Shulman Advisory

Non-firm contracts and the reform of the curtailment priority order

In some of Japan’s T&D areas, the development and optimal use of renewable assets are constrained by a lack of grid capacity. But rather than forbidding the connection of newly developed assets, the TSOs have offered them non-firm transmission contracts. This allows the new power sources to connect to the grid and use capacity at will when available but comes with a higher risk of curtailment. To ensure that as much renewable power as technically possible is generated and used, METI is considering a change in the curtailment priority order. This is important news for renewable developers and asset owners as it will potentially have a material impact on the value of their assets.

Legacy integration of generation assets into grid and issues arising
When a generation asset is brought into operation, a grid connection request must be addressed to the TSO in charge of the area. The TSO evaluates the grid connection costs, which include checks that the capacity of the network allows the new power source to be effectively transmitted and/or distributed, as well as the actual cost of connecting the asset to the correct voltage branch of the grid.

If there is not enough network capacity to accommodate the asset, two options are available to the TSO. It might consider upgrading the grid, especially if several generating assets could share the grid upgrade costs. Alternatively, it can offer the developer a non-firm contract.

Assets under a non-firm transmission contract can send power through the grid only when there is capacity left after other (firm contract) power sources have dispatched their power (see figure 1). This means that when grid capacity is reached, non-firm assets will be curtailed.

Figure 1: Fluctuation in firm capacity use and non-firm availability

This interruptible transmission system was created to increase the number of renewable assets connected to the grid. As much as 98% of the 855 connection requests in FY2020 were for renewable assets, and the period from April 2021 to end-September 2021 saw even more connection requests. Instead of refusing the connection of some of these renewable assets, the TSOs offered non-firm contracts instead. Of the 1409 connection requests during this period, 497 non-firm contracts were offered – a nationwide average of 35%, with considerable variation among regions (see figure 2).

Figure 2: Firm/non firm transmission contracts in Japan

While this interruptible transmission system theoretically allows for the integration of more renewable power on the grid, the increased curtailment risk can also result in the asset not getting commissioned. Non-firm assets are currently not allowed to participate in the capacity and balancing markets, reducing monetization options. Moreover, coal assets under a firm contract might keep producing power during grid congestion, while renewable assets under a non-firm contract are curtailed. To avoid this, the Japanese government has decided to make all new connections non-firm and change the curtailment priority order to favor renewables – to increase both the commissioning of renewable assets and the production of renewable power.

Reforms of the rules regarding non-firm assets
From April 2022, only non-firm transmission contracts are given to all forms of generating assets connecting to the bulk power system nationwide, and this will be extended to the local power system layer by the end of FY2022.

From December 2022, the curtailment order will be modified for non-firm assets as well as for adjustable power assets (assets that fall under the I, I’ and II categories of the balancing market). From FY2023, these rules should be extended to all assets, including those under firm contracts. The new curtailment order will be as follows:

  1. The first assets that will be curtailed will be thermal power plants that have been appointed as priority curtailment assets by the TSOs (Source I), thermal power plants with online curtailment control systems, pumped hydro, and batteries
  2. After that, thermal power plants with no online controls will be curtailed
  3. Followed by biomass power plants
  4. Followed by PV and wind power plants
  5. And finally, other plants such as nuclear, hydropower, and geothermal

Within each category, plants with the highest marginal generation cost will be curtailed first. This will have the added benefit of reducing the power wholesale market price as the price is equal to the marginal cost of the most expensive asset cleared for a given interval on the market.

In addition to the change in curtailment priority order, non-firm assets will be allowed to participate in both the capacity market (from this year for delivery in 2026) and the balancing market. METI plans to monitor and review the results of these changes in FY2022 and FY2023.


These changes should have several effects on the power market. Renewable assets developed over the last two years with non-firm contracts but not commissioned due to the associated risks are likely to move forward. In the future, curtailment of renewable assets will be reduced considerably from where it would have been under the old system – although as renewable penetration increases, curtailment risk is still expected to increase compared to recent years. Finally, the economics of fossil fuel generation plants will be further squeezed as curtailment increases. These assets will have to find new sources of income, potentially through the balancing market. It will be interesting to see how fossil fuel generation plant curtailment orders will be implemented when METI’s vision of ammonia fuel and/or carbon capture materializes. There may also be moves to include a plant’s environmental criteria and marginal costs in deciding the curtailment order.

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