As we’ve reported previously, the development of renewables in Japan thus far, although successful in bringing many gigawatts of new generation online, has been a bumpy process marked by many missteps and disappointments, and the road ahead remains filled with uncertainty.
Among the variables with the potential to make or break Japan’s achievement of its official target of 22% – 24% renewable generation by 2030 is the upcoming transition from feed-in-tariff to feed-in-premium incentive structure.
Much remains to be decided. The Ministry of Economy, Trade and Industry (METI) plans to implement the feed-in-premium system in fiscal 2022, and won’t finalize the details until fiscal 2021.
Nonetheless, much of METI’s thinking has been revealed in expert committee meetings and reports.
Let’s take a look and see where things stand.
#1: Feed-in-Tariff and the Transition to Feed-in-Premium
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. That said, the program with the most significant effect on non-hydro renewables growth in Japan has been the feed-in tariff scheme put in place in 2012, which residential net metering was merged into.
There are several reasons METI has decided to gradually develop a feed-in-premium scheme. One is that beginning in November of 2019, residual net metering contracts from 2009 began expiring, and by 2023, roughly 1.65 million residential solar FIT contracts will expire.
FIP is intended to create a structure for these solar producers to continue to sell their excess generation into the grid.
Another is that the feed-in-tariff, with its guaranteed high kWh rates, disincentivizes renewable generators from investing in energy storage which could play an important role in optimizing the operation of the entire power supply system through aggregation business models.
In addition, there has been no incentive for those with FIT contracts to invest in high accuracy generation forecasting capabilities and output adjustment controls, which could also play an important role in optimizing operation of Japan’s fragmented grid and its limited interconnections.
Finally, the renewable energy promotion surcharge levied on all electricity ratepayers nationwide in order to fund the FIT program has been raised multiple times. By 2018 it accounted for 11% of total residential electricity charges and 15% of commercial and industrial. The government wants to take this burden off of ratepayers and, under FIP, force renewable generators to begin competing on a more level playing field.
However, there’s a big disconnect here: Even after eight years during which 10- and 20-year FIT contracts have been doled out to developers, the LCOE of renewables in Japan remains stubbornly high compared with much of the rest of the world.
Can the growth of renewables in Japan be sustained at the rate necessary to hit the 2030 targets under a feed-in-premium in an environment where renewables are still some distance from reaching grid parity? Certainly there are developers and asset managers who have refined their businesses to a level where they can continue to grow and thrive in this brave new world, but will there be enough of them?
Can a feed-in-premium system provide the level of certainty regarding return on investment needed to keep renewables growing in Japan? This remains an open question.
#2: Models for Trading Power under FIP
Setting aside bigger picture questions, let’s look at what we know about METI’s thinking on the mechanics of the FIP system.
METI envisions FIP-approved generators selling power through three channels: wholesale on the Japan Electric Power Exchange (JEPX), bilateral contracts with electricity retailers, and to aggregators who can then sell on JEPX.
However, because of minimum volumes required in order to trade on JEPX, and the complexity of integrating variable renewables into the portfolios of retailers, METI anticipates the aggregation channel being the most important one for small scale generators, whom it is particularly eager to incentivize through the FIP.
(In future posts we’ll look at Japanese retailers who offer 100% renewable power supply and how their businesses work, as well as Japan’s nascent aggregation market.)
#3: What Will the Premium Look Like?
METI has looked at several premium models and assessed them in terms of two criteria:
- Investment Incentive – Will the model offer investors acceptable returns?
- Market Integration – Will the model push renewables to compete on the market without as much help from taxpayers?
METI has settled on Model D, which is a hybrid of A and B, having concluded that Model D does the best job of incentivizing investment while also pushing renewables toward greater market integration.
METI is considering two approaches to defining the actual yen value of the premium.
- Categorization by generation type and output capacity
- Auction system
Though not yet written in stone, METI appears inclined to use the auction system, which would most likely be based on the existing system which has been implemented in recent years even as FIT is still in place.
Given the lackluster results of the auctions which have been held so far, it’s probably safe to assume that METI will refine and adjust the system quite a bit before pinning the success of the FIP program to it.
In any event, what’s clear is that there will be a premium component determined either by the Procurement Price Calculation Committee or through auction, and that there will be a reference price component which will be derived from average market price over a period yet to be determined.
We will continue to closely track how the FIP system is framed up between now and its implementation. There are many other moving parts in the continuing development of renewables in Japan which we’ll also be keeping a close eye on.
Stay tuned so we can keep you up to date.