Philippines: Energy Transition and Climate Resilience

OBJECTIVE

The Program Development Objective is to support the Government of the Philippines’ reforms to (1) scale up adoption of clean energy technologies; (2) increase the security, flexibility, and competition of electricity markets; and (3) improve water management across water uses.

DESCRIPTION

The proposed Climate Policy-Based Financing (CPBF) will co-finance the second operation of the programmatic Energy Transition and Climate Resilience Development Policy Loan (DPL) series led by the World Bank (WB). The Program supports the Government of the Philippines (GoP) in advancing the clean energy transition and strengthening water security and climate resilience. The first operation was approved by the WB on March 31, 2025 and became effective on June 8, 2025, while the second operation was approved by the WB on June 25, 2026. Building on the policy and institutional reforms initiated under the first operation, the proposed CPBF supports the next phase of reforms aimed at accelerating renewable energy deployment, improving electricity market efficiency, flexibility and competition, and strengthening integrated water resources management and water service delivery. The Program provides continuity in reform implementation, reinforces institutional capacity, and sustains policy dialogue on climate, infrastructure, and private sector participation. These reforms contribute to climate mitigation by reducing emissions from the energy sector and to climate adaptation by enhancing the resilience of energy and water systems to climate-related risks. 

The Program is organized around three reform areas:

Reform Area 1: Scaling Up Adoption of Clean Energy Technologies. This reform area supports measures to accelerate private investment in renewable energy, including offshore wind, hydropower, geothermal, and solar energy, while promoting energy efficiency and transport electrification. The reforms aim to strengthen regulatory certainty and market incentives for clean energy investment and support the Philippines' decarbonization objectives.

Reform Area 2: Increasing the Security, Flexibility, and Competition of Electricity Markets. This reform area supports policy and regulatory measures to improve market design, enhance system flexibility, strengthen ancillary and reserve market arrangements, facilitate greater integration of renewable energy, and increase competition among electricity suppliers. These reforms seek to improve energy security, reduce system costs, and enable a more reliable transition toward a low-carbon power system.

Reform Area 3: Improving Water Management Across Water Uses. This reform area supports reforms to strengthen water governance, improve coordination across competing water uses, and enhance water supply and sanitation service delivery, particularly in underserved and climate-vulnerable areas. The reforms are intended to improve water security, resilience to floods and droughts, and the performance of water service providers while laying the foundation for more integrated sector management.

Progress Update on Reform Implementation

The proposed CPBF marks AIIB’s first CPBF operation in the Philippines and aligns with the second phase of the two-phase DPL led by the WB. The renewable energy market is now operational, preparations for offshore wind auctions are initiated with registration opened for pre-qualification of bidders. Similarly, the reforms rolled out contributed to increasing the share of RE from 30% to 32% (against a 42% target by 2027). Electricity market reforms, including the reserve market and expanded retail competition, are structurally established, while early steps have also been taken to promote electric vehicle adoption.

In contrast, water sector reforms are at a more incremental and operational stage. The Philippines already has an established reform framework, including the PWSSMP, but significant gaps remain in inter-agency coordination, local utility performance, tariff-setting, financing allocation, and bulk water regulation. Early progress is nonetheless emerging through utility-level reforms, with the number of LGU-run water service providers that are financially sustainable to increase from fewer than 10 to 100. This growth reflects a reform agenda focused on strengthening LGU-run service providers, improving targeting of public support, and laying the foundation for more coherent sector governance. Their full effects are expected to materialize progressively through downstream investment programs and subsequent operations, including those supported by the World Bank and AIIB. If enacted, the proposed law creating the Department of Water Resources would further consolidate these efforts and support a step change in sector coordination and implementation.

Overall, while energy sector reforms are delivering early results and electricity market reforms are in place pending impact, water management reforms are laying the institutional groundwork for future investments and outcomes through 2027.

