August.16.2021
As the government works to further expand renewable energy, new developments are constantly emerging in related renewable energy schemes. With respect to the mandatory decommissioning reserve scheme that we have addressed several times in our Japan Renewables Alerts, draft guidelines have been published and are currently undergoing the public comment process. In addition, with respect to environmental impact assessments that are required for the construction of solar and wind power plants, the conceptualization of a single “project” will be clarified in a new document that is expected to be released following the completion of the public comment process that is currently underway. Related renewable energy developers will need to comprehend and respond appropriately, as the former will have an impact on all commercial solar projects that operate under FIT/FIP approval whether already installed or not, and the latter is an unavoidable issue in solar and wind power development.
With regard to offshore wind power development in outer sea areas, the government announced on July 30, 2021, the selection of three (3) sea areas that will be surveyed for a preliminary study in establishing a “Japan-style central method” of development. Currently, although offshore wind power projects are to be conducted in the area designated as “promotion zone (sokushin-kuiki)” by the government and the operators of such projects are to be determined through auction held by the government pursuant to the Act on the Promotion of the Utilization of Marine Areas for the Development of Marine Renewable Energy Power Generation Facilities (Act No. 89 of 2018), which came into effect on April 1, 2019, the preliminary surveys on sea areas (e.g., wind surveys and preliminary environmental impact assessments) are conducted by individual developers. The survey project is part of Japan’s current efforts to promote more efficient development of offshore wind power projects by establishing a Japan-style “central method,” in which national and local governments are involved from an early stage in conducting preliminary surveys and securing grid capacity; surveyors are to be commissioned to conduct surveys of the three selected sea areas and provide findings to municipalities and developers.
We will provide an overview of the fast-moving renewable energy schemes that are currently undergoing the public comment process and will also cover the topics impacting the future of offshore wind. We also refer you to our recently published “2021 Orrick Offshore Wind Energy Update and Outlook” as a useful resource on foreign trends that may inform the development of offshore wind here in Japan.
In this Alert, the Ministry of Economy, Trade and Industry is referred to as “METI”; the Electricity Business Act (Act No. 170 of 1964, as amended) is referred to as the “EBA”; the Act on Special Measures Concerning Procurement of Renewable Electricity by Electric Utilities (Act No. 108 of 2011, as amended) is referred to as the “REA”; and the Rule for Enforcement of the REA (METI Ministerial Order No. 46 of 2012, as amended) is referred to as the “REA Rule.”
On July 16, 2021, a draft of the Decommissioning Reserve Guidelines (廃棄等費用積立ガイドライン; the “Draft Guidelines”) was released for the commencement of public comment procedures (see here (provided only in Japanese); until August 15, 2021).
As we have discussed in our previous Japan Renewables Alerts (please refer to Japan Renewables Alert 43, 44 and 52), the decommissioning reserve scheme is scheduled to start in 2022 as a result of amendments to the REA (the amendment by "the Act on Partial Revision of the Electricity Business Act, etc. for the Purpose of Establishing a Robust and Sustainable Electricity Supply System" (Act No. 49 of 2020), promulgated on June 12, 2020). With respect to the decommissioning reserve scheme, on June 30, 2021, two METI Public Notifications (kokuji) (No. 133 and 134 of 2021) as well as a METI ministerial order (shourei)(No. 56 of 2021) that amends the REA Rule to include details of the decommissioning reserve scheme (the government released its responses to opinions collected from the public comment process for such METI ministerial order and public notifications (see Japan Renewables Alert 52) on June 29, 2021 (see here; provided only in Japanese).
The decommissioning reserve scheme obligates FIT/FIP-approved commercial solar power projects to secure funds necessary for the decommissioning of power generation facilities through an external reserve, in principle, or by alternative method (internal reserve) under certain conditions. METI established in 2019 a Working Group for Securing Funds for Decommissioning Solar Power Facilities (the “Working Group”) to discuss the creation of the new scheme, and related laws and regulations have been prepared based on the Working Group’s interim report that was published in December of the same year. While the above ministerial order and public notifications outline the conditions for the use of internal reserves and set forth standard amounts for external reserves, the Agency for Natural Resources and Energy (“ANRE”; an agency established under METI) explained that it will publish further guidelines on the interpretation of requirements to opt for internal reserve and standard amounts for such.
ANRE’s Draft Guidelines address how conditions for internal reserves should be interpreted. For example, where the amended REA Rule stipulates with respect to internal reserves that (1) the project “shall take necessary measures to continue the renewable energy project after the end of the procurement period and disclose such measures” (amended REA Rule, Article 5.1.(8-2).(i)) and that (2) the project “shall take measures for coexistence of the renewable energy project and the local community and disclose the status of such measures” (Article 5.1.(8-2).(ro)), the Draft Guidelines contemplate, for example, measures such as “describing in the project plan the status of studies on the method of power sales after the end of the procurement period” and “describing in the project plan the status of efforts to secure land for the power plant after the end of the procurement period” with regard to (1), and measures such as “making efforts to promote understanding of the project” and “cooperating in environmental education and other activities in the project area” with regard to (2) (p.25).
