Japan Renewable Alert 43: Introduction of Mandatory Reserve for Cost of Decommissioning PV Facilities
Energy & Infrastructure Alert | February.05.2019
On January 15, 2019 the Review Committee on Basic Policy Regarding Solar Facilities and the Environmental Impact Assessment (the "Review Committee") issued a draft report (the "Report") in which a policy (the "Policy") was announced to classify solar power projects with output (AC) of 40 MW or more on a grid-connection phase basis as Class-1 Projects under the Environmental Impact Assessment Act (the "EIA Act"), and to make such projects indiscriminately and comprehensively subject to environmental impact assessments under the EIA Act (the "EIA").
This Policy will potentially lead to a distortion of environmental conservation, as intended under the EIA Act, and by imposing an unnecessary burden on developers and operators, it will also make it difficult to reduce costs and expand development and ultimately deflate Japan's solar power market, as well as the entire renewable energy industry itself, in contradiction to Japan's energy objectives.
The Ministry of the Environment is currently accepting public comments on the Policy through February 18, 2019. In this Alert, we express a number of the concerns we have compiled in the course of discussions with our clients and various related parties and outline our opinions and pleas to the government regarding the Policy.
As we wrote in our Japan Renewable Alert 37 dated November 8, 2018, the Ministry of the Environment has been contemplating subjecting certain solar power projects to EIA. Following a period for review, the government's current proposal in the Policy is that: 1) projects of 40MW or more (as opposed to 32MW or 36MW cutoffs) on an AC output basis in the grid-connection phase should be classified as Class-1 projects under the EIA Act (dai isshu jigyou, the "Class-1 Projects") that will be comprehensively and unconditionally subject to EIA, and 2) projects of 30MW or more on an AC output basis in the grid-connection phase should be classified as Class-2 projects under the EIA Act (dai nishu jigyou, the "Class-2 Projects") and will be subject to EIA if deemed necessary as a result of screening for regional characteristics and other variables. Thus, the government has opted not to use the "100 hectares" land area-based cutoff that so many operators and other interested parties have counter-proposed.
The Policy does not touch on what stages of project development the changes will apply to, or address the question of consistency with the Ministry of the Economy, Trade and Industry's new rules for non-operational projects. Although there are unverified rumors that the Policy will go into effect by summer of 2020 and that projects will be exempted if the construction plan notice pursuant to the Electricity Business Act has been accepted before the enforcement date, the details are still unclear with respect to the timing of enforcement, conditions for exemption and any interim transitional measures.
While the Report admits that "the area of development (ha) is an ideal index for solar project scale from the perspective of environmental impact" (page 8), it goes on to present certain primary rationales for adoption of the Policy with output as an index ("Output Criterion"), specifically 40MW on the AC side for determination of Class-1 status. However, the rationales presented in the Report are neither adequate nor reasonable, and adopting an Output Criterion is unfair considering the difficulty of establishing appropriate output standards. (A memorandum of detailed analysis regarding the rationales of the Policy is available upon request.)
As the Report itself points out, the environmental impact from solar power projects is largely dependent on the degree of land formation and other surface development involved (page 8). Assuming a similar area of development, it is difficult to argue that the impact of two solar projects on the environment would vary based on output alone. In fact, under many regional authorities, it is the land formation aspect of the project that is subject to environmental impact assessment under ordinance, and not the project itself. Even among regional authorities that have already made solar projects subject to environmental impact assessments under ordinance, the majority classify projects based only on the area of land being developed. Clearly, land area is the most germane criteria for determining the applicability of environmental impact assessment as intended under the EIA Act.
As discussed above, unlike with other power generation businesses, the environmental impact of solar power projects is limited largely to the extent of surface development with very little impact in terms of modules and other equipment. Again, this is why many local governments choose to require environmental impact assessment under ordinance for land development associated with a solar project, rather than for the solar project itself.
As pointed out in the Report, there are significant regional differences in how solar projects impact the environment as well as the volume of objections raised by local residents (page 11 of the Report). Since solar power equipment itself has very little impact on the environment, generally, if the extent of land formation pertaining to the project is limited, then it follows that the environmental impact of the project itself is also limited. Especially in cases where a project is to be implemented on land that would have little environmental impact from land formation, therefore, there would be no reason for environmental assessment simply on account of being a solar project.
In cases where land development is subject to environmental impact assessment under ordinance, for many local governments, the area subject to assessment varies for respective regions. Rather than indiscriminately requiring EIA across the board, we should learn from these local practices that regional attributes must be taken into consideration in the interest of both environmental conservation and promotion of the solar industry.
