Japan Renewables Alert 58

March.30.2022

日本語:コーポレートPPA(第2弾):FIP制度本年4月に開始

Today’s Topic

Corporate PPAs (No.2) – Feed-in Premium to Start in April 2022

Amendments to the Act on Special Measures Concerning Procurement of Electricity from Renewable Energy Sources by Electricity Utilities (Act No. 108 of 2011; the Act will also be renamed the “Act on Special Measures Concerning Promotion of Utilization of Electricity from Renewable Energy Sources”; hereinafter referred to as the “REA,” regardless of prior to or after the amendments) newly introduce the Feed-in Premium (FIP) scheme effective as of April 2022 as another supporting measure for renewable power sources in addition to the Feed-in Tariff (FIT) scheme, which was established and is currently operating under the REA.  Under the FIP scheme, FIP-approved renewable projects are to earn revenue by conducting normal market transactions (unlike FIT projects) and will be further granted a FIP premium.  Pursuant to the REA, the Minister of Economy, Trade and Industry (the “Minister”) is to designate, based on the opinion of the Procurement Price Calculation Committee (the “Committee”), which categories of power sources (technologies, capacity and installation method) will be eligible for FIT/FIP approvals and what the FIT/FIP prices will be (or whether such applicable prices will be determined through FIT/FIP auction).  Such opinion of the Committee was published as of February 4, 2022 (see here, provided only in Japanese; the “Committee Opinion”).  The draft designations by the Minister (see here, provided only in Japanese) based on the Committee Opinion and the draft ministerial order on detailed calculation method of FIP premiums (see here, provided only in Japanese) have already completed public comment procedures; and the FIT/FIP premiums in FY2022 (April 2022 to March 2023) and beyond were formally announced on March 25, 2022 (see here, provided only in Japanese).

As we reported in our Japan Renewables Alert 56 (see here), there has been growing interest in the procurement of renewable energy among corporates across various fields, including through the use of corporate PPA schemes that could potentially be used in conjunction with the FIP scheme, which assumes that renewable power producers will be engaged in ordinary market transactions.  As the second installment in our corporate PPA series, this report summarizes the FIP scheme and the new gate it opens for the renewable market in Japan.

1. Outline of the FIP Scheme

Under the FIT scheme, which was introduced by the REA as enacted in July 2012, general transmission and distribution system operators (“TDSOs”) are obligated to purchase energy generated from renewable projects that are FIT-approved by the Minister; thus, renewable projects have been entitled to have the entirety of their generated energy purchased at a fixed price (the procurement price, or the “FIT price”) for a certain period (the procurement period, or the “FIT period”) by a relevant TDSO as long as they have secured interconnection right and obtained a FIT approval from the Minister (note that prior to April 1, 2017, the purchase obligation applied to electricity retailers; as a result, offtakers of some FIT projects continue to be retailers even now).  In addition, while ordinary power producers must submit a generation plan in advance based on power generation projections for every timeframe and are later subject to imbalance settlement for any deviation from such generation plan based on the imbalance payment prices calculated from fluctuating market prices and other factors, FIT power producers are eligible for exemption from such obligation to submit generation plans and pay imbalance settlements (FIT imbalance exemption).

By releasing renewable power producers from the risks of market price fluctuation and imbalance payments, the FIT scheme has been successful in enticing investment in renewable projects and accelerating Japan’s sluggish introduction of renewable energy, and renewables have now reached a stage where they are expected to be integrated into the market and compete with other power sources.  Unlike under the FIT scheme, FIP projects are to earn revenue through normal market transactions (i.e., transactions in the wholesale electricity exchange under JEPX or bilateral transactions) with retailers; the FIP scheme is considered to be a system “bridging” the transition from the FIT phase to the full market transaction phase.  Renewable projects that are FIP-approved will be entitled to receive, in addition to the revenue from market transactions, a “premium” through the Organization for Cross-regional Coordination of Transmission Operators (OCCTO) that will be calculated in accordance with a certain method (the premium is called a “supply promotion subsidy (kyoukyuu sokushin koufukin)” under the amended REA and will be sourced from surcharges ultimately borne by consumers) (see below chart).  The premium will be granted monthly based on the amount calculated by multiplying the premium unit price (“supply promotion subsidy unit price (kyoukyuu sokushin koufukin tanka)”; JPY/kWh) by the energy supplied by the FIP power producer for the relevant month (kWh), with certain added adjustments (the adjustment is related to the energy generated during the timeframes where the lowest spot market price occur (JPY0.01/kWh), that is, where curtailment on renewables could be ordered) (Premium (JPY) = Premium Unit Price (JPY/kWh) x Energy Supplied (kWh) x Adjustment).  The premium unit price is calculated monthly by subtracting the reference price (the price based on the market price and other factors) from the FIP price that is designated by the Minister based on the opinion of the Committee (Premium Unit Price (JPY/kWh) = FIP Price (JPY/kWh) - Reference Price (JPY/kWh)).

graphic comparing FIT Scheme and FIP Scheme

Chart is sourced from the website of the Agency for Natural Resources and Energy (see here)

The FIT scheme and the FIP scheme are vastly different in that the latter is based on the premise that power producers are engaged in market transactions of energy.  Non-FIT renewable projects (including those that have obtained a FIP approval) are expected to act in accordance with their projections of fluctuating market prices and energy generated.  FIP generators wishing to avoid bearing the risks related to market price fluctuation and imbalance on their own need to contract with an aggregator or electricity retailer to transfer such risks to them.  With respect to the non-fossil certificates (“NFCs”), which represent the environmental attributes generated from renewable power generation, while the seller of FIT NFCs is limited to the third-party organization managing the funds for operation of the FIT system (i.e., OCCTO from April 2022), non-FIT renewable power producers, including FIP generators, can sell non-FIT renewable NFCs on their own to earn additional revenue.  FIP power generators can thus earn revenue from the transfer of energy and non-FIT renewable NFCs to an electricity retailer (consumers are to purchase energy supplied through the grid only from licensed retailers) and also receive the premium from OCCTO, as shown in the below chart (this scheme is also a combination of the physical corporate PPA (sleeved PPA) scheme and a FIP premium; please see our Japan Renewables Alert 56 for more details).

