Alternative Energy & Power 2022

Last Updated June 08, 2022

Japan

Law and Practice

Authors



Nagashima Ohno & Tsunematsu is one of the foremost providers of international and commercial legal services based in Tokyo. The firm has over 513 lawyers, including over 42 experienced foreign attorneys from various jurisdictions (as of April 2022). Its overseas network includes offices in New York, Singapore, Bangkok, Ho Chi Minh City, Hanoi and Shanghai, and collaborative relationships with prominent local law firms throughout Asia, Europe, North and South America and other regions. The firm regularly advises leading power utilities, trading companies and investors on their energy projects, including all associated regulatory matters, as well as financial institutions on financing for these projects. The firm has dealt with a number of renewable power projects since the introduction of the feed-in tariff in Japan.

General Structure and Ownership

The structure of the Japanese power industry was established during the occupation period after the Second World War when nine vertically integrated companies, each covering a different geographical region in Japan, were incorporated on 1 May 1951, pursuant to a directive from General Headquarters (GHQ). Each of these nine companies were granted a monopoly over all electricity business (generation, transmission, distribution and retail sectors) in their specific region. Those nine companies were:

  • Tokyo Electric Power Company, Inc;
  • Chubu Electric Power Company, Inc;
  • the Kansai Electric Power Company, Inc;
  • Tohoku Electric Power Company, Inc;
  • Kyushu Electric Power Company, Inc;
  • the Chugoku Electric Power Company, Inc;
  • Hokkaido Electric Power Company, Inc;
  • Hokuriku Electric Power Company, Inc; and
  • Shikoku Electric Power Company, Inc.

In 1972, when Okinawa was returned to Japan from the USA, Okinawa Electric Power Company, Inc was incorporated and granted a monopoly over electricity business in Okinawa.

These nine companies and Okinawa Electric Power Company, Inc are referred to as "major utilities".

There were two exceptions to this vertical integration. They are both wholesale electricity generators: (i) the Electric Power Development Co, Ltd (also known as "Denpatsu" or, since 2002, "J-Power"), which was incorporated in 1952 as a state-owned corporation (with 40% of its shares held by major utilities) to supplement the generation capacity of the original nine companies; and (ii) the Japan Atomic Power Company, which was incorporated in 1957 to promote the development of nuclear power plants by major utilities and J-Power.

Power industry liberalisation

This vertical integration and the regional monopolies over the generation, transmission, distribution and retail sectors have been gradually relaxed and liberalised since 1995.

In the generation sector, an Independent Power Producer (IPP) scheme was introduced in 1995, which liberalised the generation and wholesale of electricity.

In the retail sector, a Power Producer and Supplier (PPS) licensing regime was introduced in 2000, which partially liberalised retail sales of electricity. A PPS licence holder could sell its generated electricity to large-volume purchasers (meaning purchasers of 50 kW or more). However, the PPS licence scheme was abolished in 2016 when all electricity retailers were folded into a single category for regulatory purposes.

In the transmission and distribution sectors, a Specified Electricity Business operator licence scheme was established in 1995 under which the holder of such licence may sell its generated electricity to consumers in a very limited geographical area through a transmission and distribution network that it operates and maintains on its own in such area. As such, this scheme also dilutes the regional monopolies and vertical integration that were established under the GHQ directive in 1951.

In 2003, an electricity wholesale market, the Japan Electric Power Exchange (JEPX), was established to provide a liquid market of electricity. In 2004, J-Power was privatised through being listed on the Tokyo Stock Exchange.

Further, the power industry has completed a series of structural reforms that began in 2013. These consist of:

  • establishing a system to efficiently manage electricity across the transmission networks in Japan;
  • full liberalisation of the retail sector; and
  • "legal unbundling" of the transmission and distribution sectors from the generation and retail sectors (see 1.6 Recent Material Changes in Law or Regulation).

Principal Laws

The Electricity Business Act (Act No 170 of 1964, as amended) is the principal law governing electricity business in Japan. Under this Act there are seven types of regulated business, as follows.

Electricity generation business (hatsuden jigyo)

This is the business to generate and sell electricity to retail sellers and General Electricity Transmission and Distribution Business operators.

Specified electricity wholesale business (tokutei oroshikyokyu jigyo)

This is the aggregation business of small power sources including residential rooftop solar, batteries, demand responses (ie, “DR” – reducing or shifting consumers’ electricity usage during peak periods in response to time-based rates or other forms of financial incentives for balancing supply and demand). Specified Electricity Wholesale Business operators wholesale such aggregated power to Electricity Retail Business operators, etc (also referred to as Electricity Aggregation Business). From 1 April 2022, the Electricity Business Act newly regulates this business as it has much in common with Electricity Generation Business in that the aggregated power is also an important power source for the national power system.

General electricity transmission and distribution business (ippan sohaiden jigyo)

This is the operation and maintenance of an electricity transmission and distribution network. General Electricity Transmission and Distribution Business corresponds to the electricity transmission and distribution segment of the business that each of the major utilities (including their wholly-owned subsidiaries) have conducted and continue to conduct since their inception under their regional monopolies. Those who engage in General Electricity Transmission and Distribution Business are also required to provide ancillary services such as supply-demand adjustment and frequency control in their region.

Electricity Distribution Business (haiden jigyo)

This is also a newly regulated business from 1 April 2022. It is the operation and maintenance of a certain portion of the electricity distribution network in the service area of a General Electricity Transmission and Distribution Business operator. While General Electricity Transmission and Distribution Business covers electricity distribution business in Japan, the Electricity Business Act allows a General Electricity Transmission and Distribution Business operator to transfer or lease a part of its facilities in its service area to an Electricity Distribution Business operator. Electricity Distribution Business operators are also required to provide ancillary services in their area.

Electricity transmission business (soden jigyo)

This is the business to transmit electricity to a General Electricity Transmission and Distribution Business operator through transmission lines that the Electricity Transmission Business operator operates and maintains on its own. Unlike a General Electricity Transmission and Distribution Business operator and an Electricity Distribution Business operator, an Electricity Transmission Business operator is not responsible for providing ancillary services as provided by General Electricity Transmission and Distribution Business operators and Electricity Distribution Business operators.

Specified electricity transmission and distribution business (tokutei sohaiden jigyo)

This is a form of electricity business which allows the Specified Electricity Transmission and Distribution Business operator to sell electricity on its own network to consumers within certain limited geographical area.

Electricity retail business (kouri denki jigyo)

This is the business that sells electricity to consumers.

All major utilities are investor-owned companies with one exception: Tokyo Electric Power Company Holdings. This major utility has more than 50% of its shares held by the Nuclear Damage Compensation and Decommissioning Facilitation Corporation – this is a quasi-governmental institution having half of its capital funded by the government, established in response to the Fukushima nuclear incident in 2011. All major utilities are listed on a stock exchange in Japan and their stock is freely traded in the market.

Generation

As of April 2022, there are more than 1000 Electricity Generation Business licence holders.

The principal Electricity Generation Business operators are the major utilities or their wholly-owned subsidiaries and J-Power.

Transmission and Distribution

As of February 2022, there are ten General Electricity Transmission and Distribution Business licence holders, three Electricity Transmission Business licence holders and 35 Specified Electricity Transmission and Distribution Business licence holders. At the time of writing, were no Electricity Distribution Business licence holders.

Main transmission and/or distribution network operators are the major utilities or their wholly-owned subsidiaries as well as J-Power Transmission Network Co, Ltd.

Retail

Since 1995, Electricity Retail Business has been gradually liberalised. After full liberalisation of the retail electricity market in 2016, the number of Electricity Retail Business licences has grown significantly from 57 in August 2015 to 737 in June 2022. Although most of them are investor-owned companies, there are some retail electricity suppliers owned by municipal governments.

While major utilities or their wholly-owned subsidiaries in aggregate supply most of Japan’s electricity, new entrants are expanding their market share in the retail sector. As of December 2021, the share by sales volume of the electricity supplied by the new entrants was approximately 20%.

The Electricity Business Act does not provide any nationality requirement to obtain an electricity business licence or any restriction with respect to foreigners owning shares in an electricity business licence holder.

However, under the Foreign Exchange and Foreign Trade Act (Act No 228 of 1949, as amended), a foreign investor may not invest in an unlisted power company or own 1% or more of the shares in a listed power company unless the foreign investor gives prior written notice through the Bank of Japan (BOJ) to the Ministry of Finance (MOF) and the Ministry of Economy, Trade and Industry (METI) of the foreign investor’s intent to do so or complies with the exemption scheme.