Furthermore, the amended REA Rule requires that for internal reserves to be permitted, the facility must be 50 kW or larger (Article 5.1.(8-2).(ha)), the certified business project must be in principle an Electricity Generation Utility as defined under the EBA (required to file a notice pursuant to the EBA) (amended REA Rule, Article 5.1.(8-2).(ni)), the amount and timing of the reserve must meet certain standards (Articles 6-2.(1) and 6-2.(2)), the project must agree to disclose the amount of the accumulated internal reserve annually (Article 6-2.(5)), and the project must agree to create an external reserve when any of the internal reserve requirements are no longer met (Article 6-2.(6)) and secure funds through certain methods (Article 6-2.(3)). Such methods to secure funds for internal reserves are: (i) securing funds under management of a financial institution based on a contract with it satisfying certain requirements (the “project-finance method”); or (ii) securing funds by recording such in financial statements and the project owner or its parent company or subsidiary is a listed company (listed company method) (Article 6-2.(3)). The Draft Guidelines explain these requirements and provide the specific standard amounts for internal reserves as well as other details (see p. 24 et seq. of the Draft Guidelines).
As discussed at in the Working Group, the amended REA Rule also provides another option for the “internal reserve” to be secured by a method other than actual reserve (amended REA Rule, Article 6-2.(4)); and on this point, the Draft Guidelines provide for specific methods such as securing funds through certain qualified insurance or guarantee. The Draft Guidelines essentially set forth qualifying criteria, such as that the provider of the insurance or guarantee must be a financial institution or insurance company with a credit rating of A- or A3 or higher, and that the content of insurance or guarantees will be made public (p. 30 of the Draft Guidelines).
Projects that have already been FIT-approved must apply for FIT amendment approval and undergo the review on internal reserve requirements if they wish to opt for internal reserve instead of external reserve, and the Draft Guidelines note that “applying for and receiving an amendment approval to establish internal reserve does not in itself constitute an amendment approval resulting in a change in procurement price (including projects that have received FIT approval but have not yet started operation)” (p. 31). Although the Draft Guidelines do not include description related to FIP-approved projects, additional regulations and description of operations are likely to be added in the future to the REA Rule and the Guidelines regarding the decommissioning reserve for FIP-approved solar projects as the new scheme is to be applied to such projects as well.
The construction work for the installation of a power plant above a certain scale is subject to environmental impact assessments (“EIA”) pursuant to the Environmental Impact Assessment Act (“EIA Act”; such EIA, “Act EIA”). The Electric Power Safety Division of the Industrial Safety Group under the ANRE, a division overseeing the Act EIA on development of power plants, published a draft guidance document titled “Conceptualization of Singularity (ichiren-sei) of Projects in Environmental Impact Assessments for Solar and Wind Power Plants under the Environmental Impact Assessment Act and the Electricity Business Act” (“Conceptualization of Singularity”)(太陽電池発電所・風力発電所に係る環境影響評価法及び電気事業法に基づく環境影響評価における事業の一連性の考え方について) and commenced public comment procedures on July 30, 2021, (see here (provided only in Japanese); until August 30, 2021, (00:00 on August 31, 2021)).
The EIA Act requires certain “projects (jigyou)” to undergo Act EIA. It defines a “project (jigyou)” as “a single series (ichiren) of changes in the shape of the land … and new construction and expansion or alteration of structures for a specific purpose” (Article 2.1; emphasis added) and stipulates that the “singularity (ichiren-sei)” of such a project is to be comprehensively determined based not only on the location and timing of construction but also on considering whether the purpose and the timing of planning and decisions are the same. Based on such interpretation of a single “project” for Act Assessment, METI’s Electric Power Safety Division states that such “singularity” will be recognized with respect to construction of power facilities if it constitutes the “same work” related to the “same power facility.” The Electric Power Safety Division further discusses the criteria to determine the “same work” and “same power facility” in a document titled “Guidelines for Determination of ‘Same Power Facility’ and ‘Same Construction Work’ Related to Construction Plan Notice or Environmental Assessment Requirements” (工事計画届出等又は環境アセスメントの要否の判断に係る「同一発電所」及び「同一工事」に該当するか否かの判断の目安について; dated April 4, 2013, see here (provided only in Japanese); hereinafter, the “Guidelines for Determination”).
There has been some suggestions that the current Guidelines for Determination may not be clear enough as more solar and wind power plants are developed and structures and layouts of such plants become increasingly diversified. Therefore, the Electric Power Safety Division has decided to issue the Conceptualization of Singularity to elaborate on and clarify how “singularity” should be determined. This effort is related to its understanding that there are some solar power projects that have been intentionally divided up into smaller sizes to circumvent the threshold for Act EIA (see the minutes of the METI’s expert committee meeting held on June 15, 2021 (see here), p. 22).
