Renewable Alert Letter 36: 32-40 yen Projects: Risk of Lower Applicable Procurement Prices

Energy & Infrastructure Alert | October.23.2018

日本語:32円~40円案件・適用調達価格引き下げの危機 

On October 22, 2018, METI announced a call for public comment on ordinances partially amending the FIT regulations.  This is in relation to a meeting held on October 15, 2018 by METI's Subcommittee on Renewable Energy Large-Volume Introduction and Next-Generation Power Network, at which it was announced that a significant reduction in applicable procurement price will be implemented for those pre-COD projects that have secured a procurement price of 32 to 40 yen and to which the so-called "three-year rule" (see Energy & Infrastructure Alert of August 4, 2016) does not apply.

Specifically, the Subcommittee introduced a new rule establishing new criteria for "the date on which the transmission and distribution business operator receives an application for commencement of grid-connection construction from the operator" ("Grid-connection Work Application Date") and requiring all PV projects of 10kW or more that have not commenced operations and that have been granted an old FIT approval on or prior to March 31, 2015 and executed an interconnection agreement on or prior to July 31, 2016 to submit a grid-connection work application to the transmission and distribution business operator.  If the Grid-connection Work Application Date does not fall before the end of March 2019 for FY2012 to FY2014 approved projects (32 to 40 yen projects), the applicable procurement price will be the price that was in effect two years prior to the Grid-connection Work Application Date. (Although the summary provided in the call for public comment ("Public Comment Outline") targets only FY2012 to FY2014 approved projects, annual expansion has also been proposed by the Subcommittee.)

For example, if the Grid-connection Work Application Date for a project falls in April 2019, the FY2017 procurement price (procurement price for non-bidding scale projects; the same hereinafter) of 21 yen will be applied, and if the Grid-connection Work Application Date for a project falls in April 2020, the FY2018 procurement price of 18 yen will be applied.

According to an informal statement from a METI official, this new rule will be applied without exception even to projects that have already been financed or that have commenced construction.

It is therefore crucial to determine the exact Grid-connection Work Application Date.  Assuming that "the operator side is standing by to connect the facilities to the grid by the transmission and distribution business operator," or in other words, that the "transmission and distribution business operator is positioned to automatically determine the earliest scheduled commencement date for grid-connection depending on grid side circumstances," the intent in the Public Comment Outline and the Subcommittee's proposal is to have the operator apply for commencement of grid-connection construction as a practical procedure to determine the scheduled starting date of interconnection, and the date on which the application is received by the transmission and distribution business operator without defect is considered to be the Grid-connection Work Application Date.  The Subcommittee's report provides the summary below.

Source: 9th Committee on Natural Resources and Energy 

(Source: 9th Committee on Natural Resources and Energy; Sessions on Energy Conservation & New Energy and Electricity & Gas Businesses; Subcommittee on Renewable Energy Large-Volume Introduction and Next-Generation Power Network Report 2)

What conditions must be met to apply for grid-connection work?  The Public Comment Outline sets forth the following minimum requirements with the caveat that "details on specific procedures and practical matters will be provided separately."

(i) Title to use of the land has actually been acquired (all adjustments with land right holders have been completed);
(ii) Permits and approvals required for project development and implementation such as forest development, conversion of agricultural land, etc. have actually been obtained;
(iii) When environmental assessment is required under ordinance, such process has been completed; and
(iv) The approved project plan will not be subsequently amended.

To allow for receipt of the grid-connection work application by the transmission and distribution business operator before the date on which the new rule is to be enforced (that is, so that  the Grid-connection Work Application Date falls prior to the end of March 2019), the deadline for submission would appear to be around the latter half of January 2019.

Further, the Subcommittee proposes to set a deadline of one year from the Grid-connection Work Application Date (or by March 31, 2019, whichever is later) for the commencement of operations.

Accordingly, if the Grid-connection Work Application Date for a project falls before the end of March 2019, the deadline for commencement of operations will be the end of March 2020, and if the Interconnection Work Application Date falls after April 2019, the deadline for commencement of operations will be one year from such date.  It is yet to be determined whether the so-called "three-year rule" will be applied in cases where the deadline is not met.

A summary of the new rules are provided below.

For PV business-use projects approved in FY2012-2014 for which no deadline for commencement of operations has been set and which have not entered the preparatory phase of operations, appropriate procurement prices will be applied to reflect costs when operations commence.
→Determined based on whether the transmission and distribution business operator receives an application to start grid-connection construction by the end of March 2019 without defect.
○ Conventional procurement price (40 yen, 36 yen, 32 yen) + Operation commencement deadline of one year from April 1, 2019
x Receipt of application for start of construction in FY2019: 21 yen + Operation commencement deadline of one year from date of receipt of the initial construction application
x Receipt of application for start of construction in FY2020: 18 yen + Operation commencement deadline of one year from date of receipt of the initial construction application

Source: 9th Committee on Natural Resources and Energy

(Source: 9th Committee on Natural Resources and Energy; Sessions on Energy Conservation & New Energy and Electricity & Gas Businesses; Subcommittee on Renewable Energy Large-Volume Introduction and Next-Generation Power Network Report 2)

The new rule gives no consideration to individual project circumstances and is detrimental across the board to PV projects that fall under certain criteria.  We are aware that many operators have taken individual action already, and at the very least, we must make ourselves heard through public comment so that the government might take a more realistic approach.  The deadline for the public comment submission is November 21, 2018.  Submission of appropriate opinions is paramount.