Japan: Renewable Energy

Since the introduction of the FIT (Feed-in Tariff) mechanism in 2012, the renewable energy industry has substantially developed.  The ratio of renewable energy out of all electricity generation increased from 10.4% in 2011 to 19.8% in 2020.  The following is the composition out of all electricity generation in 2020: solar 7.9%, hydro 7.8%, biomass 2.9%, wind 0.9% and geothermal 0.3%.

The Ministry of Economy, Trade and Industry (METI) and its agency, the Agency for Natural Resources and Energy, are responsible for the energy policy.  The Minister of METI has the authority to issue certification to renewable power projects which can enjoy the FIT or FIP (Feed-in Premium) mechanism.

OCCTO (Organization for Cross-regional Coordination of Transmission Operators, Japan) is a public entity which was incorporated under the Electricity Business Act, and plays different roles, including gathering the renewable power facilitation charges from the electricity retailers (which such retailers have received from consumers) and distributing the compensation payment to the transmission utilities (the obligated purchaser) under FIT and the premium payment to the power generators under FIP, holding auction processes to select certain large scale solar, onshore wind and biomass power operators which can enjoy FIT or FIP mechanism, and managing the reserves deposited by power operators for the decommissioning of solar projects.

For offshore wind projects, in addition to METI, the Ministry of Land, Infrastructure, Transport and Tourism (MLIT) has the authority to grant the certification to dominantly use a certain ocean area for the purpose of offshore wind project.

The Ministry of the Environment is responsible for the environmental policy, and operates subsidy programs for certain renewable power projects for environmental purposes.

To obtain certification by METI and enjoy FIT/FIP in certain large-scale solar, onshore wind and biomass power projects, one must apply for and win an auction process held by OCCTO.  Other renewable power projects (certain small solar, onshore wind and biomass power projects, small and medium hydro power projects and thermal power projects) may obtain METI’s certification and enjoy FIT/FIP without an auction process (but needs to satisfy certain requirements for METI’s certification).

For offshore wind projects, it is necessary to apply for an auction process held by METI and MLIT, and win the auction and obtain certification by METI and MLIT, in order to dominantly use a certain designated ocean area for a period up to 30 years and enjoy FIT for 20 years.

As mentioned in item 1. above, since the introduction of the FIT mechanism in 2012, the renewable energy industry (especially solar and biomass) has substantially developed.  The ratio of renewable energy out of all entire electricity generation increased from 10.4% in 2011 to 19.8% in 2020.  The following is the composition out of all electricity generation in 2020: solar 7.9%, hydro 7.8%, biomass 2.9%, wind 0.9% and geothermal 0.3% in 2020.  On the other hand, as in Japan, it is politically difficult to restart or newly construct nuclear power plants after the Fukushima Accident, thermal power generation still constitutes 74.9% of all electricity generation.  While Japan is surrounded by ocean, the development of offshore wind is not sufficient so far, and it is expected to develop materially.

The Sixth Fundamental Energy Plan determined by the Cabinet in October 2021 stated that the government aims to procure about 50 to 60% of total power generation from renewable power in 2050, and it will continue the designation of ocean areas for 1 million kW offshore wind projects per a year for 10 years.  It also stated that the government aims to achieve 10 million kW offshore wind project developments by 2030, and achieve 30 to 45 million kW offshore wind project developments by 2040.

The Japanese government supports the development of the renewable industry by way of the FIT/FIP mechanism and subsidies, etc.  There is no government-owned renewable company, except for JOGMEC (Japan Oil, Gas and Metals National Corporation), of which its main roles are financial support for oil, gas and metals projects, will play roles for supporting geothermal power development and CCS (Carbon Capture and Storage) projects.

In 2012, the Japanese government introduced Feed-in Tariff (FIT) for renewable power projects, including solar, wind, biomass, geothermal and small and medium hydro projects, under Renewable Energy Act.  Under FIT, operators are entitled to sell the electricity to a general transmission utility at a fixed price for a fixed period (typically 20 years).  The price is determined by a governmental committee annually, based on the type of generation and scale, and based on the cost plus margin concept.  To enjoy FIT, operators need to obtain the certification issued by the Minister of METI, by showing the grid connection title, land use title and other matters to properly operate such renewable power project.