If the foreign investor gives such notice, it may invest only after the required waiting period elapses, assuming the notification is not questioned or objected to by MOF and METI. The required waiting period is usually 30 days but it may be shortened to two weeks or extended up to five months at the discretion of MOF and METI. Also, the waiting period will be shortened to five business days if the investment falls within one of the following categories:

  • incorporation of a wholly-owned subsidiary in Japan or acquisition of equity or debt in a wholly-owned subsidiary in Japan, or the opening of a branch in Japan (ie, "greenfield investment");
  • acquisition of additional equity in a Japanese company without the foreign investor changing its shareholding in the Japanese company and with no change in the management structure of the Japanese company, within six months from the most recent acquisition of equity in the Japanese company by the foreign investor for which a notification to the Minister was made (ie, "rollover investment"); or
  • acquisition of equity or debt in a Japanese company as a passive investor having no voting rights on material management matters regarding the Japanese company (ie, "passive investment").

The exemption scheme is applicable to investments which result in the investor owning less than 10% of the shares in a listed company that operates in the core sectors and investments which result in the investor owning any shares in a listed or unlisted company that operates in the non-core sectors. With regard to power companies, “core sectors” means General Electricity Transmission and Distribution Business, Electricity Transmission Business and Electricity Generation Business owning a power plant with maximum capacity of 50,000 kW or more; “non-core sectors” are simply those that are not core sectors, as previously defined.

Further, under the Foreign Exchange and Foreign Trade Act, a foreign investor is also required to give prior written notice through BOJ to MOF and METI if it proposes and consents to transfer the company’s business or dissolve the company’s business, or consents to appoint itself or a closely related person as a director or other material officers required to be appointed at a shareholders meeting.

Notifications in Practice

In practice, most notifications fall within one of the three categories above. For example, in 2015, approximately 90% of the notifications made with respect to investments over which METI held jurisdiction (which includes investments in the energy sector) fell into one of these three categories and thus were cleared within five business days.

If, during the waiting period, MOF or METI decides that the investment may undermine national security, public order or public safety, or adversely affect the national economy, MOF and METI may issue a warning to change the terms of, or cancel, the investment. If the foreign investor does not adequately respond to the warning or the foreign investor expresses an intention to disobey the warning, MOF and METI may issue an order to change the terms of, or cancel, the investment.

At the time of writing, the only examples of a warning to cancel an investment and an order to cancel an investment were those issued by MOF and METI against the Children’s Investment Fund in 2008 when it attempted to increase its shareholding in J-Power from 9.9% to 20%.

The Electricity Business Act regulates the sale of an entire business, an amalgamation or merger and a corporate split (collectively "business transfer"), made by an operator of an electricity business.

Under the Electricity Business Act, an operator of an Electricity Generation Business, Specified Electricity Wholesale Business, Specified Electricity Transmission and Distribution Business or Electricity Retail Business may implement a business transfer at its own discretion. However, an operator of a General Electricity Transmission and Distribution Business, an Electricity Distribution Business or an Electricity Transmission Business may not implement a business transfer without the prior written approval of METI, without which the business transfer will be deemed to not take effect.

Further, the Electricity Business Act requires an operator of a General Electricity Transmission and Distribution Business, an Electricity Distribution Business or an Electricity Transmission Business to make a prior written notification to METI if the operator sells or disposes of the facility used to conduct that business. If METI considers that such sale or disposition adversely affects the operation of that business, METI may issue an order to change the terms of or prohibit such sale or disposition.

A person who has acquired facilities used to conduct an electricity business must submit a written notification after the acquisition to METI under the Electricity Business Act.

Nuclear Power Plant and Monopolisation

The Act on the Regulation of Nuclear Source Material, Nuclear Fuel Material and Reactors (Act No 166 of 1957, as amended) provides that an operator of a nuclear plant may not implement an amalgamation or merger or a corporate split without the prior written approval of the Nuclear Regulation Authority (NRA). In addition, a person who intends to acquire a nuclear power plant must obtain the permission of the NRA before the transfer.

More generally, under the Act on Prohibition of Private Monopolisation and Maintenance of Fair Trade (Act No 54 of 1947, as amended), if a merger, amalgamation, company split or transfer of business substantially restrains competition in a particular field of trade, the Japan Fair Trade Commission (JFTC) may issue an order forbidding such actions or to change the terms of such actions.

METI and ANRE

The ministry responsible for energy policy is METI. The Agency for Natural Resources and Energy (ANRE), a government organisation under METI, is in charge of proposing and implementing the energy policies adopted by the government. ANRE also has independent authority to promulgate rules to implement those policies. As such, except for safety regulations, most regulatory aspects of the electricity industry are delegated to ANRE.

OCCTO

As a part of the recent reforms of the electricity industry, the Organisation for Cross-regional Co-ordination of Transmission Operators (OCCTO) was established in 2015. All licensed operators of electricity businesses must join OCCTO, which has the power to give directions to operators in order to achieve its mission.

While OCCTO has been expanding its mission since its establishment (eg, monitoring the demand and supply of electricity at the country level, operating the capacity market, providing access to the power grid network, managing the FIT surcharge), the fundamental purpose of OCCTO is to co-ordinate the transmission networks in Japan in accordance with the Network Codes (which are issued by OCCTO and approved by METI), so that the transmission networks are integrated and operated, maintained and developed in a consistent manner.

The Network Codes provide the rules on how network operations are to be performed (including the procedures required by a network user in relation to accessing the networks). All electricity business operators, as members of OCCTO, are required to operate their business in accordance with the Network Codes and directions from OCCTO.

EGC

The Electricity and Gas Market Surveillance Commission (EGC) was established on 1 September 2015. EGC’s primary mission is to monitor the energy market and propose better regulations to promote competition.

In order to achieve its mission, EGC, as an advisory body to METI, has the power to issue warnings to operators of electricity business and to propose solutions to METI. EGC detects improper trades through daily market surveillance, examines and reviews the rate of transmission and distribution tariffs and regulated retail tariffs set by major utilities, and proposes regulations to promote competition or protect consumers.

As described in 1.1 Principal Laws Governing the Structure and Ownership of the Power Industry, the vertical integration and regional monopolies in the generation sector and the retail sector have been gradually relaxed and liberalised since 1995.

In 2020, the electricity industry completed a series of structural reforms that began in 2013. These consist of:

  • establishing a system to efficiently manage electricity across the transmission networks in Japan;
  • full liberalisation of the retail sector; and
  • a "legal unbundling" of the transmission and distribution sectors from the generation and retail sectors.

As noted in 1.5 Central Planning Authority, OCCTO and EGC were established in 2015. Subsequently, the retail sector was fully liberalised in 2016. However, as major utilities and their affiliates have still dominated the market, their existing basic retail tariffs of electricity have continued to be regulated to secure fair competition with other retailers. The regulation is expected to be lifted at such time when the government considers that a sound competitive market has been established.

Legal Unbundling

"Legal unbundling" occurred in April 2020 when new rules were introduced prohibiting an operator of a General Electricity Transmission and Distribution Business – except for Okinawa Electric Power Company, Inc – from operating an Electricity Generation Business (for the purpose of supplying electricity to retailers) or Electricity Retail Business (except for such business in certain isolated Japanese islands).

Under this prohibition, General Electricity Transmission and Distribution Business operators are required to create a separate entity if they also want to conduct Electricity Generation Business or Electricity Retail Business within its group. This new rule aims to secure the impartiality of the major utilities as operators of transmission and distribution networks so that every electricity retailer and electricity generator may be given equal access to their networks under fair and equal conditions.

In order to achieve this goal, new regulations were also promulgated to prevent the transmission and distribution network operators from exercising influence on the operations of their affiliate retailers. See 5.1.3 Terms and Conditions Imposed in Approvals to Construct and Operate Transmission Facilities.

New Electricity Markets and Offshore Wind Promotion

In order to respond to new entrants’ needs after this structural reform, the government has established several new electricity markets:

  • the futures market;
  • the base-load market;
  • the capacity market;
  • the balancing market; and
  • the non-fossil fuel energy certificates trading market.

In order to promote offshore wind electricity generation in Japan, the Japanese Diet passed the Act for the Promotion of Use of Marine Areas for Development of Marine Renewable Energy Generation Facilities (Act No 89 of 2018, as amended). See 2.1 Structure of the Wholesale Electricity Market and 3.3 Principal Laws and/or Policies to Encourage the Development of Alternative Energy Sources.

Changes to the Electricity Business Act in 2022

In recent years, Japan has suffered a number of natural disasters that damaged stable power supply. In 2018, the Hokkaido Eastern Iburi earthquake caused the first large-scale blackout in Japan in living memory. In 2018 and 2019, large and powerful typhoons hit the main island of Japan and caused wide scale destruction of electricity distribution infrastructure. Faced with these situations, on 5 June 2020 the Diet passed a bill to amend the Electricity Business Act (“2022 Amendment”). Except for certain limited matters, the 2022 Amendment came into force on 1 April 2022. The 2022 Amendment introduces substantial changes to the Electricity Business Act in order to:

  • enhance co-operation amongst electricity companies in the case of emergencies;
  • strengthen the power grid network; and
  • establish a resilient power distribution system.

