Japan's renewable energy market is bracing for a "Green Rush" --- rather than gold rush --- as domestic and foreign attention focuses on Japan's Feed-in-Tariff ("FIT"), to be enforced this July, and the Green Investment Tax Credit, which went into effect last year and will continue to 2014. The next two to three years are crucial for the players involved, and in this article, we will briefly explain the new measures and outline major points of interest.
(1) How attractive is Japan's FIT scheme?
The Act on Purchase of Renewable Energy Sourced Electricity by Electric Utilities (August 30, 2011; Law No. 108), better known as the Feed-in-Tariff Act ("FIT Act"), was approved by the Diet in August 2011 and will be enforced starting in July of this year.
Although the purchase price (procurement price) and purchase period (procurement period) under the Feed-in-Tariff scheme ("FIT Scheme") have not been officially announced, the Ministry of Economy, Trade and Industry ("METI") previously uploaded to its website a summary of the FIT Scheme in which it assumes that the initial purchase period is likely to be in the range of 15 to 20 years and the initial purchase price is likely to be in the range of ¥15 to ¥20/kWh ($0.19 to $0.26/kWh at current exchange rates) for non-solar power (wind, small and medium hydroelectric, geothermal, and biomass energy).
While the assumed purchase period for solar power is 15 to 20 years in this summary, METI says only that the purchase price will be "set at a high level initially and gradually reduced in accordance with declines in the cost of solar power generation systems." The new purchase price is likely, however, to be close to ¥40/kWh ($0.52/kWh at current exchange rates), which is the FY2011 price under the current system for purchasing excess power from photovoltaic power generation systems ("Excess Electricity Purchasing Scheme") and which METI proposed on January 25th to extend through FY2012 as well. Even after the FIT Scheme is introduced in July, this price will continue to apply for solar power purchases that originally began under the Excess Electricity Purchasing Scheme, and, as explained further below, the new price under the FIT Scheme is unlikely to be drastically different given that the FIT Act clearly states that power producers will have an advantage for the first three years. Assuming these prices, Japan will be extremely attractive to power producers and projects even when compared to Europe, where FIT schemes have been commonly implemented to support renewable energy.
FIT schemes have been introduced in 20 out of 27 EU countries. Prices range widely, but many countries have set wind at around €0.1/kWh (¥10/kWh or $0.13/kWh at current exchange rates), and solar PV at around €0.3/kWh (¥30/kWh or $0.39/kWh at current exchange rates). PV prices in Spain, which was referred to as a "renewable bubble" when it first launched a FIT scheme in 2007 with record high purchase prices, are between €0.24 and €0.47/kWh (¥24 to ¥47/kWh or $0.32 to $0.62/kWh at current exchange rates). The UK, which introduced a FIT scheme in 2010 as a supplement to other support schemes and which has an especially favorable purchase price for PVs under 5MW, sets this purchase price at £0.30/kWh (¥37/kWh or $0.47/kWh at current exchange rates). In comparison, Japan's expected purchase price is likely to be highly competitive globally.
With respect to the purchase period, longer terms are of course desirable especially when construction costs are financed through project finance. The shortest period expected in Japan is 15 years, which corresponds with standard project financing periods for renewable energy in the US and Europe and allows sufficient time to support a project financing.
Thus, while the crucial purchase price and period have yet to be decided in Japan, the indications are that the FIT scheme will be very favorable for power producers and projects and make the Japanese renewable energy market extremely attractive to investors and other players in this field.
Below, we outline several major points under the FIT Act.
Electricity eligible for purchase under the FIT Act includes that generated by solar PV, wind power, hydraulic power (small to medium hydraulic power of less than 30MW), geothermal energy, biomass, and any other energy separately set forth under applicable government ordinances.
A power generation company (electricity supplier) must have its renewable power generators approved by the Minister of Economy, Trade and Industry pursuant to ministerial ordinance. It must further demonstrate that it is able to provide stable and efficient renewable energy power over the procurement period and that its power generation methods meet criteria set forth under ministerial ordinance.
