Energy & Infrastructure Alert | June.01.2017
The Agency for Natural Resources and Energy recently released a policy promoting the use of biomass power generation as stable substitution for nuclear power to the maximum extent possible by fiscal year 2030. The Agency aims to increase the aggregate capacity of biomass power plants operating under the FIT Act from 1.9 million kW (of which 0.98 million kW is from woody biomass power plants) as of December 2016 to a capacity of 4.75 to 6.01 million kW (of which 3.35 to 4.61 million kW would be from woody biomass power plants) by fiscal year 2030.
In response to such policy, biomass power generation, especially woody biomass power generation, which can promote the effective use of unused woods in Japan and which can be a base load power source, has been attracting a lot of attention. This alert letter presents an outline of legislation, notes and prospects of power generation using woody biomass and the agricultural residues (“Agricultural Residues”) which are often mixed in and burned together with woody biomass.
1. What is Woody Biomass
Under the FIT Act, woody biomass is a subset of biomass – organic substances derived from animals and plants which can be used as a source of energy – which was derived from woods.
2. FIT Price and Term
The FIT Price for woody biomass will vary depending on the category of woods used. Fiscal year 2017 prices are as follows. Following the April 2017 amendment of the FIT Act, the authority can determine the FIT Price for multiple years, and the following FIT Price applies until the end of the fiscal year 2019.
|Category of Wood||FIT Price (excluding tax)|
|Unused Woods (less than 2,000 kW）||40 yen/kWh|
|Unused Woods (2,000 kW or more）||32 yen/kWh|
|General Woods, Agricultural Residues (less than 20,000 kW）||24 yen/kWh|
|General Woods, Agricultural Residues (20,000 kW or more)||21 yen/kWh (24 yen/kWh until the end of September 2017)|
|Waste Materials of Buildings||13 yen/kWh|
The FIT Term in fiscal year 2017 for woody biomass power generation is fixed at 20 years for all categories of woody biomass.
During such term, the category of biomass to be used at the power plant can be changed only with approval from the applicable authority. However the determination period of the applicable FIT Price and Term will not be affected by such change. If a biomass power plant using General Woods under a FIT Price and Term determined in fiscal year 2017 receives approval to change to Unused Woods in fiscal year 2026, the fiscal year 2017 FIT Price of 40 yen/kWh (less than 2,000 kW) or 32 yen/kWh (2,000 kW or more) will apply for the remaining FIT Term regardless of the FIT Price in 2026.
3. Categories of Woody Biomass
(1) Unused Woods
According to the Guidelines for the Verification of Woody Biomass Used for Power Generation issued by the Forestry Agency ("Verification Guidelines"), Unused Woods means either (a) thinned woods or (b) woods legitimately logged (except by thinning) from specified forests, such as forests subject to certain forest management plans or protecting forests (hoanrin). Generally, Unused Woods include unused thinned woods or residue of woods cut for regeneration abandoned at the forest. According to the Q&A for Woody Biomass Power Generation and Verification issued by the Forestry Agency ("Q&A"), those woods (i) which have not been sold for other purposes, such as paper manufacturing, and are not expected to be so sold, or (ii) which exceed the capacity for sale for such other purposes are treated as Unused Woods. Imported woods are excluded from Unused Woods.
(2) General Woods
General Woods refers to all woods other than Unused Woods and Waste Materials of Buildings, and includes sawdust, remnants and bark from production of other woods, and other woods, in each case for which verification of its origins is possible. Imported woods with Verification of Legality pursuant to the Guidelines for Verification of Legality and Sustainability of Woods and Wood Products (the "Legality Guidelines") are included in General Woods. Sawmill residue from Unused Woods are treated as General Woods.
(3) Waste Materials of Buildings
Waste Materials of Buildings means building materials which became "waste" under the Wastes Disposal and Public Cleansing Act. Any woods without verification of their origin pursuant to the Verification Guidelines are deemed Waste Materials of Buildings (i.e., 13 yen/kW of the FIT Price applies in fiscal year 2017).
4. Verification of Woody Biomass
(1) Verification of Origin
Since the applicable FIT Price varies depending on the category of woody biomass, it is essential to verify the origin of Unused Woods and General Woods and to manage them separately from other categories of woods. The origin of Unused Woods and General Woods must be verified using the proscribed method for the applicable category of woods in order to secure the FIT Price. If such verification or segregated management cannot be confirmed, the woods are deemed Waste Materials of Buildings and become subject to a lower FIT Price than other categories.
