Japan Renewables Alert 67
Today's Topic
- Amendments to Maintain Proper Development and Operation of Renewables Projects
- Amendments to Further Promote the Introduction of Renewable Energy
- Offshore Wind in the EEZ
- Other Material Amendments
- Outlook for FY2024
Many regulatory amendments that could impact renewable energy generation projects are scheduled to take effect in FY2024 (starting in April 2024).
In April 2024, the amendments to the Act on Special Measures Concerning Promotion of Utilization of Renewable Energy Electricity (Act No. 108 of 2011; the REA) will take effect pursuant to the Act for Partial Amendment of the Electricity Business Act, etc. for the Establishment of Electricity Supply System toward the Realization of a Decarbonized Society (Act No. 44 of 2023; the GX Decarbonization Electricity Act). The amended REA will require renewable projects to conduct information sessions for local residents before the submission of the FIT/FIP application or FIT/FIP amendment application in the case of certain changes, and will also authorize the Minister of Economy, Trade and Industry (METI Minister) to issue a “reserve order” to withhold FIT/FIP grants from projects that are in breach of the approved FIT/FIP business plan. The ministerial order of the Ministry of Economy, Trade and Industry (METI) (METI Ministerial Order No. 6 of 2024) to amend the Rule for the Enforcement of the Act on Special Measures Concerning Promotion of Utilization of Renewable Energy Electricity (METI Ministerial Order No. 46 of 2012; the REA Rule) in relation to these topics was already promulgated on February 20, 2024.
In addition to amendments aiming to introduce more rigorous and effective measures to maintain appropriate operation of renewable energy projects, there are also amendments planned to further promote the introduction of renewable energy while keeping social costs at a reasonable level through the use of existing projects and the FIP program. Among such amendments are a new provision for allowing storage batteries installed in FIT/FIP projects to be charged from the grid and a provision to temporarily increase the amount of the balancing cost equivalent in the course of FIP price calculation. Furthermore, a new regulatory framework has been discussed to promote the use of Japan’s Exclusive Economic Zone (EEZ), the sixth largest in the world, for offshore wind power generation.
As the introduction of renewable energy continues to grow increasingly important both as an environmental and industrial policy, we will provide an overview of some of the various planned revisions as well as the outlook for the upcoming fiscal year.
1. Amendments to Maintain Proper Development and Operation of Renewables Projects
First, as reported in our Japan Renewables Alert 66 (Section 1), one of the amendments to maintain proper development and operation of FIT/FIP renewable projects is that operators will need to hold an information session that meets certain requirements in advance to obtain a FIT/FIP approval for renewable projects of 50 kW or more (see REA amended by the GX Decarbonization Electricity Act, art. 9, para. 4, item 6). Operators will also need to hold an information session before applying for FIT/FIP amendment approval for certain changes, such as change in land plots of the facility location or certain investors (e.g., change in the member(s) of a godo kaisha or certain changes in the tokumei kumiai investors) (see amended REA, art. 10, paras. 1, 4; see also amended REA Rule (here), art. 8-2; Guidelines for Implementing Information Sessions or Prior Notification Measures (here), p. 28). Concerns have emerged for the draft guidelines after the guidelines and METI’s responses to the public comments, both published on February 20, 2024. For instance, the guidelines state that “a director or employee of the entity who can provide sufficient and appropriate explanation should attend an information session and provide such explanation” in the case that the FIT/FIP-approved operator is an entity (p. 20). In response to a public comment regarding whether it is allowable for the parent company or asset manager to provide an explanation in the case that a FIT/FIP approval is to be or has been obtained under the name of a special purpose company (SPC), METI stated that the SPC itself should provide an explanation by, for example, having the representative of the SPC provide explanation (see here; No. 84). This raises concerns about the impact the amendment will have, considering the widely adopted investment structures in the renewable market.
Second, the METI Minister will be authorized to issue an order to an operator that is in breach of its approved FIT/FIP business plan to reserve an amount equivalent to the FIT/FIP grant to be withheld by OCCTO (amended REA, art. 15-6). A reserve order can be issued expeditiously without giving opportunity for a prior hearing or statement procedure (see Administrative Procedures Act, art. 13, para. 2, item 4). A new provision has also been added, authorizing the METI Minister to order any operator whose FIT/FIP approval has been revoked to refund the FIT/FIP grant (amended REA, art. 15-11, para. 1).
2. Amendments to Further Promote the Introduction of Renewable Energy
First, as reported in our Japan Renewables Alert 62, to further promote the introduction of renewable energy, the impact on the applicable FIT/FIP price due to increase in the total capacity of the solar modules (DC capacity) will be reduced in order to encourage additional investment in existing solar projects. The new applicable FIT/FIP price after an increase in the DC capacity by 3 kW or more or by 3% or more (cause for price revision) will be calculated so that the existing price continues to be applied to the existing portion, whereas the latest FIT/FIP price is to be applied only to the difference (amended REA, art. 10-2; amended REA Rule (here), art. 10-2). Please note, however, that the new price is applicable to the entire facility when there is an increase in the capacity of the power generation facility, as is the case under the current laws and regulations.
