Japan Update: Battery storage development projects

In order to support the continued decarbonization of the Japanese energy market, the Organisation for Cross-regional Coordination of Transmission Operators, Japan (OCCTO) is implementing a new program referred to as the “long-term decarbonization of electric power auction” (choki datsu-tanso dengen auction) (the Program).

On 5 April 2023, the Japanese Ministry of Economy, Trade and Industry (METI) announced the contemplated auction rules for the Program. The Program will provide developers of a qualifying project with subsidies equivalent to the “fixed costs” of the applicable project for a period of 20 years thereby mitigating the risk to potential developers. Storage battery facilities of at least 10 MW capacity that can be independently connected to the grid (Stand-alone SB Facilities) are permitted to participate in the Program.

Background

Japan has seen a tremendous increase in the development of renewable energy projects over the past few years, in particular solar and wind projects. It is hoped that through the development of Stand-alone SB Facilities, electricity generation fluctuations and corresponding strain to on the grid that is caused by these renewable projects can be better managed and generation curves levelled.

The expectation is that Stand-alone SB Facilities will balance power generation by receiving excess electricity when production exceeds demand, and outputting electricity when demand exceeds production.  

Storage Battery Regulatory Framework

Pursuant to an amendment to the EBA, which came into effect as of 1 April 2023, Stand-alone SB Facilities are treated as independent “power generation facilities” (note that a storage battery facility that is attached to a power generation facility will continue to be treated as “part of the power generation facility” under the EBA). This means that a Stand-alone SB Facility will be able to generate revenue through the purchase and sale of electricity, whether via JEPX or a PPA with a specific retailer/power generator. The Program will provide subsidies to mitigate development and operational cost risk for developers, which OCCTO hopes will encourage the development of Stand-alone SB Facilities.  

Auction Process and Available Subsidies

The Program will provide subsidies equivalent to the “fixed costs” of a qualifying project, which would include a Stand-alone SB Facility, for a period of 20 years.  

According to the announcement from METI on 5 April 2023, the initial auction will commence in January 2024 (and business operators planning to participate in the auction are to pre-register from October 2023). 

The auction rules are, in summary, as follows:

• Participants will be required to demonstrate its capability to develop and operate the target project by submitting a business and financial plan, interconnection examination results and construction plans (if any). 
• There is no deposit or security requirement.  
• Participants will submit to the auction the proposed capacity (kW) of the project and the anticipated fixed cost per year to maintain the capacity. The fixed cost of each project will be calculated based on the following:

1. Capital costs (i.e., construction costs, interconnection costs, decommissioning costs);
2. Operation and maintenance costs (i.e., fixed asset tax, labor costs, repair and maintenance costs, wheeling charge, business tax, other costs such as operation management consignment fee); 
3. An amount equal to 5% of the capital expenditures necessary to develop the project, reflecting the WACC of the project development. 

• Each participant will be required to submit a cost breakdown, with supporting evidence, of these costs estimates.   
• Projects will be selected primarily based on the pricing. The auction method is the multi-price auction and the subsidy amount will be individually determined based on each participant’s own bidding price.

Projects selected to participate in the Program will be entitled to receive a monthly subsidy (as described in more detail below) from OCCTO for a period of 20 years and in exchange will be obliged to maintain the operational capacity of the project in a manner consistent with the submitted terms for that period. A failure to so maintain the project may result in financial penalties being levied.  

The Participating projects will be required to report its revenues to OCCTO. The subsidy entitlement of the project will be reduced based on the revenues generated by the project based on the below formula: 

90% × (revenue – actual variable costs)

Conclusion

Stand-alone SB Facilities are expected to play a key role in Japan’s energy transition. 

Considering the Program is scheduled to commence in January 2024, it is expected that METI/OCCTO will finalize the Program terms and provide clarification as to Program eligibility requirements and non-conformance penalties in the near future. We will continue to monitor and update. 

For more information, please contact Peter Armstrong and Takanobu Morita