Energy Policy 135 (2019) 111008

Contents lists available at ScienceDirect

Energy Policy
journal homepage: http://www.elsevier.com/locate/enpol

Clearing barriers to project finance for renewable energy in developing

countries: A Philippines case study
Jose Barroco *, Maria Herrera
Asian Institute of Management (AIM), 123 Paseo de Roxas, Makati City, Metro Manila, 1260, Philippines

A R T I C L E I N F O A B S T R A C T

Keywords: Project finance (PF) is a powerful tool for mobilizing capital for renewable energy (RE) projects but faces
Project finance challenges in developing countries. This paper examines factors driving the financing method choice between
Developing country project finance (recourse exclusively to project assets) and corporate finance (recourse to parent company as­
Feed-in tariff
sets), including the feed-in tariff (FIT), using the Philippines as a case study for a developing country. After the
Renewable energy
Project risk
RE Law was approved in 2008, RE capacity increased but RE share in energy mix decreased. FIT resulted in
Energy investment increased investments in RE, primarily in solar and wind. Results show that PF incidence is higher for baseload,
high-capacity utilization, non-intermittent technologies; non-FIT projects with revenue contracts; and larger
projects owned by public companies. Contrary to expectation, PF was less utilized for FIT-eligible RE, and
projects owned by private or small investors. PF was utilized primarily by well-capitalized investors, and mostly
by power and financial companies. The Philippine FIT’s tight deadlines and low technology-specific capacity
caps increased revenue uncertainty, resulting in high concentration of project ownership and potential erosion of
public support. Given the intrinsic uncertainty of RE and developing countries, policymakers need to design
policies to minimize revenue uncertainty, enable PF and broaden the investor base.

1. Introduction developing countries (Kleimeier and Versteeg, 2010). Research on the

Capital mobilization, a critical concern for energy policymakers, is
challenging for renewable energy (RE) projects in developing countries.
Developing countries must finance rapid growth with limited financial
resources and typically operate without the mature capital markets,
access to foreign capital, institutional capacity, and corporate gover­
nance of developed countries (World Bank, 2013). Capital mobilization
for RE is also harder than for fossil fuel energy given RE’s higher capital
intensity, intermittency and longer development and investment hori­
zons. There is a tremendous financing gap in RE in Asian developing
countries (Ng and Tao, 2016), with China being the exception.
This paper analyzes two alternative financing methods for RE. Under
corporate finance (CF), the traditional way of funding infrastructure
projects (Esty, 2004a), the parent company (the corporation) provides
the capital directly to the project or indirectly by providing credit sup­
port such as a guarantee to lenders. PF, on the other hand, mobilizes
funding through capital raised solely against project assets, mainly
future cash flows. PF expands debt capacity, enhances project risk
management and transparency, and can drive economic growth in
role of financial markets in mobilizing capital for RE is still at an early
stage (Hall et al., 2015) and while the structure of ownership in new
energy projects is relatively well understood, much less is known about
financing methods (Steffen, 2018).
Direct support policies (DSP), such as feed-in tariffs (FIT) or
renewable portfolio standards (RPS), are widely used by policymakers to
promote RE but its use in developing countries has been lagging
compared to developed countries (Rickerson et al., 2013). While there
are many studies on DSP and several on its use in developing countries
(Baldwin et al., 2017; Friebe et al., 2014), the literature is much scarcer
on how DSP impact the financing method choice. This paper focuses on
addressing three gaps in the existing literature on RE PF in developing
countries. First, while there are a few papers analyzing FIT effectiveness
in developing countries, to our knowledge, this paper is the first to focus
its analysis on how FIT impacts financing method choice in developing
countries. Second, the most comprehensive analysis of financing method
choice requires project-level data but most studies use industry level
data or anecdotal evidence. Third, a few papers study drivers of PF in RE,
but focus on developed countries (Steffen, 2018) or use qualitative

* Corresponding author.
E-mail address: jose.barroco@NewPlatformGroup.com (J. Barroco).

https://doi.org/10.1016/j.enpol.2019.111008
Received 31 August 2018; Received in revised form 11 September 2019; Accepted 20 September 2019
Available online 30 September 2019
0301-4215/© 2019 Elsevier Ltd. All rights reserved.
J. Barroco and M. Herrera
methods without project-level data (Hamilton, 2010; Kann, 2009). Still
other papers use project finance databases containing project-level data
that are not specific to RE or developing countries, and the financing
method choice is not the focus of the study (Byoun and Xu, 2014; Corielli
et al., 2010).
The Philippines case study, which includes a novel dataset of 120
new power plants with detailed project-level data, provides insights on
financing RE in developing countries and specifically on: (a) how FIT
influences investor decisions including choice of financing method; (b)
specific PF drivers in both RE and fossil fuel energy; and (c) how poli­
cymakers can design energy policies to facilitate the use of PF. The
research focuses on RE electricity generation and does not cover other
RE topics such as transportation biofuels. This research addresses the
following specific questions for the Philippines: (a) what was the impact
of FIT in RE development, and (b) what factors drove financing method
choice?
The rest of this paper covers PF rationale and drivers, and research
hypotheses (section 2), methodology (section 3), Philippines case study
including FIT effectiveness and financing method analyses (section 4),
discussion (section 5), and conclusions and policy implications (section
6).
2. PF rationale and drivers
2.1. PF: Definition, use and structure
In CF, also called balance sheet financing, a project raises capital
indirectly through a parent company or, if directly, through a project
company with recourse to assets of the parent company, e.g. via an
unqualified parent company guarantee. Under PF, investors typically
create a legal entity with the sole purpose of pursuing the project. PF has
recourse only to project assets (Gatti, 2008) including future project
cash flows, with few limited exceptions.
The ring-fencing nature of PF enables project sponsors to mobilize
specific project capital without endangering other corporate projects.
The non-recourse nature of PF requires multiple parties to mitigate the
risks. The key principle is to allocate risk, through contracts, to the party
best able to control or bear the risk at least cost (Brealey et al., 1996).
Appendix A describes key PF parties and risk mitigation contracts.
Major advantages of PF to the parent company are lower financial
exposure and increased availability of capital. Financial exposure is
minimized since financing is non-recourse to the parent company (Pol­
lio, 1998). PF also increases capital availability (IFC, 1999) since capital
is now raised against project assets including future project cash flows.
PF is also superior to CF in terms of risk management, and minimization
of costs associated with incentive conflicts and asymmetric information
(Esty, 2004b).
2.2. PF for RE
Compared with fossil fuel, RE projects are typically more capital
intensive, generally smaller in size, and less familiar to the financing
community. Information uncertainties concerning RE resource ade­
quacy, intermittency, and long development cycles make RE projects
riskier, hence more difficult to finance and to PF (World Bank, 2013).
However, a significant percentage of new RE projects are now project
financed, up from 16% (USD 5 billion) in 2004 to 43% (USD 91 billion)
in 2017 (Frankfurt School-United Nations EP, 2018).
PF for RE has several advantages:
(a) It forces the RE project to go through a strict risk management
process which improves project financial viability (Yescombe,
2013). This is particularly important for RE projects since they
are subject to higher risks than fossil fuel energy projects.
(b) It increases the overall pool of investors available to RE since it
enables funding for small investors without a strong balance
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Energy Policy 135 (2019) 111008
sheet (Henderson, 2012). RE is an especially good match for small
investors since it is typically not subject to the economies of scale
of fossil fuels. These small investors are also embedded and close
to the community making it easier to obtain social and political
support for a project or an RE policy (Broughel and Hampl, 2018;
Oji and Weber, 2017; Sovacool, 2013).
2.3. PF for RE in developing countries
In developing countries, RE PF has several advantages:
(a) PF expands RE capital mobilization beyond investors’ own bal­
ance sheets (Yescombe, 2013), which is crucial in developing
countries where local investors have limited financing options.
(b) PF improves governance, management and transparency. PF
corporate governance and risk management structures substitute
to some degree for the lack of corporate governance frameworks,
legal system and institutions in developing countries (Hainz and
Kleimeier, 2012; Kleimeier and Versteeg, 2010). PF makes
ownership and management of the project company transparent.
PF accomplishes this by reducing manager and owner discretion
through a dedicated project company, a cash-flow waterfall
typically managed by lenders, and arms-length contracts with
related or third parties including governments.
Despite PF advantages, contextual risk factors increase the difficulty
of PF implementation in developing countries (Fig. 1).
2.4. PF for RE and FIT
For many experts the key risk in an energy project is the revenue risk,
the risk that the project cannot generate enough revenue to cover its
costs. In PF, investors typically mitigate this risk by signing revenue
contracts with a creditworthy customer that covers the project’s oper­
ating and capital costs. However, signing revenue contracts isn’t easy for
RE projects given intermittency, resource adequacy uncertainty and for
some technologies, high cost. Policymakers have addressed this issue by
implementing RE DSP such as FIT and RPS. FIT and RPS provide in­
centives for investors to participate in RE through a guaranteed payment
structure (FIT) or by creating dedicated RE demand (RPS).
FIT is the most common DSP in the world (IRENA, 2018; REN21,
2018) and preferred by investors in developed (Bürer and Wüstenhagen,
2009) and developing countries (Friebe et al., 2014). Several papers
demonstrate that FIT can lower cost of capital (Hamilton, 2009; Shrimali
et al., 2013). Successful FIT design requires a tariff level high enough to
cover costs and long contract durations (García-Alvarez
� et al., 2017),
guaranteed grid connection (Lipp, 2007), proper legal structure (Ham­
ilton, 2009) and ideally no caps (Dijkgraaf et al., 2018). Given the
combined risk of RE and developing countries contextual risk factors, it
is critical that FIT be properly implemented to minimize uncertainty and
enable PF.
The bulk of FIT literature covers developed countries, where broad
and long track-records of implementation exist, and data is easily
available. By contrast, few papers study FIT in developing countries, and
even fewer analyze FIT effectiveness in developing countries. Results are
mixed but tend to indicate that, if properly implemented, FIT can be
effective. Studies that conclude FIT was effective in developing countries
are Surana and Anadon (2015) and Becker and Fischer (2013) for China,
Aquila et al. (2017) for Brazil, Shrimali et al. (2013) for India, Tongsopit
and Greacen (2013) for Thailand, Wong et al. (2015) for Malaysia and
World Bank (2014) for Sri Lanka. Several studies conclude the opposite:
Becker and Fischer (2013) for India, due to low tariffs, and South Africa,
due to legal issues; Schmid (2012) for India, due to lack of competition
and policy inconsistency; Jacobs et al. (2013) for Latin America, due to
low tariffs and political and regulatory risks; Washburn and
Pablo-Romero (2019) for Latin America, due to limited use; Nguyen
J. Barroco and M. Herrera Energy Policy 135 (2019) 111008

