Japan Renewable Alert 52

March.01.2021

日本語版

Today’s Topics

  1. Public Comment Process on Decommissioning Cost Reserve and Other Matters
  2. Further Details of the FIP System
  3. Other Matters Addressed in the Draft Ordinances
  4. Future Outlook

In the upcoming fiscal years, we will see the implementation of critical changes to the REA, which has been amended by the “Act to Partially Amend the Electricity Business Act and Other Acts in Order to Establish a Resilient and Sustainable Electricity Supply System,” promulgated on June 12, 2020 (Act No. 49 of 2020; the “Energy Resiliency Act”). In particular, the introduction as of April 1, 2022 of a new (1) FIP system, (2)decommissioning cost reserve scheme, and (3) nullification rule will have a significant effect on Japan’s renewable energy industry (see Japan Renewable Alert 44).

A METI ordinance for (3) the nullification rule was promulgated on December 1, 2020 (METI Ordinance No. 85 of 2020; please see item 1 of Japan Renewable Alert 51), and a draft of the METI ordinance (shourei) and METI notifications (kokuji) related to (2) decommissioning cost reserve scheme and other matters (the “Draft Ordinances”) were released on February 8, 2021 and are open to public comments until March 9, 2021 (see here). Discussion of the details of (1) the FIP system is nearing finalization as well. METI’s expert committee (joint committee 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; the “Joint Committee”) published a report on February 26, 2021 summarizing the discussions thus far regarding all three schemes (“Detailed Plan for the Amended REA included in the Energy Resiliency Act”; the “Joint Committee Report”)(see here; provided only in Japanese).

This client alert provides an outline of the current discussions on the decommissioning cost reserve scheme and the FIP system.

Please note that the following abbreviations are used throughout this client alert: “REA” stands for 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), “REA Rule” stands for the Rule for Enforcement of the REA, “METI” stands for the Ministry of Economy, Trade and Industry, and the “Minister” stands for the Minister of Economy, Trade and Industry.

1. Public Comment Process Begins on Decommissioning Cost Reserve and Other Matters

The decommissioning cost reserve scheme obligates certain power sources designated by the Minister to reserve funds for decommissioning costs to ensure the appropriate decommissioning of facilities after expiration of the FIT/FIP term (see Japan Renewable Alert 43). In principle, reserves are to be kept externally under the Organization for Cross-Regional Coordination of Transmission Operators (OCCTO), and other methods such as reserve by deposit into the project’s own accounts (internal reserve) will be allowed only under certain conditions.

As recommended by METI’s expert committee (Working Group for Securing Funds for Decommissioning Solar Power Facilities; the “Working Group”), the Draft Ordinances propose applying the decommissioning reserve scheme to solar projects of 10 kW and above. The specific contemplated reserve amount is as outlined in the Working Group’s interim report (released on December 10, 2019; see here; provided only in Japanese; the “Interim Report”) and the Procurement Price Calculation Committee’s (the “Calculation Committee”) opinion on procurement price for FY2021 (April 2021 to March 2022) and beyond (released on January 27, 2021, see here; provided only in Japanese; the “Calculation Committee Opinion”). Reserves are to be deposited monthly in an amount calculated by multiplying the designated unit price per 1 kWh (decommissioning reserve base price) by the volume of electricity, and the Draft Ordinances set out the following figures in line with the Interim Report and Calculation Committee Opinion.

Approval Year

FIT Price
(procurement price

Decommissioning Reserve Base Price
(unit price of deposit)

FY2012

JPY 40/kWh

JPY 1.62/kWh

FY2013

JPY 36/kWh

JPY 1.40/kWh

FY2014

JPY 32/kWh

JPY 1.28/kWh

FY2015

JPY 29/kWh
JPY 27/kWh

JPY 1.25/kWh

FY2016

JPY 24/kWh

JPY 1.09/kWh

FY2017

Non-Auction

JPY 21/kWh

JPY 0.99/kWh

Eligible to bid Round 1

varies for each successful bidder

JPY 0.81/kWh

FY2018

Non-Auction

JPY 18/kWh

JPY 0.80/kWh

Eligible to bid Round 2

(no successful bidder)

