Japan Power: Renewables to embrace more competition

October 2021 are anticipated to continue rising over the next decade while
renewable technologies are aimed to almost triple to account for
36-38% of total electricity generation during the same period. It
is inevitable to make a transition towards competitive settings to
1. Introduction ensure affordability.

At the same time, issues inherent to the Japanese renewable

Japan has seen a rapid deployment of variable renewables
market in general, such as high capital costs and limited grid
thanks to the generous feed-in tariff (FIT) program introduced in
connection persist, and appropriate location is becoming
July 2012. Renewable power (excluding hydropower)
scarce. The government is enhancing policies to tackle these
accounted for 10% of total power generation in fiscal year (FY)1
issues, including defining zones to promote deployment at local
2019, a significant increase from less than 3% a decade ago. In
government level, promoting the use of underutilized space (e.g.
particular, the installed capacity of solar PV has reached 60 GW,
abandoned farmland, rooftop of public sector buildings) and
the third largest in the world, and the technology is responsible
revising grid operation rules to integrate more renewables.
for more than 90% of renewable capacity installed under the
FIT. The high rate of deployment has had a strong impact on To create and expand competitive markets for renewables
wholesale power prices. Especially resource-rich Kyushu region towards the 2030 targets, the government has proposed new
observes extremely low prices at daytime during low power schemes (see our September 2021 report “Is the 2030 power
demand seasons and has experienced curtailment (Figure 1). mix target too ambitious?” for details of the targets). These
include feed-in premium, corporate power purchase
agreements (PPAs) and renewables certificate markets. Carbon
pricing mechanisms which indirectly influence the use of
renewable power are also under discussion.

In this note, we discuss the new measures and potential

business opportunities for existing and new market players.

2. New framework towards more

competitive power markets

The government has followed the move towards more

competitive markets seen in many parts of the world, shifting
Figure 1. Japan Electricity Power Exchange (JEPX) spot price by region from FIT to more market-oriented schemes. New schemes
in the first half of October 2021 target at the renewable market both inside and outside the FIT
Source: Refinitiv Workspace
program.
Amid the increasing penetration of renewables, there are
growing calls for competitive mechanisms to support the zero 2-1. Feed-in Premium to replace Feed-in Tariff
carbon technologies, shifting away from the subsidy-based FIT.
Burdens on retail customers to finance the current FIT program The government is set to introduce a feed-in-premium (FIP)
program in April 2022 to gradually replace FIT. In FY2022, new

1
In Japan fiscal year starts in April and ends in March.
 Japan Power Market | 26 October 2021 2

large projects of all technologies but wind power can only opt for certificate auction (see the renewable certificates section
FIP (Appendix). Of these, FIP prices for solar PV projects larger below).
than 1MW and solid biomass projects larger than 10MW will be
The impact of FIP will come after the FIT backlog is tackled
settled through auction. Smaller projects and wind installations The FIP approval process is to kick off in April 2022 but it will
of any size will be able to choose between FIP or FIT. The scope take a few years until the first projects under FIP come online
of FIT and auction are expected to expand over time. given the high level of FIT project backlog (Figure 3, Figure 4).
Risks and opportunities As of the end of FY2020 (March 2021), power capacity that has
been approved but not yet installed stands at about 20 GW for
The FIP is designed to control the financial burden of retail
solar PV and 11 GW for wind. These are equivalent of 4 years
customers by building its pricing mechanism on the competitive
and over 20 years of backlog respectively, when assuming
market. Renewable power from a FIP project will be sold at a
deployment at the current rate, while some of the approvals can
premium while the selling price can fluctuate. The premium is
be cancelled missing the deadlines for start-up.
determined as the difference between the FIP price fixed for a
fiscal year and the reference price based on market prices that
is reviewed every month (Figure 2). While the fluctuating selling 50 50

JPY/kWh
GW
price (and revenue) is expected to incentivize power supply
during peak hours when market prices are high, it may not be 40 Approved but not yet 40
installed under FIT: 19.5GW
favourable from a financing standpoint. 30 30

Premium 20 20
Non-fossil value =FIP - reference
10 JPY1.2/kWh Balancing cost subsidy 10 10
JPY/kWh

JPY1/kWh
0 0
8
JPY10/kWh -10 -10
6 fixed for Adjusted FY2012 2013 2014 2015 2016 2017 2018 2019 2020
FY2022* market price
Reference price Approved Installed FIT-Ut/Com (right axis) FIT-Res(right axis)
4
(updated monthly)
Figure 3: Solar PV capacity and feed-in tariff rates (FIT)
2
5 50

