Energy & Infrastructure Alert | March.27.2019
It was decided this month that April 1, 2019 will be the effective date of the "Act to Promote Offshore Use by Offshore Renewable Energy Facilities" (the "Act"), which was approved on November 30 last year to establish mechanisms for coordination with stakeholders and implement measures to enable the long-term use of sea areas by offshore renewable energy facilities. The Act is expected to promote the spread of offshore wind projects in promotion zones.
This Alert Letter outlines the Act and discusses issues related to the contemplated structure for implementation (the "Structure").
For a smooth introduction of offshore wind projects and in the interest of realizing long-term occupation of general sea areas, the Act sets forth uniform rules to allow certain sea areas in promotion zones designated by the Minister of Economy, Trade and Industry and the Minister of Land, Infrastructure, Transport and Tourism to be offered under public bid based on price and other assessment factors for use by selected operators for a maximum period of 30 years. The procedures are detailed below.
Before designating the promotion zones, the government will first identify candidate areas based on the opinions of a third-party committee of experts, conduct detailed studies in tandem with discussions involving fishery parties, and hold a final meeting of the third-party committee. At least 5 zones are expected to be designated across the country, particularly off the windy coasts of Aomori, Akita, Saga and Nagasaki prefectures that are suitable for wind projects.
The highly anticipated offshore Structure does not come without problems. In this section, we discuss some of the issues we view as significant.
1. Grids to be secured by operators and "succession" of grid rights
The Structure presumes that the "operator has already secured adequate grid capacity within the contemplated promotion zone for the scale of the contemplated wind project, and that the operator wishes to apply such grid to the bid for usage rights after promotion zones are designated." That is, it is up to the operator to secure the grid.
Further, the Structure presumes that "if other operators have been selected through public bid for usage rights, the operator consents to the succession of such operators to its grid agreements." In other words, even if an operator were to apply for grid connection and secure a grid for an offshore wind project, there is no guarantee that it would be selected in the public bid for usage rights in the applicable promotion zone, and in such case, under the Structure, it would have to succeed its grid rights to the operator that was in fact selected in the bid. Although such succession is supposed to be "based on an objectively calculated price so as not to cause unfair profit or loss of profit (to the operator that secured the grid or the operator succeeding the grid)," further details have not been provided. A major concern is how such a fair method of succession can be set up, if at all. Particularly, since from a grid connection standpoint, the securement of the project site needs to be done by operators, it is said that there are numerous offshore wind projects in general sea areas with fully or partially overlapping project sites. In such cases, the succession to the operator selected in the bid and fair methods of succession will need to be further considered.
2. Projects in progress
Many offshore wind projects are already partially underway in the areas targeted under the Structure for promotion zones. Operators as well as prefectural officials have called for the Structure to accommodate the fact that some of these projects have already begun employing personnel and holding informational sessions for local residents. The Structure only goes so far, however, as to provide for an assessment item related to advance coordination with the heads of administrative offices for the evaluation of the usage plan that is submitted for bid by the operator.
The Structure also proposes that to aid in the collection of information necessary for the designation of promotion zones, "municipalities and operators should endeavor to provide existing and known information in the interest of efficiency while ensuring equity, fairness and transparency." Ensuring equity, fairness and transparency may be a difficult task considering the need to maintain competitiveness and protect projects that have already invested massive amounts in development.
3. Procurement price shift to bid system
The government plans to shift procurement price to a bid system with respect to offshore projects subject to the Structure. Depending on when the Act would apply, the government had also indicated that certain offshore wind projects would be shifted to a bid system even with respect to years for which the procurement price has already been set. Despite fixing a price of JPY36/kWh (excluding tax) in 2017 for fiscal years 2017, 2018 and 2019 with respect to bottom-fixed offshore projects of 20kW or more pursuant to the FIT Act, the government effectively went back on its word on grounds that "the unforeseen need to establish rules (for the promotion of offshore use) and the potential for more cost-effective introduction might dramatically change the basis for previously fixed prices". There were outcries from home and abroad that this violated the FIT Act, and the result has been a loss of faith in the stability of Japan's legal system. In the face of repeated changes to laws and procedures related to renewable energy, we must now undertake the challenge of regaining a sense of stability and continuity.
There are many other issues concerning the Act and the Structure, and we should keep especially careful watch over implementation of the Structure as well the direction in which the government plans to take offshore wind.