The determination of the “same power facility” is to rely on (i) same premises or proximity, (ii) unity of management, and (iii) connectivity of facilities, and, after determination thereof, the “same work” prong is to be determined. Among the elements for determining the applicability of “same power facility,” with respect to (i) same premises or proximity, the draft Conceptualization of Singularity states: “in addition to obvious cases where facilities are located within the ‘same premises’ surrounded by enclosures or fencing, this element will be deemed satisfied when mutual proximity is observed (even if not within the ‘same premises’),” considering that various layouts are possible with respect to solar power plants, including creating physical distance between power generation facilities. Further, while the draft Conceptualization of Singularity notes the difficulty of assigning specific values to “proximity” and does not attempt to do so, it explains that “for solar power facilities, appropriate determinations should be made considering the circumstances of individual projects on the premise that such proximity can be recognized, for instance, when there is not a large distance between facilities installed within a single municipality or across neighboring municipalities.”
With respect to the element of (ii) unity of management, the draft Conceptualization of Singularity states that when determining whether or not the project is managed by the same person/entity, “it is necessary to identify not only the management entity in the legal and external sense, that is, the installer of electric equipment under the Electricity Business Act, but also the ‘substantial’ management entity in the sense of the company that manages and operates the project or receives profits from the project.” Further, in cases where projects are split up during the development process, it states that “‘unity of management’ can be found if the transferee maintains a capital relationship with the transferor or if the parties involved in each of the split businesses …are the same, or if the ‘substantial’ management entity is otherwise in actuality the same,” and that therefore, in the event that a project claims that “unity of management” is lost as a result of split of a project, “the project must provide a reasonable explanation” for the administrative agency to make a determination on such element.
On July 30, 2021, ANRE of METI and the Ports and Harbors Bureau of the Ministry of Land, Infrastructure, Transport and Tourism (MLIT) announced the selection of three (3) sea areas for the “Survey Project on Integrated Regional Development of Offshore Wind Projects” (off the coasts of the Gan’u and Minami-Shiribeshi districts in Hokkaido Prefecture (fixed foundation), Sakata City in Yamagata Prefecture (fixed foundation), and Hirono Town in Iwate Prefecture (floating foundation); see (provided only in Japanese)).
As mentioned at the beginning of this Alert, due to the scale of offshore wind and the many stakeholders involved and for a smooth introduction of offshore wind power generation, the government considers it essential for smooth introduction of offshore wind power generation to establish a “central method” for development in which national and local governments are involved from the initial stages to conduct surveys of wind conditions and other factors and secure grid connections timely and efficiently.
The current auction process for general sea areas was launched without a mechanism for such government-led grid security and surveys due in part to the lack of progress in reforming conventional systems. In the preliminary study for implementation of the “central method”, the New Energy and Industrial Technology Development Organization (NEDO) will commission surveys for the three selected sea areas and provide findings to local governments and developers. If projects in such areas achieve COD, they are expected to be the first offshore wind projects in Japan to be developed through such concept.
The government is also considering a mechanism that would allow a certain extent of involvement in securing grid access (see Japan Renewables Alert 54), and amendments presumed on such mechanism were made on July 30, 2021, to the “Guidelines for Designation of Offshore Renewable Energy Power Facility Promotion Zones” (see here (provided only in Japanese); please refer to Japan Renewables Alert 54 regarding the public comment process for the draft amendments).
In addition, on August 11, 2021, the government announced that it is ready to designate the offshore area of Happou Town and Noshiro City in Akita Prefecture as a new promotion zone (sokushin-kuiki) (see here). Before the designation of a promotion zone the government must make a public announcement thereof and provide related documents explaining the reason for the contemplated designation to be open to public for two weeks. The area was nominated as a “prospective zone” last year and is this time expected to be elevated to a promotion zone.
Orrick has been involved in offshore wind projects for many years in many parts of the world, including Europe, the leading region in offshore wind, and we are prepared to support investors and developers in the industry by leveraging our extensive global knowledge and experience. Please see the July 27, 2021 edition of our “Orrick Offshore Wind Energy Update and Outlook,” a collaboration of our global offices and local partner firms that provides an overview of the current and future state of offshore wind energy around the world.
In October 2020, the Japanese government declared a goal carbon neutrality by 2050, and in April 2021, it set a target for reducing greenhouse gas emissions by 46% from FY2013 levels by FY2030. These targets cannot be achieved without further introduction of renewable energy and greater promotional measures need to be taken by the government. At the same time, it is essential to obtain strong support from society at large, and as solar power continues to expand, the decommissioning reserve scheme has been one of the government’s responses to rising public concern over the disposal of power generation equipment and the public calls for proper implementation of EIAs.
As Japan pushes forward with renewable energy and reforms of conventional systems that are continually impacted by various societal stakeholders and international trends, it will be important for developers and operators to keep close watch and take timely and appropriate actions including making their stance known.