More specifically, under the new regulations, General Electricity Transmission and Distribution Business licence holders are required to both create co-operation plans and establish reserves to cover the costs of dealing with emergencies. OCCTO is given a mission to create and revise power grid network development plans, taking into consideration the potential generation capacity of electricity generation sites as well as mid-term and long-term cross-regional network formation (ie, “push-type network formation”). All transmission and distribution business licence holders are required to replace their facilities in a planned and structured way. In addition, transmission and distribution tariffs are to be set on a revenue cap basis on 1 April 2023.

Further, as described in 1.1 Principal Laws Governing the Structure and Ownership of the Power Industry, the 2022 Amendment newly regulates two types of electricity business: Specified Electricity Wholesale Business and Electricity Distribution Business.

Changes to the FiT Act

The 2022 Amendment also amends the Act on Special Measures Concerning Procurement of Electricity from Renewable Energy Sources by Electricity Utilities. In order to harmonise the renewable energy market with the conventional energy market, the 2022 Amendment introduces a feed-in premium regime to complement the existing feed-in tariff regime.

Severely tight supply-demand balance and sharp price spike

In December 2020 and January 2021, Japan experienced a severely tight balance between the supply and demand of electricity. This caused an historic price spike in the JEPX spot market (the new record of JPY251.0/kWh was set on 15 January 2021, the highest price since JEPX foundation) and also triggered a high imbalance fee. This, in turn, caused a financial crisis for a number of retailers and some have commenced bankruptcy procedures.

According to a government assessment, the main reasons for this serious situation were a significant increase in the demand for electricity due to severe cold weather and the curtailment of electricity production by LNG power plants arising from an LNG shortage caused by accidents at LNG production plants in LNG-producing countries which decreased the supply of LNG in Japan. The government has also stated that the growing dependence on LNG power plants due to the recent abandonment of many oil power plants, the suspension of nuclear power plants, the expansion of photovoltaic and wind power which have fluctuating supply, and the accidental suspension of coal power plants are further contributing factors.

In fiscal 2021 and 2022, as with the worldwide energy situation, economic recovery from the COVID-19 pandemic, a decrease in upstream investment due to decarbonization, extreme weather conditions, the Russian invasion of Ukraine and other factors have led to extreme supply and demand pressures and increased fuel and electricity prices. In March 2022, the government for the first time issued a warning to people in the Tokyo area with regard to electricity supply and demand pressures. OCCTO anticipates that the electricity supply and demand in summer and winter fiscal 2022 will also be severe.

Learning from these lessons, the government has introduced “preventive measures”, “contingency measures” and “structural measures”.

As “preventive measures”, the government has improved and extended the governmental forecast of supply and demand conditions, published guidelines for electricity generators in order to demonstrate good practice in fuel procurement and promoted hedging trades in markets such as the forward market, futures market and base-load market (see 2.1 Structure of the Wholesale Electricity Market).

As “contingency measures”, the government has created a  framework for the relevant parties (ie, electricity companies, OCCTO and the government) to deal with the tight supply and demand balance such as emergent power and fuel accommodation and urgent call to increase power generation. The government has also created the ceiling price on the imbalance fee as the safeguard against the market price spike.

As “structural measures”, the government prepared risk management guidelines to explain and demonstrate basic risk assessment methodology and good practices for risk management in the electricity business.

Furthermore, on 13 May 2022 the Diet passed a bill to amend the Electricity Business Act (“2023 Amendment”) which will change ex-post filling obligation for the abolishment of certain generation facilities to a prior filling obligation so that the government can secure sufficient time to deal with electricity supply shortages. The 2023 Amendment will become law on 1 April 2023.

Carbon-neutral target in 2050 and raising the 2030 GHG emissions reduction target

In response to the increased global interest in sustainability and the potential for economic growth, the Japanese Prime Minister declared in October 2020 that Japan would aim for net-zero greenhouse gas (GHG) emissions and seek to become a carbon-neutral society by 2050. Moreover, the Japanese Prime Minister declared at the virtual climate summit held in April 2021 that Japan aims to reduce GHG emissions by 46% from 2013 levels, which is a sharp increase from the previous target of 26%.

In order to achieve these goals, the government is discussing a variety of measures including promotion of renewable energy power plants as well as investment and innovation in the power industry. As a part of these measures, on 26 May 2021 the Japanese Diet passed a bill to amend the Act on Promotion of Global Warming Countermeasures which includes achieving carbon neutrality in 2050 as a guiding principle. The amendment became law on 1 April 2022.

The 2023 Amendment also includes decarbonisation programmes such as new regulation of storage batteries and the promotion of non-fossil fuels (see 3.2 Principal Laws and/or Policies Relating to the Early Retirement of Carbon-Based Generation and 3.3 Principal Laws and/or Policies to Encourage the Development of Alternative Energy Sources).

As the vertically integrated major utilities enjoyed a regional monopoly for nearly 50 years, the reality is that these major utilities (and their affiliates) continue to possess the dominant share of the retail market in their region.

Consequently, from the beginning of the liberalisation of the retail sector, the question of how to secure an environment where new entrant electricity retailers will be put on an equal footing with major utility retailers has been an important issue. Among the unique aspects of Japan’s power industry is that while the government continues to establish regulations to address that issue, it also strongly encourages the major utilities to voluntarily develop solutions to support new entrant retailers. One example of these solutions is that major utilities voluntarily commit themselves to supplying their surplus electricity to JEPX at marginal cost and to perform wholesale transactions without discriminating between their group companies and others.

Other unique characteristics of Japan’s power industry include the following:

  • there is no interconnection with other countries, which means that the electricity demand must be satisfied by electricity generated by power generation facilities in Japan; and
  • there are two types of electric frequency in Japan (50 Hz in Eastern Japan and 60 Hz in Western Japan) and thus a frequency conversion facility is necessary to transmit electricity between Eastern and Western Japan.

In Japan, an electricity retailer procures electricity by entering into a power purchase agreement with an electricity generator or through the electricity wholesale markets. JEPX is the electricity wholesale market in Japan. Trades available in JEPX as wholesale of electricity are:

  • spot market trading;
  • forward market trading;
  • intraday market trading; and
  • OTC trading.

Market Trading in JEPX

Spot market trading is trading of electricity supplied on the next day after a trade date, where the minimum trading unit is 30 minutes and 50 kWh and the trading price is determined through a "blind and single price auction". Under this auction, wholesale market participants submit a bid for purchasing or selling electricity and the trading price is fixed at the crossing point of all purchasing bids and selling bids.

Forward market trading is the trading of electricity supplied for a certain period starting on a day that is three or more days from the trade date, where traded time periods are one week, one month and one year, and orders are continuously executed in strict price and time priority. An order entered into the system at an earlier time must be executed in full before an order at the same price entered at a later time is executed.

Intraday market trading is trading of electricity supplied on a day for which spot trading is closed, where the minimum trading unit is 30 minutes and 50 kWh, and orders are continuously executed in strict price and time priority.

OTC trading is usually employed for trading a small amount of electricity that does not satisfy the thresholds for spot or intra-day trading.

New Electricity Markets

In addition to the above, several new electricity markets have opened with the aim of meeting the needs of new entrants after full liberalisation of the retail sector. The base-load market began in July 2019, which is a wholesale market of electricity generated by a nuclear power plant, a traditional large-scale hydro power plant, a coal-fired power plant or a geothermal power plant (also known as "base-load electricity") to electricity retailers. Major utilities and J-Power are required to offer base-load electricity to the base-load market by no less than a certain amount calculated by a prescribed formula to secure retailers’ access to base-load electricity for no more than a certain price which is not to be unduly higher than their intra-group price.

The capacity market held its first auction in July 2020. While electricity companies trade in kWh in the wholesale JEPX market, the capacity market auctions the future value of generation capacity in kW. The capacity market is expected to provide predictability to recover certain fixed costs in the generation business in which such fixed costs have been difficult to recover due to the liberalisation of the retail sector (ie, “stranded costs”). If a generator places the successful bid at a capacity market auction it may receive a certain amount of fixed income from OCCTO for four years after the auction, which is funded by a capacity surcharge that OCCTO levies from retailers.

In September 2019, a futures market was commenced by Tokyo Commodity Exchange, Inc (TOCOM) which allows buyers to hedge the volatility risk of the JEPX spot market trading price. The European Energy Exchange (EEX) and New York Mercantile Exchange (NYMEX) also launched a Japanese futures market in May 2020 and February 2021, respectively.

In 2021, a balancing market (also referred to as a real-time market) has started to be operated by the Transmission and Distribution Grid Council (TDGC), which is comprised of General Electricity Transmission and Distribution Business licence holders. Through this market, General Electricity Transmission and Distribution Business licence holders are able to procure control reserves by auction in order to economically and efficiently make supply-demand adjustments and maintain frequency control in their region. This also allows generators and demand response aggregators to make profits by making use of their balancing functions.