Currently, eligibility is limited to new projects that start operations on or after the FIT Act is enforced; however, this may be extended to include existing projects pending further discussion.
(3) Purchase obligations
Unless there is a justifiable exception as set forth under ministerial ordinance, electric utilities are obligated to purchase electricity at the procurement price and may not refuse requests by power generation companies ("specific suppliers") to enter into an agreement (defined as a "specific agreement" under the FIT Act) to supply electricity generated from renewable energy-sourced power plants approved under the FIT Act ("Power Purchase Agreement").
The Act is structured so that power generation companies have quite an amount of control over the substance of Power Purchase Agreements. That is, an "electric utility" must execute a Power Purchase Agreement at the request of a "specific supplier (power generation company)" unless "there is a risk that the substance of such agreement will unjustly harm the interests of such electric utility, or there are other justifiable reasons as set forth under the ministerial ordinances of METI." While the details of what constitutes "justifiable reasons" are still under discussion, our understanding of the view of the Agency for Natural Resources at METI is basically that such "justifiable reasons" will be very limited to certain circumstances such as when the power generation company calls for extremely high compensation for damages or the electric utility is otherwise unfairly and materially disadvantaged, or when the power generation company refuses to allow necessary parties to enter or inspect the power plant or otherwise makes unreasonable demands that hinder the maintenance of appropriate performance standards. Other than in such very limited situations, an electric utility is obligated to enter into a Power Purchase Agreement. Thus, although the details are yet to be decided, it is highly likely that power generation companies will have quite a bit of control over the process of preparing Power Purchase Agreement formats. The key question is what sort of form of agreement to prepare and present to the electric utilities.
Finally, while electric utilities have purchase obligations under the FIT Act, power producers are not obligated to generate (supply) power. Therefore, even in cases where power producers cannot supply electricity as initially agreed, penalties will not be imposed unless separately set forth under the Power Purchase Agreement.
(4) Purchase price
Purchase prices (procurement prices) will, in principal, be annually determined by the Minister of Economy, Trade and Industry prior to commencement of the fiscal year for each type, form of installation, and scale of renewable energy source. The Minister will give public notice of the decision based on an opinion from an independent third party committee ("Procurement Price Committee") to be appointed after authorization by the Diet and upon consultation with the Minister of Agriculture, Forestry and Fisheries, Minister of Land, Infrastructure, Transport and Tourism, Minister of the Environment and Minister of State for Consumer Affairs Procurement cost will be determined based both on power generation costs normally required for stable supply of electricity using the renewable energy-sourced power plant and reasonable profit levels to be earned by the renewable energy-sourced power producers.
In order to intensively promote the expansion of renewable energy, the FIT Act has stated that it "shall give special consideration regarding profits to be received by specific suppliers when determining procurement price during the first three years of the FIT Act." Therefore, the procurement price is expected to be especially favorable to power generators by adding a greater profit margin over the standard costs required for power generation. According to a comparison chart disclosed by METI in relation hereto, the generation cost of solar PV power runs between ¥38/kWh and ¥45/kWh ($0.49 to $0.58/kWh at current exchange rates). Therefore, it is not likely that the initial purchase price for solar PV will be below ¥38/kWh, and we can assume that the purchase price will be close to the current purchase price under the Excess Electricity Purchasing Scheme.
Once a Power Purchase Agreement is executed, unless otherwise mutually agreed under such agreement, the purchase price agreed under the Power Purchase Agreement ("PPA Price") will be maintained for the term of the agreement, which term shall not exceed the procurement period under the FIT Act. Therefore, once the PPA Price is mutually agreed upon under the Power Purchase Agreement , such PPA Price will not be reduced even if the procurement price (to be annually determined by the Minister) declines as the result of future price revisions (unless separately mutually agreed).
It will be in the interest of power producers to secure Power Purchase Agreements during the initial three year period of the FIT Act, assuming that procurement prices are as favorable as expected. The key for development will be whether the Power Purchase Agreements can be executed for a favorable PPA Price within these first three years.