Institutional Arrangements

The Department of Finance (DOF), through its International Finance Group, will serve as the Program Executing Agency and will coordinate overall implementation, monitoring, and reporting. DOF has relevant experience in managing policy-based financing operations, including coordination across government agencies and oversight of policy actions. Sector-specific reforms will be carried out by the responsible agencies in accordance with their respective mandates, including the Department of Energy (DOE), Energy Regulatory Commission (ERC), Department of Environment and Natural Resources (DENR), Department of the Interior and Local Government (DILG), Department of Economy, Planning, and Development (DEPDev), and National Water Resources Board (NWRB). AIIB will maintain regular engagement with DOF and relevant agencies to monitor progress, support implementation as appropriate, and facilitate timely reporting. Regular consultations and joint reviews will help identify implementation issues and sustain reform progress.

Financing Modalities

The proposed CPBF is co-financed with the WB.

Analytical Work

The policy actions under the Program build on and consolidate the policy foundations established under the first operation led by the World Bank, advancing them into the next phase of implementation. The design of these policy actions is further reinforced by coordinated technical and financial support from development partners like IFC, UNICEF, AusAID and ADB.

ENVIRONMENTAL AND SOCIAL INFORMATION

Applicable Policy and Environmental and Social Instrument. The proposed CPBF will be structured as a single-tranche operation for AIIB and parallel co-financing with the WB, therefore, AIIB's Environmental and Social Policy (ESP), including the Environmental and Social Exclusion List (ESEL) and provisions related to CPBF set forth in Section 16 of the ESP, are applicable to this Program, and the provisions on Environmental and Social (ES) categorization in the ESP do not apply to this Program. The Program focuses on policy and institutional reforms that do not entail involuntary resettlement or impact the lives of Indigenous Peoples. However, some downstream reform activities resulting under the Program may lead to indirect, short-term, and temporary adverse impacts. The Bank conducted due diligence based on the assessment of ES aspects undertaken by the WB under the first policy loan and an ES matrix that has been prepared covering the Program’s policy actions. This outlines the potential direct and indirect impacts of each prior action, along with corresponding mitigation measures. ES matrix will be disclosed on the Bank’s website in a timely manner to inform the Member’s consultation. 

Environmental and Social Aspects. The policy actions supported under this Program are expected to generate positive poverty and social outcomes in the short, medium and long term. Additional benefits are expected through reduced health risks from air, soil and water pollution and water-borne illnesses, solid and hazardous waste and through job creation in renewable energy, energy efficiency, and water service delivery, with potential to enhance women’s participation in formal employment and decision-making roles in the water sector. The social impacts of reducing GHG emissions under the Program are assessed as largely positive, with long‑term welfare gains outweighing short‑term adjustment costs. The Program supports intergenerational equity, improves public health outcomes, and strengthens social and climate resilience, while existing national systems, including mechanism for lodging and managing grievances, provide adequate capacity to manage and mitigate potential social risks associated with the energy transition. In addition, the Program aims to reduce gender gaps in the water sector, through Reform Area 3, which mandates women's substantive participation in governance by promoting women’s leadership and gender-sensitive, merit-based recruitment, while improving WASH access that particularly affects women and girls. 

Program Grievance Redress Mechanism (GRM) and Monitoring Arrangement. Individuals and communities who believe they are adversely affected by the Program may submit complaints to the responsible government authorities and the appropriate local/national grievance mechanisms. The information about the GRMs to be used and AIIB’s Project-affected People’s Mechanism (PPM) will be disclosed in an appropriate manner. Under the Program, the DOF, as the Program Executing Agency, will report to AIIB on the implementation progress. AIIB, working in coordination with WB, will conduct monitoring periodically to ensure that the policy actions continue to be put in place. At the Program’s closure, the AIIB team will verify the achievement of outcome indicators as a medium-term policy impact. More details on monitoring and reporting arrangements will be discussed and determined with DOF during program appraisal.