In general, there are no price regulations on wholesale electricity prices. However, as described in 1.7 Announcements Regarding New Policies, METI has placed a ceiling on the imbalance fee, which in effect functions as a price cap on the JEPX market price. Moreover, in order to secure competition on an equal footing between major utility retailers and other retailers, wholesale trading of electricity by major utilities is monitored so that the price will not be manipulated or unduly expensive.

At the time of writing, Japan has no international interconnection. There is no legal restriction against imports and exports of electricity, although in practice this does not occur.

According to ANRE, the supply mix of electricity in 2019 was as follows:

  • natural gas 37.1%;
  • coal 31.9%;
  • oil 6.6%;
  • nuclear 6.2%;
  • hydro 8%;
  • solar 6.7%;
  • wind 0.7%;
  • biomass 2.6%; and
  • geothermal 0.3%.

As of the time of writing, Japan’s target for the supply mix in 2030 is:

  • natural gas 20%;
  • oil 2%;
  • coal 19%;
  • nuclear 20–22%;
  • hydro 11%;
  • solar 14%-16%;
  • wind 5%;
  • biomass 5%; and
  • geothermal 1.0%.

There are no concentration limits in Japan.

Under the Electricity Business Act, EGC has responsibility for market surveillance to secure the soundness and fairness of the electricity market. If any anti-competitive behaviour by an electricity business operator is detected, the EGC may give a warning to such an operator and advise the Minister of Economy, Trade and Industry to issue an order to such an electricity business operator to improve its business.

In addition, under the Act on Prohibition of Private Monopolisation and Maintenance of Fair Trade, JFTC oversees the power industry. If any anti-competitive behaviour is detected, JFTC has the power to issue an order to any person engaging in anti-competitive practices to take specific actions to eradicate such practice.

The Act on Promotion of Global Warming Countermeasures (Act No 117 of 1998, as amended) requires all business operators to endeavour to take actions to reduce greenhouse gas emissions.

Pursuant to the Act, the Japanese government initially adopted a Plan of Global Warming Countermeasures in 2016 under which Japan was to target a 26% reduction in its greenhouse gas emissions below 2013 levels by 2030 and an 80% reduction by 2050. On 31 March 2020 Japan subsequently submitted its Nationally Determined Contributions (NDC) in accordance with the Paris Agreement that refers to the same target for 2030. However, as described in 1.7 Announcements Regarding New Policies, pursuant to the Japanese Prime Minister’s declaration, the Japanese government now aims for a 46% reduction by 2030 and net-zero emissions by 2050.

The Japanese Diet also passed a bill to amend the Act on Promotion of Global Warming Countermeasures. The amended Act states that achievement of a carbon-neutral society by 2050 is a fundamental principle and obliges Japanese prefectures and large cities to set the carbon reduction targets to promote renewable energy. Under the amended Act, developers of decarbonisation projects such as renewable energy power plant projects are able to perform all of the relevant permission procedures at a single government authority if the local government certifies that the project complies with the local government’s decarbonisation policy.

In Japan, thermal power plants, including coal-fired generators, are still considered an important source of energy and are classified as a "base-load" electricity source, as shown in the 2030 energy mix target (see 2.3 Supply Mix for the Entire Market). However, in order to reduce the amount of carbon dioxide emissions, the power industry in Japan strives to develop and introduce high-efficiency and low-carbon coal-fired power plants under the Act on Rationalising Energy Use (Act No 49 of 1979, as amended).

As an action taken by the government to facilitate the retirement of aged coal-fired power plants, METI has also introduced measures to reduce potential income from the capacity market and imposed an obligation on certain coal power plant operators to prepare fade-out plans for their inefficient coal power plants to cease power production by 2030. Further, the 2023 Amendment will amend the name of the Act on Rationalising Energy Use to the Act on Rationalising Energy Use and Conversion to Non-fossil Fuel Energy and will promote energy users to use non-fossil fuel energy.

However, after the severely tight balance of supply and demand of electricity since winter 2020, how to satisfy both a stable supply of electricity and the retirement of inefficient coal power plants has become an issue (see 1.7 Announcements Regarding New Policies).

The Act on the Promotion of Use of Non-fossil Energy Sources and Effective Use of Fossil Energy Materials by Energy Suppliers (Act No 72 of 2009, as amended, the "Promotion Act") was promulgated in recognition of the importance of developing non-fossil energy sources.

Pursuant to the Promotion Act, the government published a basic policy outlining its goals for non-fossil fuel development. Under the policy, the government aims to increase the share of non-fossil energy sources to 44% by 2030. Electricity suppliers of 500,000 MWh or more are required to prepare and submit an implementation plan to achieve such a target and provide a progress report every year.

The 2023 Amendment will also amend the name of the Act on the Promotion of Use of Non-fossil Fuel Energy Sources and Effective Use of Fossil Fuel Energy Materials by Energy Suppliers to the Act on the Promotion of Use of Energy Sources Complying with Environmental Suitability and Effective Use of Fossil Fuel Energy Materials by Energy Suppliers which promote thermal power plant operators to use decarbonised fuels such as hydrogen and ammonia.

The FiT Regime

The Act on Special Measures Concerning Procurement of Electricity from Renewable Energy Sources by Electricity Utilities (Act No 108 of 2011, as amended, the "FiT Act"), promulgated in 2011, introduced a feed-in tariff regime ("FiT Regime"). The FiT Act encouraged the development of alternative energy sources by offering a very generous feed-in tariff to renewable energy generators.

Under the FiT Act, renewable energy that meets the statutory and regulatory requirements is sold at a fixed price for a specified number of years (20 years, in many cases) to transmission and distribution network operators, and transmission and distribution network operators are not allowed to refuse to purchase such renewable energy, with very limited exceptions. Moreover, under the FiT Regime, renewable energy generators do not have an obligation to supply energy (it is a right of renewable energy generators to supply energy) and are exempted from imbalance risks.

The renewable energy that can benefit from the FiT Regime is electricity generated by solar, wind, hydro, geothermal or biomass methods.

In order to promote investment in renewable energy, the feed-in tariff – ie, the price of renewable energy – is set at a rate generally higher than the market rate and any additional cost incurred by transmission and distribution network operators in relation to the purchase of the renewable energy is transferred to and assumed by consumers through charging a FiT surcharge to consumers. Electricity retailers are required to transfer funds collected as surcharge to OCCTO and OCCTO pools these funds. OCCTO then distributes those pooled funds to the purchasers of energy sold in the FiT regime so that additional costs incurred by those purchasers will be compensated.

The FiP Regime

In order to improve the FiT regime and harmonise it with the conventional energy market, the 2022 Amendment amends the name of the FiT Act to the Act on Special Measures Concerning Promotion of Usage of Electricity from Renewable Energy Sources and introduces the feed-in premium regime ("FiP Regime") from 1 April 2022. The FiP Regime grants to renewable energy generators the balance obtained from subtracting the reference market rate price of supplied electricity from a fixed rate (which will generally be set at higher than the market rate), assuming that the generators will sell their electricity to the market. Under the FiP Regime, renewable energy generators will need to consider the volatility risks of the market price and the off-taker risks of the energy they generate to a certain extent. Moreover, under the FiP Regime, as with conventional power plants operators, renewable energy generators will need to manage their imbalance risks.

The Non-Fossil Fuel Energy Certificate Trading Market

As an additional measure to achieve the non-fossil energy source target, another new market was established in May 2018: the non-fossil fuel energy certificates trading market. In this market, each non-fossil fuel energy certificate represents an amount of non-fossil fuel energy and has a corresponding CO₂ emissions reduction value under the Act on Promotion of Global Warming Countermeasures. At the time of writing, the non-fossil fuel energy certificates are traded in two markets: the Market for the Achievement of the Targets of the Promotion Act and the Market for the Trading of Renewable Energy Values.

The Market for the Achievement of the Targets of the Promotion Act deals with the certificates of non-fossil fuel energy outside the FiT regime (“Non-FiT certificates”) and the purchasers are limited to retail electricity suppliers. Against the background that retail electricity suppliers are obligated under the Promotion Act to target 44% or more of their electricity supply coming from non-fossil fuel energy by 2030, the Non-FiT certificates and this market are expected to encourage retail electricity suppliers to achieve that target. In addition, they can promote themselves as a CO₂-neutral supplier by purchasing the Non-FiT certificates. From a consumer’s perspective, those who purchase electricity from such CO₂-neutral supplier may claim that they purchase CO₂-neutral electricity for the purposes of the Act on Promotion of Global Warming Countermeasures. Also, under growing global initiatives such as the Carbon Disclosure Project (CDP), Science Based Target (SBT) and RE100, those who purchase electricity from a supplier with a Non-FiT certificate derived from renewable energy may claim that they purchased renewable energy sourced electricity. From a power producer’s perspective, they may earn additional income by selling the Non-FiT certificate. This market is expected to incentivise the development of non-fossil energy sources outside the FiT regime.