Second, a provision will be added to the REA Rule to allow charging of storage batteries installed on FIP projects from the grid (draft amended REA Rule, which is now open for public comment (here), art. 5). This provision will be applicable to projects that obtained FIP approval on or after April 1, 2024, and are subject to the generation charge; on the other hand, the provision will not be applicable at this time to projects that are FIP-approved in FY2022 or FY2023 and projects that are FIT-approved prior to FY2024 and converted to FIP. However, METI explained at an expert panel meeting held on December 19, 2023, that it will continue discussions on existing FIP projects as well (see here, p. 36).
Third, during expert panel meetings, METI proposed increasing the amount of the “balancing cost equivalent” in the calculation of the FIP premium on a temporary basis. Under the current policy, the balancing cost equivalent is set at 1.00 yen/kWh in FY2022, 0.95 yen/kWh in FY2023, 0.90 yen/kWh in FY2024, and 0.80 yen/kWh in FY2025, with the amount to be reduced sequentially each year. Under the proposed new policy, the amount for the first year of operation as a FIP project will be 1.0 yen/kWh regardless of the fiscal year, the amount for the fourth and subsequent years will be those under the current policy (set for each year), and the amounts for the second and third years will be reduced in steps so that the reduction is the same in each year. The new policy would be applicable to projects that started operation as FIP between FY2024 and FY2026 for solar power, and between FY2024 and FY2027 for wind power. METI further explained that projects converting from FIT to FIP are also eligible if such conversion is in the fiscal years specified above.
3. Offshore Wind in the EEZ
The Japanese government has been discussing the establishment of a system for the implementation of offshore wind power generation projects in the EEZ. Expert panel discussions were summarized and submitted for public comment from February 9 to 22, 2024 (see here).
According to the summary, a “two-tier system” is proposed to be adopted for offshore wind power projects in the EEZ wherein (1) installation and long-term use of power generation facilities are limited to those operators who have obtained an installation permit from the government, and (2) such operators can receive support if desired by bidding in the FIT/FIP auction pursuant to the REA. Specifically, (1)(a) the government will designate candidate zones based on natural conditions and other factors following interministerial consultations considering defense radar, major shipping routes, etc.; (b) the operator will determine an area within the candidate zone where it will conduct the power generation project and then submit an application to the government with a draft map specifying the area and installation plans; (c) the government will review the application and grant a provisional permit; (d) the operator will make adjustments and coordinate through a council composed of stakeholders; and (e) the installation permit will be granted, and (2) the operator may participate in the FIT/FIP auction pursuant to the REA if it so desires.
Another governmental expert panel has been discussing new environmental impact assessment schemes not only in relation to offshore wind projects in territorial waters, but also in relation to those to be conducted in the EEZ (see here). Regulatory amendments necessary for offshore wind power generation in the EEZ are expected to occur in the near future.
4. Other Material Amendments
The generation charge will be introduced in April 2024. The amendment to the General Terms and Conditions of Wheeling Services of each transmission and distribution system operator on this point has already been approved by the METI Minister. While existing FIT/FIP-approved projects are to be exempted from the new charge until the expiration of the FIT/FIP period, new projects to be FIT/FIP-approved in or after FY2024 will be subject to the generation charge, though the generation charge equivalent that is to be calculated considering the national average of the charge and the characteristics of each technology will be added to the applicable FIT/FIP prices.
Miyagi Prefecture’s Ordinance on Renewable Energy Local Coexistence Promotion Tax (Miyagi Prefecture Ordinance No. 34, 2023; the Miyagi Ordinance), which is the first local ordinance to impose a tax specifically targeting renewable energy business, will be implemented as of April 2024 (see Section 4 of our Japan Renewables Alert 63 and Section 2 of our Japan Renewables Alert 66). The Miyagi Ordinance is intended to discourage the development and construction of renewable energy power plants in forest areas, but it also allows room for exemption for projects on which consensus of local stakeholders is achieved through certain procedures. The actual operation of the Miyagi Ordinance should be carefully monitored at this time when local governments are inevitably under pressure to seriously take measures to achieve net-zero under the national target of 36-38% for renewable energy by FY2030.
5. Outlook for FY2024
Corporate and societal demand for renewable energy is increasingly growing, and energy storage businesses are becoming more and more important as renewable energy continues to forge ahead. We are seeing more diversity and complexity than ever before in project structures and the involvement of various parties, and we expect this trend to continue in the next fiscal year.
Having leveraged our experience in the United States to pioneer corporate PPA projects in Japan even before the FIP scheme was introduced (see Japan Renewables Alert 60, Japan Renewables Alert 56), and having been involved in the development, contract negotiation, and financing of non-FIT renewable energy projects—including numerous corporate PPA projects, both FIP and non-FIP—we are looking forward to continuing to assist businesses with new challenges in the upcoming fiscal year.
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