The FIT is a key element in the Renewable Energy Act of 2008 (RA 9513). The Act grants incentives for the installation of new generation plants with an officially declared target of 4,000 MW over the medium term. Aside from the FIT scheme, the RE Act also grants incentives to eligible RE producers that include a seven-year income tax holiday, with a 10% corporate income tax after the holiday; duty-free importation of inputs; and tax credits on locally-produced equipment. In short, new RE producers will get tax breaks to entice them to install new capacity.
Here in the Philippines, the FIT price is to be paid for by monies collected from consumers (the power distributor collects these monies when it bills the end-user, and passes them on to the operator of the transmission grid, who in turn pays the new power producer). The FIT is therefore a subsidy scheme expressly paid for by consumers. The consumers will see their contribution to the financing of the FIT scheme through an item in their bill called the FIT-Allowance (FIT-All).
Because each FIT producer is guaranteed that it can sell what it wants to the grid, the FIT scheme has effectively a “take-and-pay” provision somewhat similar to the “take-or-pay” provisions in independent power producer (IPP) contracts of producers who installed new capacity in the 1990s. The take-or-pay contracts result in an item in the retail consumer’s electricity bill called the purchased-power adjustment (PPA).
These provisions guarantee a certain rate of return on investment for the power producers. The guarantee is backed by imposing an obligation on the retail consumer to pay for something he did not consume – in the case of FIT, for the subsidy to RE producers, and in the case of IPPs with take-or-pay, for installed capacity whether electricity was produced or not.