The Challenges of Financing Renewable Energy Projects in the Philippines

Renewable energy project development in the Philippines has been gaining traction. However, the government is in a tight spot. It wants to encourage more renewable energy investment to help Philippines pivot away from overreliance on coal-fired power projects. However, both coal and liquefied natural gas (LNG) developers continue to hold considerable power in the country, pushing through with their fossil-fuel project objectives.

This has created a divide between environmental groups and much of the populace on one side against well-financed corporate interests on the other. The domestic banking sector is also caught in the debate as it tries to figure out the best path forward.

Attractive Market for Investors

As the debate continues, the Philippines is also becoming an attractive market for renewable energy investors. This is due to its auctions scheme, feed-in tariffs that guarantee assured payments for 20 years, net metering and generous tax incentives, including a seven-year income tax holiday. Other incentives include duty-free importation of equipment and VAT-zero rating, tax credits on domestic capital equipment, tax exemptions on carbon credits and priority connection to the grid.

Authorising Full Foreign Ownership

In December 2022, the Philippine government authorised full foreign ownership in renewable energy projects in the Philippines, a nearly unprecedented move for a Southeast Asian country. Before the new law, foreign firms could only own up to 40% of an energy project, with the balance being held by a Filipino firm or citizen.

National Renewable Energy Program

The new policy amends the existing National Renewable Energy Program, which seeks to stimulate investments, develop technologies and provide planning to help identify the most feasible and least expensive renewable energy developments. The Philippines also passed the Renewable Energy Act in 2008, which provides the legal and institutional framework necessary for harmonising policies for developing renewable energy resources and technologies.

Philippine Renewable Energy Percentages

The Philippine government has earmarked that renewable energy make up 35% of its energy mix by 2030 and 50% by 2040. Policies to help reach those goals include active participation in the Green Energy Auction Programme (GEAP).

Coal made up some 31% of the country’s energy mix in 2022, natural gas (4.2%), renewable energy (32.7%) and oil-based solutions (32.2%). The Philippines’ renewable energy sector is comprised of geothermal resources at 14.6% of the total, solar and wind energy at 1.4%, hydropower at 4.1% and biomass at 12.6%.

Renewables Investment Increases

Philippine banks are also starting to invest in more renewable energy projects. Total renewables funding reached USD 3.7 billion from 2020 through 2023. This increase is more than double the amount earmarked for coal projects by local banks, which came in at USD 1.4 billion over the three-year time period. But much of this increase in renewables investment came after 2020, when the government put in place a moratorium on new coal-fired project construction. Before the moratorium, local bank funding for coal-fired power projects reached USD 13.8 billion.

Coal Funding Loophole

More troubling is that the coal moratorium isn’t a total ban, as it doesn’t cover existing projects, upgrades or extensions. Coal power project proponents can also request that the Philippine Department of Energy (DOE) issue a certification that the moratorium does not cover a project. The DOE, for its part, has pushed back against criticism. A government statement from July 19, 2024, described “the allegations of arbitrariness in the issuance of certifications as unfounded”.

However, adding weight to DOE criticism, in 2023, coal usage in the country reached a record 62%, bypassing the top coal user, China, in terms of the percentage share of electricity generated from the fuel.

Small Renewable Project Investors Ignored

Over the past few years, how domestic banks finance renewable energy projects has also been scrutinised. Banks often prioritise the size and scale of a project over other factors, with a preference for a higher base load and higher capacity projects owned by well-known public companies.

From a banking perspective, these larger projects offer less risk, since they already have backing from corporate players and well-capitalised investors (usually power and finance companies). Smaller, privately owned projects or investors without deep pockets haven’t fared as well.

“Smaller investors that typically are less well capitalised and could have relied on project finance had uncertainty been lower, were not able to finance their projects or had to sell a majority stake of the project to larger investors,” a report by the Asian Institute of Management (AIM) found.

More Financial Challenges

Other financial challenges for the Philippines’ renewable energy sector include high upfront technology costs, inaccessible financing and a lack of market competitiveness.

The absence of renewable sector-specific targets and mandatory funding obligations for local banks are also major hurdles. Last year, the central bank of the Philippines, the Bangko Sentral ng Pilipinas (BSP), proposed the introduction of new incentives to encourage sustainable and green project financing in the country. However, legislation needs to be passed establishing specific banking guidelines, criteria and benchmarks for renewable energy project financing.

Moreover, many banks, both globally and in the Philippines, still prefer to finance coal or gas power projects instead of renewables. Since these projects are often more capex-intensive and have fossil fuel company backing, more money is on the table, while banks and lenders can earn greater returns. There is also a premium for financing fossil fuel projects, since the sector is increasingly under the radar over its climate impact, making investment more risky.

Increase in Gas Project Funding

Another problem for the Philippine energy sector comes from the increase in gas project funding. From 2021 to 2023, local banks financed USD 1.2 billion for gas projects, up from only USD 296.5 million in funding from 2009 to 2020. Gas financing will likely escalate with both local and international banks keen to enter the sector, since the Philippines is building a major LNG import terminal and gas-to-power project.