Renewable Energy 2024 Comparisons

The Japanese government has set a goal of achieving carbon neutrality by 2050, and the energy transition is already underway. According to statistics released by the Ministry of Economy, Trade and Industry (METI), renewable energy sources accounted for 21.7% of the energy mix in FY2022. The government has also committed to reducing greenhouse gas emissions by 46% by FY2030 compared to FY2013 levels, and it continues to strive towards the ambitious target of a 50% reduction. To support this goal, the Strategic Energy Plan announced by the government envisions that renewable energy will make up approximately 36–38% of the energy mix by FY2030.

Renewable energy sources currently being introduced in Japan, ranked by their share of the energy mix, are as follows: solar (9.2%), hydro (7.6%), biomass (3.7%), wind (0.9%), and geothermal (0.3%). The following points are particularly noteworthy:

• Solar PV – solar power is rapidly expanding as the leading source of renewable energy, with Japan holding the world’s highest installed capacity per square metre of land area.
• Wind power – offshore wind in particular is progressing and is expected to be a key factor in making renewable energy the main source of power in Japan.
• Geothermal – Japan has the third-largest geothermal resources in the world, positioning geothermal energy as a promising baseload power source.

Additionally, the Strategic Energy Plan emphasises the need to pursue new and innovative options, such as hydrogen and ammonia power generation, as well as thermal power generation with carbon capture, utilisation, and storage (CCUS) technology, alongside the renewable energy technologies that are currently in practical use. Progress in the development of technologies in these areas is anticipated.

In Japan, investment in renewable energy continues to grow, with a particular focus on solar, biomass, and wind power. Notably, the second and third rounds of offshore wind power auctions have taken place, with a total of approximately 2.9 million kW of development currently underway. Investments in hydrogen, ammonia, and CCUS technologies are also advancing, with pioneering projects in progress.

There are various laws governing the energy sector in Japan.

The Electricity Business Act and the Gas Business Act serve as the fundamental laws for electricity and gas, respectively. For renewable energy, the Act on Special Measures Concerning Procurement of Electricity from Renewable Energy Sources by Electricity Utilities (the “Renewable Energy Special Measures Act”) functions as a special law under which feed-in tariff (FIT) and feed-in premium (FIP) programmes have been introduced. These programmes are designed to stimulate renewable energy investment by providing, respectively, either a fixed tariff per kWh or a premium on top of the market price for the renewably generated energy. Additionally, the Act on Promoting the Utilisation of Sea Areas for the Development of Marine Renewable Energy Power Generation Facilities (the “Renewable Energy Sea Area Utilisation Act”) allows for the occupation of certain sea areas for a certain period, specifically for offshore wind power development.

Recent legislative developments include the enactment of the GX Promotion Act in May 2023. This law is expected to raise JPY20 trillion over ten years through the issuance of GX Economic Transition Bonds. Furthermore, in May 2024, the Hydrogen Society Promotion Act and the CCS Business Act were enacted. These laws are designed to promote the supply and use of low-carbon hydrogen (through subsidies) and to advance carbon capture and storage (CCS) projects, with institutional frameworks being put in place to support these initiatives.

In Japan, METI and the Agency for Natural Resources and Energy (ANRE), as an agency under METI, are responsible for overseeing energy policy. These agencies hold broad authority over energy-related businesses.

For instance, companies involved in electric power and gas retail must be registered with the Minister of METI, and renewable energy generation facilities must obtain certain certifications from the Minister to qualify for the FIT and FIP programmes. The Minister also has the power to request reports, conduct on-site inspections, order improvements in operations, and, if necessary, revoke a company’s registration or accreditation. Additionally, penalties are imposed for certain violations, such as operating without proper registration or certification.

Electricity

Businesses operating in the electricity sector in Japan are regulated depending on the type of business carried out. The sector is roughly divided into three categories: power generation, power transmission and distribution, and retail.

• Power generation is regulated through a filing system, meaning that businesses can operate as long as the necessary information is filed.
• Power transmission and distribution are regulated by a licensing system and are operated as regional monopolies, with Japan divided into ten regions.
• Retail is regulated as a registered business, allowing operations to commence once the required information is submitted and the business is officially registered.

Gas

The gas industry is similarly regulated:

• gas production is subject to filing;
• gas pipeline operations require a licence and
• gas retail requires business registration.