Fig. 1. RE project finance risk mitigation framework with project & developing countries context’s risks.

et al. (2018) for Vietnam, due to low rates; and Ca �rdenas-Rodríguez
et al. (2015) for non-OECD countries.
To our knowledge this paper is the first to study the impact of FIT on
the financing method in a developing country using extensive project-
level data including financing and project fundamentals. The paper
also uses this data to analyze other RE project finance drivers. The most
often used databases to study financing drivers are Dealogic ProjectWare
Database (Corielli et al., 2010; Dorobantu and Müllner, 2018), Project
Finance database of Thompson Financial Securities Data Corporation
(Byoun and Xu, 2014) and Bloomberg New Energy Finance Database
(Ca�rdenas-Rodríguez et al., 2015; Polzin et al., 2015). These databases
have several drawbacks if used to study RE financing method in devel­
oping countries, since they contain sparse information on: (a) small
projects which are typical of RE, (b) developing countries (except
China), (c) corporate finance since financing is largely done within a
company and not publicly announced, (d) other project contracts be­
sides the loan agreement described in Appendix A (e.g. revenue or
construction contracts), and (e) project operating metrics (e.g. capacity
factor or intermittency).
2.5. PF drivers and hypotheses
The research aims to understand what drives investors to PF RE but
this can only be understood in the broader context of the financing
method choice for both RE and fossil fuel energy. This section identifies
potential PF drivers and articulates research hypotheses.
Technology /Fuel Source: fossil fuel (coal, gas and oil) and RE
(geothermal, wind, solar, hydro and biomass). Our hypotheses are that
base-load, non-intermittent technologies are easier to PF and intermit­
tent fuel sources are more difficult to PF. Table 1 shows energy char­
acteristics by technology.
Revenue Source: Revenue certainty is a major driver of PF and a
lender’s requirement. With FIT policy, the research expected a signifi­
cant percentage of capacity to use PF since FIT is designed to mitigate
revenue uncertainty, a key project risk. Table 2 describes the available
sources of revenue in the Philippines. PPA-DU is the major revenue
source for power projects in general and WESM-REPA the key source for
FIT-awarded projects.
Several papers found that revenue source affects financing decisions
(Corielli et al., 2010; Kann, 2009) but this paper goes beyond existing
research by grouping revenue sources in six categories with different
levels of risk and creditworthiness and analyzing how they impact the

Table 1
Energy characteristics per technology in the Philippines context for the period analyzed.
Technology Coal Gas Oil Geo Hydro Hydro Solar Wind Bio
Storage ROR

Power Type Base Load Mid Merit Peak Base Load Mid Merit, Base Load Day-Time Peak Base Load Base Load
Peak
Intermittency No. Firm No. Firm No. Firm No. Firm No. Firm Yes. Yes. Daily, Yes. Daily, Yes.
Power Power Power Power Power Season Season Season Season
Investment USD M/ 2–2.5 1–1.5 0.5–1 1–2 2–3 2.5–4 1.2–2 2.2–3 2–5
MW
OPEX /KWh Medium Medium High Low Low Low Low Low Medium
Capacity Factor % 70–85 40–60 5–20 60–85 25–40 50–70 15–20 25–30 50–80

Note: Estimates based on compilation of data by the authors from Power Purchase Agreements (PPA) submitted to the Energy Regulatory Commission (ERC) and
selected project data.
ROR: Run-of-river; MW: Megawatt (1,000 Kilowatts); KWh: Kilowatt-hour (1,000 Watts for 1 h).

3
J. Barroco and M. Herrera
Table 2
Categories of revenue sources.
Revenue Description
Source
PPA-DU Power Purchase Agreement (PPA) with a distribution Company
(DU). Since DUs serve a captive market, this can be a highly
valuable contract. PPA is also often called Electricity Supply
Agreement (ESA) or Power Supply Agreement (PSA).
PPA-RES Power Purchase Agreement (PPA) with a Retail Electricity
Supplier (RES). A RES serves the contestable market, that is,
customers that can bypass their DU and buy power directly from
different RES.
REC Retail Electricity Contract (REC). Under a REC the power plant
sells directly to a contestable customer. An example is a coal
power plant selling to a cement company.
SELF-USE The customer of the power plant is the investor itself. An example
is a cement company or a sugar mill investing in a power plant for
self-consumption.
WESM-REPA The Renewable Energy Payment Agreement (REPA) is a 20-year
(FIT) power purchase agreement between the Government of the
Philippines and a FIT awarded project. A FIT awarded project sells
its energy to the WESM but receives the shortfall between WESM
and the FIT rate from the REPA.
WESM Wholesale Electricity Spot Market (WESM). This is the last resort
for power plants without a long-term revenue contract. Under
WESM the electricity quantity is purchased, and the price is set on
an hourly basis so there is no certainty for investors.
financing method choice. For example, a PPA-DU is generally more
creditworthy than a PPA-RES, and a PPA-RES more creditworthy than
WESM, so they should impact the financing method differently.
Project Size: The hypothesis is that PF for a project below a certain
size may not make financial sense since setting up PF involves fixed costs
such as management time, legal, technical, finance and insurance.
Location: Peace and order is a key requirement for financing in
general and especially for PF. The hypothesis is that projects in Mind­
anao are more difficult to PF than in other regions given Mindanao’s
peace and order challenges.
Investor Core Business: Table 3 describes the investor type cate­
gories. The hypotheses and rationale are the following:
(a) For developers and financial companies, the research expected a
high incidence of PF given the weak balance sheet of developers
and the funding sophistication of financial investors.
Table 3
Investor type categories.
# Investor Type Description
1 Power The core business of the company is power. A project is a
Company long-term investment to grow their portfolio of power assets.
2 Financial The primary objective is a financial return. Private equity
Investor funds are typical investors. Power assets are acquired with
the objective of selling them later at a higher price.
3 Supplier The main objective of investment is to generate revenues for
their core business, which is not power. Typical investors are
construction companies, power manufacturers (solar panels
and equipment) and fuel suppliers (coal mining companies).
4 Developer Early investors that develop, license, conduct the initial
studies, secure the land and can later construct and finance
the project. Typical developers are not very well capitalized
and rely heavily on bank debt to fund construction. Their
objective is to sell a majority stake at a profit once the project
reaches commercial operations.
5 Industrial The core business is manufacturing. The investment in power
is secondary and a natural extension of their core business.
Typical investors are sugar and rice mills that decide to use
their organic waste as feedstock for a biomass power plant.
Other examples are cement companies or refineries financing
a power plant for self-consumption.
6 Economic Major economic group in which power is not a major line of
Group business. The objective of the investment is to grow their
portfolio of businesses while earning a financial return.
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Energy Policy 135 (2019) 111008
(b) For industrial companies and suppliers, the expected result was a
low incidence of PF. For industrial companies this is due to the
difficulty of segregating the power business from their core
business. Suppliers on the other hand, have strong incentives to
finance the project, and CF is the easiest way to accomplish this.
Suppliers will benefit from the project beyond equity financial
returns by supplying services and equipment.
(c) Power companies were expected to exhibit a balance between PF
and CF. On the one hand, it is easier for them to mitigate project
risks and consequently PF. On the other hand, their confidence in
mitigating project risks may provide them an incentive to CF to
accelerate project implementation.
Investor Ownership (Public or Private): It is easier for publicly
listed companies to CF their own projects since they can easily access
capital markets. Consequently, the expected result was a higher inci­
dence of PF for private companies.
Nationality (Local or Foreign): It is harder for foreign companies to
PF since local banks are less familiar with them. Consequently, the
research expected a higher incidence of PF in local companies.
Table 4 summarizes the hypotheses.
3. Methodology
This research used two datasets: (a) the main dataset contains
extensive project-level data developed for this research and (b) the
second dataset contains industry-level data from the Department of
Energy (DOE).
The industry dataset provides information on what technology was
financed. The project dataset provides information on the financing
method, and other potential drivers. A key objective of the analysis is to
understand how these drivers impact the financing method. Both data­
sets cover projects successfully financed in the most recent decade
following congressional approval of the Renewable Energy Law in 2008.
Industry-level data, from 2008 through to 2017, are sourced pri­
marily from DOE and include information per technology on: (a) annual
installed capacity in megawatts (MW); (b) annual energy in megawatt-
hours (MWh); (c) DOEs installation targets and actuals in MW. Annual
installed capacity and energy generated identify technologies receiving
financing. A comparison per RE technology of actual installed capacity
versus DOE targets provides information on relative progress and po­
tential investment barriers.
The main dataset contains project-level data. This dataset was
created for this research by collecting and analyzing data from multiple
sources, including company official disclosures such as audited financial
statements and debt securities prospectus, DOE project data, regulatory
Table 4
Hypotheses summary.
PF Driver Hypothesis Hypothesis Description
Number
Technology 1 Higher incidence of PF for baseload, non-
intermittent technologies.
Revenue Source 2 High incidence of PF for projects with a
revenue contract.
3 High incidence of PF for FIT projects
especially solar and wind.
Project Size 4 Lower incidence of PF for small projects.
Location 5 Lower incidence of PF for Mindanao
projects.
Investor Core 6 High incidence of PF for developers and
Business financial companies.
7 Low incidence of PF for industrial and
supplier companies.
Investor 8 Higher incidence of PF for private
Ownership companies.
Investor 9 Lower incidence of PF for foreign
Nationality companies.
J. Barroco and M. Herrera Energy Policy 135 (2019) 111008