To cover the cost of purchasing this electricity, utilities will collect surcharges in addition to regular electricity charges from electricity users.
(5) Purchase period/FIT period
The purchase period (procurement period) will also be determined annually by the Minister of Economy, Trade and Industry prior to commencement of the fiscal year for each type, form of installation, and scale of renewable energy source, in general. Likewise, the Minister will give public notice of the decision based on opinions by the Procurement Price Committee and upon consultation with the ministers concerned.
The procurement period will reflect the typical period from installation of a renewable energy-sourced power facility to the time when renewal of the major equipment becomes necessary.
Under the FIT Act, every time the national Basic Energy Plan is changed, or at least every 3 years, the government is required to review the current and projected volume of renewable energy-sourced power provided and the associated costs and consider changes in social and economic conditions in Japan and abroad. The government will conduct a major review of the Act before March 2021, at which time the Act itself may be abolished.
(6) Restrictions in entrance of foreign capital
The FIT Act does not restrict foreign investments in renewable energy power businesses in Japan. However, investors may be required to complete necessary procedures under the Foreign Exchange and Foreign Trade Act depending on the form of investment. For example, if a non-resident foreign investor establishes a domestic subsidiary to engage in renewable energy-sourced power generation or provides certain loans to domestic corporations, it is highly likely that a 30 days prior "direct investment" notification will be necessary since the law requires such action for electric power businesses. If such foreign investor actually acquires shares of a domestic subsidiary or lends money, it will need to file a compliance report in accordance with the order on direct investment.
(1) Green Investment Tax Credit
In June 2011, the Japanese government established a tax system to promote investment ("Green Investment") in environmental related fields including renewable energy ("Green Investment Tax Credit") under the "Law to Partially Amend Income Tax Law, etc., to Aim for Maintenance of Tax System to Correspond to Current Difficult Economic Situation and Employment Situation."
Under this system, corporations and individual business persons that submit blue form income tax returns may receive favorable tax treatment in the form of either a special depreciation equivalent to 30% of the acquisition price or a 7% tax credit, provided that they acquire applicable facilities including "New Energy Facilities" between June 30, 2011 and March 31, 2014 and commence business use within one year. Solar PV, wind power, hydrothermal, snow and ice based thermal energy, and biomass facilities all qualify as New Energy Facilities.
Specifically, if corporations and individual business persons that submit blue form income tax returns acquire an applicable facility during the applicable term and commence business use within one year, in addition to normal depreciation, a special depreciation equivalent to 30% of the acquisition price can be made during the fiscal year that includes the date when a facility first commences business use. The acquisition price includes, in addition to the purchase price (including purchase fee) and production cost (including cost of raw materials, facilities and employee salaries) for the facility, interest on borrowings (interest on funds borrowed for the purpose of purchase or construction of depreciable assets, production or manufacturing and which relates to the period prior to the start of use of the relevant assets) included in the acquisition price for accounting purposes by the corporation.
The tax credit, on the other hand, applies only for "small and medium enterprises" and is equivalent to 7% of the standard acquisition price. If the tax credit amount exceeds the amount equivalent to 20% of corporate tax amount for the relevant fiscal year, however, such amount equivalent to 20% will be the maximum tax credit. "Small and medium enterprises" refers to corporations whose paid-in capital amount or investment amount is 100 million yen or lower, or corporations without any capital or investment with 1,000 or less permanent employees. As this excludes subsidiaries of large corporations, detailed review (including review of the structure) is needed to judge whether or not a corporation qualifies for the 7% tax credit.
Corporations may use the green investment tax credit even when receiving subsidies, and concurrently with local corporate enterprise and property tax treatments.
(2) Reduced tax base for solar PV power generation facilities (property tax)
An enterprise may qualify for a reduction of its property tax base to two-thirds of the standard base for solar PV power generation facilities for up to three fiscal years, including the initial year of taxation, if such enterprise acquired such solar PV power generation facilities utilizing applicable governmental support.
