Energy & Infrastructure Alert | July.29.2020
1. Current Status of the Nullification System
As we reported in our Japan Renewable Alert 44 and Japan Renewable Alert 47, the Act to Partially Amend the Electricity Business Act and Other Acts in Order to Establish a Resilient and Sustainable Electricity Supply System (promulgated as of June 12, 2020; Act No. 49 of 2020; the “Act”), which includes the fundamental revamp of the Act on Special Measures Concerning Procurement of Electricity from Renewable Energy Sources by Electricity Utilities (Act No. 108 of 2011, as amended; the “REA”), introduced the “FIT/FIP approval nullification system,” whereby FIT/FIP approvals are to be automatically nullified by the passing of a certain period of time, to be effective as of April 1, 2022.
As the nullification system was presented as one of the possible options by the Ministry of Economy, Trade and Industry (“METI”) to an expert panel under METI on November 18, 2019, and the bill that includes such nullification system was submitted to the Diet on February 25, 2020, the specific length of time for an approval to be nullified (the expiration period) and the treatment of existing projects have not yet been made clear. Because of this uncertainty concerning the details of the new system, numerous financial institutions, including top Japanese banks, are having difficulty determining how to properly evaluate the risk associated with investments in Japan’s renewable market, and have suspended making loans to renewable projects in Japan.
2. The Discussion on the Nullification System Has Begun
Amid such confusion, METI finally presented a brief draft plan for the nullification system at the session of the expert panel held on July 22, 2020, which was the first public discussion of the details of the new system.
METI pointed out that it had received multiple opinions stating that, due to the uncertainty described above, it has become difficult to obtain financing, especially for existing large-scale solar projects of 2 MW or more that have already been approved, even if those projects have already progressed to a certain stage of the preparation for the commencement of operation, because the lenders fear that the project may not complete the whole process of construction and commence operation by the expiration deadline and that the FIT approval for the project may consequently be nullified. METI went on to acknowledge that “it is important for the further installation of renewable power to prevent deterring preparation for the operation of such projects, including financing therefor” by “timely presenting the direction of the arrangement of the system.”
METI went on to describe “solar projects of 2 MW or more that are confirmed to have commenced construction through a public process at the point of the effective date (April 1, 2022)” as “projects that have progressed in the preparation for the commencement of operation and are expected to commence operation with certainty,” and suggested practically “exempting them from the risk of nullification till the commencement of operation.” More specifically, the draft plan proposes that the projects should be seen as being “confirmed to have commenced the construction through a public process” if they have submitted and had duly accepted the construction plan notice pursuant to Article 48 paragraph 1 of the Electricity Business Act by the said effective date, and that the expiration period should be 20 years for such projects.
METI also pointed out that details of the nullification system regarding other projects should be discussed as soon as possible as well, based on the above direction.
3. Other Changes to the Operational Practice
At the above session of the expert panel, METI also mentioned the change in operational practice regarding detached-site projects (projects that place a power generation facility on land including detached land plots).
As we reported in our Japan Renewable Alert 45, the operational practice regarding detached-site solar projects has become increasingly strict over time. METI stated that allowing the addition of a detached site distant from the original site and placing most of the solar modules on the new site is “inconsistent with what the FIT system was intended to be,” and again tightened its policy on detached-site projects as of the same date by amending the documents on its website: (i) the Table of Procedures to Amend Items on FIT Business Plan and (ii) Location of the Renewable Power Generation Facilities under the Renewable Energy Power Generation Business Plan (both Japanese only).
The amendments point out that the project site is required under Article 5 item 2-2 of the Rule for Enforcement of the REA (METI Ministerial Order No. 46 of 2012) to be kept at the same place until the end of the procurement period, and provide that, except for the cases where the land has become unavailable due to public expropriation or natural disaster, etc., the addition or deletion of land plots is allowed only for (i) the addition or deletion of “land plots that are attached to the original site” or (ii) the addition or deletion of “land plots that are detached but within such distance from the original site as can be seen as the same site (limited to the case where the most of the solar cells are to be installed in the originally approved land plots).” As the language, except for the parenthesized part, does not seem to limit the scope of the regulations to solar projects, it is uncertain how this new regulation is to be applied to wind projects, for instance, where the project site locations can naturally be detached from one another. We are making an inquiry to the relevant officials, but we have not yet received a clear answer and still need to continue communicating with the authority to confirm.
The above documents have frequently been updated with amendments having large impacts, and it is advisable to pay close attention to them.
4. Future Outlook
The direction, shown at the above expert panel after hearing voices of relevant parties, including Orrick, was a first step in the discussion regarding the details of the nullification system. However, the entire picture of the nullification system has not yet been made sufficiently clear, and multiple points to be discussed or clarified regarding other issues have piled up as well, including the above regulation on detached-site projects and details of the other systems newly introduced by the Act, such as the FIP system and the reserve system for the costs of decommissioning.
While the stability and the reasonableness of the regulatory system is an important factor for developers actively seeking opportunities and investors supporting such development financially amid the worldwide trend of decarbonization, a variety of amendments to laws and regulations and related operational practices are taking place in the middle of the reformation period of the renewable regulations in Japan. As most issues can impact renewable power sources other than solar projects, developers and investors involved in the renewable market, regardless of the power sources, are advised to precisely comprehend these amendments and need to make their voices heard effectively so that the regulations are reasonable based on the actual development and financing practices of the industry.
Four Orrick partners, including Minako Wakabayashi, have been named to A Word About Wind’s (AWAW) 2020 Legal Power List, a biennial ranking of the 100 most influential lawyers working in the global wind industry across in-house counsel and at law firms. The list features Orrick partners from the firm’s London (Evan Stergoulis and Ravinder Sandhu), Houston (Giji John) and Tokyo (Minako) offices—demonstrating the global reach of Orrick’s market-leading renewable energy practice across Europe, Asia and the United States.
Selection to the list is based on industry input and independent research by AWAW’s editorial and insight teams in conjunction with its advisory board and a panel of expert judges from the wind and finance sectors.