Publication date: Aug 1, 2025
Understanding Japan’s Capacity Market and the LTDA Framework
In recent years, Japan has been investing in a capacity market to stabilize electricity supply and prices, while accelerating the introduction of decarbonized energy sources.
This article explores the capacity market, which includes the single-year capacity auction and the Long-Term Decarbonized Power Source Auction (LTDA) — through which the government aims to create better conditions for long-term energy security and enhanced introduction of renewable energy.
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The Single-Year Capacity Auction
Following the liberalization of the retail market, the single-year capacity auction was introduced in FY 2020 to procure the supply capacity (kW) needed to meet future demand, increase business predictability for generators and retailers, and stabilize electricity prices. The auction is organized by the Organization for Cross-Regional Coordination of Transmission Operators (OCCTO) four years prior to the actual supply year. In FY 2025, the fifth auction is scheduled for October 2025, targeting delivery in FY 2029.
In the fourth auction held in FY 2024 (for actual delivery in FY 2028), the contracted supply capacity totalled 166.21 GW, down 1% from the third auction. The total contracted cost, however, reached JPY 1.8506 trillion, up 41% from the third auction and a record high.
Regarding the auction process, power generators submit bids, and OCCTO determines the winning bids and contract prices based on the demand and supply balance. During the delivery year, OCCTO collects capacity contribution charges from retailers (who purchase the supply capacity) and distributes capacity remuneration to generators based on contracted asset types.
However, several challenges remain. Rising inflation has pushed contracted prices higher, increasing the burden on retailers. And while the government wants to encourage generators to invest in new capacity with a long-term vision, such investment has yet to increase significantly, since this auction only guarantees single-year revenue.
Ensuring a stable, long-term electricity supply is essential for corporate planning and investment predictability. To address this, the government recently introduced the LTDA to improve long-term visibility and stimulate investment in decarbonized energy sources.
The Long Term Decarbonization Auction (LTDA)
The LTDA was launched in FY 2023 to accelerate Japan’s energy transition by encouraging investment in clean power infrastructure. It is also regulated by OCCTO and offers long-term fixed payments to large-scale power generation projects (new built or retrofit) that contribute to decarbonization, including renewable energy sources (hydro, hydrogen/ammonia co-fired thermal, geothermal, biomass), battery energy storage systems (BESS), pumped hydro, nuclear, LNG, and Hydrogen and Ammonia co-firing.
The LTDA operates as a competitive bidding process. Key features as of FY 2025 are:
- Winning bidders receive a fixed annual payment based on the auction-clearing price for 20 years
- 90% of additional profits from other market transactions (e.g. JEPX) must be returned
- Contracted capacity must be maintained for 20 years and commit to the required commissioning date for each power source (e.g., solar 5 years, wind and geothermal 8 years)
The LTDA has faced several challenges since its launch. Participation has been uneven across asset categories, with battery storage (BESS) bids far exceeding capacity limits while other segments, such as retrofitted thermal plants, have fallen short, limiting competition and driving concerns over price efficiency. Rising inflation and cost uncertainties have further strained project economics. At the same time, the current requirement for winning bidders to return 90% of profits from other markets has been criticized for reducing incentives to optimize operations.
In response, the Ministry of Economy, Trade and Industry (METI) and OCCTO are considering key changes for upcoming auctions, including raising the bid price cap, adjusting category-specific capacity caps, and revising the profit-sharing model to a fixed fee with support triggered only under significant cost or revenue fluctuations. Additional measures include requiring detailed business plans for BESS projects to improve project reliability and introducing relief mechanisms that exempt developers from penalties in delays caused by external factors.
Japan’s capacity market and the LTDA continue to evolve to improve investment predictability and support the energy transition. With upcoming auctions and evolving policy measures, understanding these mechanisms is essential for companies evaluating opportunities in the Japanese power market. Our team can provide tailored analysis and strategic guidance to help navigate these developments and assess potential business impacts.
Understanding Japan’s Capacity Market and the LTDA Framework