filings, financial institution disclosures, press releases and corporate

websites. This dataset is composed of 120 Philippine grid-connected
power generation projects (53 fossil fuel, 67 RE) financed by investors
from 2008 to the first half of 2017. This dataset excludes off-grid pro­
jects but accounts for more than 95% of capacity additions in the
Philippines during the period under investigation. The dataset only
covers financing deals resulting in capacity additions and excludes
refinancing deals, that is, financing deals after the capacity was already
installed.
The basic project-level dataset sourced from the DOE includes proj­
ect name, operator name, location, technology type, capacity installed
and date of commissioning. Two types of analyses were conducted on
the project dataset. The objective of the first analysis is to understand
how FIT drove installations of eligible RE technologies, especially solar
and wind. The objective of the second analysis is to understand the
factors that drive financing method choice. By combining the two pre­
Fig. 2. Project finance classification process.
vious analyses the research provides insights on how FIT impacted
financing method choice. For the first analysis, two fields were added to
the basic dataset indicating whether the project had applied for FIT and Table 5
whether it had been awarded FIT. Reaching commercial operations is a Project finance criteria.
condition necessary but not sufficient to obtain FIT since awarding is
# Conditions for Project Description
subject to capacity installations caps and tight deadlines. The data on Finance
FIT applications were sourced from the DOE while the actual FIT-
1 Existence of a Project For the purposes of this analysis, a company is
awarded projects were obtained from the National Transmission Cor­ Company considered a Project Company if it owns one
poration (Transco), the government FIT administrator. By comparing operating power plant. If it owns several
capacity installations progression against key FIT milestones, the operating power plants, it is not considered a
research provides an understanding of how FIT impacted RE Project Company.
This is a condition necessary but not sufficient
installations.
for Project Finance.
For the second analysis, the research covers seven potential drivers of 2 The Borrower is the Project The Borrower is the Project Company, not a
PF. The first three drivers were already included in DOE’s project data. Company parent, associate or sister company. This
These are project size, technology and location. Four additional PF means the Project Company issued the debt
drivers were added: project revenue source, and investor’s ownership, instrument (e.g. note or bond). The lender
needs to be a financial institution and not a
nationality and core business. The first four drivers are intrinsic to the
related party.
project: technology, project size, location, and revenue source. The last This is a condition necessary but not sufficient
three drivers are intrinsic to the investor: investor core business, investor for Project Finance.
ownership, and investor nationality. 3 Non-Recourse or Limited The parent company or related parties
Recourse to the Sponsors provided no or only limited credit
The starting point in obtaining data on the project investor is to
enhancements to the project loan. Examples of
identify the company name in the Energy Regulatory Commission (ERC) credit enhancements are guarantees and
certificate of compliance (COC) which is a requirement for any grid standby letters of credit (SBLC). Limited
connected project in the Philippines. The COC needs to be in the name of recourse is defined as enhancing the
the project owner. The ultimate owner is easily identified if it is part of a creditworthiness of the Project Company only
up to start of commercial operations or signing
publicly listed company. If it is a privately held company, and the
of a long-term revenue contract. If the
ownership is not clear, the research used the general information sheet financial disclosures do not mention a
(GIS) from the Securities and Exchange Commission (SEC). The GIS in­ guarantee to the Project Company, then it is
dicates the company’s owners. Even foreign companies operating in the assumed that no such guarantee exists. On the
other hand, if it mentions a guarantee but it
Philippines need to register with the SEC.
does not state it as temporary or conditional
Finally, after extensive analysis to determine the financing method, then it is assumed that it stays for the term of
that is PF or CF, this data field was added to the project dataset. A project the loan.
was classified as PF only if it fulfilled three conditions: (a) there was a This is a condition necessary but not sufficient
project company; (b) the borrower was the project company, and no for Project Finance.
4 Project Assets Collateralized The project assets were pledged as security for
other entity outside the project such as the parent company; and (c) the
by Lenders the loan.
loan was non-recourse or limited recourse. If a project did not fulfill one This is further evidence of condition 2 (that the
of these conditions, it was automatically classified as CF. Two additional Project Company is the Borrower) and
conditions were included in case there was not enough conclusive in­ condition 3 (no or limited recourse) since the
existence of project collateral decreases the
formation from the three conditions above: (d) project assets collater­
likelihood that the sponsors provided security
alized by the lenders and (e) project classified as PF by a financial outside the project.
institution. Fig. 2 summarizes the project classification process while This condition is not necessary and not
Table 5 provides more details on each PF condition. The basis of the sufficient for Project Finance.
classification process (steps 1 and 2 in Fig. 2) is similar to Steffen (2018) 5 Classified as Project Finance The loan is classified as project finance by
financial institutions or in the audited
but adapted to developing countries that have underdeveloped banking
financial statements of a publicly listed
systems and are relatively unfamiliar with PF. In these countries it is company. Condition sufficient for Project
common practice for lenders to request the project parent company to Finance in the absence of enough information
provide credit enhancements, such as a parent company guarantee, on the conditions above.
breaking the essential ring-fencing nature of PF. Consequently, it is
important to verify that the loan is non or limited recourse (step 3 in
Fig. 2 and condition 3 in Table 5), including whether projects assets have

