Japan’s Long-Term Decarbonization Auction (LTDA) to Introduce Fixed Repayment Option for LNG Power Plants

A new mechanism will allow LNG-only thermal power plants awarded contracts in the long-term decarbonization auction LDTA to choose to fix the amount they repay from earnings in the wholesale and other markets. The auction forms part of the capacity market, and successful generators usually receive revenue covering fixed costs for 20 years, but must return approximately 90% of earnings from other markets to the Organization for Cross-regional Coordination of Transmission Operators, Japan (OCCTO). The 90% repayment requirement has limited generators’ upside, while the new fixed-repayment option can support investment in LNG-fired power as Japan seeks to shift away from coal.

Generators will be able to choose between the existing mechanism of repaying 90% of market earnings and the new fixed repayment mechanism over a period of five or ten years. Annual repayments have been set at JPY 9,800 per kW for the five-year option and JPY 8,300 per kW for the ten-year option. The repayment levels will be reassessed in FY2031. The fixed repayment option will be available to both LNG-only thermal plants awarded contracts in the next auction in January 2027 and those awarded in previous auctions.

Thermal plant operators have argued that the limited earnings retained under the 90% rule do not adequately compensate for the risk of losses from surplus LNG procured under long-term import contracts. Fixing repayment costs aims to give these operators greater scope to increase earnings through their own efforts and make it easier to enter into long-term LNG import contracts, but it also means that they must make fixed repayments even when their market activities generate losses.

🔍 Shulman Commentary:

The new measure reinforces LNG’s role as a transitioning fuel source toward 2050 carbon neutrality, consistent with the 7th Strategic Energy Plan (SEP). METI’s plan to potentially increase the profitability and predictability of repayments for LNG thermal power plant operators reinforces its emphasis on maintaining a stable electricity supply during that transition. For market participants, the composition of the generation mix will be an important factor in forecasting future wholesale electricity prices.

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