significant hurdle to EEC implementation in the building sector. Addressing this issue requires the government to consider assessing and evaluating the potential increase in budget allocations for LGU’s EEC projects. This will ensure that the necessary resources and technical expertise are in place before project formulation and execution. Likewise, collaboration with international development partners and the private sector is vital for the advancement of EEC in public buildings. Such collaboration can provide support to LGUs in terms of i) designing a robust and realistic strategy for EEC projects; ii) enhancing LGU’s awareness of available commercial funding options; and iii) facilitating open dialogues between lenders and EEC project promoters within the LGUs. These efforts are instrumental in overcoming budgetary constraints and promoting the successful implementation of energy efficiency projects. • Data Collection and Transparency are crucial in engaging stakeholders and crafting successful projects. Effective data collection that is focused on pertinent information enhances the security and efficiency of developing an EEC business model. This process also broadens stakeholders' comprehension of the project and can serve as an input for the Building Energy Efficiency Index (BEEI), which measures a building’s energy performance. • Capacity Building. Sustained implementation of capacity-building and awareness-raising programs is essential for assisting LGUs in identifying and capitalizing on EEC opportunities. These programs serve as the building blocks for stakeholders' knowledge and expertise. Capacity building can encompass the entire EEC project supply chain, covering aspects like policy and regulations, project origination, implementation, financing, incentives, and performance data and analytics. 124 Philippine Energy Plan === pep-2023-2050-vol2-transition-finance-page-135.pdf === Moreover, with the collaboration of international partners, capacity-building efforts can target a diverse range of groups, including policymakers, LGUs, technology providers, industry professionals, financial institutions, commercial end-users, and civil society. These initiatives collectively strengthen the foundation for effective EEC implementation and promote sustainable energy practices. • Energy Saving Insurance is a valuable mechanism that ensures revenue from energy savings by way of an insurance policy. Further, permitting multilateral banks to employ this mechanism and work in collaboration with LGUs can enhance investor confidence and facilitate improved access to low-cost financing for EEC projects. This approach can offer added financial security and attractiveness to potential EEC investors and stakeholders. Private Sector Initiative on Energy Transition Finance Navigating the energy transition path requires policy and finance as levers to assist in its realization. As the government continues to lay out the required directions, the private sector refers to this as guidance on a proactive and flexible approach to achieving sustainability and transition efforts. Pioneering ETM Initiative The Energy Transition Mechanism (ETM), which combines public and private investments, is promoted by the Asian Development Bank (ADB) with the intent of retiring coal power plants earlier than scheduled. The ADB is implementing its ETM for the Mindanao Coal-fired Power Plant, which operates under a build-operate-transfer (BOT) arrangement. It will finance the plant's retirement as early as 2026, five (5) years before the BOT agreement ends. One of the companies in the country to successfully implement the first market based ETM is ACEN146. The company is pioneering initiatives in the early retirement of fossil-fuel plants specifically coal-fired power plants (CFPPs) and dieselbased plants. Its venture is also guided by the corporate objectives and vision of 100 percent renewables generation by 2025, increasing RE capacity to 20 gigawatts (GW) by 2030, and committing to achieve net-zero emissions by 2050.147 The ETM concept facilitated the divestment and early retirement of its 246-MW South Luzon Thermal Energy Corporation (SLTEC) CFPP in Batangas. This move to gradually transition its coal-based plant to cleaner technology is scheduled for completion by 2040, aligning with the plant’s 25 years of operation. Among the benefits to be derived from the ETM implementation is the expected reduction of 50.0 million tons of carbon emissions. The company is also set to apply the same approach in its remaining diesel power plants. This mechanism is underpinned by debt and equity investors – local private banks covering the debt with equity coming from the Government Service Insurance System (GSIS) and private companies. The three (3) enabling contracts that supported the ETM structure are the Administrative and Management Agreement (AMA), Operations and Maintenance Services Agreement (OMSA), and Call Option (shown in Figure 34). Figure 34. Key Imperatives for a Successful TC Pilot 1. Administrative and Management Agreement (AMA) is also known as the offtake contract. In the current setup, ACEN remains to be the offtaker of SLTEC for a period of 25 years or until 2040. The AMA was then amended to allocate key risks to the offtaker, which includes technical, operating and capital costs, market, and fuel. The risk allocation is designed to ensure a consistent and predictable cash flow to the CFPP, thereby decreasing the cost of capital and enabling the ETM transaction. 