The Market for Trading of Renewable Energy Values was newly established in November 2021 following the growing demand for renewable energy sourced electricity by consumers. This market deals with the certificates of non-fossil fuel energy under the FiT regime (“FiT certificate”) and not only retail electricity suppliers but also consumers can purchase the FiT certificates. Although the FiT certificates do not give benefits under the Promotion Act to retail electricity suppliers, both retail electricity suppliers and consumers may deduct the amount of CO₂ represented by the FiT certificates from their CO₂ emissions for the purposes of the Act on Promotion of Global Warming Countermeasures. Income from the sale of FiT certificates belongs to OCCTO and is applied to reduce the rate of the FiT surcharge imposed on consumers. This market is expected to sustain the development of renewable energy sources under the FiT regime.

Further Promotions

To further promote the development of renewable energy, under the Network Codes curtailment rule, renewable energy power plants are prioritised over fossil fuel power plants in that renewable energy power plants are curtailed only after fossil fuel power plants have reached their curtailment limit. Also, the government has introduced a reduced rate of property tax for certain qualified renewable energy facilities for three years commencing from the date when such facilities become taxable.

The principal laws governing the construction and operation of electricity generation are:

  • the Electricity Business Act;
  • the Environmental Impact Assessment Act (Act No 81 of 1997, as amended);
  • the Act on Rationalising Energy Use; and
  • the Act on the Regulation of Nuclear Source Material, Nuclear Fuel Material and Reactors.

Electricity Business Act

Unless the electricity capacity is below 10 MW, any person who intends to generate electricity for sale must first submit to OCCTO an application for OCCTO membership. Next, under the Electricity Business Act, that person must submit to METI a notification form containing certain prescribed information such as the location of the generation facility and its power source.

Operators are also generally required to file a construction plan of the generation facility with METI no less than 30 days prior to commencing construction if the intended electricity production capacity of the facility is over a prescribed level or the intended facility meets certain specifications.

The generation facility must also pass a pre-use inspection conducted by METI before it starts commercial operation.

Environmental Impact Assessment Act

The operator must perform an environmental impact assessment in accordance with the Environmental Impact Assessment Act whenever the operator intends to construct a generation facility that falls within a prescribed category. Preparation of the environmental impact statement requires the following steps. (Some regional governments also have their own additional environmental impact assessment process for the construction of certain prescribed generation facilities.)

Consideration statement

The operator prepares a statement on the environmental impact that the operator expects the construction to have and submits it to METI for review. The operator is expected (but not obliged) to publish it to seek feedback from the public.

Scoping statement

Based on the consideration statement, as revised to reflect METI’s comments and public feedback (if any), the operator prepares a statement defining the scope and methodology of the environmental impact assessment that the operator proposes to implement, submits it to METI and the relevant local government for review and publishes it to seek feedback from the public.

Environmental impact assessment

Based on the scoping statement, as revised to reflect the comments of METI, the relevant local government and public feedback (if any), the operator performs the environmental impact assessment.

Draft environmental impact statement

Based on the completed environmental impact assessment, the operator prepares a draft of the environmental impact statement, submits it to METI and the relevant local government for review and publishes it to seek feedback from the public.

Environmental impact statement

Taking into account the comments from METI, the relevant local government and public feedback (if any), the operator prepares an environmental impact statement, submits it to METI for review and, based on METI’s feedback (if any), finalises the environmental impact statement, submits it to the relevant local government and publishes it. METI has authority to issue an order to further revise the environmental impact statement if it thinks revision is necessary to ensure due consideration of environmental impact.

Act on Rationalising Energy Use

With respect to the construction of thermal power plants with a coal or other fossil fuel energy source, the Act on Rationalising Energy Use requires the operator to endeavour to ensure that the thermal power plant satisfies the standards of power generation efficiency stated in this Act and its related regulations.

Act on the Regulation of Nuclear Source Material, Nuclear Fuel Material and Reactors

Under the Act on the Regulation of Nuclear Source Material, Nuclear Fuel Material and Reactors, the operator may not install a nuclear reactor without obtaining permission from NRA and approval of the nuclear reactor construction plan from NRA. Further approval from METI for the construction plan of a nuclear reactor is required under the Electricity Business Act.

Other

Additional national or local permits may be required to construct or operate an electricity generation facility depending on its location.

In addition to the requirements to obtain construction and operation approvals as summarised in 4.2 Regulatory Process for Obtaining All Approvals to Construct and Operate Generation Facilities, an operator of an Electricity Generation Business is, in particular, obliged to do the following, pursuant to the Electricity Business Act and its secondary regulations:

  • supply electricity, as directed by the transmission and distribution network operators to balance the demand and supply of electricity within the network;
  • supply electricity in accordance with any orders that METI may issue in the case of an emergency (such orders have never been issued to date);
  • prepare and submit a supply plan to OCCTO;
  • submit its financial statements to METI;
  • submit a report on its performance and operation results to METI; and
  • comply with the Network Codes of OCCTO.

The Expropriation of Land Act (Act No 219 of 1951, as amended) empowers an operator of electricity business under the Electricity Business Act to expropriate a piece of land for its business in exchange for paying just compensation to the land right-holder, following the procedures set out in the Electricity Business Act.

In order to expropriate land, the operator must first obtain approval from the Ministry of Land, Infrastructure, Transport and Tourism (MLIT) and/or the relevant local government, as the case may be, on any undertaking that necessitates expropriation. After obtaining such approval, the operator files for expropriation with the Expropriation Committee of MLIT, which will grant to the operator an award of expropriation unless the undertaking is found to be materially different or materially differently implemented than as explained to MLIT and/or the relevant local government.

If an operator of an Electricity Generation Business intends to suspend or terminate the whole of its generation business, it must submit a notification to METI in advance (as described in 1.7 Announcements Regarding New Policies, the 2023 Amendment will introduce the prior filling obligation for the abolishment of certain generation facilities). In addition, if the operator decommissions a generation facility that has an installed capacity of 100 MW or more, such operator must also submit a notification in advance to OCCTO in accordance with the Network Codes.

With respect to a nuclear power plant, the operator must prepare a decommissioning plan and obtain approval from NRA for the plan under the Act on the Regulation of Nuclear Source Material, Nuclear Fuel Material and Reactors.

Further, in response to public concern about illegal abandonment of solar power plant facilities, under the 2022 Amendment, operators are required to establish a mandatory reserve to cover decommissioning costs.

The Electricity Business Act governs the licensing arrangements for the construction and operation of transmission and distribution networks, as well as the procedures for the construction of such networks and associated facilities.

In general, METI controls the development of transmission and distribution networks by requiring General Electricity Transmission and Distribution Business operators and Electricity Transmission Business operators to submit a development plan of their major network assets (major transmission lines and transformer stations) for the forthcoming ten years. With respect to individual construction work, the operator is required to file a construction plan with METI no less than 30 days prior to commencement of the work if it involves the construction of a transmission line or transformer substation of 170 kV (in some cases, 100 kV) or more. Such transmission lines or transformer substations must pass a pre-use investigation conducted by METI.

Notwithstanding the general trend and significant government activity towards liberalisation of the electricity market since 1995, the transmission and distribution network sector has seen the least structural change and on an organisational level remains largely unaltered. The ten major utilities continue their regional monopolies in their respective service areas for this sector. As METI’s position is to maintain these regional monopolies for the transmission and distribution sector, it is unlikely that METI would issue a new licence to conduct General Electricity Transmission and Distribution Business to any person.

There are, however, three exceptions to this monopoly.

Electricity transmission business licence holders

When the current licence regime was introduced, J-Power was the only electricity transmission business licence holder. At the time of writing, two more operators have obtained an Electricity Transmission Business licence. They are expected to supplement the transmission services conducted by the operators of General Electricity Transmission and Distribution Businesses within the respective monopoly regions of those operators by constructing transmission lines in areas that the existing transmission network does not cover and will not cover in the near future. To operate an Electricity Transmission business requires the approval of METI.

Specified electricity transmission and distribution business licence holders

The transmission and distribution networks of Specified Electricity Transmission and Distribution Businesses have been constructed to serve consumers within a limited geographical area. As such, these networks are more akin to distribution networks than transmission networks in respect of length and capacity. As the impact that such networks may have on the transmission and distribution networks of General Electricity Transmission and Distribution Businesses is insignificant, Specified Electricity Transmission and Distribution Businesses can be conducted with notification to METI of the services to be provided such as geographical area of service, layout of transmission and distribution lines, and the specifications thereof.

