The Philippine Department of Justice (“DOJ”) has issued an opinion to the effect that the exploration, development and utilization (“EDU”) of solar, wind, hydro and ocean or tidal energy sources is not subject to the forty percent (40%) foreign equity limitation under Article XII, Section 2 of the Philippine Constitution.

Prior to the opinion, the Philippine Department of Energy (“DOE”) has required that corporation applicants for renewable energy (“RE”) contracts (subject to exceptions in case of geothermal resources and biomass) be at least sixty percent (60%) Filipino-owned. This is based on the understanding that exploitation of RE resources constitutes EDU of natural resources which, under Article XII, Section 2 of the Philippine Constitution, may only be undertaken by the State or by Filipino citizens or corporations or associations at sixty percent (60%) of whose capital is owned by Filipino citizens. This limitation has hampered foreign investments in and, consequently, the development of, the RE sector in the Philippines. Notably, where an industry or undertaking is nationalized or partly nationalized, aside from equity ownership limitations, foreigners are also prohibited from participating management, operation, control and administration of the enterprise. Thus, foreigners have, to date, been limited to the role of passive investors in RE undertakings.

The DOJ opinion which was issued at the request of and is addressed to the DOE. The DOJ cited the following as basis for its opinion:

• Solar, wind, hydro and ocean or tidal energy sources are inexhaustible and, therefore, not within the ambit of the term “natural resources” in Article XII, Section 2 of the Philippine Constitution. The reason behind the imposition of foreign ownership restrictions, i.e., to prevent depletion of exhaustible resources by foreigners, does not apply to inexhaustible energy resources.

• While Article XII, Section 2 makes reference “all forces of potential energy” as among the natural resources subject to the restriction, such term should be interpreted to exclude kinetic energy or “energy in motion”.

• Its interpretation is consistent with the Constitutional policies of advancing the right of the people to a balanced and healthful ecology and developing a self-reliant and independent national economy, as the development of RE (which requires foreign capital, technology and expertise) will provide the country with clean energy not subject to price fluctuations and market forces to which fossil fuels are vulnerable.

The DOJ, however, noted that its opinion is subject to the following limitations: (i) the forty percent (40%) foreign equity limitation would remain unless the implementing rules and regulations of the Renewable Energy Act (Republic Act No. 9513), which restate the limitation, is amended; and (ii) the use of hydro and ocean or tidal energy sources, if the same is directly harvested from the source by foreign nationals or entities, would still not be permitted based on the Water Code and existing jurisprudence.

The DOJ opinion paves the way for the issuance by the DOE of amended implementing rules and regulations to remove foreign equity ownership restrictions in respect of entities engaged in the EDU of solar, wind, hydro and ocean or tidal energy sources.

Read the maiden issue of The SyCipLaw ESG Bulletin here or via this link.