Shulman Advisory

Renewables in Japan – The Big Picture

In recent months, several developments have highlighted the uncertain future of Japan’s electric power generation mix.

Worldwide supply chain disruptions caused by COVID-19 have brought attention to the fact that Japan has only a two-week stockpile of LNG, a resource that fuels 40% of the country’s power generation. That has renewed anxiety about Japan’s perennial dependence on fuel, raw materials, and food imports needed to maintain its economy and society.

Japan also remains reliant on coal, which it finds easier to import from politically stable countries, and has come under increasing international criticism for dragging its feet in its move away from using the environmentally unfriendly fuel as a source of power..

Finally, to make matters even worse, two of Japan’s operating nuclear plants have come offline this year due to failure to meet regulatory deadlines for construction of new anti-terrorism safety facilities.

Several more are expected to end up in the same situation over the next couple of years.

If, against this background, you find yourself asking, “What about renewables?” don’t worry. You’re in good company.

Japan has an official target of 22% – 24% renewable generation (including hydro) by fiscal year 2030.

Over the last decade, it has succeeded in increasing the share of non-hydro renewables from about 2% to north of 8% of total generation.

The majority of that growth has been in solar PV, incentivized by a feed-in-tariff (FIT) system put in place in 2012 following the 2011 Fukushima Daiichi nuclear accident. While the system is still in place, the Ministry of Economy, Trade and Industry (METI) intends to switch the incentive to a feed-in-premium (FIP) model in 2021.

All that said, the levelized cost of solar and wind in Japan is still several years from reaching grid parity, and many developers found projects under the FIT scheme to be a much bumpier ride than they expected.

This article is the first in a series in which we’ll look at the market, regulatory, and other factors affecting the prospects for further development of renewables in Japan.

To begin with, today we’ll take a look at the FIT system and the mixed results it has produced.

#1: From Renewable Portfolio Standard to Net Metering to Feed-in-Tariff

The growth of non-hydro renewables in Japan was driven first by a renewable portfolio standard (RPS) system starting in the early 2000s. Starting in 2009, it was further accelerated by a net metering program to purchase excess residential solar generation.

As mentioned earlier, however, the program that had the most significant effect on non-hydro renewables growth in Japan has been the feed-in tariff scheme put in place in 2012.

By the end of 2018, the FIT system had succeeded in incentivizing the addition of 46 GW of renewable generation to Japan’s grid. The average annual growth between 2012 and 2017 was 22%.

Although undoubtedly significant, the level of growth was disappointing in comparison to the growth of LNG and coal generation during the same early post-Fukushima period. Coal grew to 33% of generation, and after peaking at 44%, LNG has persisted at about 40%.

#2: Bumpy Road

The cost of imported raw materials and innate constraints on available land unquestionably made renewable growth in Japan a somewhat steep climb to begin with. However, the execution of the FIT program has in many ways also failed to deliver on the baseline of certainty that it’s supposed to provide to investors, thereby undermining its whole purpose.

There have been cases of utilities inflating interconnection fees so high as to sink the economics of solar projects and make them untenable.

There have also been cases of negotiations with utilities or other stakeholders dragging on for so long after a 10- or 20-year power purchase agreement (PPA) has already been granted to a developer – and the clock is ticking against it – as to throw the project’s profitability into question.

Perhaps worst of all, midway into the implementation of the FIT program, METI began allowing for unlimited, uncompensated curtailment in some of the contracts between utilities and developers, throwing into doubt how much electricity the affected projects would be able to sell in spite of the long term contracts they were awarded.

Understandably, many developers are of the view that METI should have done more to eliminate, or at least minimize, such stumbling blocks and risk.

Nonetheless, significant growth was achieved under the FIT program, and hopes remain high that it can continue in the years ahead.

High FIT rates for offshore wind through 2019 have led to a boom, and rates remain high for geothermal and some biomass and hydro into 2020.  Overall, though, it’s time to start thinking about the post-FIT era and how renewable development can continue in Japan.

#3: Beyond FIT

METI is presently designing the feed-in-premium program that it intends to implement starting in 2021.  However, the weak showing seen in most of the five auctions for solar generation which METI has held since late 2017 raises questions about how ready solar generators are to compete on the market.

Still, new legislation aimed at creating greater resilience in the Japanese electricity supply system and a wide variety of public-private partnerships with similar aims are creating important applications of renewable generation in specific contexts which may open more opportunity.

How renewables in Japan will continue to evolve from this point forward is a complex, multifaceted question which we will continue to track and analyze in the months and years ahead.

Stay Tuned!

In subsequent articles in this series, we’ll be examining issues including:

  • The stubbornly high LCOE of renewables in Japan
  • Pitfalls encountered by developers under the feed-in-tariff system
  • Design of the feed-in-premium system to be launched in 2021
  • The impact of the 2016 deregulation of electricity retail on renewables
  • Renewables in the context of microgrids and electricity supply system resilience
  • The structure and operation of Japan’s grid as it relates to the introduction of variable renewables

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