Japan revamps Renewable Energy Act to set timeframes for project implementation and reduce costs for consumers

Japan has amended its Renewable Energy Act to make sure that projects adhere to certified plans and introduce a bidding process to help lower costs. The changes came into effect on April 1.

These are the most comprehensive changes made since the Act came into effect in 2012 and are aimed at reducing costs and increasing the implementation speed of projects. The changes will require owners of renewable energy facilities to meet feasibility criteria and to start operation and power production within a specific time frame after certification. Owners of these facilities will need to enter into an interconnection agreement with the utility before certification. The changes also introduce a bidding process to determine the purchase price for power generated by large-scale solar projects. For wind, geothermal and biomass projects, the purchase price will be fixed for three consecutive years after certification to allow for buffer time and costs needed for feasibility studies.

Koji Fukatsu

“The cost to purchase renewable energy for consumers has increased dramatically,” says Koji Fukatsu, partner at TMI Associates. “Many entities with accreditation do not have the intent to set up power plants because they wait for the decrease of the set-up costs or module price by progress of module manufacturing or they just wait for the buyers of accreditation. Such dormant accreditation hinders the establishment of power plants by others because once an owner secures the frame of output in the grid, the transmission operator rejects other applications.”

Detailed business plan

Before the amendments, projects could be started at any time. Now, electricity generators need to submit a business plan to the Ministry of Economy, Trade and Industry (METI) that includes the starting times for the proposed project, descriptions of the electricity system, location, output power, facility management methods and a connection agreement with a utility company. “The plan should show that the planned power generation will comply with the standard of starting generation in three years, that it will perform smoothly through the connection to the grid, and that it will generate in a stable and effective way,” says Fukatsu.

Projects that METI has previously approved will need a new certificate and business plan. “If an entity received an accreditation on its power plant from July 1 2016 to March 31 2017, such accreditation will be void and invalid nine months from the accreditation date,” says Fukatsu. METI has the power to order a supplier to follow the certified plan and may revoke the certification if the supplier does not adopt the requested changes.

Price setting

To help minimise the costs for consumers, METI is trialling an auction system, first with solar plants. Any entity intending to set up a solar plant of 2,000 kW (kilowatts) or more needs to bid for the right to set up the plant. To improve on the foreseeability of tariff prices in the future, METI will set tariffs before the beginning of each fiscal year for wind and geothermal power projects. METI’s procurement price calculation committee will indicate target prices in advance.

Sadayuki Matsudaira

“Some solar operators are confused about the bidding system and will need to analyse the bidding system to get a better sense of what price to bid at,” says Sadayuki Matsudaira, counsel at Nishimura & Asahi.

“For wind and geothermal projects, there’s the downside that the feed-in-tariff price is low but the upside is that there is assurance that the price is fixed for three years,” says Matsudaira.

“Instead of retail electricity companies being the purchaser, transmission companies are now the purchasers of renewable energy, so existing operators need to make sure that their existing agreements can be grandfathered or new agreements would need to be drafted if material conditions have changed,” adds Matsudaira.

With the cancellation of dormant accreditations after April 1, Japan will be able to free up opportunities for entities that intend to complete renewable energy projects. Investors will need to make sure they have feasible business plans and are prepared to participate in bidding processes to set up projects.