13 minute read | June.09.2023
Two important laws on energy policy were passed by the Diet in May 2023. One is the Act on Promotion of a Smooth Transition to a Decarbonized Growth-Oriented Economic Structure (Act No. 32 of 2023; the GX Promotion Act), passed by the Diet on May 12 and promulgated on May 19, and the other is the “Act for Partial Amendment of the Electricity Business Act, etc. for the Establishment of Electricity Supply System toward the Realization of a Decarbonized Society” (Act No. 44 of 2023; the GX Decarbonization Electricity Act), passed by the Diet on May 31, 2023 and promulgated on June 7, 2023. The GX Promotion Act introduces mechanisms to promote investments for transitioning to a decarbonized society (green transformation or GX) as well as future carbon pricing schemes such as fossil fuel levies and emissions trading programs. The GX Decarbonization Electricity Act amends the Electricity Business Act (Act No. 170 of 1964), the Act on Special Measures Concerning Promotion of Utilization of Renewable Energy Electricity (Act No. 108 of 2011, the REA), and three laws related to nuclear power generation in order to reach a decarbonized society.
The Japanese government has declared its goal to achieve net-zero by 2050 and aims to reduce greenhouse gas emissions by 46% from FY2013 levels by 2030, with renewable energy accounting for 36-38% of total power generation and nuclear power accounting for 20-22%. The government believes that coexistence between renewable energy projects and local communities is important to promote the introduction of renewable energy, and amendments to the REA by the GX Decarbonization Electricity Act include measures to strengthen regulation of FIT/FIP projects.
In this Alert, we will focus on the issues related to the relationship between renewable projects and local communities that may have a significant impact on renewables in years to come.
1. Amendment of REA Under the GX Decarbonization Electricity Act
Regarding the coexistence of renewable businesses with local communities, the Working Group on Long-Term Renewable Energy Sources and Local Coexistence (the Local Coexistence WG), an expert panel established under the Ministry of Economy, Trade and Industry (METI), published an interim report as of February 10, 2023 (see here; the Interim Report; see Japan Renewable Alert 62 (here), Section 2 for further information on the draft Interim Report). The GX Decarbonization Electricity Act amended the REA (the REA amended by the GX Decarbonization Electricity Act, the Amended REA) to tighten regulations for FIT/FIP projects in line with the direction summarized in the Interim Report. The amendment will become effective as of April 1, 2024.
(1) Orders to Reserve and Refund FIT/FIP Grants
FIT/FIP-approved operators are obliged to implement projects in accordance with their approved business plans (Revised REA, art.10-3, para. 1), and when they outsource all or part of a project to a third party, they are obliged to supervise such contractor in a manner necessary and appropriate to ensure that the project is operated in accordance with the approved business plan (para. 2). Under the Amended REA, the Minister of Economy, Trade and Industry (the METI Minister) will be authorized to issue an order to any operator deemed to be in breach of its FIT/FIP business plan to reserve an amount equivalent to the FIT/FIP grant to be held by the Organization for Cross-regional Coordination of Transmission Operators, Japan (OCCTO) (Amended REA, art. 15-6). The possibility of improvement orders and revocation of approvals for operators in breach remains unchanged (Amended REA, art. 13; art. 15, item 1).
Under the Administrative Procedures Act (Act No. 88 of 1993; the APA), hearing procedures are required to consider the arguments of the operator before revocation of an FIT/FIP approval (APA, art. 13, para. 1, item 1), but they are not required for a disposition that only orders the payment of money (para. 2, item 4). A reserve order under the Amended REA, being construed to fall under such exception, can be issued expeditiously without opportunity for such prior hearing procedures (Interim Report, p. 6). The operator may not retrieve such reserved amount unless the METI Minister confirms that the reserve is no longer necessary (Amended REA, art. 15-9). The reserve order is expected to deter and promptly eliminate breach of FIT/FIP business plans.
A new provision has also been added that authorizes the METI Minister to order an operator whose FIT/FIP approval has been revoked to refund the FIT/FIP grant (Amended REA, art. 15-11, para. 1).
(2) Resident Briefing Sessions to be Required for FIT/FIP Approval Application
In addition, for certain types of renewable energy facilities, the FIT/FIP approval application requirements have been revised to include undertaking measures to publicize certain elements of the project, such as holding briefing sessions for residents in the surrounding area (Amended REA, art. 9, para. 4, item 6). The Interim Report suggests that such briefing sessions should be required for renewable facilities of 50 kW or more and those below 50 kW installed in certain protected areas (pp. 13, 14) and that METI should formulate specific guidelines on the details of such sessions (p. 14).