-

Eligible to bid Round 3

varies for each successful bidder

JPY 0.63/kWh

FY2019

Non-Auction

JPY 14/kWh

JPY 0.66/kWh

Eligible to bid Round 4

varies for each successful bidder

JPY 0.54/kWh

Eligible to bid Round 5

varies for each successful bidder

JPY 0.52/kWh

FY2020

10 kW or more and less than 50 kW

JPY 13/kWh

JPY 1.33/kWh

50 kW or more and less than 250 kW

JPY 12/kWh

JPY 0.66/kWh

250 kW or more

varies for each successful bidder

JPY 0.66/kWh

FY2021

10 kW or more and less than 50 kW

JPY 12/kWh

JPY 1.33/kWh

50 kW or more and less than 250 kW

JPY 11/kWh

JPY 0.66/kWh

250 kW or more

varies for each successful bidder

JPY 0.66/kWh

 

Furthermore, the Draft Ordinances outline the requirements to be eligible for internal reserve method, which will be provided by the amended REA Rule. In addition to fulfilling certain conditions related to the power generation facility and some other requirements, a project will be required to “undertake and make public certain measures necessary to continue the relevant renewable energy business even after the expiration of the FIT term” and to “undertake and make public the status of efforts aimed at the coexistence between local communities and the relevant renewable energy business.”

The Joint Committee Report comments further on discussions related to the decommissioning cost reserve scheme, including matters not covered in the Draft Ordinances (such as the standard for the deposit amount under the internal reserve method), which is in line with the Interim Report.

2. Further Details of the FIP System

Under the FIP system to be implemented as of April 1, 2022, a renewable energy project that has obtained an approval from the Minister (FIP approval) will be entitled to receive a certain premium in addition to the revenue it earns through market transactions (exchange or bilateral transaction).

In-and-after FY2022, the Minister will decide, deferring to the opinion of the Calculation Committee, as to which power sources will be eligible for the FIT scheme or the FIP scheme. The Calculation Committee Opinion that was released as of January 27, 2021, contains the criteria for FIT as well as FIP eligibility for FY2022, when the FIP system will debut. With respect to FY2022 solar projects, projects of 1,000 kW (1 MW) or more will be eligible for the FIP scheme (auction) only, projects of 50 kW or more but less than 1,000 kW will be able to choose between the FIT scheme (auction for projects over a certain size) and the FIP scheme (non-auction), and projects under 50 kW will be within the scope of the FIT scheme. With respect to FY2022 wind projects, there will be no category solely for FIP, and projects of 50 kW or more will be able to choose between the FIT scheme (auction for certain category of projects) or FIP scheme (non-auction)  while projects under 50 kW will be eligible only for the FIT scheme. The Calculation Committee Opinion does not address how offshore wind projects that are subject to the Act on Promoting the Utilization of Sea Areas for the Development of Marine Renewable Energy Power Generation Facilities (Act No. 89 of 2018; the “New Offshore Act”) should be handled.

The Joint Committee has discussed the FIP system and published details in the Joint Committee Report, including topics related to the amount of the FIP premium.

The unit price (per kWh) of the premium under the FIP scheme will be a spread between the FIP price (standard price) and the reference price, which is to be calculated based on market price (premium unit price = FIP price – reference price). While eligible power sources and FIP prices will be determined by the Minister, deferring to the opinion of the Calculation Committee, reference prices will be calculated based on wholesale market price, the specific method of which will be specified in a METI ordinance.

The Joint Committee has discussed the calculation method for reference price and has reached the conclusion that reference price (per kWh) is to be calculated by adding the environmental attribute equivalent to the market price and deducting balancing cost therefrom (reference price = market price + environmental attribute equivalent – balancing cost), which means that the balancing cost equivalent is to be added into the value of the premium while the environmental attribute equivalent is to be excluded therefrom since FIP projects will be able to separately earn profit from selling the Non-FIT Non-Fossil Certificates, representing the environmental attributes, to electricity retailers. The Joint Committee also discussed in detail how to calculate the market reference price and METI presented trial calculations based on the discussion using actual past numbers at the session held on January 13, 2021 (see here; for the trial calculation, see here; provided only in Japanese).

FIT projects of 50 kW or more that were approved in the past will have the option to transfer to the FIP scheme and maintain the same pricing level (Calculation Committee Opinion, pp. 8-10; Joint Committee Report, p. 4). In the interest of promoting the integration of renewable energy into the market by activating aggregation businesses, METI will put incentives in place with the expectation that they will encourage such transfer early on. According to the discussions at the Joint Committee, for variable renewable energy sources (solar and wind), the above balance costs in the process of the calculation of a FIP premium will be an amount that is more than the estimated cost for balancing during the initial years of the FIP system: JPY1.0/kWh for FY2022, progressively decreasing each year by JPY0.05/kWh until FY2024 and by JPY0.1/kWh in and after FY2025 until ultimately dropping down to the estimated costs required for balancing (Joint Committee Report, pp. 9-10).

