Japan Doubles LTDA Price Cap Ahead of 3rd Auction to Counter Inflation Pressures

At a meeting held on April 23, 2025, the Ministry of Economy, Trade and Industry (METI) discussed changes to the 3rd Long-Term Decarbonization Auction (LTDA) auction in FY 2025. The LTDA is one of the key measures supporting Japan’s energy transition by promoting new investment in low-carbon power sources. Launched in FY 2023, it offers 20-year fixed capacity payments to successful bidders, providing long-term income stability to help offset substantial upfront costs. Covering technologies such as renewables, BESS, and nuclear, the LTDA reduces investment risks and drives the expansion of clean energy in Japan.

The key adjustments discussed at METI’s meeting include doubling the maximum bidding price from JPY 100,000 to 200,000/kW,as the previous price caps likely contributed to low participation in earlier auctions. This significant increase addresses rising construction costs due to inflation, higher interest rates, and the weakening yen.

Emerging Technologies and Inflation Adjustments in Japan’s LTDA Auction

Even higher price caps are being implemented for emerging technologies—new green hydrogen-dedicated thermal projects will be capped at JPY 795,000/kW, while new green ammonia-dedicated thermal projects will receive JPY 303,000/kW. These higher caps come with reduced solicitation volumes, reflecting a more targeted approach to supporting innovative but costly technologies.

The meeting also addressed differentiating project return rates for power generation projects to tackle investment challenges associated with varying construction lead times. Under the new scheme, projects with longer construction periods (over 10 years) will receive a 1% risk premium, while those with shorter lead times (under 5 years) will see a 1% reduction. This approach aims to balance incentives across diverse energy sources, promoting a diversified energy mix.

Additionally, the inflation adjustment mechanism is being refined to use multiple economic indicators rather than solely the Consumer Price Index (CPI). The new system will apply the construction work deflator for capital cost at the start of operations, the Corporate Goods Price Index (CGPI) for annual maintenance costs, and exchange rates with overseas price indices for variable costs, creating a more responsive framework for the changing economic environment.

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