2. Operations and Maintenance Services Agreement (OMSA) ensures that the plant operates in a safe, reliable, and efficient manner. The agreement signed between SLTEC and ACEN addresses three important matters: a. Provides comfort to the investors and lenders on asset management and operations. b. Helps SLTEC attain desired outcomes and realize the upside that ACEN has taken on. c. Enables ACEN to help CFPP workers transition into green jobs by integrating them into its rapidly growing RE ecosystem. 146 147 RE platform of the Ayala Group and has 4,500 MW of capacity from owned facilities in the Philippines, Australia, Vietnam, Indonesia, and India. ACEN – Pioneering Early Coal Retirement Vo l u m e 2 125 === pep-2023-2050-vol2-transition-finance-page-136.pdf === 3. Call Option grants ACEN the right to repurchase the plant between 2030 and 2040. This allows ACEN to facilitate the early retirement of SLTEC and its transition to cleaner technology by 2040. Through these enabling contracts, ACEN can further expedite the timeline for retiring the CFPP to as early as 2030 and accelerate coal retirement through transition credits. Accelerating Coal Retirement Through Transition Credit In addition to spearheading the market based ETM initiative, private companies are also exploring alternative mechanisms, such as the transition credit to facilitate the early retirement of coal. This mechanism considers the integration of transition credit into the ETM framework. By establishing transition credit, it aims to leverage carbon finance for the gradual replacement of CFPP with RE, ensuring a fair transition. This includes guaranteeing the cost of substitute energy and facilitating fair transitions for impacted workers and the local community. By aggressively developing RE sources, transition credit enables the replacement of lost generation from the CFPP. In a parallel effort, ACEN can expedite its plans to repurpose the asset, considering converting it into a large battery to support the Luzon grid, establishing a green manufacturing facility, or exploring other applications in close collaboration with LGU and other stakeholders. Key Imperatives for a Successful Transition Credit Pilot Figure 35 illustrates the crucial steps necessary for establishing the foundation of successful outcomes and ensuring the delivery of high-integrity transition credits. Currently, emerging methodologies place emphasis on the remaining term of the PPA as the basis for quantifying financial value and mitigating carbon emissions. This approach is suitable for regulated markets, such as Vietnam and Indonesia. However, PPAs can also be signed with retail clients, such as commercial and industrial entities, as well as other utilities in countries with liberalized markets, such as the Philippines. On the other hand, addressing both compliance and voluntary markets strengthens the transition credit’s integrity, presenting an opportunity to leverage Article 6.2 of the Paris Agreement148 for establishing corresponding adjustments and entering into bilateral agreements with other countries. Figure 35. Key Imperatives for a Successful TC Pilot CL Carbon Market and Carbon Credits A carbon market is primarily a trading system wherein carbon credits are bought and sold. The market can be used by companies, as well as individuals to compensate for their GHG emissions by purchasing carbon credits from entities that remove or reduce GHG emissions.149 Two broad types of carbon markets exist – compliance and voluntary. Compliance markets are a result of national, regional, and/or international policy or regulatory environment. Meanwhile, voluntary (national and international) markets pertain to the issuance, buying, and selling of carbon credits voluntarily. The supply of carbon credits is mainly from private entities involved 148 149 126 Article 6.2 allows countries to exchange carbon credits and other units, like renewable power in GW, directly with each other through bilateral agreements. Source: https://climatepromise.undp.org/news-and-stories/what-are-carbon-markets-and-why-are-they-important Philippine Energy Plan === pep-2023-2050-vol2-transition-finance-page-137.pdf === in developing carbon reduction projects or governments that developed programs on certified carbon standards. On the other hand, demand emanates from individuals wanting to compensate for their carbon footprints, corporations with corporate sustainability targets, and other actors aiming to trade credits at higher prices to earn a profit.150 An example of a compliance market is the emissions trading system (ETS). One of the mature markets in Asia is the Korea ETS (K-ETS). Launched in 2015, the K-ETS is East Asia’s first nationwide, mandatory ETS covering around 74.0 percent of South Korea’s national GHG emissions. It is seen to aid the country in becoming carbon neutral by 2050 as espoused in the Carbon Neutral Framework Act of 2021. The K-ETS covers 684 of South Korea’s largest emitters in the power, industrial, buildings, waste, transport, and domestic aviation sectors.151 A carbon credit is generated by a project that has avoided or removed GHG emissions. A credit is normally represented by one ton of carbon