Energy& Infrastructure Alert
As we reported in our Renewable Alert Letter 40, the Act of Promoting Utilization of Sea Areas in Development of Power Generation Facilities Using Maritime Renewable Energy Resources (Act No. 89 of 2018; the “Act”) was promulgated on December 7, 2018, and took effect as of April 1, 2019. The Act aims to promote the utilization of general sea areas for renewable energy power generation while maintaining harmonization with other maritime policies, and is expected to advance Japan’s offshore wind market.
Under the Act, the Minister of Economy, Trade and Industry and the Minister of Land, Infrastructure, Transport and Tourism are to designate “promotion areas (sokushin-kuiki)” for which the organizer of the power generation project is to be selected through a public auction, and such selected organizer is to obtain a FIT approval and exclusive utilization permit for the relevant sea area. After designating a certain area as a promotion area, the government is to formulate for each promotion area the “public auction exclusive utilization guidelines” (the “Utilization Guidelines”) (Article 13 paragraph 1 of the Act) designating how to decide the applicable FIT price (paragraph 2 item 8), criteria on which to evaluate applicant businesses (item 15) and other items and select the applicant who has filed the best suitable “public auction exclusive use plan” (paragraph 3).
In July 2019, the government announced four “prospective areas,” and as of December 27, 2019, designated the sea area off the coast of Goto City in Nagasaki Prefecture, one of the four prospective areas, as a promotion area under the Act. On April 17, 2020, the government published the draft Utilization Guidelines for the Goto project (the “Draft”) and is now soliciting public comments to the Draft until May 16, 2020 (see here, only provided in Japanese). Although the outline of Utilization Guidelines in general has already been shown in the “guidelines for practice of the exclusive utilization through public auction in general sea area” (the “Practice Guidelines”) published on June 11, 2020, the Draft is drawing great attention from developers and investors because it will be the first set of actual Utilization Guidelines under the Act.
① Basic Terms of the Auction
Each set of Utilization Guidelines is to designate items provided under Article 13 paragraph 2 of the Act. Among the items are the type of power source, power output, requirements for applicants, method of determining the FIT price and the FIT term, which are to be determined by respecting the opinion of the Procurement Price Calculation Committee (the “Committee”) (Article 13 paragraph 4).
The Draft, based on the discussion at the 55th session of the Committee held on February 4, 2020, states that the target project is to be a floating offshore wind project, the maximum output is to be 21,000 kW, the output of the power generation facility is to be a minimum of 16,800kW and the FIT price is to be JPY36/kWh (pp. 6, 7). Among the requirements listed in the Draft for applicants to participate in the auction are that applicant businesses (i) need to be Japanese entities, (ii) have experience with maritime civil engineering works inside or outside of the country, and (iii) have obtained a letter of intent from a financial institution that has experience with project finance in Japan or similar experience (pp. 14, 70 and 71).
② Evaluation Criteria
Under the Act, the criteria on which to evaluate applicant businesses will be determined and shown in the Utilization Guidelines after consultation to the governor(s) of relevant prefecture(s) and academic experts (Article 13 paragraph 2 item 15, paragraph 5). The Draft laid out the following criteria (pp.40 et seq. of the Draft), based on the discussion at the Joint Session, which by and large coincide with the basic concepts in the Practice Guidelines.
Applicants are to be evaluated and given up to a maximum of 240 points, consisting of up to 120 points for each of the two categories of (i) the price and (ii) the feasibility of the project proposal. As the procurement price for the Goto project is to be set at the single price of JPY36/kWh, all applicants are to be given 120 points for the category of the price, and the applicants are to compete with one other based on the evaluation of project feasibility. The project feasibility will be evaluated based on the “capacity to perform the project” (80 points) and the “coordination with the local stakeholders and impact on the local economy” (40 points). The “experience” of applicants constitutes 30 points of the “capacity” category. In evaluating the “experience” of the applicant, the experience of the whole applicant group, including the experience of the “project operators” organizing and executing the project (such as members of the SPC) and that of the EPC contractors or O&M providers, will be taken into consideration. As there are few examples of offshore wind projects in Japan to date, experience with (i) installation of wind turbines, (ii) general maritime civil engineering works and (iii) operation of wind power projects are to be assessed when evaluating the experience of applicants, and whether the relevant experiences took into account natural or social circumstances in Japan will be considered in evaluating the “experience” of the applicant.
