PE2 to DOF, FIRB: EE needs optimal CREATE incentives
MANILA, 12 November 2021 (PE2.org) – The Philippine Energy Efficiency Alliance (PE2) officially transmitted earlier today its letter to Secretary Carlos G. Dominguez of the Department of Finance (DOF), in his capacity as Chairman of the Fiscal Incentives Review Board (FIRB) to request the upgrading of the industry tier classification of energy efficiency (EE) projects within the income tax holiday (ITH) framework of domestic market activities of RA 11534, better known as the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act. Officials of the Joint Congressional Energy Commission (JCEC), represented by the Committees on Energy of the Senate of the Philippines and the House of Representatives of the Eighteenth Congress, the Department of Energy (DOE) and the Board of Investments (BOI) were copied in the PE2 submission.
In the letter, PE2 president Alexander Ablaza said, “Since 2016, PE2 has been consistent in seeking a minimum six-year ITH and duty-free importation as the floor package of fiscal incentives that would start to elevate after-tax internal rates of return (IRR) of energy efficiency investments from single-digit to low-teens percentages. We need to stress that both local and foreign portfolio investors need energy efficiency project portfolios to hurdle 15% in after-tax IRR before pledging long-term capital, especially for an entirely new investment asset class (energy efficiency).”
PE2 explained that, before the passage of the CREATE Act, the Alliance was starting to understand how the 6-year ITH could be legally supported through the pioneer status provisions of EO 226, Omnibus Investments Code of 1987. After the CREATE Act became effective, PE2 realized that the incentive matrix according to the location and industry tiers of domestic market activities was logically inconsistent with the imperative for energy efficiency to harvest the bulk of wasted energy (as an “indigenous” resource) from the more developed, energy-intensive urban and industrialized localities.
PE2 requested the FIRB, chaired by the DOF Secretary, to enable BOI and other relevant investment promotion agencies to reclassify EE projects from Tier I to Tier III. PE2 justified the request with the following reasons:
- Scaling-up EE is critical to the structural transformation and industrial revolution of the economy, primarily because the steady reduction of the energy intensity of the entire economy, and the decelerated rise of energy prices due to deferred energy infrastructure upgrades, together raise the national competitiveness of the country and allow the Philippines to catch up with our ASEAN neighbors in terms of energy productivity;
- EE projects approach low-mid-teens after-tax IRR and start to become attractive to potential portfolio investors with at least 6-years ITH and duty-free importation;
- Tier III re-classification compensates for the locational incentive framework of EE projects, which should be focused and targeted heavily at the urban and industrialized localities (e.g. NCR and metropolitan NCR areas);
- The project-specific and site-specific process of conducting energy audits, engineering a packaged system of technologies and delivering guaranteed savings is by itself a research and development activity resulting in demonstrably significant value-added, higher productivity, improved efficiency, breakthroughs in science, health, and high-paying jobs;
- EE projects will collectively pull a market demand for more innovation in technologies and methods, thereby generating new knowledge and/or intellectual property to be registered and/or licensed in the Philippines;
- A growing number of EE projects will employ cloud-based energy monitoring and management systems and other IoT technologies to perform data analytics and automated energy management and/or demand-response functions as building blocks of smart-grid infrastructure; and,
- EE projects generate more jobs than other energy projects or other infrastructure development activities for the same amount of stimulus or investment funding.
PE2 also attached to the letter a five-year summary of its positions on fiscal incentives for energy efficiency projects.
A slide excerpt from the PE2 presentation on fiscal incentives for EE projects on 19 October 2021 was attached to the PE2 letter to DOF on 12 November 2021. (Image: PE2)
Ablaza stressed that, even if PE2 set aside the climate and economic impacts for a moment, the tax flow impacts of incentivizing energy efficiency should allay DOF fears that excise tax collections from imported fossil fuels will suddenly decline from energy saving projects:
- While energy efficiency will reduce fossil fuel dependence on the pathway toward the net-zero targets and Paris climate obligations, the reduction will be gradual (through a 20–30-year phase-down), and that energy efficiency in the first 5-10 years will be implemented more aggressively in the end-use sectors that are less dependent on fossil fuels.
- PE2 believes that the additional income tax revenues caused by energy savings would be more than enough to compensate for the foregone DOF revenues due to the gradual reduction in excise taxes on imported fossil fuels attributed to energy efficiency investments.
- PE2 has also demonstrated that for every PHP 1.00 in fiscal incentives for energy efficiency, at least PHP 2.00-5.00 flows back to the national treasury through incremental income tax collections arising from increased business or economic activity arising from energy savings. These cash reflows exclude the social, economic and environmental returns, which should improve the total return to a double-digit PHP figure.