Energy & Infrastructure Alert | August.07.2019
The Ministry of Economy, Trade and Industry ("METI") is currently discussing the details of producer-side base charges that will be implemented in the near future. METI's advisory panel (Subcommittee on the Large-volume Introduction of the Renewable Energy and Next Generation Electric Network (再生可能エネルギー大量導入・次世代電力ネットワーク小委員会) (the "Subcommittee") discussed the new instrument as part of a review of its draft Third Interim Report at the 17th session held on August 5, 2019.
The costs of maintaining power grids have fundamentally been borne by power consumers through the mechanism of general fees (一般負担) that are incorporated into wheeling charges, in addition to special fees (特定負担) mainly for facilities not being heavily shared that power producers pay as contributions in aid of construction (工事費負担金) when they connect their power generation facilities to grids owned by utility companies. In light of the decrease in demand for electricity and increase in distributed energy sources, however, in order to expand grid networks nationwide, the government thinks it necessary to revamp the wheeling charge system and formulate a more equitable sharing of costs between both consumers and producers. Power producers (except for owners of home solar power facilities of 10kW or under), therefore, will now have to regularly pay producer-side base charges to the utility company that will be appropriated to part of the fixed costs of maintaining the grids.
Producer-side base charges will be implemented as soon as possible in or after 2020 based on the capacity (kW) of the power plant and regardless of the type of power source, as described in the First Interim Report of the Subcommittee published in May 2018. In anticipation of such implementation, in June 2018, the cap was raised on the amount to be borne by utility companies (general fees) when connecting renewable energy-sourced facilities to the grid.
As mentioned above, producer-side base charges will be imposed on a per-kW basis regardless of the type of power source, and because FIT power producers will have no way to transfer costs to a third party during the FIT period, they will be faced with continuous negative cashflows. A METI review council estimated a charge of JPY150/kW per month, which would have a severe impact for renewable energy sources with low capacity factors, and estimated a burden of JPY0.8/kWh for onshore wind power (26% capacity factor) and JPY1.4/kWh for solar power (15% capacity factor). Especially for already approved projects, this presents a retroactive burden on cashflow that was not originally anticipated and significantly impacts projects and their financing. Relief measures were therefore discussed in the first and second (January 2019) interim reports of the Subcommittee for projects that have already obtained FIT approval, as well as for projects that will obtain approval in the future.
At the 16th session of the Subcommittee held on July 5, 2019, several members argued that commercial solar power projects that had obtained a FIT approval during the "profit incentive period (利潤配慮期間)" (i.e. projects with a FIT price of JPY29/kW or above; hereinafter "Profit Incentive Projects") should not qualify for relief measures because they already enjoy a high FIT price calculated based on high IRR. On this point, the resulting draft Third Interim Report states that while opinions vary, "relief measures commensurate with the additional costs of producer-side base charges will be considered in principle for projects other than Profit Incentive Projects." The report also called for discussion of how to reflect this new cost in calculation of procurement price and setting of caps on bidding for new projects seeking FIT approval.
At the Subcommittee's meeting on August 5, 2019, opinions were divided over whether a statement should be added to the draft of the Third Interim Report to the effect that relief measures for Profit Incentive Projects would continue to be reviewed. This is an issue that should be closely followed as some members strongly objected while others called for caution with respect to retroactive changes for already approved projects.
The Third Interim Report is expected to summarize the Subcommittee's discussion from August 5 and will be released to the public.
Relief measures for producer-side base charges are to be further considered by the Procurement Price Calculation Committee (調達価格等算定委員会) based on findings of the Subcommittee's Third Interim Report. These movements should continue to be monitored carefully because, if already approved projects including Profit Incentive Projects are in fact subjected to producer-side base charges without any appropriate relief measures, it would in fact amount to nothing other than a retroactive and detrimental amendment to the FIT scheme.
In addition to producer-side base charges, project developers are faced with other amendments, such as the requirement to keep reserves for the decommissioning of solar power facilities that are being contemplated as part of the fundamental overhaul of the FIT scheme which is planned by the end of FY 2020. It is crucial that we understand these various trends affecting renewable energy projects, whether approved or to-be approved, and mitigate potential risks by bringing voices from the field to the government as necessary.