5
J. Barroco and M. Herrera
been collateralized (condition 4 in Table 5), which is further evidence of
condition 3.
Appendix B.1 provides details on how information was obtained on
each of the PF conditions in Table 5, while Appendix B.2 describes these
information sources. The research relied on six major information
sources:
(a) For projects part of a publicly listed company, annual reports and
audited financial statements filed with the SEC and available at
the Philippine Stock Exchange (PSE);
(b) For projects that are part of a company that issued corporate debt
securities, the prospectus for the issue available at the Philippine
Dealing & Exchange Corp (PDEx);
(c) For projects that are part of a privately held company, the annual
audited financial statements and the GIS available at the SEC;
(d) ERC regulatory approvals on revenue contracts, COCs and grid
connections;
(e) Other information provided by government agencies, such as
DOE;
(f) Direct experience of the authors in developing and financing
fossil fuel energy and RE projects in the Philippines for the last
decade, including interactions with investors, banks, government
agencies, contractors and other energy stakeholders.
4. Philippines case study
4.1. Background: Country and power sector
The United Nations estimates the Philippines 2018 population at 106
million people, making it the 13th most populous country in the world
and the 2nd in Southeast Asia (United Nations, 2018). In 2014, elec­
tricity power consumption per capita was only 699 Kilowatt-hours
(KWh) versus an OECD average of 7,995 (IEA, 2017). The DOE ex­
pects peak demand to increase fourfold, from 12,213 MW in 2015 to 49,
287 MW in 2040 (DOE, 2016). The country regularly ranks as one of the
most vulnerable countries in the world to climate change (Eckstein et al.,
2017). The Philippines signed the Paris Agreement on Climate Change in
2016. The enormous need for investment in power generation and
climate change vulnerability stress the need for sustainable, financeable
and efficient RE policies.
4.2. Philippine electricity industry market structure
The Philippine Electric Power Industry Reform Act of 2001 (EPIRA)
defines four sectors in the electricity industry: generation, transmission,
distribution, and supply. Transmission and distribution entities are
public utilities subject to price regulation. National Grid Corporation of
the Philippines (NGCP), a private concessionaire, operates government-
owned transmission sector assets (the high voltage backbone of the
electricity network). A few large private companies in major urban
centers and more than one hundred electric cooperatives in the prov­
inces comprise the distribution sector (low voltage backbone). The
generation and supply sectors are competitive and open. Both businesses
are subject to public interest, hence require permits from the regulator
(ERC) to operate. Supply companies sell to large end-users, the
contestable market (15% of market in KWh), while distribution com­
panies sell to all other end-users, the captive market (85% of market).
4.3. Renewable energy laws
Policy objectives. The RE Law (Congress, 2008) declares as State
Policy the increase and acceleration of the exploration, development
and utilization of RE resources, with the objective of preventing or
reducing harmful emissions and reducing the country’s dependence on
fossil fuels.
FIT system. The government FIT Administrator (Transco) signs 20-
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Energy Policy 135 (2019) 111008
year revenue contracts (REPA), guaranteeing a fixed rate per KWh to
all electricity generated by FIT-awarded projects. Rates (pesos per
KWh), capacity installation caps (MW) and deadlines vary by eligible
technology which are run-of-river (ROR) hydropower, biomass, solar,
wind, and ocean. Government announced FIT rates and the first round of
capacity caps in 2012 and began payments in 2015. DOE increased solar
cap in 2014 and wind cap in 2015. Solar and wind were both fully
subscribed by 2016 and DOE decided against further rounds. The first
round of FIT capacity is still undersubscribed for hydropower and
biomass and scheduled to lapse in 2019. FIT in the Philippines was
generally seen to have increased cost of electricity (La Vin~ a et al., 2018),
resulting in decreased public support and eventual discontinuance. By
contrast, the WESM market operator conducted two studies in 2015
showing that FIT resulted in a net saving for consumers (de la Vin ~ a,
2015; de la Vin ~ a, 2015). However, these results were never widely
communicated.
Renewable portfolio standards (RPS). Government approved RPS
rules in December 2017 and these become effective in 2020. It set a
target of 35% RE share in the national energy mix in MWh by 2030. The
RPS requires electricity distributors and suppliers to increase the RE
share in their energy mix by 10% from 2020 to 2030, with a minimum
increase of 1% per year until the target is reached, effectively creating an
additional separate demand for RE regardless of technology.
4.4. RE investment assessment
This section evaluates the development of the RE industry in the ten
years following approval of the RE Law in 2008.
4.4.1. RE capacity, generation and share
Total RE generation (MWh) and capacity (MW) increased but RE
share in the total electricity mix decreased. RE share decreased by 9% in
terms of generation (from 34% to 25%) and by 3% in terms of capacity
(from 34% to 31%). Technologies with long development cycles,
geothermal and hydropower, saw significant losses in share, both in
terms of generation and capacity. FIT-eligible technologies with short
development cycles, such as solar and wind saw significant gains in
capacity share and some gains in generation share. Appendix C.1 and
Appendix C.2 show changes in generation and capacity share by tech­
nology. The RE Law aimed to reduce dependence on fossil fuels but the
share of electricity generation by fossil fuels increased from 66% to 75%,
while the share of electricity generation from coal, the most polluting
fossil fuel increased from 26% to 50%. In terms of generation (MWh),
Appendix C.3, and capacity (MW), Appendix C.4, RE increased by 12%
(MWh) and 34% (MW) but fossil fuels increased faster, by 77% (MWh)
and 50% (MW) respectively, with coal tripling in generation and
doubling in capacity.
4.4.2. The impact of FIT on eligible RE installations
FIT had a significant positive impact in solar and wind but a negli­
gible impact in hydropower ROR and biomass. Table 6 shows that by
end of 2016, the FIT installed capacity of solar, wind, biomass and hydro
ROR were 764, 394, 106 and 27 MW respectively, translating into
1528%, 197%, 42% and 11% of the initial capacity caps.
FIT policy benefited solar and wind, technologies exhibiting short
development and construction cycles and relatively low capital in­
tensity, versus hydro ROR and biomass. Fig. 3 shows solar and wind
capacity installations annual progress by category: FIT awarded projects
(applied for FIT and obtained it), FIT applied but not awarded (applied
for FIT but did not obtained it) and Non-FIT projects (did not apply for
FIT). Appendix C.5 summarizes FIT milestones for solar and wind.
Investors installed no wind or solar projects for almost a decade until
2014 when FIT became effective. In a period of just 9 months, October
2014 to June 2015, investors installed 394 MW of wind FIT projects,
accounting for 100% of the wind projects. Fig. 3 shows that not a single
wind installation occurred since 2015. There was a huge ramp-up of
J. Barroco and M. Herrera Energy Policy 135 (2019) 111008

Table 6 FIT-awarded hydropower installations were only 11% of the 250 MW

FIT capacity caps, rates and installed capacity. FIT installation target. In hydropower, only the ROR technology, which
RE First FIT 2015 Latest FIT FIT Installed historically accounts for a small portion of total hydropower in­
Technology 2015–2019(1) Capacity (Dec 31, stallations, is FIT-eligible. Hydropower and geothermal projects lack a
2016) clear path to profitability due to a long development and construction
Rate Capacity Rate Capacity Installed Versus cycle, approximately 4–8 years, due to heavy land (McCombie and
(US Caps (US Caps (MW) First Jefferson, 2016) and permitting (Gatchalian, 2017) requirements.
Cents (MW) Cents (MW) FIT (%)
per per
KWh) KWh) 4.5. Financing method analysis
Solar 19.6 50 17.6 527 764 1528%
Wind 17.2 200 14.9 394 394 197% 4.5.1. Analysis by PF driver
Biomass 13.4 250 13.3 250 106 42%
Investors project financed most of the capacity (62%) but corporate
Hydro ROR 11.9 250 11.9 250 27 11%
Total 750 1,421 1,291 172% financed most of the projects (63%). Results indicate that technology,
revenue contracts, project size, investor core business and ownership are
Note: 1 USD ¼ 49.5 Philippine Pesos (December 31, 2016). FIT rates are set in
key PF drivers. Analysis by PF driver follows.
Philippine pesos but in the table, values are converted to US Cents for easier
Technology. The incidence of PF varies significantly by technology
comprehension. Data compiled from the Department of Energy (DOE) and the
(Fig. 4). Three quarters (74%) of fossil fuel capacity was project
Energy Regulatory Commission (ERC).
(1) FIT fully subscribed for solar and wind by 2016. FIT will lapse for hydro and financed, more than triple the percentage in RE (22%). Baseload, firm
biomass at end of 2019. (non-intermittent), high-capacity utilization technologies such as coal,
hydro and geo exhibit the highest incidence of PF. These technologies
solar installations from 253 MW to 678 MW in March 2016, the expi­ tend to be the most reliable and affordable. The most intermittent and
ration date for awarding FIT to solar projects. No significant installations low-capacity utilization RE technologies, such as wind and solar, and
have occurred in the following three years when total installations reach peak, low-capacity utilization fossil fuel technologies, such as oil, tend to
870 MW (Fig. 3). The few installations that occurred are projects that be CF. Within fossil fuel and RE, results vary significantly. Coal exhibits
applied for FIT but were not awarded due to commissioning delays. Of the highest incidence of PF at 93% of capacity versus 6% for oil and 0%
the 870 MW, only one non-FIT project (12.5 MW) was installed repre­ for gas. Oil capacity consisted mainly of rehabilitations of existing
senting only 1% of total solar installed capacity. These findings indicate peaking plants with low investments per MW. Hence, investors reverted
that FIT was a major determinant in the installations of solar and wind primarily to traditional CF. Natural gas capacity consisted of mid-merit
projects. power plants that historically have been less cost competitive than coal.
Only 22% of RE capacity was project financed, mostly large projects
4.4.3. RE investment versus DOE’s objectives
DOE compiled targets in the National Renewable Energy Program Table 7
(NREP) 2011–2030 (Table 7). From 2011 to 2015, RE installations fell National renewable energy program (2011–2030) (data from DOE, 2010).
below 100% of target both overall as well as by technology: 38% for RE Actual NREP Target Installations Actual
total RE, 14% for hydropower, 31% for geothermal, 38% for wind, 53% Technology Installed Installations
MW
for biomass, and 61% for solar.
RE installations for wind, solar and biomass seem driven primarily by MW MW MW MW MW %
FIT. In the period 2011 to 2015, wind installations fell below NREP Target

target but were double the initial FIT target. All wind installations By 2010 2011 to 2011 to By 2011 to 2015
applied and obtained FIT. The FIT was particularly effective for solar as 2015 2030 2030