JPY/kWh
GW

Approved but not yet installed

0 under FIT: 11.1GW
4 40
FIP price Reference price calculation
Figure 2: Indicative pricing for a solar PV project under FIP 3 30
Sources: Refinitiv, METI
Note: This chart shows the FIP price for a solar project between 50kWh 2 20
and 1MW set at JPY10/kWh. With that and the reference price (the sum
of adjusted market price e.g. at around JPY7/kWh and non-fossil value 1 10
at JPY1.2/kWh) less the subsidy for balancing cost (JPY1/kWh), the
0 0
premium will be at around JPY3/kWh.
-1 -10
In addition to the risk of price fluctuation, power producers under FY2012 2013 2014 2015 2016 2017 2018 2019 2020
the FIP face imbalance risk although the subsidy to compensate Approved Installed FIT-onshore(right axis) FIT-offshore(right axis)
the risk is offered (Figure 2). They will be required to match their
supply with their plan reported to the TSO and will have to pay
Figure 4: Wind capacity and FIT rates
imbalance penalty if their actual power supply deviates from Source: METI
their plan. It is unlikely that many small renewable power Note: Negative values for approved capacity indicate approval
producers have the capability to manage imbalance risks, which cancellation. Ut=utility, Com=commercial, Res=residential
underscores the importance of aggregators in the market
operation. Under the FIT, power producers are exempt from 2-2. Corporate PPAs
imbalance cost.
Amid the growing interest from end-users in direct purchase of
On the other hand, FIP can attract retailers to engage in renewable electricity, i.e., outside the FIT/FIP scheme, the
renewable projects themselves, because the non-fossil fuel government this Autumn (likely by November) will loosen the
value of the power belongs to its power producers and it can be restriction on electricity transactions and allow end users to
used to meet a legally-binding non-fossil fuel share target. purchase electricity directly from a renewable project operator.
Alternatively, the non-fossil fuel value can be unbundled from At the same time, end users will be exempt from the renewable
the electricity to be sold in the form of renewable certificates to surcharge to support the FIT. Currently, corporate PPAs
other retailers. In the FIT, while generators sell power to a TSO, between end-users and power producers must involve an
they give way to a designated organization for renewable electricity retailer in between. In addition, users pay the
 Japan Power Market | 26 October 2021 3

renewable surcharge even though the power comes exclusively and project developers have had little incentive to develop
from renewable sources outside the FIT. outside the scheme. Cases for corporate PPAs via retailer have
been limited to onsite PPAs where end-users procure power
In many parts of the world, led by the US and Europe, corporate
from generation facilities on its premises, notably rooftop solar
PPAs have emerged as a driver of investment in solar PV and
PV, in which the wheeling charge to a regional TSO does not
wind as costs decline. In addition to the sustainability benefit,
accrue.
corporate PPAs allow them to procure renewable power
controlling electricity costs through signing long-term contracts. For an offsite corporate PPA to be economically attractive, in
Such a scheme is becoming increasingly attractive with the high addition to the exemption of the renewable surcharge, overall
wholesale power prices linked to the volatile fuel markets today. cost reduction is necessary to expect a meaningful expansion
as is seen in the US and Europe. The three-quarter decline in
Direct purchase by end-users could unlock the potential
FIT rates for solar PV since the introduction of FIT implies
of further deployment project costs have declined by the same degree (Figure 3, 4
In Japan, there is a substantial gap between the corporate above). However, not all projects are likely to generate
sector’s potential demand for renewable power and its supply. electricity parity to the grid.
An increasing number of Japanese companies are voluntarily
The power price of a solar PV project through an offsite
committed to 100% renewable target under initiatives such as
corporate PPA is estimated to be JPY20/kWh to JPY 23/kWh
RE100 as well as carbon neutrality. Progress is not yet visible.
(Figure 6). The power price is comprised of a project cost (as
Of 39 Japanese member companies of RE100 as of the end of
represented by levelized cost of electricity, LCOE) which is in
2020 (today the number has risen to over 60), 25 or two-thirds
the order of JPY10/kWh (estimated for the cheapest 15%
have reported renewable power accounting 5% or less of their
projects started in 2020) to JPY13/kWh (the median among the
total consumption. The share of renewable power stands at 14%
projects started in 2020). The wheeling cost, a fee to use the
overall, lower than the top 3 RE100 countries in terms of power
regional TSO’s network to transmit electricity, depends on the
consumption of its members (Figure 5).
region, and it is currently JPY11.45/kWh in the Tokyo region for
a large user consuming between 50kW and 2MW for reference.
40 A project outside the FIT has to be very competitive to be on par
TWh

with renewable power from the grid. The latter costs less than
30
RE share: 62%
JPY20/kW consisting of the retail electricity price, averaged
2%
26% JPY16/kWh in FY2021 year-to-date, the JPY3.36 renewable
20 42%
surcharge for the FIT, and renewable certificates derived from
10
91% FIT projects which will be lowered from the historical
30%
19%
JPY1.3/kWh level to JPY0.3/kWh at this autumn’s auction.
14%
0
US UK China Japan Unbundled EAC purchase
Contract with suppliers 25
Generation
JPY/kWh