In April 2022, the amendment to the Renewable Energy Act became effective, and thereafter Feed-in Premium (FIP), instead of FIT, applies to certain large scale solar and biomass projects.  Under FIP, power operators are entitled to receive a certain premium from OCCTO.  The amount of such premium is the difference between the standard price and the reference price.  The standard price is determined by a governmental committee, based on the cost plus margin concept, depending on the type of generation and size.  The reference price is determined monthly as the expected revenue from the electricity market and the non-fossil fuel value market.  The power generators which have METI’s certification under FIP are expected to sell electricity and non-fossil fuel value through the wholesale market (JEPX) or through a bilateral power purchase agreement with an electricity retailer, and receive the premium from OCCTO.

In 2018, the Japanese government enacted the Act on Promoting the Utilization of Sea Areas for the Development of Marine Renewable Energy Power Generation Facilities, in order to facilitate the development of offshore wind projects.  This Act enables an offshore wind power generator which has won the bid process to dominantly use a certain designated ocean area for the purpose of the offshore wind project for a certain period up to 30 years.

In addition to the FIT/FIP mechanism under the Renewable Power Act, there are multiple subsidies for the development of renewable projects, granted by METI, Ministry of Environment, or local governments, etc.  In addition, there are some tax treatments preferable for renewable power projects, such as the reduction of tax base of certain renewable power assets under fixed assets tax.

A material number of large energy consumer companies are trying to reduce the carbon emission.  Such large consumers are required to report the volume of its carbon emission every year to the government under the Act on Promotion of Global Warming Countermeasures and Energy Conservation Act.  Enhanced pressure on companies from investors and customers also have brought strong motivation to reduce the carbon emission.  Such companies are trying to expand the procurement of electricity generated from renewable power projects, and some of them are willing to participate in such procurement in ways such as on-site and/or off-site corporate PPAs.  A substantial number of industrial consumers are trying to obtain a certification from private initiatives such as RE100.

Key contracts typically include PPA (Power Purchase Agreements), grid connection agreements, land lease agreements, EPC agreements, O&M agreements, fuel supply agreements (for biomass projects), asset management agreements, and finance agreements.

In FIT projects, PPA is a common format prepared by an electricity transmission utility, which is obligated to purchase the generated electricity from an operator; in FIP and other non-FIT projects, as no one is obligated to purchase the generated electricity from an operator, we expect bilateral negotiated PPAs will increase.

Grid connection title and land use title are requirements to obtain FIT/FIP certification issued by METI.  It is often necessary for a project developer to bear certain construction costs necessary for the grid connection.

For offshore wind projects, the contribution to the local economy (including contribution to local employment, development of factories and investment to local community, use of local logistics) and contribution to the Japanese economy (including the increase of employment  in Japan, to what extent factories will be developed in Japan, and to what extent logistics in Japan will be used) are a part of the factors to be considered and evaluated in the auction process.

Solar power generators which enjoy FIT or FIP are required to reserve expenses necessary for decommissioning.  Such reserve is generally held by OCCTO, and in only limited circumstances, is it allowed to have the reserve in the project operator’s bank account.

Offshore wind power generators are required to conduct the decommissioning of the plants upon the expiry of the use of a certain ocean area.  Such generators are required to prepare the decommissioning plan in the business plan submitted to METI and MLIT in the auction process.

In December 2021, the result of the auction processes in three ocean areas was announced, and the consortiums lead by the same company won all of them.   Offshore wind projects are expected to develop most in the coming years, and the cost reduction competition among bidders will become stronger in the future.

In addition to the renewable projects relying on the FIT/FIP mechanism, these days we often see the projects not relying on such mechanism; such projects often use on-site and off-site corporate PPAs and/or virtual PPAs, or a subsidy program provided by a governmental agency.