2011–2016 solar installations reached 780 MW, with 616 MW installed Geothermal 1,966 220 1,495 3,461 69 31%
just in 2016, well above the 2011–2030 NREP target of 285 MW. Hydro 3,400 341 5,324 8,724 47 14%
Biomass 39 277 277 316 148 53%
Virtually all the 780 MW of solar installations applied for FIT, although
Wind 33 1,048 2,345 2,378 394 38%
the DOE only awarded the FIT to around 500 MW of projects. Two-thirds Solar 1 269 284 285 164 61%
of 2011–2015 biomass installations obtained FIT. Ocean 0 0 71 71 0 NA
FIT seemed much less effective for hydropower. By the end of 2016, Total 5,438 2,155 9,796 15,235 822 38%

Fig. 3. Solar and wind capacity cumulative installation progress per category from 2013 to 2018.

7
J. Barroco and M. Herrera
Fig. 4. Percentage of capacity project financed or corporate financed per technology.
covered with temporary corporate guarantees from financially solid
parent companies. These guarantees remain in place until the projects
reach commercial operations and obtain revenue contracts, i.e. mostly
the REPA.
Revenue source. Two thirds (62%) of the installed capacity had
some form of revenue contract in place before commissioning, a PPA
with a DU (51%), a PPA with a RES (10%), or a contract directly with the
end customer (1%). Two percent (2%) was self-use. Roughly one third
(36%) of the capacity had no revenue contracts prior to project
commissioning. Within this 36%, 15% obtained a revenue contract
shortly after commissioning in the form of a REPA (WESM-REPA) and
21% sold their output to the WESM. The incidence of pre-commissioning
revenue contracts varies significantly by technology (Fig. 5). Majority of
coal and hydro capacities have revenue contracts while wind and gas
have none. These results align with the incidence of PF. High incidence
of revenue contracts translate into high incidence of PF.
The results are even more compelling if Fig. 5 is disaggregated by PF
(Fig. 6) and CF (Fig. 7). For most technologies a revenue contract is a PF
requirement. 100% of the PF capacity for coal, oil, hydro, geo, and bio
have pre-commissioning revenue contracts. The exceptions are PF for
solar and wind that instead of revenue contracts obtained a temporary
parent company guarantee until the project received FIT.
For CF projects, the large percentage had no revenue contracts. All
CF capacity for gas, geo, wind and solar and the majority for coal, oil,
Fig. 5. Percentage of capacity per revenue source.
8
Energy Policy 135 (2019) 111008
hydro and bio had no pre-commissioning revenue contracts (Fig. 7).
Project size. Investors tend to rely on PF for larger projects. The
average PF project was 3.5 times larger than the average CF project. This
is in line with expectations. To avoid any distortion of a few large pro­
jects on the averages, the analysis grouped projects in percentiles. The
larger PF project size holds true for 9 out of 10 percentiles (Fig. 8). The
exception is the top percentile due to the CF of the 450MW San Gabriel
gas power plant.
Table 8 shows that average project sizes are larger for PF than CF.
This is the case for both RE and fossil fuel, and across all investor types.
Financial companies use PF mostly for large projects with a PPA in place
or with a targeted defined revenue source (WESM REPA). They avoid PF
for small deals. Power Companies use PF often, mostly for deals with
revenue contracts but prefer to CF small projects or projects with no
revenue contracts.
Investor type (core business). Table 9 shows that power companies
financed the bulk of capacity (70%) and majority of the projects (52%).
Financial, supplier and industrial companies financed 14%, 8% and 6%
of the total capacity respectively. Developers account for a meager 1% of
the capacity but 12% of projects since they focused on small projects.
Power companies dominate most of the technologies except in bio
and solar. In bio, industrial companies account for 76% of capacity while
in solar, financial, supplier and power companies account for respec­
tively 43%, 35% and 17% of capacity (Fig. 9).
J. Barroco and M. Herrera
Fig. 6. Percentage of project finance capacity per technology per revenue source.
Fig. 7. Percentage of corporate finance capacity per technology per revenue source.
Fig. 8. Project size (MW) per percentile per financing method.
Table 10 shows that financial companies use PF the most at 78%,
followed by power companies at 66% and suppliers at 53%. While this
was expected for financial companies since they tend to rely more on
financial engineering, such as PF, the high percentage was not expected
9
Energy Policy 135 (2019) 111008
for suppliers since they tend to rely more on corporate funds. Industrials,
developers and economic groups hardly use PF. While this was expected
for industrial companies given the difficulty in clearly separating the
power business from its core business, it is surprising for developers
given their relatively weak balance sheets. Developers project financed
13% of their capacity, indicating inability to create the conditions
required to PF, and it may be the reason why developers account for only
1% of total capacity (Table 9). By contrast, in Denmark (Sovacool, 2013)
and in Germany (Couture and Gagnon, 2010) most of the RE projects
were deployed by developers and community groups. All investor types
relied on PF for a larger percentage of capacity than projects, which
means that they tend to PF larger projects.
Investor public ownership. Publicly listed companies deployed
77% of the capacity and 52% of the projects. Public companies exhibit a
higher incidence of PF than privately owned companies. Public com­
panies project financed 65% of their capacity versus only 50% for pri­
vate companies, but in terms of projects the difference is much higher at
50% for public companies versus only 10% for private companies. This
may indicate that private companies, which are expected to need PF
more than public companies, experienced difficulty in obtaining PF.
The research did not find location and investor nationality to be
relevant PF drivers. The percentage of capacity and projects project
financed in Mindanao was respectively 63% and 33% in line with the
national average of 62% and 31%. This might be explained by the fact
J. Barroco and M. Herrera Energy Policy 135 (2019) 111008

Table 8
Average PF and CF project size (MW).
Financing Method Total Technology Investor Type

RE Fossil Fuel Power Financial Supplier Industrial Developer

Project Finance 119 43 140 107 261 150 84 7

Corporate Finance 34 21 65 53 20 27 32 6
PF /CF 3.5 2.1 2.2 2.0 13.3 5.6 2.6 1.2

Source: Research project-level data.

Table 9
Percentage of total financed capacity and projects by investor type (core business).
Total Financing Power Financial Supplier Industrial Developer Economic Total

% Capacity 70% 14% 8% 6% 1% 0% 100%

% Projects 52% 12% 12% 11% 12% 3% 100%

Source: Research project-level data.

Fig. 9. Percentage of capacity per technology per investor type.

