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The year 2022 marked the entry of Japan’s renewable energy market into a new phase. The FIT scheme reached a 10-year milestone, a new FIP scheme was launched, and a regulatory framework favorable for corporate PPAs was developed. In the area of virtual PPAs, significant progress was made as the framework of direct bilateral trading of Non-Fossil Certificates (i.e., RECs for on-grid electricity in Japan), an indispensable component of virtual PPAs, was introduced, and an opinion of the authority on long-standing concerns regarding the Commodity Derivatives Transaction Act was released (this was prompted by our inquiries; see Japan Renewables Alert 60).
This year 2023 is expected to be a year in which new projects will flourish and build on the achievements of 2022. We also anticipate many regulatory changes and discussions thereon aimed at achieving decarbonization, especially in the renewable energy sector, which has been and will continue to be a critical area. In this first Alert of the year, we discuss some of the important recent developments in the renewable energy sector and provide our outlook for 2023.
In this Alert, METI stands for the Ministry of Economy, Trade and Industry, and a TDSO stands for a general transmission and distribution system operator (ippan sohaiden jigyosha).
Round 2 of offshore wind bidding began on December 28, 2022, upon the release of the Public Tender Guidelines.
Offshore wind power generation projects in the general sea areas are to be selected through public tender in the promotion zones (sokushin kuiki) designated by the government pursuant 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 method of evaluation for applications and other details are to be set forth in public tender guidelines published by the government when each bidding is conducted.
Round 2 covers four promotion zones (all bottom-fixed) in the offshore areas of: (1) Happo Town and Noshiro City (Akita Prefecture), (2) Enoshima, Saikai City (Nagasaki Prefecture), (3) Oga City, Katagami City and Akita City (Akita Prefecture), and (4) Murakami City and Tainai City (Niigata Prefecture). In the first public tender under the FIP scheme, participants will be competing against one another in preparing an outstanding tender plan for submission based upon the revised evaluation criteria and also considering the results of the Round 1 auction and other factors. In a country surrounded by the sea on all sides, public expectation for offshore wind has been high, with the auction attracting a great deal of attention not only from the electric power industry but also from the public in general (see also Japan Renewables Alert 61).
In recent years, some have pointed out that improper development of some of renewable power plants has been destroying mountains and forests, posing a serious threat on the safety of local communities and local environment. To facilitate the introduction of renewable energy with public support and understanding, the government plans to revise laws and regulations in order to promote appropriate discipline on renewable projects to ensure that they achieve coexistence with local communities.
Measures for local coexistence were discussed by the expert panel under METI (Working Group on Long-Term Renewable Energy Sources and Local Coexistence) in 2022. A draft interim report summarizing these discussions (the Draft Interim Report) was released in December 2022, and public comments were accepted through January 10, 2023 (see here). Developers and investors are advised to be aware that amendments to laws and regulations and changes to the operations are expected to come in line with the Draft Interim Report.
The Draft Interim Report proposes requiring projects to have obtained certain permits when applying for FIT/FIP approval. Specifically, these include (1) a forest land development permit (an FDP) under the Forest Act, (2) a permit under the Residential Land Development and Specified Embankment Regulation Act (amended from the Residential Land Development Regulation Act; the Embankment Regulation Act), and (3) permits under what is known as the Erosion Control Acts. Of these, (2) the Embankment Regulation Act will require permits to be obtained for certain embankment purposed for the installation of solar power equipment in the restricted areas designated by a prefectural governor (effective May 26, 2023). In addition, an amendment has been made to expand the scope of (1) FDP-required activities to encompass solar power development of more than 0.5 ha, amended from “more than 1 ha” (effective April 1, 2023). It is important not only to pay attention to the treatment of these permits under the FIT/FIP scheme, but also to the amendments made to each of these permits.
Under the FIT/FIP scheme, if a project does not conform to the FIT/FIP business plan submitted to METI, after instruction and improvement order, the FIT/FIP approval may be revoked. However, the government is, in general, very cautious about imposing such revocation considering the seriousness of the consequence, and it has been understood that a FIT purchase or FIP premium will continue until the final revocation of the FIT/FIP approval. In the interest of more expeditious and effective enforcement, therefore, the Draft Interim Report proposes a mechanism whereby the Minister of Economy, Trade and Industry can issue an order to reserve FIT revenues/FIP premiums and withhold payment in the event of a breach against the FIT/FIP business plan. It is also important to be aware that, whereas an approval revocation requires a hearing under the Administrative Procedures Act, the Draft Interim Report notes that such reserve orders can be issued promptly without undergoing any such procedures.
The Draft Interim Report also proposes a system to facilitate communication with the local community by requiring that a briefing session be held for local residents prior to application for FIT/FIP approval in relation to a renewable power plant with a certain scale (requirements are expected to vary depending on the scale of the power facility and whether the council for local decarbonization promotion projects under the Act on Promotion of Global Warming Countermeasures has been taken). In the Draft Interim Report, a similar procedure has been proposed in the event of a FIT/FIP project transfer to address concerns that a change of operator makes it difficult for local residents to identify the responsible party, and this point needs to be kept in mind in future secondary transactions.
Under the FIT/FIP scheme, when certain amendments are made after obtaining a FIT/FIP approval, the original FIT/FIP price is to be reduced to the latest FIT/FIP price in effect at the time that such amendments are approved. The increase in the aggregated capacity of the photovoltaic batteries (i.e., DC capacity) by 3 kW/3% or more constitutes such cause for FIT/FIP price reduction. The new reform on this price change rule is expected to be introduced to alleviate the impact on the price due to an increase in the DC capacity.
One of the reasons for the current rule is that the increase in the DC capacity leads to higher levies on consumers (a significant portion of the cost of purchase by TDSOs under the FIT scheme is funded by levies paid by end-users of electricity). However, adding solar panels or upgrading solar panels to ones with higher efficiency at an existing solar power plant would increase the amount of renewable electricity without having to develop new land. Some have pointed out that the steep reductions in price under the current rules have the effect of discouraging such addition or renewal of solar panels that are beneficial to society.
A proposal is therefore being considered in light of keeping the burden on end-users at a reasonable level and effectively utilizing existing renewable power plants at the same time by weighting the initial price and the latest price by the initial DC capacity and the amount of increase (if a FIT/FIP project with an initial price of p [yen] and an initial DC capacity of A [kW] is increased by B [kW] during the fiscal year of the latest price of q [yen], the applicable FIT/FIP price after such change is (p x A + q x B) ÷ (A＋B) (see Agency for Natural Resources and Energy documents here (p. 42)).
The Japanese government has set a goal of becoming carbon neutral by 2050 and achieving a renewable energy ratio of 36-38% with a 46% reduction in greenhouse gas emissions by 2030. In this era of mass renewable energy deployment, many measures related to grid maintenance, storage batteries, and hydrogen and ammonia are being discussed in addition to the items noted above, and many regulatory changes are expected toward the end of the fiscal year (March) in tandem with discussions on more mid-to-long-term oriented schemes. There is also significant increased interest in corporate PPAs in the Japanese market. As Orrick has been leading the corporate PPA market in the U.S. and Europe for more than a decade, we have been supporting a variety of parties in their planning and negotiations on corporate PPAs in Japan.
With the energy market facing unprecedented upheaval, it has become more and more important to understand fast-changing laws and framework and then to take on new challenges. Orrick’s Tokyo office is committed to continue supporting businesses leading the market in 2023 and beyond.