Japan Renewable Alert 44: Comprehensive Revamp of Regulations on Renewables

Energy & Infrastructure Alert | March.10.2020

日本語:再エネ関連法制、抜本的な改正へ

1. New Phase for Renewable Projects in Japan

The Cabinet, as of February 25, 2020, finalized the “Bill of the Act to Partially Amend the Electricity Business Act and Other Acts in Order to Establish a Resilient and Sustainable Electricity Supply System” (the “Bill”) to amend the Electricity Business Act (Act No. 170 of 1964, as amended), the Act on Special Measures Concerning Procurement of Renewable Energy Electricity by Electricity Utilities (Act No.108 of 2011, as amended—also known as the Feed-In Tarriff Act, the “FIT”, or the Renewable Energy Special Measures Act, the “REA”) and other related acts and submitted it to the Diet on the same date (see here). The Bill includes a fundamental revamp of the REA and is critical to anyone in the renewable market in Japan as it will fundamentally shape the future of Japan’s renewable market. The amendments will in principle take effect as of April 1, 2022, once the Bill is passed.

On February 25, 2020, the government also made public the final version of the interim reports (the “Reports”) of the Subcommittee on System Reform for Renewable Energy to be a Main Power Source (the “SRRE”) and the Subcommittee for Sustainable Power Systems (the “SSPS”), the committees under the Ministry of Economy, Trade and Industry (the “METI”) that discussed the policies embodied in the Bill, and the responses to public comments on the drafts of the Reports (see here for the SRRE Report and here for the SSPS Report).

In the midst of these steps to amend the national acts, the government also made public on February 17, 2020, drafts of the amendments to the Guidelines for FIT Business Plans, reflecting a part of the discussion at the relevant committees under METI regarding the regulations and practices to be in effect from and after FY2020 (which runs from April 2020 through March 2021) prior to the amendments to the acts taking effect (see here). The drafts will be open for public comments until March 17, 2020.

This Alert Letter outlines this huge tide of changes in the regulations for renewables and what to watch out for in the coming years.

2. Outline of the Bill

The Bill includes the following critical changes:

(1) Introduction of a FIP System

The Bill is to implement a Feed-In-Premium (“FIP”) system by introducing a new section as the first section of Chapter 2 of the amended REA, titled “Supply of Renewable Energy through Market Transactions”. “Market transactions” here essentially means sales of electricity through a wholesale power exchange or though over-the-counter transactions with retailors (Article 2-2 paragraph 1 of the amended REA), in order to integrate certain types of renewable energy into the market. The category to which the FIP scheme will apply is called the “subsidy category” and will be designated by the Minister of Economy, Trade and Industry (the “Minister”), respecting the opinion of the Procurement Price Calculation Committee (the “Committee”) (Article 2-2 paragraphs 1 and 4). Under the FIP scheme, a business owner with FIP approval is expected not only to gain revenues from market transactions, but also to receive a premium (“supply promotion subsidy”) for a certain period of time (the FIP term) (paragraph 2 of the same Article).

On the other hand, the FIT scheme will still apply to the category of power generation facilities that are deemed appropriate for electricity utilities to procure electricity therefrom at fixed prices (such category is called the “specified procurement category”; Article 3 paragraph 1 of the amended REA). The specified procurement category will also be designated by the Minister, respecting the opinion of the Committee.

The Minister has authority to designate the category of power generation facilities to be subject to FIP/FIT auction (Article 4 of the amended REA).

Based on the discussions so far, the subsidy category subject to the FIP scheme is basically expected to include mega-solar projects and wind projects (onshore/offshore), but the details of the types of power sources and capacities of for each type are to be determined in the future taking into account the market situation and other factors. Furthermore, the categories that are subject to FIT/FIP auction are to be further discussed as well (see page 4 of the Report of the SRRE). In addition, with respect to the premium under the FIP scheme, which is to be calculated based on the unit price (JPY/kWh) calculated by subtracting a reference price based on the market price from the standard price (FIP price) designated by the Minister, the method for calculating the reference price is left to be determined through future discussions before being specified in the ministerial order. Developers are advised to keep closely following the discussions on this issue.

(2) Mandatory Reserve for the Decommissioning Cost

Regarding the reserve system for decommissioning costs of renewable power generation facilities, the provisions in the Bill are based on the discussions summarized in the interim report as of December 10, 2019, of the Working Group for Securing Funds for Decommissioning Solar Power Facilities (the “Working Group”) (see here; see also our Japan Renewable Client Alert 43).

The Minister is to designate a category of power generation facilities for which business owners are required to reserve funds as “dismantlement reserve funds” for the cost of dismantling the facilities and disposing the waste therefrom (Article 15-6 paragraphs 1 and 2). Such category is defined as the “reserve category” and, based on the previous discussions, all commercial solar power facilities of 10 kW or more are likely to be included in the reserve category.

Such dismantlement costs are in principle to be reserved through withholding methods to be maintained by the Organization for Cross-regional Coordination of Transmission Operators (external reserve; Article 15-6 paragraphs 3 and 4 and Article 15-8). However, business owners operating a facility in the reserve category are allowed to submit a business plan providing the amount and method for reserving funds for the cost of dismantlement and disposal and other items, and if such plan meets certain standards, the business owner is entitled to instead reserve the funds in accordance with such plan (internal reserve; Article 9 paragraph 3, paragraph 4 item 7, Article 15-11). The items to be included in such plans and the standards to be satisfied will be specified later in the ministerial order. The discussion on the internal reserve that has already taken place at the Working Group will be referred to, but business owners who wish to utilize the internal reserve method are advised to keep an eye on further discussions as this will be a key issue in utilizing such method.

Failure to properly reserve the dismantlement reserve funds, regardless of whether it is an external reserve or internal reserve, constitutes a reason for revocation of the FIT/FIP approval (Article 15 item 4).

(3) Nullification of FIT/FIP Approval of Non-operating Projects

Considering that interconnection rights saved for projects that have not started operation for years since obtaining FIT approval prevent new projects from being developed (see page 21 of the Report of the SRRE), the Bill newly introduces the provision that the FIT/FIP approval for a project that has not started operation for a certain period of time is to be automatically nullified (Article 14 item 2). As the specific period of time for FIP/FIT approvals to be nullified and any transitional measures for existing projects are to be discussed in the future, we need to keep a close eye on such discussions to avoid unreasonable nullification of approvals.

3. The Guidelines for FIT Business Plans

As mentioned in the Section 1, the draft of the new version of the Guidelines for FIT Business Plans is now open for public comments through March 17, 2020. The new Guidelines for solar projects urge a solar project of 10 kW or more to make efforts to buy fire insurance and earthquake insurance so that funds are available when it is necessary to repair or remove the facility due to a natural disaster or other cause during operation.

Since METI is going to discuss whether to make this a mandatory obligation in the future, according to the Report of the SRRE (page 15) and the response to the public comment on the draft Report (Q169), we need to pay close attention to further discussions on this issue as well.

4. Future Outlook

The amendments intended by the Bill include various topics and will have huge impact on the renewable energy market in Japan. As the Bill only outlines the skeleton of the new system, several details are still unclear including when and to what extent the details will be clarified. Furthermore, some of the proposals discussed by the committees do not require amendments to national statutes and are continuously being implemented into practice.

In the midst of the huge tide of these changes in regulations on renewables, it is essential for developers and operators in the renewables market to precisely comprehend these amendments, and examine potential impact on their business or projects and, if necessary, approach the authorities so as to find the best solution for each project.