Table 10
Percentage of capacity and projects using PF by investor type (core business).
Project Finance Power Financial Supplier Industrial Developer Economic Total

% of Capacity 66% 78% 53% 18% 13% 0% 62%

% of Projects 48% 21% 14% 8% 7% 0% 31%

Source: Research project-level data.

that Mindanao’s peace and order challenges are confined to certain
areas. Local investors account for 77% of the capacity and 73% of the
projects. Foreign and local investors project financed respectively 71%
and 60% of their capacity but 23% and 33% of their projects.
4.6. Detailed analysis by technology and revenue source
Technology and revenue source seem to be major drivers of PF. A
detailed analysis along these two drivers is warranted (data in Appendix
D). This coupled with analyses at the individual project-level should
provide valuable insights.
Coal. Ninety-three percent of the coal capacity was project financed,
all with revenue contracts: 75% PPAs with DUs, 16% PPAs with RES and
2% REC. Only 7% of the coal capacity was corporate financed, half with
no revenue contracts and half for self-use by an industrial company.
These results indicate that for coal, having a revenue contract is a key PF
driver.
Natural Gas. Virtually 100% of the gas capacity was corporate
financed due to lack of revenue contracts. This capacity consist of the
450MW San Gabriel (mid-merit power) and the 100M Avion (peak
power) power plants from First Gen, one of the largest power companies
in the Philippines. Since these power plants are not baseload, which is
typically the most affordable type of power, signing revenue contracts
was a challenge. Only 1 MW project had revenue contracts but it was too
small to PF. For gas, results indicate that revenue contracts drive PF.
Oil. Most of the oil capacity (93%) was corporate financed given the
lack of revenue contracts (62% WESM and 8% Self Use) or small project
size. The 62% WESM are rehabilitations of old heavy fuel oil power
plants. The investment per MW for an oil power plant rehabilitation is
low and collateralizing old equipment for loan purposes can be

10
J. Barroco and M. Herrera Energy Policy 135 (2019) 111008

challenging. For these reasons, investor prefer to just CF these re­ 4% of the capacity. Unlike coal and gas that exhibit significant econo­
habilitations.1 Twenty three percent (23%) of the capacity that was mies of scale, and hydro, wind and geo that require high investments per
corporate financed had PPAs with DUs but with an average of 12 MW MW, solar is a natural fit with developers given its low investments per
per project it may have been too small to PF. The investment per MW for MW and small project size.
new oil power plants can range from USD 0.5 to USD1.2 per MW,
considerably lower than for coal, gas and RE. For oil, results indicate 5. Discussion
revenue contracts, project size and rehabilitations are drivers of CF.
Geothermal. Geothermal only commissioned two power plants. One Table 11 summarizes the PF drivers, hypotheses and results. Results
with a revenue contract was project financed and the other without a supported hypotheses number 1, 2, 4, 6 (financial) and 7 (industrial). PF
revenue contract was corporate financed. Therefore, revenue contracts incidence for FIT, developers and private companies were lower than
seem to drive PF. expected.
Biomass. Investors corporate financed 87% of the capacity given the The incidence of PF in FIT projects was low; in terms of capacity, at
lack of revenue contracts (WESM 18% and WESM REPA 51%) and the only 27% for wind, 22% for solar, and 0% for hydro and biomass. The
difficulty of creating a new power project company distinct from the uncertainty in obtaining the FIT most likely explains this low PF inci­
existing biomass company that supplies the feedstock. Seventy-six dence, since DOE only awards the FIT to a project if it commissions
percent of the bio capacity is owned by industrials, mostly sugar or before tight deadlines and low technology-specific capacity caps are
rice mills, with access to feedstock and hosting power facilities inside reached. The lack of project-size limits may have compounded uncer­
their premises. The power business shares key infrastructure with the tainty since a few projects could have easily exhausted the full
core biomass business. In biomass, only one deal was project financed. technology-specific capacity cap. Most of the FIT projects that were
This project had a PPA and a clear segregation existed between the project financed had parent company guarantees that remained in place
power company and the feedstock supplier.2 In biomass, results indicate until DOE awarded the FIT, supporting the conclusion that revenue
revenue contracts and ease of segregating the power from biomass uncertainty was a key concern for lenders. These results are relevant as
business are PF drivers. FIT uncertainty adversely affected PF use, RE share in the energy mix,
Hydropower. Aboitiz Power (AP) project financed a 43MW project and attainment of RE technology-specific targets. The parent guarantees
with a revenue contract (PPA DU), accounting for roughly half of hydro also indicate that the investor main motivation to PF FIT projects is to
capacity. Forty-nine MW of installations was corporate financed. This expand capital availability and not risk mitigation, since most of the
was likely due to the lack of revenue contracts (30MW WESM REPA and project risk (construction risk and revenue risk due to FIT-award un­
1 MW WESM) or small project size (18MW PPA DU but with an average certainty) is present while these guarantees remain in place.
project size of just 4.5 MW). AP, which owns 80% of the hydro capacity The Philippine economy is highly concentrated, and the power and
(73 MW), doesn’t seem to PF hydro projects under 20 MW even with public companies that invested during the study period are primarily
revenue contracts. However, once a hydro project reaches a certain size controlled by a few wealthy family groups. This result is counterintuitive
AP tries to PF it even in the absence of revenue contracts. This is the case since FIT tends to benefit smaller projects and investors in contrast to
of the 68.8 MW hydro in Manolo Fortich, Mindanao. This project applied other DSP such as quotas and auctions (Couture, 2014; Grashof, 2019;
for FIT and has been project financed with a temporary guarantee from IRENA, 2018). This is relevant for policymakers since highly concen­
AP, that remains in place until DOE awards it FIT. This project is not in trated industries tend to exhibit low competition, which has negative
the dataset since it is scheduled for commissioning in 2019. For hydro, effects on social welfare.
results show that revenue contracts and project size are key PF drivers.
Wind. The revenue source of all six installed wind projects was FIT 6. Conclusions and policy implications
(WESM REPA). Investors project financed 27% of the capacity, repre­
senting two deals, which all had temporary guarantees from the parent Key direct support policies (DSP) design elements impact not only
company until award of FIT. Even the PF refinancing of the largest wind the amount of investment per technology but also the financing method
project in the Philippines, First Gen’s 150MW Burgos, required a tem­ choice and consequently the type of investors attracted. Policymakers
porary parent guarantee until it obtained FIT. This project is not part of tend to focus on the former while discounting the latter. A successful
our dataset as PF since its construction was corporate financed. policy should consider both factors.
Solar. Investors project financed only 22% of the solar capacity In the Philippines the main PF drivers were technology, revenue
consisting of three projects. The first project is the 12.5 MW Kirahon source, project size, and investor type (ownership and core business).
power plant, the only on-grid solar project with a PPA installed in the
Philippines during the study period. The other two projects are a Table 11
133MW private equity owned Helios project, the largest solar plant in Hypotheses summary.
the Philippines, and a 23MW project owned by a large power company.
PF Driver HYP Hypothesis Description Meets
Investors financed Helios with 60% equity, twice the typical 30%. De­ # Results
velopers initially owned most of the solar projects but to fund con­
Technology 1 Higher incidence of PF for baseload, Yes
struction had to sell to or partner with well-capitalized investors such as non-intermittent technologies.
financial companies (43% of capacity), suppliers (35% of capacity) or Revenue Source 2 High incidence of PF for non-FIT Yes
power companies (17% of capacity). Developers ended up owning only projects with revenue contract.
3 High incidence of PF for FIT projects No
especially solar and wind.
Project Size 4 Lower incidence of PF for small Yes
1 projects.
The rehabilitations of old heavy fuel oil power plants consist mainly of the Location 5 Lower incidence of PF in Mindanao. No
following: (a) 242 MW from Therma Mobile Inc (TMO), a wholly owned sub­ Investor Core 6 High incidence of PF for developers No/Yes
sidiary of Aboitiz Power (AP), in Navotas, Metro Manila, Luzon and; (b) Business and financial companies.
114 MW from Mapalad Power Corporation (MPC) in Iligan City, Mindanao. 7 Low incidence of PF for industrial and Yes/No
2
The investors of these two businesses were also distinct. Unfortunately, this supplier companies.
project was closed one year after commissioning for lack of consistent and Investor 8 Higher incidence of PF for private No
quality feedstock. Separating the ownership of the power project from the Ownership companies.
Investor 9 Lower incidence of PF for foreign Inconclusive
feedstock supply seems to have been detrimental to the survival of the power
Nationality companies.
project.

