Philippine banks are enabling the 'detour' in the country's transition to sustainable and affordable energy. Read more:
Like many small business owners, Salvador “Aboy” Castro, CEO of renewable energy developer Cleantech, has had his fair share of loan rejections from banks. In 2016, his company managed to establish a solar farm thanks to a partnership with a private equity firm.
“Commercial banks, even if you have a power purchase agreement [with a power distributor], they are very conservative. It can still be hard [to secure financing],” he said. Justin Reginald Nery, a professor at the University of Asia and the Pacific, who published a paper on the sustainable financing practices of banks, explored this phenomenon. Banks have also been averse to financing independent merchant renewable projects, as they supposedly remained “risky,” he found.
The latter could be in the form of a partner with technical or financial capacity and one that could demonstrate the ability of the RE proponents to fund the equity portion of their project. Independent renewable energy merchants tended to not have both, or have just one of these risk mitigants. showed that loans extended for electricity, gas, steam, and air-conditioning supply grew more than three times in the period June 2014 to October 2022, from P372 billion to as much as P1.1 trillion.
When asked how much exposure the bank had on RE projects, the bank said it would disclose the full details in its 2022 annual report, set to be released by April. A loan spread is the difference between the lending and borrowing rates of banks. The spread is a key determinant of a bank’s profitability as a higher differential means higher income.
The BSP specifically forced banks to embed sustainable financing principles into their operations, risk management frameworks, and training of their board members. By April 2023, banks are expected to have embedded the provisions of the circular in their practices. According to the regulator, a number of factors kept banks from complying with the circular. These include the lack of technical knowledge to craft and implement sustainability principles, difficulty in identifying and collecting relevant data that may help them measure environmental and social risk factors, and the cost of investment in such efforts.
Since the report’s publication in May 2022, other coal companies have also raised money by issuing bonds. Meanwhile, 45% or P17.4 billion was allocated to investments in “LNG projects and related assets.” Only a third of the amount disbursed was allocated to investments in battery storage, and less than 1% was allocated to solar power plant projects.FGP Corp., a subsidiary of First Gen Corp., reported to the Philippine Stock Exchange in 2021 that it had drawn a $308-million, six-year term loan from BPI, BDO, PNB, and Sumitomo Mitsui Banking Corp.
But for Avril de Torres , executive director of Center for Energy, Ecology, and Development, the organization behind the WFC reports, banks’ financing decisions were “furthering deceptions” of the fossil gas industry. “This means they are enabling the detour from our energy transition,” she said. In April 2022, RCBC and BPI loaned P13.7 billion to ACEN to refinance an existing P9.8-billion loan of a wholly-owned subsidiary, South Luzon Thermal Energy Corp.
ACEN adopted the principles of the Asian Development Bank ’s Energy Transition Mechanism , which was launched at the 26th United Nations Climate Change Conference of the Parties or COP26 in November 2021. “From a bankers’ perspective, the guarantee of 10 to 15 years of additional operation –regardless of other market developments – seems justified as a way to deliver traditional investment returns,” the report said. “However, what is overlooked is that any decision to guarantee a full economic life to a high-carbon emissions facility works against the goal of creating focused incentives for rapid transition.”.
De Torres said these developments showed that banks remained vague on their coal divestment policies. “ you are financing an energy transition loan, you are still refinancing a coal project…so how can you say you are really divesting from coal?” she added. The latest BSP regulation indicated a less committed stance toward investments in RE projects.
However, under the “investment” pillar, the BSP defined low-carbon energy as a term that includes “energy efficiency, renewable energy , natural gas, and nuclear power.” The European Union’s sustainable finance taxonomy also allowed natural gas projects, albeit with certain conditions. Critics have contested this provision, pointing out that natural gas, a fossil fuel, should not be considered sustainable.
“BSP can really just issue those guidelines. They could set an example transition on how to manage transitions in terms of physical risks, but in so far as directing things [at banks]…that’s kind of blurry. It’s a regulator-regulatee kind of dynamic,” Apanada said. Nery of the University of Asia and the Pacific, who published a paper on the sustainable financing practices of banks, echoed this finding. “As for-profit banks, they would rather pay such penalties instead of risking losing money,” he said.
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