dioxide or another GHG equivalent in the atmosphere. Projects normally rely on the sale of carbon credits to operate and are independently audited to verify the tons of carbon emissions avoided or reduced. Carbon credits are also enablers for critical finance to flow to decarbonization projects which are important in ensuring that global climate goals are met.152 The carbon credit issued to a particular company or organization is a representation of its emissions limit (“cap” in a cap-and-trade system). If a company or organization can limit its emissions below its cap, then there is effectively a surplus of carbon credits, which can be retained for future use or sold into the compliance carbon market. Companies or organizations that are unable to keep emissions under its limit are considered non-compliant and must make up for the difference. This paves for overemitters to get from the carbon market by purchasing carbon credits from under-emitters within the cap-and-trade network.153 As countries transition to sustainability, carbon credits are viewed to contribute to reducing energy costs. This is because it can help support the development of clean energy sources thereby making these more affordable. Accordingly, a carbon credit market paves for a mechanism that leverages the financing sector and drives more investments into renewables.154 Relatedly, carbon credit incentivizes companies or organizations to reduce their carbon footprint thereby allowing them to invest in sustainable practices which include RE projects, energy efficiency improvements, and carbon capture and storage technologies. 155 Energy Resiliency Financing Strengthening resilience of energy infrastructure and facilities necessitates prioritizing investments in adaptation and mitigation strategies. Harnessing a range of funding mechanisms, including Public-Private Partnerships (PPPs) and innovative financing platforms, allows energy stakeholders and development partners to pool resources in building a robust and resilient energy sector. This collaborative approach is crucial for navigating the challenges posed by climate change and ensuring the sustainability of the country’s energy systems. To catalyze investments in energy resiliency, the DOE is committed to foster stronger partnership with other government agencies, development partners, and international funding institutions to tap viable international climate finance options. This involves accessing and leveraging resources from Green Climate Fund (GCF), Global Environment Facility (GEF), Adaptation Fund (AF), Climate Technology Center and Network (CTCN), and the Loss and Damage Fund (LDF), among others. Such collaboration has the potential to securing crucial funding streams that will significantly enhance efforts in strengthening the resilience of the energy sector against climate-related challenges. Moreover, the Disaster Risk Financing and Insurance (DRFI) presents itself as a crucial innovative approach to mitigate the financial impacts of various hazards. The DRFI not only shields the energy infrastructure and systems from potential disruptions but also cushions the rate impact on consumers. The DOE shall establish mechanisms and guidelines to further strengthen DRFI practices within the energy sector. These measures will ensure accessible funding sources necessary for promoting resilience while incorporating safeguards to prevent any potential misuse or abuse of these financial resources. Ibid Source: https://icapcarbonaction.com/en/ets/korea-emissions-trading-scheme Source: https://www.climateimpact.com/services-projects/carbon-credits-explained-what-they-are-and-how-they-work/ 153 Source: https://corporatefinanceinstitute.com/resources/esg/carbon-credit/ 154 Source: https://carboncredits.com/the-impact-of-carbon-credits-on-renewable-energy-development/ 155 Source: https://www.green.earth/carbon-credits 150 151 152 Vo l u m e 2 127 === pep-2023-2050-vol2-transition-finance-page-138.pdf === Annexes Annex 1. Annex 2. Annex 3. Annex 4. Annex 5. Annex 6. Annex 7. Annex 8. Annex 9. Annex 10. Annex 11. Annex 12. Annex 13. Annex 14. Annex 15. Annex 16. 128 Cumulative Biodiesel Additional Production Capacity and Investment Requirements Cumulative Bioethanol Additional Production Capacity and Investment Requirements (If All Locally Produced) Cumulative Bioethanol Additional Production Capacity and Investment Requirements (If 60% Locally Produced) Renewable Energy (Pre-Development) Investment Requirement, Reference Scenario Renewable Energy (Pre-Development) Investment Requirement, Clean Energy Scenario - 1 Renewable Energy (Pre-Development) Investment Requirement, Clean Energy Scenario – 2 IAEECC Resolutions Capacity Additions (MW), Reference Scenario Capacity Additions (MW), Clean Energy Scenario – 1 Capacity Additions (MW), Clean Energy Scenario - 2 Investment Requirements for Generation Projects (PhP Billion) at 2022 Prices, Reference Scenario Investment Requirements for Generation Projects (PhP Billion) at 2022 Prices, Clean Energy Scenario – 1 Investment Requirements for Generation Projects (PhP Billion) at 2022 Prices, Clean Energy Scenario – 2 Ongoing Transmission Projects – Luzon Grid as of October 2023 Ongoing Transmission Projects – Visayas Grid as of October 2023 Ongoing Transmission Projects – Mindanao Grid as of October 2023 Philippine Energy Plan