There are a variety of players which are active in developing the renewable projects, including electricity/gas utilities, trading companies, oil companies, financial institutions, new comers and their affiliates.

Auctions to select an offshore wind project operator will be held in several ocean areas each year.

Solar projects which do not rely on FIT or FIP, such as corporate PPAs and virtual PPAs, are expected to increase, as FIT will be usable in only small projects and the creditworthiness of consumers which are purchasers in corporate PPAs is often higher than that of electricity retailers which become purchasers under FIP.

Hydrogen power projects (including hydrogen generation by electrolysis, hydrogen transportation and storage, and pipeline supply) are expected to develop.  The government plans to provide JPY 200 billion subsidies to hydrogen projects in total to develop the supply chain of hydrogen through a subsidy program called Green Innovation Funds.

The first issue is the reduction of the purchase price under the FIT and FIP mechanism.  In 2012, the purchase price under FIT for industry case solar projects was JPY 40 per kWh, but in 2022, it was less than JPY 10 per kWh.  The significant reduction of the purchase price caused more projects not to rely on the FIT or FIP mechanism, rather rely on corporate PPAs, etc.

The second issue is the grid connection.  Renewable power operators must secure the grid connection to obtain the FIT/FIP certification from METI.  Especially for wind projects, suitable areas are remote from the existing grid lines, so depending on the areas, developers have difficulty securing the grid connection without bearing high-price grid construction costs.

The third issue is curtailment.  In certain transmission areas, renewable power operators must accept unlimited curtailment without any compensation.  Due to the increase of renewable power projects, power generators are more often subject to curtailment than before.

The fourth issue is procurement of land.  It is becoming difficult to find and procure land suitable for solar projects, due to the significant development of solar projects in the last about 10 years and the mountainous land form of Japan.  Developers will need to procure land in a more creative way, such as collaboration through use of agricultural land or building rooftops.

For geothermal projects, much of the land which is suitable for them is located in a national park or a place close to a hot spring area, which is popular for tourists in Japan, and therefore, geothermal power generators face difficulty in obtaining approval of a governmental authority under the natural park act or consent of a local community under the hot spring act.

Although we do not see a very clear impact of Covid-19 on the renewable industry, the investments by foreign investors in the Japanese renewable industry might have been negatively affected due to the difficulty of entering Japan due to the Covid-19 border control.  Such border control is being relaxed from March 2022.

A variety of foreign investors in Europe, North America and Asia have invested in the Japanese renewable industry, especially in solar projects.  Such investments have facilitated the development of the Japanese renewable industry, and have reduced the costs in the industry.

Through the introduction of FIT in 2012, the Japanese government has facilitated the development of renewable power projects.  The government continues its efforts to develop renewable power projects by continuing the FIT/FIP mechanism, although the increase of costs borne by consumers is becoming a larger public concern, and the amount of the purchase price under FIT and the amount of the premium under FIP is becoming and will become smaller almost every year.

In addition, the Japanese government requires electricity retailers to procure at least 44% of electricity from non-fossil fuel resources by 2030, under Act on Sophisticated Methods of Energy Supply Structures.

The Japanese government also requires a certain large energy consumer to report annually to the government the volume of carbon emission discharged by such consumers, under Act on Promotion of Global Warming Countermeasures and Energy Conservation Act.

In advance of COP26, in April 2021, the Japanese government enhanced the target of its 2030 carbon emission reduction (in comparison with that in 2013) from 26% to 46%.  The Japanese government determined the sixth energy fundamental plan in October 2021, and included in it plans development of renewable power projects (including the target to  procure 36 to 38% of the total power generation from renewable power in 2030, and procure 50 to 60% of the total power generation from renewable powers in 2050), continued use of nuclear power generation as well as the development of hydrogen and ammonia, and CCS.

As mentioned above, the Japanese government increased the target of its 2030 carbon emission reduction compared with 2013 from 26% to 46%, in April 2021, before COP 26.   The Japanese government also announced its aim to achieve net carbon zero by 2050, in October 2020, and submitted the strategy plan to achieve it to the United Nations in October 2021.