③ Assignment of the Project Rights
The Act allows amendments to the selected plan only when it is likely to contribute to further improvement of the public interest or due to unavoidable reasons (Article 18 paragraph 2 item 2). The above expert panel discussed appropriate requirements for changes to the members of the consortium or the SPC operating the project under such provision, balancing the necessity to keep the evaluation described above credible and the necessity to lower the costs of offshore projects by allowing businesses to operate in a reasonable manner. The Draft, reflecting such discussions, shows that such amendment to the plan should be cautiously examined if the effect of the change is to be considered material such as (i) the change of the entity which has the largest portion of the voting rights, (ii) the exit of the project operators or (iii) a change resulting in the ratio of the voting rights held by the entities that have been under evaluation in the selection process being under a certain standard (less than two-thirds prior to the COD, one-half or less subsequent to the COD), whereas a change of the entities is to be allowed in principle if such change does not fall under any of the above material changes (pp. 51 and 52).
④ Information Provided by the Government
The government is to provide certain information useful for participating in such public auction. The Draft provides information regarding the port to be used for the project and the fee for such use. The government also began, as of April 22, 2020, to provide information regarding interconnection, including the amount of the construction charge and other relevant information in response to a disclosure application by businesses meeting the requirements for participation in the auction (see here, only provided in Japanese).
According to the available statistics, the global introduction of offshore wind power, which was 1.5GW in 2008, has increased dramatically to reach 23.1GW in 2018[i], and some expect that the number can even reach 228GW in 2030 and 1,000 GW in 2050[ii].
In Japan, the government newly created the Act to catch up with such worldwide trend and is getting ready to conduct the first offshore wind auction pursuant to the Act. This move by the Japanese government is overall welcomed by many developers and investors inside and outside of the nation, but there are still unresolved issues at this early stage. For instance, the current practice is based on the assumption that the result of the research and investigation of potential sea areas and the securement of interconnection rights are to be conducted by businesses. Businesses have no choice but to offer the result of their expensive research and investigation for free and to agree to offering interconnection rights for the price that may not necessarily be equivalent to the market value, being unable to be sure whether they will be selected through the auction process. It is still not clear how the government is going to protect businesses that have made initial investigations in advance while at the same time promoting further participation of other bidders in a fair and reasonable way under the current practice.
Once the Utilization Guidelines are determined, businesses are compelled to make their decision on whether they will accept all the conditions laid out in the Utilization Guidelines or will not participate in the relevant auction process at all. Since the Utilization Guidelines for the Goto project will be the first precedent for offshore projects in the future, businesses who wish to expand their business in the Japanese offshore market are advised to thoroughly review the Draft and submit their opinions in order to help ensure the appropriateness of the auction process and the whole practice, regardless of whether they intend to participate in the auction for the Goto project.
The team acts for leading sponsors, lenders and investors in project development, mergers, acquisitions and financings involving offshore wind in the United States, Europe and Asia. This includes floating wind as well as fixed bottom projects. Most recently, members of the team advised on the $3 billion project financing of the Changfang and Xidao projects (the largest Taiwanese offshore wind project financings to date), the £1.3 billion bond acquisition of a 50% stake in the Walney Extension offshore wind farm in the UK and the £472 million sale of transmission system assets relating to the Race Bank offshore wind farm to Diamond Transmission in the UK.
They have been involved in over 30 different offshore wind projects in the last 10 years in the United States, Europe and Asia. Clients for whom they have worked include Orsted, Equinor, Iberdrola, Innogy, BlackRock, Copenhagen Infrastructure Partners, Macquarie, Northland Power, PKA, SSE and numerous financial institutions.
The team has been involved in many firsts, including (i) the first HoldCo financing of an offshore wind farm, (ii) the first investment grade rated bond issue for an offshore wind farm and (iii) the first attempted project financing of a floating offshore wind project.
Our new teammates in London complements Orrick’s existing extensive global renewables experience. We will be increasingly focusing on advising on offshore wind projects around the globe, including those in Japan.
[i] REN21, Renewables 2019 Global Status Report, p. 123 Figure 37.
[ii] IRENA, Future of Wind, p. 43 Figure 19.