The verification of legality and sustainability ("Verification of Legality") under the Legality Guidelines is required for imported woods. Legality means that woods are legitimately logged in compliance with the laws of relevant country or area where such woods exist, and sustainability means that woods are logged from the forest managed in sustainable way. The Verification of Legality can be satisfied by an appraisal or authentication by third party organizations or certificate by concerned organizations.
(2) Confirmation of Legality
The Act on Promotion of Distribution and Use of Legally Logged Wood Products (the "Clean Wood Act") became effective on May 20, 2017. Under the Clean Wood Act, a business operator using woods as set forth in the ministerial ordinance ("Wood Business Operator") is required to make an effort to utilize legally logged wood products (which are made from woods logged in compliance with laws of Japan or other countries of origin). Since the Ordinance for Enforcement of Clean Wood Act states that an operator of woody biomass power generation under the FIT Act is a Wood Business Operator, and the wood products include wood pellets, wooden chips and small pieces of wood according to the basic policy of the Clean Wood Act, the operator of woody biomass power generation using such wood products is encouraged to utilize legally logged wood products under the Clean Wood Act.
5. Notes for Woody Biomass Power Generation
A woody biomass power plant is a type of thermal power plant and may be subject to an environmental assessment under the Environmental Impact Assessment Law or municipal Environmental Impact Assessment Ordinance, which assessment often takes 3 or 4 years to complete. It is necessary to review relevant laws for examining if an environmental impact assessment is required for the project. In addition, if the project contains any waste management service, approval for collection, hauling or disposal under the Wastes Disposal and Public Cleansing Act is required. Since it sometimes takes 1 year to obtain such approval upon prior consultation, it is necessary to examine if the approval is required and to consider such period for obtaining the approval upon scheduling the project.
In some cases, such as when the supply of electricity to the Utility is expected to exceed the demand, the Utility can require the operator to curtail its energy supply under the direction of the Utility, and consent to such curtailment is a condition for the interconnection under the FIT Act. Although biomass power generation used to be subject to curtailment in the same order as thermal power generation, power generation exclusively using biomass becomes subject to preferential curtailment (i.e., the order of curtailment becomes lower) due to its contribution to the increase of renewable energy and its nature as a stable power source, rather than other sources such as photovoltaic power generation. Further, biomass power generation using local resources becomes subject to more preferential curtailment since such power generation improves energy self-sufficiency rate and regional revitalization. Even in the case of curtailment, the operator of biomass power plant cannot receive compensation under the FIT Act since there is no loss of opportunity of power generation in general so long as the operator can generate the power after the curtailment and there should not be public burden without public benefits.
(3) Stable Procurement
There are unique items to be considered for woody biomass power generation such as improving the environment for stable procurement in case of Unused Woods to be increasingly utilized (such as harmony with the forest industry) and securing long-term stable procurement in case of imported woods. Long-term stable procurement of woody biomass is important for the funding of a project through project finance.
6. Prospects of Woody Biomass Power Generation
Several cases of financing for woody biomass power generation projects have recently been announced, including by Japan Finance Corporation, the Development Bank of Japan, Greed Fund (Green Finance Organisation) and local governments (with the cooperation of the Japan Foundation for Regional Vitalization). In addition, there are various benefits for woody biomass power generation. For example, improvement of wood processing and distribution facilities for woody biomass supply is eligible for municipal subsidies. Further, woody biomass power generation facilities with less than 20,000 kW output capacity (limited to the facilities mainly using Unused Woods or General Woods) are covered by the "green investment tax break" from fiscal year 2016. If the operator acquires or constructs the facilities during the applicable period (i.e., by March 31, 2018) and commences the operation within 1 year after completion, the operator can take 30% of the special depreciation in the fiscal year when it commences the operation.
As stated above, the government aims to install approximately 4 to 6 times as much capacity of woody biomass power generation by the end of fiscal year 2030 as currently operated, since it can promote the effective use of Unused Woods in Japan and is expected to become a base load power source. Dealing with several issues in an appropriate manner, woody biomass power generation is expected to increase rapidly.