The Nullification Rule and the Feed-in Premium (FIP) system, which will have significant impact on Japan’s renewable market, have recently received further clarification. Both instruments, as reported in our Japan Renewable Alert 44, will be introduced, effective as of April 1, 2022, by the amendments to the Act on Special Measures Concerning Procurement of Electricity from Renewable Energy Sources by Electricity Utilities (Act No.108 of 2011; the “REA”) pursuant to the Act to Partially Amend the Electricity Business Act and Other Acts in Order to Establish a Resilient and Sustainable Electricity Supply System (Act No. 49 of 2020; the “Amendment Act,” and the REA as amended by the Amendment Act, the “New REA”). In this Japan Renewable Alert 51, we will update you with the latest information regarding these two instruments that may impact your strategies in Japan’s renewable market.
Please note the following definitions for abbreviations used throughout this client alert: “METI” stands for the Ministry of Economy, Trade and Industry, the “Minister” stands for the Minister of Economy, Trade and Industry, the “REA Rule” stands for the Rule for Enforcement of the REA (METI Ministerial Order No. 46 of 2012, as amended) and the “National EIA” stands for the environmental impact assessment procedure under the Environmental Impact Assessment Act (Act No. 81 of 1997).
(1) The Nullification Period
The Nullification Rule is a new regulation where a FIT/FIP approval shall be nullified if the project fails to commence operation within a certain period of time from such approval (the “Nullification Period”) (see our Japan Renewable Alerts 49 and 50). After the promulgation of the Amendment Act in June 2020, we collected opinions from developers calling for swift clarification of the Nullification Period and submitted a letter of request to METI; and discussions on the Nullification Period subsequently began ahead of other amendment matters, and on December 1, 2020, METI’s ministerial order to stipulate the Nullification Period through amendment of the REA Rule (the ”Amendment Order”) was promulgated. The draft outline of the Amendment Order was made public on September 7, 2020, and was open for public comments until October 6, 2020. The government’s response to the public comments (the “Response”) was released on November 6, 2020 (see here, provided only in Japanese). In addition, on December 1, 2020, the same day the Amendment Order was promulgated, METI uploaded an FAQ chart (the “FAQ”) regarding the Nullification Rule on its website (see here).
The basic concept underlying the Nullification Period provided by the Amendment Order is that the Nullification Period can be extended if the project has achieved a certain level of progress as of the date one year after the COD deadline date (or the Effective Date). As a milestone of progress, the Amendment Order stipulates acceptance by a general transmission operator (“GTO”) of an interconnection construction commencement application (keitou renkei kouji chakkou moushikomi-sho, an “ICCA”). According to the REA Rule amended by the Amendment Order (the “New REA Rule”), the Nullification Period is as follows for FIT/FIP solar projects, where, in principle, solar projects for which the COD deadline date falls on or subsequent to the Effective Date are categorized under item a. below and those for which the COD deadline date falls prior to the Effective Date are categorized under item b. below.
The regulations for commercial solar projects in principle are as follows except when a project falls under item b. below (New REA Rule, Article 13-2, paragraph 1, item 1).
For commercial solar projects for which three (3) years have passed since obtaining a FIT/FIP approval as of the Effective Date, the Nullification Period is in principle as follows (Amendment Order, Sup., Article 2, paragraph 1). Among solar projects that were approved by March 31, 2017, and had entered interconnection agreements by July 31, 2016, those projects that submit an ICCA on and after April 2, 2023, are subject to separate stipulations (Amendment Order, Sup., Article 2, paragraph 2).
(2) Potential Impact of Change in Plans
According to METI, the filing of an amendment approval application subsequent to the submission of an ICCA itself does not affect the efficacy of such ICCA and the FIT/FIP approval will not be invalidated only because such amendment approval application is filed after one year has passed from the COD deadline date (Response No. 17 and 33 and the FAQ No. 1-3). However, a project must meet certain requirements including securing land rights for the installation location upon the submission of an ICCA (New REA Rule, Article 13-3) to qualify for an extension of the Nullification Period; hence a FIT/FIP approval can be invalidated if METI later finds out that such requirements were not met at the time of submission of an ICCA (Response No. 33, FAQ No. 1-3), which implies that the addition of land parcels to the facility location subsequent to the submission of an ICCA can potentially invalidate the extension of the Nullification Period.
