Shulman Advisory

Japan to begin Long-Term Decarbonization Power Source Auctions

Publication date: January 12, 2024

Japan’s first “Long-Term Decarbonization Power Source Auction”, or Long-Term Decarbonization Capacity Market, will be held this month. The auction is designed to promote investment in new carbon-free and low-carbon electricity sources over the long term to achieve carbon neutrality by 2050.

The Organization for Cross-regional Coordination of Transmission Operators (OCCTO) will host the auction and set a nationwide target capacity based on expected future supply needs. Generators will then bid to supply a portion of this volume with new build capacity. Payments made to successful bidders will come from retail electricity companies in the form of a “capacity contribution.” The supply period awarded through the auction is for 20 years, with lead time taken into account, which provides successful generators with a stable long-term fixed revenue for their planned projects.

Despite having similar names, the Long-Term Decarbonization Power Source Auction is separate from the existing (single-year) capacity auctions. In these capacity auctions, bidders must supply over 1MW of electricity for one year, predominantly from power sources that are already built.

The eligible power sources for the Long-Term Decarbonization Power Source Auction include:

  • Renewable energy (solar, onshore and offshore wind)
  • Battery energy storage systems
  • Hydropower
  • Geothermal
  • Nuclear
  • Thermal power (hydrogen, ammonia, biomass, and LNG)

Power generators are to bid using specified bidding units (JPY per kW per year), and the winners will be selected based on lowest bids until the target capacity has been awarded. Bidding should generally be based on individual unit power sources, but for renewables like #solar and #wind, where aggregation is common, different units may be combined.

The new market is setting a modest initial target of 4GW. This will leave significant capacity for future auctions that may benefit from innovations not currently available – so the market’s expansion will be gradual. METI will determine the scale of future rounds based on auction results and trends in technological innovation.

The timeframe for submitting bids for this first auction will be between January 23 and 30, and results are expected to be announced three months after the bidding deadline.

Japan is set to initiate its inaugural “Long-Term Decarbonization Power Source Auction” (the “Auction”) in January 2024. This event will offer a 20-year fixed revenue for newly developed power sources, specifically those contributing to the decarbonization of the Japanese power industry, including battery energy storage systems (“BESS”).

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