OCCTO graphic

2. Sources Eligible for FIP

As above, the Minister is to designate and announce which categories of renewable power sources (technologies, capacity and installation methods) are eligible for FIT/FIP approvals based on the opinion of the Committee.  The Minister is also to designate and announce in a similar way the categories for which the applicable FIT/FIP price will or will not be subject to auction.

The Committee Opinion indicates the policy on such categories to be designated for FY2022 (April 2022 to March 2023) and beyond.  Basically, renewable power sources (solar, wind, middle or small hydro power, geothermal and biomass) of 50 kW or more are eligible for FIP approvals.  More specifically, with respect to solar projects of 1,000 kW or more, only the FIP (auction) is available in FY2022 and beyond, while for onshore wind of 50 kW or more, projects can choose between the FIT (auction) and the FIP (non-auction) for FY2022 but can only choose FIP (auction) for FY2023 and beyond (see below chart).  With respect to offshore wind, projects conducted in outer sea areas will basically need to go through the public tender process subject to 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 “Maritime REA”) while projects conducted in port areas are outside of the scope of the Maritime REA; for the latter, the Committee Opinion indicates that bottom-fixed offshore wind projects will only be eligible for FIP (auction) in FY2024 and beyond (see below chart) while floating wind projects will be eligible for both FIT and FIP for some time until FY2024.  The availability of FIT and FIP for projects that are subject to the Maritime REA will formally be announced in the guidelines for the public tender for each respective sea area, but the Committee Opinion states that basically the same idea should be applied to projects both inside and outside the scope of the Maritime REA, and further provides that bottom-fixed offshore projects subject to the public tender process under the Maritime REA should likewise be eligible only for the FIP scheme in FY2024 and beyond.

FIT / FIP options by category

The Committee Opinion also indicates FIT/FIP prices that were formally designated on March 25, 2022, as mentioned above.  The FIT/FIP prices or the cap prices in case of auction for mega solar projects and wind (onshore and non-Maritime REA offshore projects) are as shown in the table below.

 

FY2022

FY2023

FY2024

Solar (1,000 kW or more)

FIP Auction (Four rounds; cap prices are JPY 10.00, 9.88, 9.75 and 9.63 for each round)

FIP Auction

FIP Auction

Onshore Wind (New; 50 kW or more)

FIT Auction (cap price is JPY 16)

FIP (FIP price is JPY 16)

FIP Auction (cap price is JPY 15)

FIP Auction (cap price is JPY 14)

Offshore Wind (Bottom-Fixed)

Non-Maritime REA

FIT (FIT price is JPY 29)

FIP (FIP price is JPY 29)

FIT Auction

FIP Auction

FIP Auction

Offshore Wind (Floating)

Non-Maritime REA

FIT (FIT price is JPY 36)

FIP (FIP price is JPY 36)

Existing FIT projects are also entitled to transition to the FIP scheme if they wish.  The applicable FIP price after the transition will be the same level as the FIT price applied to the project and the FIP period will be equivalent to the residual FIT period applied thereto.  Under the FIP scheme, considering that imbalance risk is borne by the renewable power producer, the “balancing cost equivalent” will be added to the premium; such “balancing cost equivalent” in the calculation process of the premium will be set at JPY 1.0/kWh for FY2022 and JPY 0.95/kWh for FY2023, incentivizing early transition. 

3. Summary

The Glasgow Climate Pact reaffirmed the importance of the 1.5C target agreed upon in the Paris Agreement and corporate interest in net zero has never been higher.  The Japanese government also announced its commitment to GHG reduction by 2030 by 46% compared to 2013 levels and projected in the Sixth Edition of the Strategic Energy Plan that renewable energy will increase from approximately 20% currently to 36-38% by 2030.  The growing interest in corporate PPAs and the commencement of the FIP scheme demonstrates that Japan’s renewable market is at a significant turning point.

At such a turning point, an adequate understanding of new regulations, systems and markets and an ability to respond appropriately are becoming more and more critical for the development, investment and planning in the  renewable energy sector.  For example, with respect to recent corporate PPA projects, the incorporation of the FIP scheme is an assumption for some, while some corporates do not want to use the FIP scheme, and there is an increasing need to carefully proceed with the development and investment while responding to the respective needs of the parties involved.  Likewise, as electricity retailors and aggregators emerge to offer services to renewable electricity generators in anticipation of the FIP scheme, care must be taken as to which parties should be involved at various stages.

We have a long history of experience in legal support for renewables in the United States and Japan, and our Tokyo office has supported many developers of solar and wind projects.  Please contact us if you are seeking further details on the FIP scheme or legal support for projects utilizing the new system as well as support for any phase of development, purchase or financing of renewable projects.