Electricity distribution business licence holders

As described in 1.1 Principal Laws Governing the Structure and Ownership of the Power Industry, while General Electricity Transmission and Distribution Business covers electricity distribution business in Japan, the 2022 Amendment allows a General Electricity Transmission and Distribution Business Operator to transfer or lease a part of its facilities in its service area to an Electricity Distribution Business operator. The purpose of this regulation is to enhance efficiency of the power system, disperse power sources into some regions and improve power supply resilience. Local electricity companies, infrastructure companies and IT companies are expected to be Electricity Distribution Business operators. The regulations for Electricity Distribution Business have much in common with those of General Electricity Transmission and Distribution Business since Electricity Distribution Business is, in effect, a part of General Electricity Transmission and Distribution Business. To operate an Electricity Distribution Business requires the approval of METI.

An operator of a General Electricity Transmission and Distribution Business is obliged to perform the following pursuant to the Electricity Business Act and its secondary regulations. These obligations became more stringent after the legal unbundling in 2020:

  • accept access to its transmission and distribution networks located within its service area, and apply the terms and conditions (approved by METI) to all electricity business operators equally;
  • provide last-resort services and electricity retail services in isolated islands within its service area;
  • their directors cannot assume an office of its parent holding company or any of its affiliates that operate an Electricity Retail Business or an Electricity Generation Business (such parent holding company and affiliates being "interested parties");
  • not to trade with interested parties except where permitted under the secondary regulations;
  • not to use proprietary information of electricity business operators or consumers for purposes other than its transmission and distribution business;
  • not to engage in discriminatory treatment;
  • install an appropriate information protection;
  • endeavour to maintain the voltage and frequency of the electricity in its service area at the prescribed level;
  • measure and record the voltage and frequency of the electricity in its service area;
  • submit its financial statements to METI;
  • submit its segmental financial statements regarding its transmission and distribution services to METI;
  • submit to METI a report concerning the occurrence of any imbalance in its transmission and distribution network;
  • join OCCTO;
  • prepare and submit a supply plan to OCCTO; and
  • comply with the Network Codes of OCCTO.

See 4.4 Proponent's Eminent Domain, Condemnation or Expropriation Rights.

Each General Electricity Transmission and Distribution Business operator is assigned a regional service area and is granted de facto exclusivity within such service area by METI since METI does not grant two General Electricity Transmission and Distribution Business licences in relation to any service area. Electricity Transmission Business licences, Specified Electricity Transmission and Distribution Business licences and Electricity Distribution Business licences are exceptions to these monopoly arrangements as described in 5.1.2Regulatory Process for Obtaining Approvals to Construct and Operate Transmission Facilities.

Pursuant to the Electricity Business Act, the terms and conditions of transmission and distribution services need to be approved by METI. The matters to be described in the terms and conditions and the methodology to compute service charges are set out in the regulations listed below:

  • executive rules of the Electricity Business Act (denkijigyoho shikokisoku);
  • rules on the methodology to compute tariffs for transmission and distribution services (ippan sohaiden jigyo takusokyokyuto yakkan ryokin santei kisoku);
  • rules on the methodology to balance income and loss from transmission and distribution services (denkijigyo takusokyokyuto shushikeisan kisoku).

Tariff rates and the terms and conditions of transmission and distribution services are first proposed by the General Electricity Transmission and Distribution Business operator and then fixed upon the approval of METI based on the advice of EGC. METI’s standard review period is four months.

The terms and conditions of services are reviewed to see if the following requirements are satisfied:

  • the tariff rate is the sum of the efficient cost of services plus a fair profit margin, with the assumption that the business is operated in an efficient manner;
  • the terms and conditions do not significantly undermine accessibility to the transmission and distribution services;
  • the method of computing the tariff is clearly and fairly stated;
  • the allocation of responsibility as well as cost sharing between the General Electricity Transmission and Distribution Business operator and users of the transmission and distribution network are clearly and fairly stated;
  • the terms and conditions do not discriminate against any specific person; and
  • the terms and conditions do not hinder public interest.

At the time of writing, the tariff rate is computed based on the fully distributed cost method. Under this method the tariff is determined such that projected revenues of the tariff for the forthcoming three years will balance with the sum of: (i) the efficient and necessary costs (including depreciation cost and capacity charges for balancing power supply) of providing services for the forthcoming three years; and (ii) the capital costs of the forthcoming three years.

Under the 2022 Amendment, the method of determining the tariff rate will be changed to a “revenue-cap” method on 1 April 2023. After this change, METI and EGC will review only the total revenues of wheeling charges, instead of its breakdown. It is believed that this will incentivise General Electricity Transmission and Distribution Business operators to reduce costs for transmission and distribution services.

Further, while the tariff rate is currently only charged to the demand-side (ie, retailers), METI plans to introduce a generation-side tariff in order to incentivise generators to select its power plant site in a location beneficial to effective power grid operation and formation. METI currently aims to introduce the generation-side tariff from the 2024 fiscal year.

Pursuant to the Electricity Business Act, General Electricity Transmission and Distribution Business operators are obliged to provide access to their transmission and distribution network on a non-discriminatory basis.

See 5.1.1 Principal Laws Governing the Construction and Operation of Transmission Facilities.

See 5.1.2 Regulatory Process for Obtaining Approvals to Construct and Operate Transmission Facilities.

See 5.1.3 Terms and Conditions Imposed in Approvals to Construct and Operate Transmission Facilities. Note, however, that Electricity Distribution Business operators are not obliged to provide last-resort services and electricity retail services in isolated islands within their respective service areas.

See 4.4 Proponent's Eminent Domain, Condemnation or Expropriation Rights.

See 5.1.5 Transmission Service Monopoly Rights.

Unlike General Electricity Transmission and Distribution Business operators, Electricity Distribution Business operators are not obliged to obtain the approval of METI with regard to their tariff rates and the terms and conditions of distribution services. However, the Electricity Business Act requires an operator of an Electricity Distribution Business to make a prior written notification to METI if the operator prepares or amends to its tariff rates or the terms and conditions of its distribution services. If METI considers that such tariff rates or such terms and conditions do not comply with certain requirements, METI may issue an order to them to change the tariff rates or the terms and conditions. The requirements are set out in the criteria for examinations concerning dispositions of the Minister of Economy, Trade and Industry under the Electricity Business Act (denki jigyoho nimotozuku keizaisangyodaijin no shobun nikakaru shinsakijuntou).

See 5.2.2 Establishment of Transmission Charges and Terms of Service and 6.2.1 Principal Laws Governing the Provision of Distribution Service, Regulation of Distribution Charges and Terms of Service. Tariff rates and the terms and conditions of distribution services of Electricity Distribution Business operators must be in alignment with those of General Electricity Transmission and Distribution Business operators in many respects. For instance, unit prices of distribution services of Electricity Distribution Business operators must be within 5% of those of General Electricity Transmission and Distribution Business operators on an annual average basis.

Nagashima Ohno & Tsunematsu

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2-7-2 Marunouchi
Chiyoda-ku
Tokyo 100-7036
Japan

+81 3 6889 7000

+81 3 6889 8000

info@noandt.com www.noandt.com/en/index.html
Author Business Card

Trends and Developments


Authors



Mori Hamada & Matsumoto (MHM) has an energy and infrastructure practice team that consists of approximately 25 partners and counsels, and 55 associates. The firm has offices in Tokyo, Osaka, Nagoya, Fukuoka and Takamatsu and international branch offices in Singapore, Bangkok (Chandler MHM Limited), Beijing, Shanghai, Yangon, Hanoi and Ho Chi Minh City. MHM's energy and infrastructure practice handles a variety of matters including development and construction of projects, project financing, acquisitions, regulatory matters, supporting new participation into a recently liberalised Japanese market; it represents sponsor sides and financier sides, seller and purchaser sides, in domestic and cross-border transactions. The firm has built up experience by working on many pioneering projects, especially in the areas of project financing and renewable energy, including in Japan's growing offshore wind market. The firm maintains a strong relationship with key supervisory authorities, including the Energy and Natural Resources Agency and the Organisation for Cross-regional Coordination of Transmission Operators.

Fundamental Reform of the Framework for Renewables

Currently, the energy market in Japan is at a major turning point. In October 2020, the Japanese government published a policy target to achieve carbon-neutrality by 2050, and in April 2021 released an even more ambitious target to cut down on greenhouse gas (GHG) emissions by 46% compared with 2013.

Against this backdrop, one of the most important policy issues is how to further grow renewable energy into one of the main power sources and to integrate it into the wider electricity market in Japan.

The Japanese government has begun to implement a major reform to change the fundamental framework for the country’s feed-in tariff (FIT) programme, under which electricity generated by approved developers from renewable energy sources – such as solar, wind, biomass, hydro and geothermal – is purchased by offtakers (utility companies) at fixed guaranteed rates for a fixed term (ten to 20 years). Under the FIT programme, offtakers pass their extra costs from purchasing renewably sourced electricity to end users by adding those costs to electricity bills.

