Japan renewable energy update

Summary of recent developments

The Act to Partially Amend the Electricity Business Act and other Acts to Establish a Resilient and Sustainable Electricity Supply System enacted in June 2020 (scheduled to be enforced in April 2022, with a few exceptions) (the “Resilient Energy Supply Act”) has resulted in significant legislative amendments affecting the renewable energy sector in Japan and the Electricity Business Act.

In addition, under the Offshore Renewable Energy Act enacted in 2018, designation of Promotion Areas to develop offshore wind power projects and the auction process for the public tender to select eligible offshore wind power producers are currently in progress. The first public tender for the selection of eligible offshore wind power producers pursuant to this Act was officially launched on 24 June 2020, opening a call for applicants until 24 December of this year.

Changes in government support for renewable energy

The Resilient Energy Supply Act , which amends the Act on Special Measures Concerning Procurement of Electricity from Renewable Energy Sources by Electricity Utilities (FIT Act) and the Electricity Business Act, etc., will result in major changes in government support related to the renewable energy sector in Japan. The key changes are: (i) the establishment of the Feed-in Premium (FIP) regime, a market-linked renewable energy introduction support measure; (ii) the introduction of a system to secure funds for the decommissioning cost of renewable energy power generation facilities; and (iii) the introduction of an invalidation system for FIT certification for projects whose operations have been delayed for an unreasonable period of time, each of which is described in further detail below.

(i) Introduction of the Feed-in Premium regime

For certain categories of competitive power generation projects, such as large-scale solar power and wind power projects, the FIP regime, which is a market-linked support scheme, will apply, in addition to the existing Feed-in Tariff (FIT) regime. For smaller scale power generation projects , such as hydroelectric power, geothermal power and biomass power projects, the FIT system is likely to be maintained in parallel with the FIP system.

The FIP regime is a program that allows power producers to freely sell generated electricity into wholesale electricity trading markets or through direct negotiation, and guarantees such power producers investment incentives by enabling them to receive a certain premium on top of the market price for the electricity that they generate. The premium (unit price) is the difference between the standard price of power purchase determined in advance (FIP price) and the price based on the market price (Market Reference Price). The FIP regime provides two methods to set the FIP price: (a) a price based on the recommendation of the Procurement Price Calculation Committee as in the case of the current FIT price and (b) a price determined by a bidding system. The Market Reference Price will fluctuate from time to time to reflect the market price. The diagram below provides an overview of the total amount of power sales revenue, the FIP price, and the Market Reference Price.

(the Japanese original of the diagram is on a website of the Ministry of Economy, Trade and Industry (METI)

(ii) Mandatory decommissioning cost reserve fund

For specific renewable energy power generation facilities designated by the Minister of METI (FIT-certified solar power generation facilities of 10 kW or more are likely to be targeted), approx. 5% of capital cost (including generation system cost, interconnection cost and land reclamation cost) will be required to be reserved as the eventual decommissioning cost of such facilities, from 10 years prior to the end of the applicable procurement period. As a structured method of reserving funds, in principle, funds will be withheld at the source instead of allowing each power producer to maintain internal reserves. More specifically, a portion of the FIT payment will be withheld on a regular basis and reserved by the Organization for Cross-regional Coordination of Transmission Operators, Japan (OCCTO) as the decommissioning cost. The Japanese government, however, plans to exempt certain projects from this requirement, including projects that are deemed to have secured an adequate level of financing to fund their decommissioning.

(iii) Introduction of the invalidation system of FIT certificates for delayed projects

Following the introduction of the FIT regime in 2012, METI set particularly favorable FIT prices for the initial few years. The burden on the public of subsidizing the FIT levies has become a major problem due to projects whose commercial operation was intentionally delayed or involved an unreasonably long period of time (in particular, solar power generation facilities). In order to address this issue, the FIT Act in 2016 (effective in April 2017) introduced the three year deadline (from the date of the project’s FIT certification) for commencement of commercial operations METI also imposed additional measures in December 2018, including setting a deadline for commencement of commercial operation based on the date of the Interconnection Construction Start Application.

In addition, to reduce the risk of increase in the public burden from projects that fail to commence operation, and the negative impact of such projects on the use of grid connection by new power producers, a new system will be introduced under which METI will invalidate FIT certificates if power plants do not start commercial operations within a specified period following the receipt of the FIT certificate.

This new system which is expected to come into force in April 2022, will apply not only to projects that have received the FIT certificates on or after April 2022, but also to those that received the FIT certificates before April 2022.

Offshore wind power projects

Based on the Act of Promoting Utilization of Sea Areas in Development of Power Generation Facilities Using Maritime Renewable Energy Resources (the "Offshore Renewable Energy Act") enacted in December 2018, the designation of Promotion Area for offshore wind energy projects and the auction process for the initial public tender to select eligible offshore wind power operators foreach Promotion Area are currently in progress (please see the overview of the designation process).

The area offshore Goto City in Nagasaki Prefecture was designated as the first Promotion Area in December 2019, after which four areas, mainly in the offshore area of the Tohoku region, were designated as the Promotion Area in July 2020. For the offshore area of Goto City, the auction process to select the offshore wind power operator was launched on 24 June 2020. The project operator is expected to be selected in mid-June 2021 from among the candidates who apply by 14 December 2020.