3. Other Matters Addressed in the Draft Ordinances

In addition to the decommissioning cost reserve scheme outlined in Section 1, the Draft Ordinances also address the below matters.

The Draft Ordinances set forth FIT prices and items related to the FIT auction in FY2021 (April 2021 to March 2022) that are in line with the Calculation Committee Opinion. For FY2021, the Draft Ordinances provide that solar projects and onshore wind projects of 250 kW or more and biomass projects of a certain category are to be subject to FIT auction that  is to be conducted in four rounds for solar and one round for onshore wind and biomass in FY2021, and that offshore wind projects that are out of the scope of the New Offshore Act will not be subject to FIT action in FY2021. While the upper limits for FIT auction were previously not made public, the amounts in the table below have been announced for FY2021 with respect to solar and onshore wind. The FY2021 FIT auction schedule is listed in the Calculation Committee Opinion.

 

Solar Round 1
(Round 8 in total)

Solar Round 2
(Round 9 in total)

Solar Round 3
(Round 10 in total)

Solar Round 4
(Round 11 in total)

Onshore Wind

Upper Limit for FIT Price

JPY 11.00/kWh

JPY 10.75/kWh

JPY 10.50/kWh

JPY 10.25/kWh

JPY 17.00/kWh

 

The Draft Ordinances also include a repeal of the “designated electric utility scheme (shitei denki jigyousha seido).” Currently, there is an annual upper limit (720 hours for wind power and 360 hours for solar) for the amount of curtailment a general transmission and distribution services operator (TSO) can enforce for renewable energy power sources due to supply and demand adjustments in its area (“Supply and Demand Curtailment”) without compensation, and it is only in those areas of certain electric utilities designated by the Minister that Supply and Demand Curtailment can be enforced without compensation and without such upper limit. The Draft Ordinances repeal this designated electric utility scheme and allow TSOs to apply unlimited and uncompensated Supply and Demand Curtailment nationwide to power sources newly connecting to the grid.

4. Future Outlook

Renewable energy is now in the middle of a transition period in which various large and small legal and regulatory amendments are being discussed. As another potentially major change in addition to the topics above, METI is currently considering the possibility of allowing the purchase of Non-Fossil Certificates and renewable energy by consumers directly from power producers and is going to discuss the possibility of such scheme and summarize the discussion by around summer of 2021 (the current Electricity Business Act presumes that consumers are to purchase electricity from licensed electricity retailers, and while consumers may purchase electricity with environmental attributes from retailers that have procured Non-Fossil Certificates, consumers cannot directly purchase Non-Fossil Certificates from power sources)(see Exhibit 7-1 from the Cabinet Office’s expert committee meeting held on February 3, 2021 (see here; provided only in Japanese)). This topic may impact the current discussion on the approach to environmental attributes in the process of calculation of reference price under the FIP system, as the Joint Committee Report notes that this topic “can be revisited if necessary” since “the system of Non-Fossil Certificates may be amended in the future considering the growing consumer demand for environmental attributes” (Joint Committee Report, p. 8).

From the end of December 2020 and into January 2021, Japan experienced an unexpected and arguably globally unprecedented event where the wholesale electricity market prices on the Japan Electric Power Exchange (JEPX) surged for all time slots and stayed high for approximately one month. The surge was attributed to the fact that the bid price for purchase by electricity retailers continued to rise in response to a large decrease in the volume of offers on the JEPX beginning in December 26, 2020. The price surge was a hard blow to many new electricity retailers focusing on supplying renewable energy and affected many general consumers who had chosen market-linked pricing in the recently liberalized electricity retail market. This unprecedented event has triggered some critics to question the arrangements of Japan’s electricity market system in the first place and the government’s position on the disclosure of material market information. It may impact discussions on how market prices are to be referenced under the FIP system, and the Joint Committee Report notes that “the method of referencing wholesale market price under the FIP system should be reviewed as necessary” based on the findings from the investigation of this incident (Joint Committee Report, p. 7).

As various reforms continue to be carried out in tandem and new challenges arise, all parties related to renewable businesses need to take a broad view of the regulations as a whole and continue to pay close attention to the details of related regulations.