Since the FIT programme was introduced in 2012, the development of renewable power plants (especially solar power plants) boomed and the cost burden on the public has exponentially increased to approximately JPY3.8 trillion as of 2021, and is expected to further increase in the coming years. Thus, in an effort to reduce the additional burden on households and businesses, the Ministry of Economy, Trade and Industry (METI) worked to shift from FIT to FIP (feed-in premium) with more market risks transferred to developers.

In June 2020, the Diet enacted the Act to Partially Amend the Electricity Business Act and Other Acts in Order to Establish a Resilient and Sustainable Electricity Supply System (the “Act”) to implement the fundamental reform of the existing FIT framework. The Act came into effect on 1 April 2022.

Transition from FIT to FIP

Under the Act, the government will move away from the existing FIT system based on a guaranteed fixed-price tariff for a fixed term (eg, JPY40 per kWh for 20 years in the case of mega-solar projects approved in the 2012 financial year) to the more market-driven FIP system where developers will receive a premium (“supply promotion subsidy”) to cover the gap between the designated “FIP price” (ie, strike price) and the “reference price” based on average market price. The essential purpose of this reform is to incentivise developers to make more efforts to sell electricity at higher prices through the wholesale market or over-the-counter transactions in order to reduce the public burden to subsidise renewable energy sources.

Although this regulatory policy seems reasonable, it generates many uncertainties for developers. Currently, the authors understand that the new FIP system will not be applied retrospectively to existing projects that have FIT approval. On the other hand, the category of renewable energy sources subject to this new FIP scheme will likely include mega-solar and wind, which are already considered “competitive” energy sources. For example, in the 2022 financial year, the FIP scheme will be mandatory for mega-solar projects of 1 MW or more and optional for mega-solar and wind projects of 50 kW or more. The FIP price will be determined through public auction for mega-solar projects of 1 MW or more from 2022 and for onshore wind projects of 50 kW or more from 2023. The length of the FIP period is currently set at 20 years for mega-solar and wind projects, the same as the FIT period.

The FIP price is fixed throughout the FIP period, whilst the premium (the difference between the FIP price and the reference price) fluctuates every month depending on market prices at the Japan Electric Power Exchange (JEPX). The reference price is calculated every month based on the annual average of market prices (weighted average based on actual power output for solar and wind) in the preceding year, with a certain monthly adjustment. Also, it should be noted that there is no negative premium – a power generator will not be required to pay the “premium” when the reference price is higher than the FIT price (strike price) unlike the two-sided CfD mechanism.

External reserve of decommissioning costs

Given that many solar power plants were rapidly developed all over Japan by numerous developers, including those with limited capability for operation and finance, there is now a serious policy issue on how to secure decommissioning costs to safely remove and dismantle retired solar power plants without causing environmental issues.

The Act has introduced a new system for external reserves for decommissioning costs by means of directly withholding the required amounts from the revenue under power purchase agreements (PPA) to be reserved at the Organisation for Cross-regional Coordination of Transmission Operators (OCCTO).

The Act also provides for exceptional cases where “internal” reserves (reserved by the developers) are permitted. Developers may submit a business plan with the amount and method for reserving the necessary funds for future decommissioning and obtain METI approval; if the plan meets certain criteria, then internal reserves under the approved plan may be made in lieu of the mandatory external reserves.

Automatic cancellation of FIT/FIP approval in the event of prolonged delay

As a result of the surge in solar power development since 2012, numerous developers rushed to obtain FIT approval for solar power projects. Many of these projects remain pre-operational for various reasons, such as lack of feasibility or financing, but, in the meantime, a substantial amount of grid capacity is reserved for them.

The Act has introduced a new rule to automatically cancel FIT approval for projects that have not commenced commercial operations, providing a long-stop date.

The new long-stop date for automatic cancellation is provided in the relevant ordinance for each category of renewable energy source. In a nutshell, the long-stop date falls after a certain period has elapsed from the deadline of commercial operation date (COD). Essentially, developers will need to complete the application for grid connection construction no later than one year from the original COD deadline and, by so doing, the long-stop date for automatic cancellation will be further extended up to the time when the original period for completion (commercial operation), counted from the original COD deadline, has lapsed again. In addition, for projects with 2 MW capacity or more, the period before the long-stop date can be further extended until the end of purchase period if the METI Minister confirms within one year from the original COD deadline that a construction plan has been duly filed or that Environmental Assessment Preparation Documents have been obtained.

Outlook

The Act is certain to have a huge impact on developers that have invested, or will invest, in renewable energy projects in Japan. Uncertainties regarding the implementation of the new framework under the Act remain, as well as how the renewable energy market in Japan will change due to this new legislation.

Having said that, it is clear that the Japanese government and METI are committed to further promoting renewable energy as the main energy source in Japan in the near future. This fundamental reform of the FIT programme should be considered a positive step to further develop renewable energy sources for a more resilient and sustainable industry integrated with the wider electricity market in Japan.

Development of Offshore Wind Projects in Japan

Offshore wind market in Japan

Offshore wind power is considered to be essential for the further growth of renewable energy in Japan, since three-quarters of Japan’s land is mountainous and the remaining flatlands are densely populated, but Japan has approximately 29,751 km of coastline.

The government has been introducing various policy measures, including legislation to establish new rules for the use of offshore areas, to promote offshore wind power. In line with this trend, there are several offshore wind projects being planned and many of them are currently in the process of environment impact assessment (EIA). Thus, the offshore wind market in Japan is expected to grow in the next few years, with the government setting targets of 10 GW by 2030 and 30–45 GW by 2050.

Although most ongoing commercial offshore wind projects have adopted fixed-foundation turbines, the development of floating wind farms is also highly anticipated because shallow waters are limited on the Japanese coast.

New legal framework for the use of offshore areas

Regarding project sites, the legal framework for the long-term use of marine areas used to be limited. However, the Port Act was amended in 2016 to create a legal framework to allow renewable energy projects to use port areas (kouwan kuiki, or regulated offshore areas around certain designated ports) for longer periods. In November 2018, a new law to establish a legal framework to ensure the long-term occupancy of offshore “general marine” areas (ippan kaii-ki, or Japan’s territorial waters and internal waters excluding port areas) for developing offshore wind power projects (General Marine Act) was enacted. The General Marine Act came into force in April 2019.

The General Marine Act established rules for the use of offshore areas for wind power projects, and provides for:

  • the designation of “promotion zones” to allow the long-term occupation of certain marine areas for the construction of offshore wind power plants;
  • a competitive bidding process to determine the developer and tariff; and
  • a framework to accommodate the interests of stakeholders.

For port areas, the financial close of the first large-scale commercial-basis offshore wind project in Japan in two port areas in Akita Prefecture, with an aggregate capacity of approximately 140 MW, was announced in February 2020; several other projects will follow.

For general marine areas, the bidding process for the first four promotion zones has been completed. Considering the results of the first bidding process, METI is revisiting the rules for future bidding processes.

Future outlook

Projects are under way and regulations are being set. The Japanese offshore wind market is emerging.

Although only a few offshore wind farms are currently operating in Japan, there are more offshore wind projects being planned.

The government is supporting such movements – for example, it recently showed its strong commitment to creating an attractive domestic market for offshore wind power to attract investment from both home and abroad in its Vision for Offshore Wind Power Industry (1st), as of 15 December 2020.

Also, the government continues to promote new offshore wind farms under the General Marine Act. In addition to the first promotion zones mentioned above, the government recognises 17 potential marine areas where preparation for projects has proceeded to a certain extent; among these marine areas, the government intends to start preparation for the designation process for seven marine areas as “promising areas” in the near future.

Furthermore, the government amended the Port Act in 2019 to introduce a long-term lease scheme for base ports and harbours for offshore wind farms. Following this, four base ports designated by the Ministry of Land, Infrastructure, Transport and Tourism are or will be utilised for the installation and maintenance of large wind turbines.

Although there are some hurdles for developing offshore wind farms in Japan, the government is continuing its efforts to promote offshore wind power. Investors and banks have also expressed a positive stance towards this form of alternative energy.

Current Circumstances for Other Renewable Energies

Generator-side Wheeling Charge

Discussion of the so-called Generator-side Wheeling Charge, (ie, a new mechanism under which a part of the wheeling charge currently borne by electricity retailers – and, eventually, end users – is charged to the electricity generator), which was expected to be introduced during the 2023 financial year, is still continuing. 

The sixth Energy Basic Plan announced by the Cabinet in October 2021 revisited the issue of whether there is a necessity for this mechanism. This policy change was driven by the target decrease for GHGs being set at 46% by the year 2030. This ambitious target cannot be achieved unless a significant number of renewable energy generators are installed but there were concerns regarding the negative effects of installing more PV energy generators (including those under an off-site corporate PPA mechanism, which are expected to increase) and wind energy generators (both onshore and offshore). 

