Japan Renewable Alert 42: Introduction of Power Producer-side Base Charges
Energy & Infrastructure Alert | December.20.2019
The details of the mandatory reserve system to secure the funds for costs of decommissioning solar power facilities under a FIT program have become clearer as the committee under the Ministry of Economy, Trade and Industry (“METI”) published the Interim Report (the “Report”) on December 10, 2019, based on their eight-month discussions on the issue. The new mandatory reserve system will be effective by July 2022.
Responding to the growing concerns of the public on decommissioning of solar power facilities, METI has urged solar power projects to create reserves for decommissioning costs since April 2018 by revising the “Guidelines on Business Plan for Solar Power Facilities” and also to report on the status of such reserves since July 2018. METI, recognizing that there were still a number of projects that had not created such reserves, newly established the Working Group for Securing Funds for Decommissioning Solar Power Facilities (the “Working Group”) in April 2019 to discuss the details of the mandatory reserve system, based on the discussions at the Subcommittee on the Large-Volume Introduction of Renewable Energy and Next Generation Electric Networks.
The draft Report of the Working Group's discussion was made public on November 26, 2019, and the finalized version of the Report was released on December 10, 2019, reflecting the discussions at the session held on the day the draft Report was made public. The Report illustrates the details of the new reserve system.
2. Outline of the Reserve System
The new mandatory reserve system applies to all commercial solar power projects under a FIT scheme (10kW or more), including projects both prior to and already under operation. Projects will be required in general to secure the funds through an “external reserve method,” where the funds for decommissioning costs are to be deducted from income and reserved by a third-party organization, but projects will be allowed, if certain requirements are satisfied, to opt for an “internal reserve method,” where they reserve such funds themselves.
Under an external reserve method, the amount of a designated kWh-based unit amount multiplied by the electricity sold is to be deducted from the income and reserved every month for the last 10 years of a 20-year FIT period. Projects are not allowed to withdraw funds from the reserve in principle during the FIT period, unless they terminate or downsize the power generation business and dispose of the solar panels as a result, and are basically only entitled to receive funds from the reserve upon disposition of solar panels after the FIT period.
Under an internal reserve method, on the other hand, projects are required to establish the reserve that is to be ultimately accumulated at the end of the FIT period in the amount of a designated kW-based unit amount multiplied by the power capacity on the FIT approval, and, for the last 10 years of the FIT period, the funds in reserve are required to be equivalent to or exceed the amount that would have been reserved should deposits be made to the reserve in equal installments over a 10-year period so as to ultimately meet the above standard. Projects are entitled to temporarily withdraw funds from such internal reserve for solar power repair costs during the FIT period, but are required to pay back such amount to the reserve to meet the standard again within a year, in principle.
The unit amount to be reserved for non-auction projects approved in or prior to FY2019 (ending in March 2020) is to be determined in accordance with applicable FIT prices, based on the estimated decommissioning cost (and the estimated capacity factor in the case of external reserve) presumed in the course of calculating each FIT price. For example, for a project with a FIT price of JPY40/kWh, the Report indicates that the kWh unit amount for external reserve is to be JPY1.62/kWh and that the kW unit amount for internal reserve is to be JPY17,000/kW; therefore, a deposit of JPY1.62/kWh multiplied by the energy amount sold will be deducted from the income to be reserved by a third-party organization every month for the last 10 years of the FIT period under an external reserve method, and a plan needs to be made to accumulate an amount of JPY17,000/kW multiplied by the approved capacity at the end of the FIT period (if a project is 20MW, for example, it would be JPY340,000,000) under an internal reserve method.
The requirements for a project to be eligible for an internal reserve method are described on pages 23 to 29 of the Report. According to the Report, mega-solar projects under a project finance scheme are likely to be entitled to an internal reserve by satisfying certain requirements for the period during which its loan is outstanding. These projects, however, are obliged to have their internal reserves transition to external reserves once they fully repaid the loan and are no longer financially monitored by the banks.
The Report also indicates how such unit amounts are to be determined for projects subject to a FIT auction and how much they will be and states that such unit amounts for projects approved in or subsequent to FY2020 are to be determined by the Procurement Price Committee. The Report also suggests that the same principle should be similarly applied to future projects under a FIP (Feed-in Premium) scheme, the introduction of which is currently being discussed.
3. Future Outlook
The result of the discussions of the Working Group are to be reported to other METI committees, and further details and related issues will be discussed there. Amendments to laws and regulations in connection with the mandatory reserve system will be finalized in the course of the fundamental overhaul of the FIT scheme scheduled to be completed by the end of FY2020 (ending in March 2021). According to the Report, the new reserve system will start by July 2022 at latest.
While the national government repeatedly expresses that it will keep promoting the renewable energy, we have seen and are still expected to see amendments imposing an enormous drain on renewable projects, including the “New Rules” on pre-COD solar projects issued last year (see our Renewable Alert Letter 38), the mandatory reserve system described in this Renewable Alert Letter, introduction of producer-side base charges (see our Renewable Alert Letter 42), implementation of environmental impact assessment procedures required by a national law on construction of mega-solar power plants (see our Renewable Alert Letters 39 and 41) and other regulations introduced by prefectural or municipal governments. Developers and operators in renewables are advised to precisely comprehend these amendments that could affect their business and may need to make their voices heard by the government properly and effectively.