The Response and the FAQ state that the Minister will not revoke the confirmation even if minor amendments are made to the CPN, but also state that the Minister’s confirmation can be revoked in the case of “non-minor changes that, for example, require FIT/FIP amendment approval application, such as addition of land parcels or a major change to the plan” (Response No. 48, 61, 63, FAQ No.-2-1). The Amendment Order does not provide any provision setting the conditions for revocation of such confirmation, and it is not clear what triggers such revocation. According to our inquiry to the relevant department of METI, METI will decide whether to revoke such confirmation on a case-by-case basis and will not provide any general provisions specifying such requirements in the form of a ministerial order or any other form in writing to clarify the conditions for revocation.
The uncertainties inherent in the above provisions present obstacles to project financing and can potentially hinder the progress of projects underway. We believe it is therefore essential to continue efforts to encourage METI to operate the system in a rational manner.
(3) When to Undertake Procedures Such as Submission of an ICCA
It is also unclear when it will become possible to submit an ICCA or to apply for confirmation by the Minister. Although METI plans to allow submission of the ICCA prior to the Effective Date (April 1, 2022)(Response No. 27, FAQ No. 1-1), it has not indicated any specific time.
(1) Outline of the FIP System
A renewable project approved as a FIP project by the Minister will be entitled to receive a premium (“supply promotion subsidy” under the New REA) in addition to the revenue it earns through normal market transactions.
From FY2022 on, both the FIP system and FIT system will effectively co-exist, and the Minister will designate which power source category is eligible for each scheme in deference to the opinion of the Procurement Price Calculation Committee (the “Committee”) (New REA Article 2-2 paragraphs 1 and 4 and Article 3 paragraphs 1 and 8). Further, the Minister will designate which power sources are subject to a FIT/FIP auction to bid for eligibility for a FIT/FIP approval in deference to the Committee’s opinion (New REA Article 4 paragraphs 1 and 2).
(2) Premium under the FIP System
The premium under the FIP System is a spread between the designated standard price (FIP price) and the reference price (calculated based on market price).
At the session of the Committee held on November 27, 2020, METI put forth the fundamental principle that the FIP price should be based on the same standards as the FIT price and that the FIP period should be the same as a FIT period. The method to calculate a reference price was discussed at the joint sessions of the Subcommittee on the Large-volume Introduction of the Renewable Energy and Next Generation Electric Network and the Subcommittee on System Reform for Renewable Energy to be a Main Power Source, held on October 26 and December 7, 2020.
(3) Scope of the FIP System
At the Committee’s November 27, 2020 session, members discussed and approved METI’s plans to make solar and wind power projects over a certain size subject to the FIP system in FY2022.
With respect to solar projects that are to be approved in FY2022, projects of 1,000 kW (1 MW) or more will be eligible only for the FIP system and will be subject to the auction system. Solar projects of 50 kW or more but less than 1,000 kW will be able to choose between the FIT system and the FIP system; a project that opts to apply for a FIP approval will not be subject to auction, while a project that opts to apply for a FIT approval will be subject to auction if its capacity is equivalent to or more than a threshold for the auction system (currently 250 kW).
With respect to wind projects that are to be approved in FY2022, projects of 50 kW or more will be able to choose between the FIT system and the FIP system. Projects that apply for FIP approval in FY2022 will not be subject to the auction system. With respect to the FIT system, in addition to fixed-bottom offshore wind projects that are already subject to the auction system, onshore wind projects of 250 kW or more will also be subject to the auction system from FY2021.
In addition, the Committee suggested that an existing FIT solar or wind project over a certain capacity will be eligible to choose transitioning from a FIT scheme to a FIP scheme if the project wishes to.
The year 2020 saw many amendments and reforms related to renewable energy. Topics we highlighted in our Japan Renewable Alerts include:
Additional topics include how Japan’s power networks ought to take shape, how a decarbonized society can be realized in the future, and how the power market should function. As global demand for renewable energy grows, the Japanese government has made the expansion of renewables an important policy objective and it will undoubtedly continue to initiate major legal and operational reforms. We look forward to continuing to help developers navigate the latest trends in the new year and to helping lay a strong foundation for the expansion of renewable energy in Japan.