However, on 21 April 2022, the council under the Electricity and Gas Market Surveillance Commission unanimously confirmed the necessity of this mechanism and encouraged the expeditious application of this mechanism based on the previous discussions, which are outlined below:

  • commodity charges will be charged on a per kWh basis and capacity charges will be charged on a per kW basis;
  • the initial capacity charge to commodity charge ratio will be 1:1;
  • electricity generators may shift the burden to electricity retailers through bilateral negotiations for power purchase agreements; and
  • further discussions are required for the treatment of:
    1. existing renewable projects, especially solar and wind projects, under the FIT mechanism; and
    2. projects where a transmission and grid operator is the purchaser of renewable energy instead of an electricity retailer.

Biomass

The Second Interim Report by the Biomass Sustainability Working Group under METI was released on 14 April 2022. This report discusses:

  • criteria and method to confirm competition with food resources;
  • which projects should be required to measure, and the calculation, standards and method to confirm, “life-cycle GHGs” – ie, total greenhouse gas emittance for cultivation, processing to fuel, transportation, and combustion for each type of biomass fuel; and
  • third-party certification schemes for sustainability of producing biomass fuels that are by-products of harvesting agricultural products.

Competition with food resources

Competition with food resources will be judged by:

  • whether the biomass is edible or not; and
  • for edible biomass, the impact of using land for the cultivation of fuel biomass. 

Non-edible, by-product fuel biomass will be deemed as not competing with food resources. Whether or not fuel biomass can be deemed as “not competing with food resources” will be determined through a third-party certification scheme, as described in 'Third-party certification schemes' below.

Life-cycle GHGs

The report sets out the formula to calculate life-cycle GHGs and the required rate of reduction of life-cycle GHGs for each project, which depends on the time FIT approval was obtained for that project. The “required reduction rate” for fuel biomass will be compared to the GHGs generated from producing “180g/CO₂/MJ electricity” from “thermal power plants under the 2030 energy mix”.

  • For projects that obtained FIT approval before the 2021 financial year, the required reduction rate of life-cycle GHGs will not apply. The reduction of life-cycle GHGs will be based on “voluntary maximum effort” and reports on such efforts are required to be disclosed.
  • For projects with FIT approval from and after the 2022 financial year, the required reduction rate (ie, 50% or more until 2029, and 70% or more from 2030 and after) will apply after the life-cycle GHG confirmation system commences.
  • The required reduction rate for the 2031 financial year and after may be reconsidered around the 2025 financial year 2025, if necessary.

The confirmation methods for the satisfaction of the required reduction rate (ie, setting a default figure, confirmation scheme and timing) are under further discussion.

Third-party certification schemes on sustainability of biomass fuels that are by-products of harvesting agricultural products

The Business Plan Formulation Guidelines (Biomass Power Generation) requires approved power producers to obtain certificates under adopted third-party certification schemes on the sustainability of their fuels. These fuels must be generated from harvesting agricultural products, such as palm kernel shells and palm trunks.

From this year, third-party certification schemes are required to satisfy ISO17011. In addition, ISCC (International Sustainability and Carbon Certification) and Japan FIT (ISCC Japan FIT System Document –Palm Kernel Shells and Palm Trunks) have been added as a third-party certification scheme under the FIT mechanism to RSPO (Roundtable on Sustainable Palm Oil) 2013 or 2018, RSB (Roundtable on Sustainable Biomass), and GGL (Green Gold Label), for supplying to the Japanese market under FIT.

MSPO (Malaysian Sustainable Palm Oil), ISPO (Indonesian Sustainable Palm Oil), and the certification system under the Agricultural Resource Certification Council have not been adopted, but the possibility of further discussion was reserved.

The deadline to obtain the certificate has been extended as follows:

  • for palm oils, the deadline is extended until 31 March 2023, with no further extension; and
  • for palm kernel shells and palm trunks, the deadline remains 31 March 2023, but the Working Group will reconsider an extension based on the status around summer 2022.

Development toward Carbon Neutrality by 2050

Promotion of hydrogen and ammonia

The Japanese government regards both hydrogen and ammonia as indispensable alternative energy resources to achieve carbon-neutrality because they contribute to decarbonisation in many fields, such as electricity generation, transportation and manufacturing.

The government has been vigorously promoting the development of hydrogen energy for the past five years. In addition, it has recently been promoting studies for the practical use of ammonia as an energy carrier and fuel for electricity generation. In December 2017, it established the Hydrogen Basic Strategy ahead of other governments. After then-Prime Minister Suga announced in October 2020 that Japan will achieve carbon neutrality by 2050, the government included hydrogen and fuel ammonia among the priority areas in the Green Growth Strategy Through Achieving Carbon Neutrality in 2050 which it established in December 2020. In the sixth Energy Basic Plan, which sets out the government’s most fundamental energy policy, hydrogen and ammonia are listed as prospective alternative energy resources in actual use for electricity generation.

Starting from March 2022, the government committees for hydrogen and ammonia have been in intensive discussions to create a commercial supply chain and develop facilities and infrastructure for the production, import and supply of hydrogen and ammonia in the country. Their goal is for “green” or “blue” hydrogen to comprise a considerable portion of the hydrogen used in the country and be produced domestically, although for the time being, Japan will have to import a considerable amount of lower-priced hydrogen and it seems that the government intends to utilise hydrogen primarily, regardless of its colour (ie, green, blue and grey), in order to create a supply chain and develop infrastructure quickly.

The government also started to study methanation with prospective major players in the private sector to address technical, economical and legal issues towards the introduction of methane to the existing gas supply system. 

The government is currently working to map out its Clean Energy Strategy and released an interim report on 13 May 2022. In the interim report, it was suggested that investments of about JPY300 billion are required for the development of infrastructure for hydrogen and ammonia in 2030 to achieve its decarbonisation ambition. The government intends to support such development by providing part of the necessary investments.

Increase of corporate PPAs

Along with increased environmental awareness, including movements such as RE100, and the decreased cost of introducing renewable energy generation facilities, the number of corporate PPAs is increasing. Under a typical corporate PPA, a supplier installs PV systems in the premises of a customer and supplies electricity directly to that customer. The Act to amend the Electricity Business Act, which took effect in April 2022, enabled such suppliers to meter their electricity supply using equipment attached to the generation facilities, such as inverters, instead of meters that comply with strict standards under the Measurement Act.

In addition, the non-fossil value trading market is being formed, and studies on virtual PPAs are being conducted by the authority and aggregators.

The government recently began to deregulate off-site corporate PPAs. Currently, a power producer which supplies power through a grid is required to obtain an electricity retail business licence. METI recently made a small exception for off-site corporate PPAs under certain conditions as a first step.

Development of energy resource aggregation business

In order to achieve carbon neutrality by 2050, distributed energy resources – such as PV systems and batteries – should be utilised more effectively.

The energy resource aggregation business, which operates virtual power plants or demand response by integrating distributed energy resources, is expected to play an important role. The government has been supporting the promotion of this business by setting up a study group with aggregators and subsidising experimental projects.

The need for the aggregation service is increasing in relation to the FIP scheme, under which power producers have to sell their electricity in the market.

Mori Hamada & Matsumoto

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2-6-1 Marunouchi
Chiyoda-ku
Tokyo 100-8222
Japan

+81 3 6212 8330

+81 3 6212 8230

mhm_info@mhm-global.com www.mhmjapan.com
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Law and Practice

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Nagashima Ohno & Tsunematsu is one of the foremost providers of international and commercial legal services based in Tokyo. The firm has over 513 lawyers, including over 42 experienced foreign attorneys from various jurisdictions (as of April 2022). Its overseas network includes offices in New York, Singapore, Bangkok, Ho Chi Minh City, Hanoi and Shanghai, and collaborative relationships with prominent local law firms throughout Asia, Europe, North and South America and other regions. The firm regularly advises leading power utilities, trading companies and investors on their energy projects, including all associated regulatory matters, as well as financial institutions on financing for these projects. The firm has dealt with a number of renewable power projects since the introduction of the feed-in tariff in Japan.

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Mori Hamada & Matsumoto (MHM) has an energy and infrastructure practice team that consists of approximately 25 partners and counsels, and 55 associates. The firm has offices in Tokyo, Osaka, Nagoya, Fukuoka and Takamatsu and international branch offices in Singapore, Bangkok (Chandler MHM Limited), Beijing, Shanghai, Yangon, Hanoi and Ho Chi Minh City. MHM's energy and infrastructure practice handles a variety of matters including development and construction of projects, project financing, acquisitions, regulatory matters, supporting new participation into a recently liberalised Japanese market; it represents sponsor sides and financier sides, seller and purchaser sides, in domestic and cross-border transactions. The firm has built up experience by working on many pioneering projects, especially in the areas of project financing and renewable energy, including in Japan's growing offshore wind market. The firm maintains a strong relationship with key supervisory authorities, including the Energy and Natural Resources Agency and the Organisation for Cross-regional Coordination of Transmission Operators.

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