This tax treatment currently applies only to solar PV power generation facilities, but a bill to expand it to other renewable energy facilities has been submitted to the Diet as of this month.
While the purchase period and purchase price have yet to be officially decided, the FIT Act is favorable for power producers and projects. Together with the green investment tax credit, the Act is likely to make the Japanese renewable energy market extremely attractive for investors both in and outside of Japan, especially over the coming two to three years. To be fully prepared for the coming "Green Rush," it will be necessary to grasp the key points of the various applicable renewable energy programs.
 The main difference and strength of this FIT Act in comparison to European FIT systems is the requirement for an electric utility to enter into a long term Power Purchase Agreement, such that once the purchase price is fixed under the Power Purchase Agreement, the agreed power purchase price applies regardless of any subsequent change or reduction as a result of the government's annual determination of the purchase price. In this sense, the essence of the FIT Act has some similarities to PURPA Law in the US, where the PURPA requires a utility to enter into a long term power purchase agreement, i.e., SO4 contract with a qualified facility at certain fixed price, i.e., avoided cost.
 Applicable to large scale solar PV for business other than solar PV at residences, for which a 10 year purchase period is expected.
 Applicable to non-residences and to residences with 10kW or greater and subject to confirmation (RPS certification) that the facilities were newly installed in 2011 and that no other subsidies for accelerated installation of new energy have been received. The price for residences with less than 10kW is ¥42/kWh. In the case of both solar and non-solar electricity generating facilities (double power generation) the price is ¥32/kWh for non-residences and residences with greater than 10kW and ¥34/kWh for residences with 10kW or less. The Excess Electricity Purchasing Scheme does not apply to power generated for business purposes or for power generation for 500kW or more.
 Under this system, in effect since November 2009, excess power from photovoltaic power generation systems is purchased by electric power companies from residences at a 10 year fixed price.
 Purchase price for the 3 month period from April 1st to July 1st.
 As of 2010.
 Refers to PV registered in the register of systems on or before September 29, 2008. Spain has subsequently become more restrictive and announced in January 2012 that it will suspend application of the FIT to new projects.
 As of 2011. Refers to stand-alone PV.
 Since consumption tax is likely to be included in the purchase price, however, the price will not actually be "fixed" if taxes are raised.
 This 30 day standstill period may be shortened in some cases.
 Descriptions in this section are based on the content of announcements by the Agency of Natural Resource and Energy. Orrick does not provide advice on Japanese tax law but may introduce appropriate counsel upon request regarding the green investment tax credit and other favorable tax treatments.
 This means (i) a corporation that has half or more of the total number or amount of its outstanding shares or investments owned by a single large corporation (that is, a corporation whose paid-in capital amount or investment amount exceeds 100 million yen, or a corporation with no capital or investments that has more than 1,000 permanent employees; but excluding Small and Medium Business Investment Consultation Companies.), or (ii) a corporation that has two-thirds or more of the total number or amount of its outstanding shares or investments owned by large corporations.
 As a result of budget screening, however, the government plans to consolidate other measures to promote renewable energy into the FIT Scheme. Other subsidies for renewable energy projects that qualify for the FIT are expected to gradually diminish so that those may become limited to restrictive local government support, if any. A 2013 termination has already been announced for the Subsidy System to Support Cost of Introduction of Solar PV Power Generation for Residential Use, currently offered by the Japan Photovoltaic Energy Association / Japan Photovoltaic Expansion Center (J-PEC), an ippan shadan houjin, under METI's Outline of Payment of Fund and Development Business Costs/ Subsidies to Support Cost for Introduction of Solar Light Power Generation for Residential Use.
※This article is intended to provide a brief survey of certain laws and customs relevant to renewable energy in Japan. This is not intended to be legal advice. Individual legal and factual circumstances should be taken into consideration in consultation with professional counsel prior to taking any action related to the subject matter of this article.