Electricity consumption Renewable certificate: to drop

PPAs
from JPY1.3 to JPY0.3 cost range
Of which renewable electricity consumed Self-generation 20
Figure 5: RE100 members’ electricity consumption and share of Renewable surcharge Generation
renewable electricity in the 3 largest markets and Japan (left); 15 cost
Renewable sourcing used by RE100 members (right)
Source: RE100 annual report 10 Retail
electricity Wheeling
Easing the corporate PPA rule will provide end-users with more 5 price charge
opportunities to engage in renewable projects. According to
0
RE100, companies globally procure 26% of their renewable
Renewable from the grid Corporate PPA (solar PV)
electricity by signing a PPA with power producers. This is one
of the three main channels together with buying renewable Figure 6: Indicative renewable electricity prices
Sources: Refinitiv, METI, ESMC
certificates and choosing a tariff including renewable sources Note: The retail prices are for industrial/commercial users with contract
from a retailer (Figure 5). In Japan, contracting renewable power larger than 50kW and less than 2MW. The generation cost in the
with a retailer, purchasing certificates from existing carbon offset corporate PPA price indicates the LCOE of a utility solar PV project
using a 3% discount rate. The upper range represents a project with the
schemes like J-Credit and developing “onsite” corporate PPAs median capital cost among capacity installed in Japan in 2020, the lower
(see the next section) are the main options available for end- range the cheapest 15%.
users today.

Further cost reduction required Understanding in the entire value chain is key

Virtually all renewable projects have been developed under FIT Another key to unlock the potential is filling the knowledge gap
given the historically high tariff securing stable future revenue, and building capability of end-users. Interest in renewable
 Japan Power Market | 26 October 2021 4

electricity as part of the net zero emission agenda is rising 3. Carbon pricing: carbon tax or emission
among corporate users especially after the government’s
trading, or both?
declaration of the carbon neutrality goal. But it appears that
many of them are in the process of gathering information and
Discussion on whether and how Japan could introduce carbon
assessing ways to approach the target. There is a need for a
pricing nationwide has long been under way. Carbon pricing
consultancy type of role that overlooks at the entire value chain
gives an economic signal to drive investment in cleaner energy
of the renewable market and advises an optimal portfolio of
including renewable electricity and the use of it by making fossil
options based on needs and capabilities of each end-user.
fuels expensive. The 6th Strategic Energy Plan as well as the
revised Plan for Global Warming Countermeasures, both
2-3. Structure change to non-fossil and
adopted by the cabinet on 22 October, do not have concrete
renewable certificate markets proposals on carbon pricing mechanisms (neither carbon tax
nor mandatory emission trading), partly reflecting the conflicting
The markets that trade non-fossil fuel (renewable) certificates ideas between the METI and Ministry of the Environment.
both from FIT and non-FIT projects are only open to retailers as
buyers today. This structure will change this Autumn to In our view, if anything, more realistic than a mandatory
accommodate participation of end-users. The new structure is emission trading would be to introduce a carbon tax. The
primarily designed to improve accessibility and it is not intended discussion is led by the Ministry of the Environment and how
to directly facilitate new projects. realistic it is depends on the adjustment with the existing tax
regime as well as the progress of international discussion.
Two distinct trading markets: 1) Renewable certificates
from FIT projects for end-users More specifically, we think that the country could raise and
adjust the rates of the existing petroleum and coal tax (JPY700/t
In the new structure there are two distinct markets at the JEPX. of coal, 1,080/t of LNG, and JPY2,040/kl of oil) and climate
One deals with FIT project-derived certificates for end-users as change tax (JPY289/t-CO2) which are imposed on fuels at
well as retailers and the trial trading is set to start in November. upstream (i.e. at import or production). On a tonne per CO2
The tracking information on power sources will also be available basis, they amount to JPY1,065/t-CO2 for oil, JPY689/t-CO2 for
in the trading. Corporates can directly purchase certificates to gas and JPY581/t-CO2 for coal. The tax rates could be adjusted
fulfil their voluntary targets such as those under RE100 initiative, to the same rate per tonne of CO2 emission, and raised to, for
or supplier requirements set by their clients. The price will likely example, the level in line with the EU’s proposed Carbon Border
be affordable at around JPY 0.3/kWh, as the METI recently Adjustment Mechanism.
announced as the lowest bidding price for the coming auctions,
which is significantly lower than the past auctions struck at On the contrary, the introduction of a mandatory nationwide
JPY1.1-1.3/kWh. emission trading scheme where the government allocates a cap
to emission sources in the industry appears unlikely.
As is the case with corporate PPAs, a role that bridges end- Traditionally, the industry’s action to tackle climate change is
users and the market will be important to lower the entry barrier centred around voluntary agreements with an established
and reduce transaction costs. Brokerage business is a notable pledge and review cycle that involves the government. The
example and the JEPX is finalizing the membership Keidanren’s Commitment to a Low Carbon Society is a notable
requirements and operational rules. example, involving over 60 industry sectors setting targets,
pledging actions and reporting emission reduction.
2) Certificates from nuclear/large hydro and FIP for
retailers A voluntary emission trading scheme will be launched by the
On the contrary, retailers will no longer be allowed to use the METI in FY2022. The mechanism can be particularly important
certificates from FIT projects to meet their non-fossil fuel for sectors whose emissions are difficult to reduce to zero alone
obligation as they do today. They must go to the other market such as aviation and shipping sectors. A group of companies
which is designed exclusively for retailers to trade to meet their that would participate in the voluntary scheme trade emission
legally binding target (44% of electricity from non-fossil sources credits from their voluntarily set allocations or from offset
by 2030). It deals with certificates from non-FIT non-fossil fuel projects in a newly created trading market. Offset credits from
power, which is mostly nuclear power and large-scale hydro, both domestic and overseas projects will be allowed. The role
and to a lesser extent waste. Certificates from non-FIT of the scheme or emission trading in general in the country’s
renewables including FIP will be added while whether non-FIT climate goals under the Paris Agreement will be more visible
renewable certificates should be accessible to end-users is still after COP26, where negotiations around corresponding
under discussion. adjustments for cross border transactions of carbon credits take
place (see our 15th October report “COP26: Implications for the
voluntary carbon market”).
 Japan Power Market | 26 October 2021 5

