pdf

Japan Adopts Procurement Prices for Renewable Energy

May 14, 2012

 

As described in our alert dated September 8, 2011 (see here), the Japanese Diet passed a “feed-in-tariff” law (“FIT Law”) that will require utility companies to purchase electricity generated by renewable sources. Under the new law, which is scheduled to become effective on July 1, 2012, the Minister of Economy, Trade and Industry is responsible for determining the procurement prices and duration of electricity to be purchased by utility companies. However, the FIT Law requires the Minister, before making such determination, to receive and consider the opinions of other relevant Cabinet ministers and a third-party committee, known as the Procurement Price Calculation Committee, regarding suggested procurement prices and duration. The Committee is comprised of five members appointed by the Minster and approved by the Diet.

I. SUGGESTED PROCUREMENT PRICES

On April 27, 2012, the Committee issued its suggested procurement prices and duration. Under the FIT Law, the Minister has the ultimate authority to set the prices and duration, but must “respect” the Committee’s suggestions. Thus, it is likely that the Minister will accept these.

The table below provides a summary of the Committee’s suggested prices for solar, wind, geothermal, hydro and biomass energy, and a comparison to procurement prices for the same energy sources in Germany, which are typical of the prices in many countries. Although many factors account for price differences between countries, the comparison reveals that the Committee’s suggested prices are quite high relative to those in Germany. Operators of renewable energy facilities in Japan will undoubtedly view the suggested prices as very attractive. 

Type

Suggested Prices

Procurement Prices in Germany

Price (US$ Cent)/kWh

 

Duration (years)

Price (US$ Cent)/kWh

Duration (years)

Solar

52.5

(JPY 42)

20

23.3~31.7

(Euro Cent 17.94~24.43)

20

Wind

28.8

(23.1)

20

4.55~19.5

(3.5~15)

Geothermal

34.1

(27.3)

15

32.5

(25.0)

Hydro

31.5~44.6

(25.2~35.7)

20

8.2~16.5

(6.3~12.7)

Biomass

 

 

17.0~50.8

(13.65~40.95)

20

 

7.8~18.6

(6.0~14.3)

Conversion rate: US$=JPY80, €0.77

The suggested prices are very close to those proposed by operators of renewable energy facilities during hearings conducted by the Committee. The adoption of these prices is a good indication that the Japanese government intends to strongly and generously promote renewable energy, in line with the stated purpose of the FIT Law. Specifically, the law obliges the government to give due consideration to benefitting operators of renewable energy in order to promote renewable energy for the first three years following the effective date. Thus, although the procurement prices will be reviewed annually, it is unlikely that the original prices will be reduced by any material amount for the first three years.

II. DEREGULATION

In addition to the Committee’s announcement of suggested prices, the Japanese government is planning to remove a number of restrictions concerning the installation of renewable energy facilities to support the purpose of the FIT Law. On April 3, 2012, the Cabinet put forward a plan containing 103 items, largely related to deregulation and systemic reform in the renewable energy sector. Thirty-nine of 103 items concern the installation of renewable energy facilities, such as solar or geothermal power plants.

In one item, the Ministry of the Environment announced a plan of deregulation to allow, with certain conditions, the development of geothermal power facilities in certain restricted areas of national and quasi-national parks. In another item, the Ministry of Economy, Trade and Industry plans to exempt solar power plants from regulations under the Factory Location Act, so that such plants will not be required to set aside 20% of the site as green space. In a third item, the Ministry of Agriculture, Forestry and Fisheries proposed simplifying the approval and notification procedure for the installation of solar and wind power plants on abandoned agricultural land.

III. PROSPECTS FOR RENEWABLE ENERGY

With government supported pricing for renewable energy at attractive levels and a more relaxed regulatory environment, the renewable energy industry in Japan will almost certainly experience rapid expansion. This growth will accelerate if, as expected, Japan’s reliance on nuclear power remains low. Following the Fukushima disaster and strong public outcry, all 50 of the existing nuclear power plants in Japan have ceased operations. While fossil fuels are expected to fill some of the gap caused by the nuclear plant shutdowns, additional energy sources will be necessary to avoid energy shortages during peak demand periods.

Due to the opportunities presented by the current favorable business and political environment, and the potential for growth, many Japanese companies are investing or considering investments in renewable energy operations. Non-Japanese companies with the right expertise and access to capital, and investment funds focusing on the renewable energy business in Japan, may want to consider doing the same.

The road ahead in Japan for renewable energy operators, however, still has some blind curves. First, as described in our previous alert, utilities may attempt to circumvent the purchase requirements in the FIT law and resist connecting their electrical transmission lines to renewable energy facilities, on the basis that doing so could impair the smooth supply of electricity or for other reasons stipulated in the law. It is difficult to predict to what extent utilities may object to purchasing electricity from renewable energy facilities and how the Minister will react.

Second, only time will tell whether the feed-in-tariff system is economically and politically viable. As we have seen in European countries, such as Spain and Germany, a feed-in-tariff system may prove difficult to sustain. There, renewable energy requirements coupled with the feed-in-tariff system caused significant financial burdens for companies and households, as well as an increase in the national debt. Some utilities also posted losses because they could not pass on the higher procurement cost to businesses and households. Thus, we must carefully monitor how the feed-in-tariff system operates in practice in Japan.

The Japanese government will soon publish a draft ordinance of the FIT Law for public comment, with the goal of finalizing the ordinance before July 1. We will provide another update once the ordinance is finalized.