11
J. Barroco and M. Herrera Energy Policy 135 (2019) 111008

The feed-in tariff (FIT) was perceived as financially attractive but tight
deadlines, low technology-specific capacity caps and the absence of
project-size limits created revenue uncertainty. FIT benefited primarily
intermittent technologies with a short development and construction
cycle such as solar and wind. For these technologies, investors were
willing to trade-off the risk of not commissioning their project on time
for the benefit of obtaining a 20-year revenue contract with the gov­
ernment at an above market rate per FIT policy. For other RE technol­
ogies with longer development and construction cycle, such as hydro
and biomass, FIT uncertainties translated into low revenue visibility and
consequently low investment levels. Given revenue uncertainty, only the
best capitalized investors, such as established publicly listed power
companies and private equity companies, were able to finance their
projects by using their own balance sheet, that is corporate finance (CF),
to directly fund the projects or by using their financing capacity indi­
rectly to provide guarantees to lenders. Smaller investors, such as de­
velopers that typically are less well capitalized and could have relied on
project finance (PF) had uncertainty been lower, were not able to
finance their projects or had to sell a majority stake of the project to
larger investors. RE is a natural fit with these investors since they do not
have the financial resources to develop fossil fuel projects such as coal
and natural gas that are subject to economies of scale.
These findings are relevant for two main reasons. First, PF that ex­
hibits several advantages over CF, such as expanding capital availability,
reducing project risk, increasing transparency and broadening investor
participation, was confined to just a few RE projects. Second, smaller
investors were largely sidelined but these investors are critical to the
deployment of RE for economic, social and political reasons. Small in­
vestors are embedded in the community, consequently gaining the
support of the general public is easier if they are major beneficiaries.
Moreover, widening the base of investors results in increased competi­
tion, which increases social welfare. These findings have implications
for policymakers in the Philippines and other developing countries
seeking to promote RE investments. Given the intrinsic uncertainty of RE
and developing countries, revenue certainty is critical for PF. Policy­
makers can increase revenue certainty by (a) eliminating tight deadlines
and avoiding low capacity caps; (b) defining a project-size limit to avoid
crowding out by large projects which is especially important in the
presence of FIT caps; (c) designing policies to increase the availability of
long-term revenue contracts to energy investors by mandating distri­
bution utilities and retail electricity suppliers to fully contract, not only
their current demand, but also their future demand; (d) minimizing
uncertainty in DSP implementation by defining clear and strict guide­
lines and targets; (e) mobilizing public support by quantifying DSP
benefits and displaying them in the consumer’s bills; and (f) tailoring
DSP’s to small investors, such as developers and community organiza­
tions, to broaden investor participation and increase public support.
In summary, given the intrinsic uncertainty of RE and developing
countries, policymakers need to design policies to minimize revenue
uncertainty, enable PF and broaden the investor base.
End of article
This research did not receive any specific grant from funding
agencies in the public, commercial, or not-for-profit sectors. The authors
acknowledge administrative support from the Asian Institute of Man­
agement. The authors would like to thank Francisco L. Roman, Asian
Institute of Management, and Philip Mirvis, Global Network for
Corporate Citizenship, for valuable input.

List of abbreviations

AP Aboitiz Power
CAR Contractor’s All Risk Insurance
CF Corporate Finance. Other designation is balance-sheet financing
COC Certificate of Compliance
DSP Direct Support Policies. It includes FIT, RPS, Auctions, etc.
DOE Department of Energy
DU Distribution Utility
EPC Engineering, Procurement and Construction
EPIRA Electric Power Industry Reform Act
ERC Energy Regulatory Commission
First Gen First Gen Corporation
FIT Feed-in Tariff
FIT-All FIT Allowance
GDP Gross Domestic Product
GIS General Information Sheet
GW Gigawatt (1,000 Megawatts)
GWh Gigawatt-hour (1,000 Megawatt-hours)
IEA International Energy Agency
KW Kilowatt (1,000 Watts)
KWh Kilowatt-hour (1,000 Watts for 1 h)
MW Megawatt (1,000 Kilowatts)
MWh Megawatt-hour (1,000 Kilowatt-hours)
NGCP National Grid Corporation of the Philippines
NREP National Renewable Energy Program
OECD Organization for Economic Cooperation and Development
O&M Operations & Maintenance
PDEx Philippine Dealing & Exchange Corp.
PDP Power Development Plan
PF Project Finance
PPA Power Purchase Agreement. Other names for PPA, are PSA (Power Supply Agreement) or ESA (Electricity Supply Agreement) or offtake
agreement

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J. Barroco and M. Herrera Energy Policy 135 (2019) 111008

PPA-DU Power Purchase Agreement (PPA) with a distribution Company (DU)

PPA-RES Power Purchase Agreement (PPA) with a Retail Electricity Supplier (RES)
RE Renewable Energy
REC Retail Electricity Contract. A contract, PPA, between a power plant and the end customer
REPA Renewable Energy Payment Agreement
RES Retail Electricity Supplier
ROR Run-of-River
RPS Renewable Portfolio Standards
RSC Retail Supply Contract. A contract between a RES and the end customer
SBLC Standby Letter of Credit
SEC Securities and Exchange Commission
SELF-USE The customer of the power plant is the investor
Transco National Transmission Corporation
WESM Wholesale Electricity Spot Market
WESM-REPA WESM plus REPA. The FIT Rate shortfall (FIT rate minus WESM rate) is paid by REPA

Appendix A

Fig. A1. Project finance structure: key parties and contracts.

Appendix B

Table B1
Conditions for project finance information sources.

Sources of Information Conditions for Project Finance

1. Project 2. 3. Non- 4. PC Assets 5. PF

Company Borrower Recourse Collateralized Classified

Annual Report (SEC):

Business and General Information:
Principal Products & Services √√ ✓ ✓
Properties ✓ √√
Patents, Copyrights, Franchises ✓
Transactions with Related Parties ✓
Control and Compensation Information:
Certain Relationships and Related Transactions √√
Exhibits and Schedules:
Corporate & Business Structure Organigram √√
Audited Financial Statements √√
Notes to Audited Financial Statements:
Group Information √√
Prepaid Expenses and Other Current Assets ✓
Property, Plant and Equipment ✓ ✓ √√
(continued on next page)

13
J. Barroco and M. Herrera Energy Policy 135 (2019) 111008

Table B1 (continued )
Sources of Information Conditions for Project Finance

1. Project 2. 3. Non- 4. PC Assets 5. PF

Company Borrower Recourse Collateralized Classified

Business Combinations ✓
Investments and Advances ✓ ✓
Joint-Operations ✓
Non-Controlling Interests ✓ ✓
Related Party Transactions √√
Other Non-Current Assets ✓
Long-Term Debt √√ ✓ √√ ✓
Equity ✓
Material Contracts and Agreements ✓ ✓ ✓
Registration with Board of Investments ✓
Supplementary Schedules:
Map of Company Relationships in the Group √√
E: Long-Term Debt √√
F: Indebtedness to Related Parties √√
G: Guarantees of Securities of Other Issuers ✓

Corporate Debt Securities Issuer Prospectus:

Risk Factors (assets already collateralized for loans) ✓ ✓ √√ √√ ✓
Use of Proceeds ✓ ✓
The Company: ✓
Corporate Structure ✓
Business Segments ✓ ✓
Power Plants ✓ ✓
Properties ✓ ✓ √√
Related Transactions √√ ✓
Material Contracts & Agreements ✓ ✓ ✓ ✓ ✓
Annex 2: List of Permits and Licenses ✓

General Information Sheet (SEC) ✓

Articles of Incorporation and By-Laws (SEC) ✓
Annual Audited Financial Statements ✓ ✓ ✓ ✓ ✓

Energy Regulatory Commission (ERC) Certificate of Compliance (COC) √√

ERC Approved Power Purchase Agreements (PPA) √√ √√ ✓ ✓
ERC Approval to Develop, Own and/or Operate Dedicated Connection Line to √√
the Grid

Public Disclosures of Material Information ✓ ✓ ✓ ✓ ✓

Department of Energy (DOE) RE Service Contract List ✓

DOE List of Existing Operating Power Plants ✓
DOE List of Upcoming Committed Power Plants ✓ ✓ ✓

Table B2
Conditions for project finance information sources description

Sources of Information Description

Annual Report (SEC Requirement):
Business and General Information:
Principal Products & Services
Properties
Patents, Copyrights, Franchises
Transactions with Related Parties
Control and Compensation Information:
Certain Relationships and Related Transactions
Exhibits and Schedules:
Corporate & Business Structure Organigram
Audited Financial Statements (AFS)
Notes to Audited Financial Statements:
Group Information
Prepaid Expenses and Other Current Assets
Property, Plant and Equipment (PPE)
Business Combinations
Investments and Advances
Joint-Operations
Non-Controlling Interests
Related Party Transactions
Other Non-Current Assets
Long-Term Debt
Equity
The annual report is an SEC requirement for publicly listed companies. These companies own the majority of the
power projects that were financed over the last 10 years.
Group’s companies, businesses and structure including subsidiaries, associates and Joint-Ventures (JVs)
Group’s properties indicating if mortgaged
It can list Companies Certificates of Compliance (COC) issued to each power plant. This is an ERC requirement to
operate power plants in the Philippines.
Indicates credit enhancements with related parties
Indicates credit enhancements with related parties
Group’s Organigram
The SEC requires any stock or non-stock corporation, publicly or privately owned, to file an AFS
Group parent, subsidiaries, associates and JVs and respective business and structure
Debt Service Reserve Account (DSRA) and Payment Account (DSPA) are current assets and typical PF requirements
Indicates key PPE and the ones mortgaged. Provides loan terms and conditions.
Recent Merger & Acquisitions
Non-controlling investments in associates and JVs
Companies being jointly operated
May disclose summary balance sheet of projects with minority stake
Discloses credit enhancements provided to subsidiaries, JVs and Associates such as guarantees and standby letters of
credit (SBLC).
May include details of loan current portion
Discloses companies’ borrowings and terms and conditions such as tenor, interest rate, amount, credit
enhancements, mortgaged property, lenders, grace period, etc.
(continued on next page)

