Reassessment of the nationality requirements for renewable energy projects

FILIPE RESMINI-UNSPLASH

On Sept. 29, the Department of Justice (DoJ) rendered its Opinion No. 21, Series of 2022, holding that the 40% foreign equity limitation as provided under the 1987 Constitution should not apply to the exploration, development, and utilization of inexhaustible renewable energy (RE) resources. In other words, the DoJ takes the position that foreign investors may fully own certain renewable energy projects.

By way of background, Article XII, Section 2 of the 1987 Constitution provides in part that “[a]ll lands of the public domain, waters, minerals, coal, petroleum, and other mineral oils, all forces of potential energy, fisheries, forests or timber, wildlife, flora and fauna, and other natural resources are owned by the State.” The same provision states that “[t]he State may directly undertake such activities, or it may enter into co-production, joint venture, or production-sharing agreements with Filipino citizens, or corporations or associations at least [60%] of whose capital is owned by such citizens.”

In 2009, the Department of Energy (DoE), based on its interpretation of the foregoing, released Department Circular No. DC2009-05-0008, or the Rules and Regulations Implementing the Republic Act No. 9513 (the RE Act IRR), which effectively limits the award of all renewable energy contracts to Filipino citizens and corporations or associations at least 60% of whose capital is owned by Filipinos. Section 19(a) of the RE Act IRR provides that “[a]ll forces of potential energy and other natural resources are owned by the State and shall not be alienated. These include potential energy sources such as kinetic energy from water, marine current and wind; thermal energy from solar, ocean, geothermal and biomass.”

The DoJ then issued the Opinion which appears to be contrary to Section 19(a) of the RE Act IRR but is based on a pragmatic and technical reading of the 1987 Constitution. The DoJ stated that the exploration, development, and utilization of solar, wind, hydro, and ocean or tidal energy should not be subject to the 40% foreign equity limitation since these resources are inexhaustible and thus beyond the ambit of the term “natural resources” in the 1987 Constitution, which contemplates only those limited and exhaustible resources that are susceptible of appropriation. The DoJ further opined that the term “all forces of potential energy” as stated in the 1987 Constitution should be understood in a technical sense and interpreted to exclude kinetic energy, in which solar, wind, hydro, and ocean or tidal energies are included. However, the use of water sources, if the same is directly harvested from the source by foreign nationals or entities, may not be allowed pursuant to the provisions of the Water Code of the Philippines and the pronouncement of the Supreme Court in the case IDEALS, Inc. vs. PSALM.

Significantly, while the DoJ’s Opinion is not considered binding, its influence is significant as it serves as a catalyst to the opening of the RE sector to 100% foreign ownership. In this regard, on Oct. 12, the DoE released the Draft Department Circular Prescribing Amendments to Sections 19 of Department Circular No. DC2009-05-0008, Entitled, Rules and Regulations Implementing Republic Act No. 9513, Otherwise Known as “The Renewable Energy Act of 2008” (“Draft Amendments to the Renewable Energy Act IRR”), which seeks to incorporate the DoJ’s interpretation in its Opinion in the RE Act IRR.

The salient provisions of the Draft Amendments to the Renewable Energy Act IRR are as follows:

First, Section 19 (A) of the RE Act IRR, which reserves the exploration, development, and utilization of RE resources for Filipino citizens and corporations or associations at least 60% of whose capital is owned by Filipinos, is deleted.

Second, Section 19 (B) of the RE Act IRR is amended to state that the RE Service or Operating Contracts for the following activities shall be reserved for Filipino citizens or corporations or associations at least 60% of whose capital is owned by Filipinos: a.) the appropriation of water direct from a natural source; or, b.) the exploration, development, and utilization of geothermal resources, except for financial or technical assistance agreements for large-scale exploration, development, and utilization of geothermal resources pursuant to Article XII, Section 2 of the Philippine Constitution.

While it is difficult to speculate if the Draft Amendments to the Renewable Energy Act IRR or a similar version will be approved and if the amendments will remain unchallenged, the Opinion and the Draft Amendments show that public policy is shifting towards the relaxing of foreign equity restrictions in the RE sector. Should the RE Act IRR be amended, we will likely see an increase in RE investments by foreign investors.

In this connection, during the DoE’s 2022 Virtual Energy Investment Forum on Oct. 28, Energy Secretary Raphael P.M. Lotilla stated that the proposed amendments to the Renewable Act IRR are in line with the goal of President Ferdinand Marcos, Jr.’s programs to develop the country’s RE. Given the administration’s strong push for RE, it appears that the Philippines is poised to catch up in the race to curb climate change.

This article is for general informational and educational purposes only and not offered as and does not constitute legal advice or legal opinion.

Monique B. Ang is an associate of the Corporate & Special Projects department of the Angara Abello Concepcion Regala & Cruz Law Offices (ACCRALAW).

mbang@accralaw.com

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