The Amended REA will also require such briefing sessions and other measures as a requirement for an application for an amendment approval for changes of certain items (Amended REA, art. 10, para. 4; art. 9, para. 6, item 6). In the future, the Rule for the Enforcement of the Act on Special Measures Concerning Promotion of Utilization of Renewable Energy Electricity (METI Ministerial Order No. 46 of 2012; the REA Rule) is expected to be revised to require such measures when the operator is to be changed as the result of the transfer of the project (Interim Report, p. 15).
2. Other Amendments Related to Local Coexistence
In addition to amendments to the REA under the GX Decarbonization Electricity Act, amendments to the REA Rule and other related regulations are expected to reform the FIT/FIP schemes in the interest of coexistence with local communities. In the Interim Report, for example, it is proposed that certain development permits should be required when applying for FIT/FIP approval (Interim Report, p. 4). On May 31, 2023, the Local Coexistence WG held its 6th meeting (see here) to discuss further details on the topic.
The Interim Report proposes that an application for FIT/FIP approval should be rejected unless the applicant project has obtained certain development permits, including, as necessary, (1) a forest development permit under the Forest Act (Act No. 249 of 1951; art. 10-2), (2) a permit under the Residential Land and Specified Embankment Regulation Act (Act No. 191 of 1961; the Embankment Regulation Act), and (3) permits required under the Erosion Control Act (Act No. 29 of 1897), the Landslide Prevention Act (Act No. 30 of 1958), and the Act on the Prevention of Disasters Caused by Collapse of Steep Slopes (Act No. 57 of 1969) (Interim Report, p. 4). It also proposes that METI should add other permits as requirements for FIT/FIP approval applications besides (1) through (3) if necessary. For wind and geothermal projects that are subject to environmental impact assessment procedures required by the national law (the Environmental Impact Assessment Act; Act No. 81 of 1997) or local ordinances, such requirements will not need to be satisfied at the time of the application but need to be satisfied within three years after the FIT/FIP approval (the approval is to be revoked if the project fails to obtain such permits) (pp. 4 and 5).
The Local Coexistence WG reaffirmed these policies (Document 1, p. 3) and indicated that for auction projects, the acquisition of such permits will be examined at the time of the FIT/FIP approval application rather than at the time of the participation in the auction (submission of the business plan) (p. 10). METI proposed that the Local Coexistence WG should discuss whether any other permits need to be added as application requirement if necessary (p. 7) and that the REA Rule and other relevant ministerial orders should be amended in summer 2023 and be made effective by fall. In order to provide some predictability for businesses, METI also suggested that non-auction projects for which applications are filed without deficiencies prior to the effective date and auction projects for which the business plan submission due date falls prior to the effective date will be exempted from such amendments (p. 10).
The Embankment Regulation Act is the former Act on Regulation of Residential Land Development, which has been amended, effective May 26, 2023, to expand its scope of regulation to certain embankments and other development activities, including ones for the purpose of the construction of power plants. Under the Embankment Regulation Act, a permit from the prefectural governor is required for certain development activities in regulated areas designated by the prefectural governor, with the regulated areas to be designated in the near future (see here).
The promotion of proper disposal or recycling of renewable energy equipment is also recognized as an important issue. The Interim Report indicates that information on substances contained in solar panels, which is necessary for proper disposal or recycling, should be provided upon application for FIT/FIP approval (Interim Report, p.11).
3. Regional Decarbonization Promotion Projects
The program for “Regional Decarbonization Promotion Projects” commenced on April 1, 2022, introduced by the amendment to the Act on Promotion of Global Warming Countermeasures (Act No. 117 of 1998; the Global Warming Act).
Regional Decarbonization Promotion Projects are projects that implement (1) decarbonization in the region (integrated approach of (i) installation of renewable energy facilities and (ii) other local decarbonization efforts) and (2) (i) environmental conservation and (ii) sustainable economic and social development of the region (Global Warming Act, art. 2, para. 6). The specific content of regional decarbonization projects and subject areas (“promotion zones”) are determined by the municipalities (Global Warming Act, art. 21, para. 5), and once a renewable energy operator receives a regional decarbonization project certification from the municipality (Global Warming Act, art. 22-2, para. 1 and 3), it is deemed to have obtained a forest land development permit and certain other permits and approvals (art. 22-5 et seq.).