4. Conclusions manage risks. There are business opportunities for both existing
players such as retailers and renewable project developers, and
The new competitive measures such as FIP, corporate PPAs new players such as those with expertise built in the competitive
and the new structure of renewable certificate markets will bring markets in the US and Europe.
multiple benefits. The cost efficiency of future capacity additions On carbon pricing mechanisms whether carbon tax or emission
and operation will improve and renewable electricity will be more trading, discussion is under way. While their roles are not yet
accessible to end-users. However, these measures alone are clearly defined in the country’s overall climate change policy, the
not sufficient or designed to scale up the deployment of country will begin with a voluntary scheme of emission trading
renewables as the FIT has done. For further penetration, to be launched next year.
barriers that the Japanese renewable sector faces in general
such as scarcity of appropriate location, high capital costs and How much of new renewable electricity the whole policy
limited grid connection, as well as the risks associated with the package will bring to the market is to be seen. However, the
competitive measures need to be addressed. newly designed market should still be an investment case in
Japan, where the political momentum for renewable electricity
Supporting policies to tackle the general issues have been as well as carbon neutrality stays intact after the recent change
proposed, including defining zones for deployment at local to the administration and likely so after the general election on
government level, promoting the use of underutilized space (e.g. 31st October.
abandoned farmland, rooftop of public sector buildings) and
revising grid operation rules to integrate more renewables.
Competitive markets will benefit from new types of participants
for effective operation. Players with intermediary roles such as
consultants (or stakeholders with expertise in the entire value
chain), renewable certificate brokers and aggregators are
awaited to fill knowledge gap, reduce transaction costs and

Appendix: FIT and FIP by technology in FY2022

FIT* FIT (no

FIT (auction)
Solar PV (no auction) FIP (auction)
action)
FIP (no auction)
FIT (no auction) FIT (auction)
Wind
FIP (no auction)
FIT (no auction)*
Small hydro
FIP (no auction) FIP (no auction)
FIT (no auction)*
Geothermal
FIP (no auction) FIP (no auction)
Biomass FIT (no auction)* FIP
(solid fuel) FIP (no auction) (auction)
Biomass
(liquid fuel) FIP(auction)
Biomass FIT (no auction)* FIP
(other) FIP (no auction) (no auction)
50kW 250kW 1MW 10MW

Source: Refinitiv based on METI https://www.enecho.meti.go.jp/category/saving_and_new/saiene/data/kaitori/2021_fit.pdf

Note: * denotes projects subject to requirements for local community use except solar PV residential projects below 10kW.
 Japan Power Market | 26 October 2021 6

Contact:

Refinitiv Power Research Global: [email protected]

Yoko Nobuoka, Senior Analyst, Japan Power Research: [email protected]

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