In fact, the Report presents basic premises for considering regional characteristics in screening for Class-2 Projects (page 12). The same considerations should be introduced for Class-1 Projects. Ideally, screening for Class-1 Projects would be carried out in the same manner as for Class-2 Projects, but if this is not possible, then there should be a system to allow exemptions in certain cases for Class-1 Projects. For example, in areas where the installation of a solar project could be deemed to have little impact on the environment compared to how the land was previously used, such as in the case of former quarries, disposal sites, industrial sites or golf courses, it seems prudent to grant exemption from EIA to such projects pursuant to a request by the operator and then have the project undergo environmental impact assessment under ordinance as necessary.
When wind facility construction projects were added as a new type of project subject to the EIA Act, based on the EIA Act and the Electricity Business Act, projects for which a construction plan notification had been accepted by authorities ("Construction Plan Acceptance") pursuant to Article 48 of the Electricity Business Act before the date of relevant cabinet order for enforcement ("Enforcement Order Date") were granted exemption from the provisions of Chapters 2 through 9 ("Exempt Projects").
If the government were to likewise adopt Construction Plan Acceptance as the criterion for exemption in the case of solar facility construction projects, however, it would be inconsistent with the Renewable Energy Act.
On December 5, 2018, the Ministry of Economy, Trade and Industry decided on a new policy for addressing non-operational projects ("New Rules").
As an objective criterion for determining whether "all preparations are in place on the part of an approved business operator and that the transmission and distribution business operator is in a state in which it can mechanically determine the minimum scheduled starting date of interconnection based solely on grid side reasons," the New Rules will establish a requirement for a new "Grid Connection Work Application," which had not previously been set forth under law, and which must be accepted by the electric company within a specified period to avoid reduction in the project's applicable FIT Price pursuant to the New Rules.
In other words, through the New Rules, the Ministry of Economy, Trade and Industry seeks to establish new legal criteria for determining whether or not a project is in the preparatory phase of operation ("Preparation Phase Projects").
To clarify such criteria, the New Rules set forth strict requirements for the Grid Connection Work Application and limits required authorizations to: (i) permit (or acceptance of notification) for agricultural land conversion exemption or agricultural land transfer; (ii) published report on environmental impact assessment under ordinance and completed public inspection; and (iii) permit for the development of forest land.
With the inclusion of solar facility construction projects under the EIA Act, if the government were to adopt Construction Plan Acceptance as the criterion for exemption from assessment, there would be a major discrepancy with the concept behind Preparation Phase Projects.
As indicated above, the Grid Connection Work Application requirements do not include Construction Plan Acceptance, so it would be possible to submit a Grid Connection Work Application before Construction Plan Acceptance. Therefore, EIA may be required if the Grid Connection Work Application has been received prior to the Enforcement Order Date but the Construction Plan Acceptance is later than Enforcement Order Date. If an environmental impact assessment was conducted pursuant to ordinance for such project, depending on the details of the interim measures to be taken under the EIA Act, there would be little possibility of major issues arising since publication and inspection would have been completed. However, if a project was not subject to, and did not undergo an environmental impact assessment pursuant to ordinance, it would need to undergo EIA after the Enforcement Order Date in a process that would take several years. The project would not be able to commence operations during that time, and its procurement period would be shortened in the event the operation commencement date is postponed.
If a project would be deemed ready to commence operations under one law and yet unable to actually commence operations for several years based on the provisions of another law, we have a legal conundrum that defies the entire purpose of introducing the Grid Connection Work Application.
Under the New Rules, certain Preparation Phase Projects are to be excluded from the scope of reduction of applicable procurement price based on sufficiently high maturity of development, conclusion of financing and other projects agreements, and inability to make any subsequent amendments to business plan. The idea is that such projects would not be crippled by a change in procurement price, which is why the New Rules purposely do not make Construction Plan Acceptance a prerequisite and instead outline the above strict requirements. If projects that have submitted a Grid Connection Work Application are included in the scope of EIA, they would be forced to undergo several years of unanticipated assessment and inevitably be driven into the ground due to delay in the planned start-up of operations. Furthermore, it is highly likely that the project will suffer from the burden of expenses required for unexpected EIA, additional land rent, and expenses incurred as a result of the suspension of construction. This contradicts the intent of the New Rule to protect Preparation Phase Projects by allowing them to commence operations while maintaining the applicable procurement prices.
With respect to exemptions, these points must be carefully considered in light of the Renewable Energy Act and the intended effects of the New Rule so as not to impose unreasonable burdens on developing and developed solar projects that will prevent them from starting operations, and to avoid jeopardizing the future of renewable energy projects in Japan.
The promotion of renewable energy projects is an urgent issue for Japan, and solar power in particular has been the primary driver of expansion. As the government strives to further promote development in harmony with Japan's climate, culture, and technology by taking steps to drastically reduce procurement prices under the Renewable Energy Act, we stand on the cusp of realizing grid parity.Given the tremendous amount of time and cost required for EIA, it should be limited only to projects for which it is truly required. Without such limitation, the government's attempts to reduce prices and expand development will falter and ultimately lead to the downfall of solar power, as well as the entire renewables sector in Japan.