It was anticipated that the new scheme would promote the introduction of renewable energy while addressing local issues and that municipalities under the Global Warming Act would make efforts to develop promotion zones and other criteria for Regional Decarbonization Promotion Projects under the amended Global Warming Act. It is clear, however, that the new scheme has not made much progress. According to a study by the Ministry of the Environment, as of December 2022, only 4 municipalities, meaning just 0.2% of all municipalities, have formulated the criteria, and 101 municipalities, or 6.2%, have commenced discussion for formulating them, while more than 90% of municipalities respond by stating that they have not commenced discussion, though they are planning to do so (40.6%), or they are not even planning to do so in the future (52.9%) (MOE Document (see here), p. 41).
One of the reasons for the lack of progress in utilizing the Regional Decarbonization Promotion Projects program is the lack of human resources and knowledge in municipalities as well as insufficient recognition of local benefits. The Ministry of the Environment has established a new expert panel to promote the use of the program for Regional Decarbonization Promotion Projects (see here).
4. Local Taxes on Renewable Energy
Taxes on renewable energy projects are being considered by some local governments in Japan.
In an earlier Japan Renewables Alert, we reported on a “panel tax” being contemplated by Mimasaka City in Okayama Prefecture that would levy a tax on solar power generators based on total solar panel area (see here, Japan Renewables Alert 57). In Miyagi Prefecture, a tax is now being considered for solar, wind, or biomass power plants that involve certain forest development.
The “renewables-related new tax” currently being considered by Miyagi Prefecture (the New Tax) would be imposed based on power output of renewable power plants of solar, wind, or biomass for which construction has started within five years after the completion of development activities in forests exceeding 0.5 ha. According to the final proposal released at an expert panel meeting held on May 17, 2023 (see here), the tax rate of the New Tax is to be set so that the burden should be at around 20% of operating profit: in principle, 620 yen/kW for solar power, 2,470 yen/kW for wind power, and 1,050 yen/kW for biomass. For FIT-approved solar and wind facilities, higher tax rates may be applied depending on the applicable FIT price (FIT price of 10 yen/kWh or higher for solar and 18 yen/kWh or higher for wind), such as 8,340 yen/kW for solar projects with an applicable FIT price of 36 yen or more and 4,740 yen/kW for wind projects with an applicable FIT price of 20 yen or more.
The New Tax exempts renewable energy facilities that are located within a promotion zone under the Global Warming Act and are certified as a Regional Decarbonization Promotion Project, but municipalities in Miyagi Prefecture have yet to designate any such promotion zones. Renewable energy facilities located in development zones for which development activities have already begun as of the effective date are also exempted, but the prefecture may consider whether to continue such exemption in a review to be conducted after about 5 years. Miyagi Prefecture hopes to enact an ordinance on the New Tax as soon as possible and to begin imposing the tax as early as 2024.
Like the panel tax in Mimasaka City, the New Tax in Miyagi Prefecture is a non-statutory tax (a tax that is not prescribed in the Local Tax Act (Act No. 226 of 1950) and is newly established by the local public entity based on the Local Tax Act) and therefore requires consent of the Minister of Internal Affairs and Communications (Local Tax Act, art. 259, par. 1; for such consent, see Japan Renewables Alert 57, Sections 2 and 3). As other municipalities may follow the example of Miyagi Prefecture, the stance of the national government will also draw attention in relation to its decarbonization policy.
Local relations are becoming more important than ever for renewable energy projects, and significant impact can be posed onto renewable projects not only by changes in national laws and regulations, but also by measures taken by local governments. As authorities and society expect operators that have built positive relationships with local communities to make great contributions to the local economy, it is incumbent on operators to make their voices heard adequately and to offer proactive suggestions from time to time if necessary.
Amid the enactment of the GX Decarbonization Electricity Act, which is premised on the reuse of nuclear power, the energy market in Japan is in a period of upheaval, in which taking on new challenges through the reformation of various laws and schemes has become even more critical. We currently offer biweekly regulatory updates (paid subscription only; mainly focusing on solar and wind) to our leading clients in the market, so please contact us if you would like to receive them.