14
J. Barroco and M. Herrera
Table B2 (continued )
Sources of Information
Material Contracts and Agreements
Registration with Board of Investments
Supplementary Schedules:
Map of Company Relationships in the Group
E: Long-Term Debt
F: Indebtedness to Related Parties
G: Guarantees of Securities of Other Issuers
Corporate Debt Securities Issuer Prospectus:
Risk Factors (assets already collateralized)
Use of Proceeds
The Company:
Corporate Structure
Business Segments
Power Plants
Properties
Related Transactions
Material Contracts & Agreements
Annex 2: List of Permits and Licenses
General Information Sheet (SEC)
Articles of Incorporation and By-Laws (SEC)
Annual AFS (SEC)
Energy Regulatory Commission (ERC) Certificate of
Compliance (COC)
ERC Approved Power Purchase Agreements (PPA)
ERC Approval to Develop, Own and/or Operate Dedicated
Connection Line to the Grid
Public Disclosures of Material Information
Department of Energy (DOE) RE Service Contract List
DOE List of Existing Operating Power Plants
DOE List of Upcoming Committed Power Plants
Appendix C
Fig. C1. Change in the generation mix per technology (in percentage versus 2008).
Energy Policy 135 (2019) 111008
Description
Describes appropriations of retained earnings for key projects. If 100% of project capital, then is balance sheet
financing.
RE Service Contracts, Power Purchase Agreements (PPA), Certificates for compliance (COC) and others.
Companies registered with BOI
Group Intercompany Organigram
Table with borrower’s name, short & long term amount
Debts owed to Related Parties
Lists any guarantees of other issuer’s securities by the issuer
Corporate issuers of debt securities (commercial paper, bonds and debentures) publish a prospectus for the public
proving information on the corporation business, structure, existing loans and contracts.
Describes existing collateralized assets for existing loans and recourse to Corporation.
Indicates use of proceeds in projects and subsidiaries
Describes the company structure, major businesses & transactions.
Corporate organigram
Describes Company’s business and subsidiaries
Indicates project companies and power plant description
Indicates properties that are mortgaged
Indicates loan guarantees provided to related parties
Key loan agreements and Power Purchase Agreements
Key permits and licenses per company and subsidiaries
Company ownership structure and affiliation
Corporation name and purpose
Annual audited financial statements
A COC is mandatory by the ERC to operate a power plant in the Philippines.
The Power Purchase Agreement (PPA) includes a section deriving the electricity rate based on the project capital
structure (Equity% and Debt)
The power plant is required to apply for ERC approval to develop, own and/or operation the dedicated power line
that connects it to the NGCP grid or to the distribution utility system.
Public disclosures of loan agreements terms & conditions
Discloses the company holding the RE Service Contract
Discloses the project and operator name
May list general financing terms and conditions
15
J. Barroco and M. Herrera Energy Policy 135 (2019) 111008

Fig. C2. Change in the capacity mix per technology (in percentage versus 2008).

Table C3
Electricity generation in gigawatt-hour (data from DOE, 2017)

Fuel /Technologies 2008 2017 2017 versus 2008

GWh % GWh % GWh %

Fossil Fuel: 40,193 66% 71,187 75% 30,994 9%

Coal 15,749 26% 46,847 50% 31,098 24%
Oil Based 4,868 8% 3,793 4% 1,075 4%
Natural Gas 19,576 32% 20,547 22% 971 10%
Renewable Energy: 20,628 34% 23,183 25% 2,555 ¡9%
Geothermal 10,723 18% 10,270 11% 453 6%
Hydro 9,843 16% 9,605 10% 238 6%
Biomass 0 0% 1,413 1% 1,413 1%
Solar 1 0% 1,205 1% 1,204 1%
Wind 61 0% 690 1% 629 1%
Total 60,821 100% 94,370 100% 33,549

Table C4
Electricity capacity in megawatts (data from DOE, 2017)

Fuel /Technologies 2008 2017 2017 versus 2008(1)

MW % MW % MW %

Fossil Fuel: 10,397 66% 15,649 69% 5,252 3%

Coal 4,213 27% 8,049 35% 3,836 9%
Oil Based 3,353 21% 4,153 18% 800 3%
Natural Gas 2,831 18% 3,447 15% 616 3%
Renewable Energy: 5,283 34% 7,079 31% 1,796 ¡3%
Geothermal 1,958 12% 1,916 8% 42 4%
Hydro 3,291 21% 3,627 16% 336 5%
Biomass 0 0% 238 0% 238 1%
Solar 1 0% 871 4% 870 4%
Wind 33 0% 427 2% 394 2%
Total 15,681 100% 22,728 100% 7,047 0%
Note: the capacity changes from 2008 to 2017 reflect primarily new projects but also change in efficiency from already existing power plants.

Table C5
Solar and Wind FIT Milestones and key dates (source: DOE and ERC)

Milestones Date

ERC approves the feed-in tariff (FIT) rates. (Resolution no. 10, series of 2012). The installation caps for solar and wind are respectively 50 and 200 MW with FIT July 27, 2012
rates of respectively Php 9.68 and 8.53 per KWh.
ERC approves the guidelines on the collection of FIT- Allowance (FIT-All) and the disbursement of FIT-All fund (Resolution No. 24 Series of 2013) so RE FIT Dec 16, 2013
investors can be paid.
DOE certification revises the solar energy installation cap to 500 MW or March 15, 2016, whichever comes first. April 30, 2014
ERC approves the new solar FIT rate at Php 8.69 per KWh. March 27,
2015
DOE issues a certification increasing the installation cap for wind from 200 MW to 400 MW. April 7, 2015
Deadline for the solar 500 MW installation cap expired. Projects commissioning after this date will not obtain FIT even if installation cap has not been met. March 15,
2016
(continued on next page)

16
J. Barroco and M. Herrera Energy Policy 135 (2019) 111008

Table C5 (continued )
Milestones Date

ERC approved the Wind FIT2 at Php 7.40 /Kwh and limited the entitlement to just 3 wind projects (San Lorenzo 54MW, PetroWind 36MW and Alternergy 54MW). October 6,
ERC 2015-002RM. No more wind FIT after this date. 2015

Appendix D

Table D1
Fossil Fuel capacity and projects per financing method and revenue source

Fuel Revenue Source Capacity (MW) Capacity (%) Projects

PF CF NA PF CF NA PF CF NA

Coal PPA DU 3,243 – – 75% 0% 0% 22 0 0

PPA RES 690 – – 16% 0% 0% 3 0 0
REC 84 – – 2% 0% 0% 1 0 0
Self-Use – 140 – 0% 3% 0% 0 1 0
WESM – 150 – 0% 3% 0% 0 1 0
Total 4,016 290 – 93% 7% 0% 26 2 –
Grand Total 4,306 100% 28
Gas PPA DU – – 1 0% 0% 0% 0 0 1
WESM – 550 – 0% 100% 0% 0 2 0
Total – 550 1 0% 100% 0% – 2 1
Grand Total 551 100% 3
Oil PPA DU 38 146 5 6% 23% 1% 3 12 1
SELF USE – 50 – 0% 8% 0% 0 2 0
WESM – 392 – 0% 62% 0% 0 4 0
Total 38 588 5 6% 93% 1% 3 18 1
Grand Total 631 100% 22
Source: Research project-level data.

Table D2
RE capacity and projects per financing method and revenue source

Fuel Revenue Source Capacity (MW) Capacity (%) Projects

PF CF NA PF CF NA PF CF NA

Geo PPA DU 20 – – 29% 0% 0% 1 0 0

WESM – 49 – 0% 71% 0% 0 1 0
Total 20 49 – 29% 71% 0% 1 1 –
Grand Total 69 100% 2
Bio PPA DU 9 30 – 4% 14% 0% 1 2 0
SELF USE – 8 – 0% 4% 0% – 1 0
WESM REPA – 113 – 0% 51% 0% – 7 0
WESM – 39 20 0% 18% 9% – 2 1
Total 9 190 20 4% 87% 9% 1 12 1
Grand Total 219 100% 14
Hydro PPA DU 43 18 – 46% 20% 0% 1 4 0
WESM REPA – 30 1 0% 32% 1% 0 3 1
WESM – 1 – 0% 1% 0% 0 1 0
Total 43 49 1 46% 53% 1% 1 8 1
Grand Total 92 100% 10
Wind WESM REPA 108 250 36 27% 63% 9% 2 3 1
Total 108 250 36 27% 63% 9% 2 3 1
Grand Total 394 100% 6
Solar PPA DU 13 – – 2% 0% 0% 1 0 0
WESM REPA 133 367 26 17% 47% 3% 1 20 3
WESM 23 220 – 3% 28% 0% 1 9 0
Total 168 587 26 22% 75% 3% 3 29 3
Grand Total 782 100% 35
Source: Research project-level data.

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