Energy & Infrastructure Alert
“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”), which amends the Electricity Business Act (Act No. 170 of 1964, as amended), the Act on Special Measures Concerning Procurement of Electricity from Renewable Energy Sources by Electricity Utilities (Act No.108 of 2011, as amended, also known as the FIT Act) (the “REA”) and other related acts, was passed by the plenary session of the House of Representatives (Shugi-in) on May 26, 2020, and then by the plenary session of the House of Councilors (Sangi-in) on June 5, 2020, at which point the original bill submitted by the Cabinet become law, and was formally promulgated on June 12, 2020, as the Act No. 49 of 2020 (the “Act”). The title of the REA is to be changed to the Act on Special Measures Concerning Promotion of Utilization of Electricity from Renewable Energy Sources.
With respect to the renewable energy business, as we reported in our Renewable Alert Letter 44 dated March 10, 2020, the Act includes the introduction of (1) the Feed-in-Premium system, (2) the reserve system for dismantling costs and (3) the expiration deadlines for FIT/FIP approvals, all of which are important amendments that can impact the feasibility of renewable energy projects. The Act will be fully effective as of April 1, 2022, but it only sets the framework of the new systems and the details of some systems are still unknown. Such regulatory uncertainty, especially with respect to systems with a huge impact such as (3) above, has already started posing a threat to developers making early investments for future projects. As we have been receiving multiple inquiries from our clients regarding issues related to (3), we will focus on this point in this Renewable Alert Letter.
The Act amends Article 14 of the REA as follows, intending to nullify approvals for projects that do not commence operation within a certain period after obtaining the FIT/FIP approval (Article 14 item 2 of the amended REA). The new system will eventually set “expiration deadlines” for FIT/FIP approvals and therefore will have an even larger impact on renewable projects than the current COD deadlines, which reduce the FIT period of a project by the amount by which COD overruns to deadline.
Article 14 of the current REA
An approval under Article 9 paragraph 3 [……] shall be nullified when the Approved Business Owner ceases the Renewable Energy Power Generation Business pursuant to the Approved Business Plan.
Article 14 of the amended REA
An approval under Article 9 paragraph 4 [……] shall be nullified if the Approved Business Owner falls into one of the following items:
1 When it ceases the Renewable Energy Power Generation Business pursuant to the Approved Business Plan.
2 When it does not commence the Renewable Energy Power Generation Business pursuant to the Approved Business Plan within the period specified for each category of Renewable Energy Power Generation Facility by the METI ministerial order.
At the fourth session of the Subcommittee on System Reform for Renewable Energy to be a Main Power Source (the “Subcommittee”), an expert panel under the Ministry of Economy, Trade and Industry (“METI”), held on November 18, 2019, METI pointed out that the efficient use of power grids is impeded by projects that do not commence operation for a long time after securing interconnection rights, and presented a few examples of measures taken by other countries to address this issue, such as automatic nullification of the approval or reduction of the procurement term by twice the overrun period once the project fails to commence operation by the deadline. The interim report (the “Report”) summarizing the discussions at the Subcommittee and published on February 25, 2020, (see here, only provided in Japanese) states that “if a project does not commence operation for a long time after obtaining an approval,” legal measures should be taken such as “(i) invalidating the approval or (ii) shortening the procurement term and invalidating the approval if the procurement term expires” (see p. 21). The first proposal seems to be embodied in Article 14 item 2 of the amended REA.
With respect to the specific period of time after which the approval for a project will be nullified, the Act only provides that it is to be specified by a METI ministerial order for each category of project (power source, capacity, etc.) and does not provide the specific time itself. Such period of time is likely to be specified through the amendment to the Rule for the Enforcement of the REA and will undergo a public comment procedure, but developers and investors are advised to pay close attention to the discussions at METI’s expert panels as the direction of the amendments is eventually expected to be determined at such panels prior to the public comment procedure. Such expert panels used to be regularly held publicly, but many of them are currently not held due to the pandemic of COVID-19, and the resolution of the above issue remains uncertain.
The Report also states that “projects that have already obtained an approval should be subject to the similar measures if nonoperating status lasts for a certain period of time commencing on the effective date of such measures” while “appropriate consideration should be given to power sources with long lead time” (see p. 21). The Report seems to be suggesting that existing projects are to be subject to the automatic nullification described above if they do not start operation for a certain period of time after April 1, 2022, but the details are also still unknown.
In order to responsibly conduct their business, developers always undertake the development of a project based on a schedule that includes years of negotiation and coordination with local residents and governments, loans from financial institutions and various agreements on construction and operation of the power plant. Such development of renewable energy projects becomes difficult when the details of a new system with a huge impact are completely unknown. The negative impact of such uncertainty can be magnified in the current situation where the pandemic is causing delays in construction and other negative impacts, which can possibly lead to confusion worse than the introduction of the so-called “new rule” as we reported in our Renewable Alert Letter 38 dated December 7, 2018. Some banks have already begun expressing concern about lending funds for projects, and developers will have to suspend or completely give up the development of some projects if such unforeseeable situation lasts longer, which may possibly shrink the entire renewable market in Japan. The government has failed to show the direction or even a rough schedule for discussions on the issue; but it needs to take such situation seriously and to hear the market and show the details of the system immediately as long as it continues to pursue a fundamental policy of soliciting and utilizing private investments to make renewable energy the main power source of Japan.
Amid various uncertain factors, developers and investors need to precisely comprehend the various amendments, including what is decided and what is not, and to effectively let their voices be heard in order to make the government aware of the actual circumstances renewable businesses are in and to urge the government to take appropriate action immediately.