Renewables

In addition, specific permits and licences are required for renewable energy power generation. To participate in the FIT and FIP programmes, a business plan must be certified by the METI Minister. Certification is granted once the necessary information is submitted, provided the power generation project meets certain criteria. However, for certain projects, such as large-scale solar power generation, a bidding process is required, and the project must pass this process.

For offshore wind power generation, permission is required from the Ministry of Land, Infrastructure, Transport and Tourism (MLIT) under the Renewable Energy Sea Area Utilisation Act. This licence can be obtained by participating in and winning an auction process in sea areas designated by both the Ministers of MLIT and METI.

The applicable regulations vary depending on the nature of the project but, for renewable energy power generation projects, the transfer of power generation facilities typically requires a modification to the certification of the business plan under the FIT/FIP programmes. Also, according to the 2023 amendment to the Renewable Energy Special Measures Act, a briefing session for residents in the surrounding area is generally required for the approval of such changes, with the exception of residential and roof-mounted solar power generation.

In Japan, there are generally no restrictions on foreign companies investing in Japanese companies or establishing a Japanese subsidiary within the country, with the exception of certain specific limitations on foreign investment under laws such as the Civil Aeronautics Act, Radio Act or Broadcasting Act. However, the Foreign Exchange and Foreign Trade Law does impose certain regulations.

The Foreign Exchange and Foreign Trade Law requires prior notification for what it defines as “inward direct investments” (tainai chokusetsu toushi) by foreign investors in certain circumstances. These inward direct investments include activities such as acquiring shares, setting up a new company, or lending money under specific conditions. This requirement applies if the Japanese company or its subsidiary is involved, or plans to be involved, in a business that falls within a “designated industry” (shitei gyoushu). Investors must submit an advance notification to the Minister of Finance and the minister responsible for the relevant industry through the Bank of Japan. This notification must be made at least six months prior to the planned investment date.

Once the notification is submitted, the proposed investment or related activities cannot proceed until 30 days have passed from the date of notification. This 30-day waiting period can be shortened if the investment is assessed and found not to pose any significant issues.

It is important to note that industries such as electricity, gas, and heat supply are categorised as designated industries. Therefore, when considering investments in renewable energy or other energy sectors in Japan, it is necessary to check whether the investment falls under the definition of inward direct investment and if the target company operates within a designated industry.

The renewable energy generation sector in Japan encompasses a diverse range of sources, including solar, wind, hydro, geothermal, and biomass. This market has been propelled forward by the introduction of a FIT system under the Renewable Energy Special Measures Act, which was implemented in 2012. Since then, the system for purchasing renewable electricity under this law has undergone several revisions, and now includes both a FIP system and a bidding system, depending on the type of power source.

The primary participants in this market are major electric power companies and independent power producers (IPPs). However, following the deregulation of the electric power industry, entry into the power generation business has been allowed on a notification basis, and consequently, numerous companies from outside the traditional electric power industry, especially in the solar power sector, have entered the market. These companies are involved in the development, construction, and ownership of power plants, which connect to the power transmission and distribution grids managed by private enterprises known as general transmission and distribution companies (transmission system operators, or TSOs). They supply the market with electricity generated from renewable sources by feeding it back into the grids.

As a general rule, businesses that generate electricity from renewable energy sources must register as power generation business operators under the Electricity Business Act by filing a notification. Moreover, when connecting power generation facilities to the transmission and distribution grids of the TSOs, compliance with various rules related to power transmission and distribution is mandatory. This includes adherence to new rules concerning grid usage fees on the generation side, set to take effect in April 2024.

Additionally, the development or construction of a renewable energy power plant may require an environmental impact assessment under the Environmental Impact Assessment Act. Furthermore, permits and approvals must be secured under various laws and regulations, such as the Agricultural Land Act and the Forest Act, when developing lands for the projects.

To qualify for the FIT/FIP system under the Renewable Energy Special Measures Act, “project certification” (jigyo nintei) under the same Act is necessary. However, in recent years, there has been a rise in transactions where renewable energy is directly supplied and procured through corporate power purchase agreements (PPAs), bypassing the FIT/FIP system under the Renewable Energy Special Measures Act.

In Japan’s renewable energy sector, the gas industry is also making strides toward decarbonisation with the aim of achieving carbon neutrality by 2050. A key focus in this effort is methanation, a process that synthesises methane from CO₂ and hydrogen. This technology is particularly appealing because it can leverage existing infrastructure, such as city gas pipelines and gas consumption equipment. Major gas companies are at the forefront of developing this technology. Their targets include incorporating 1% synthetic methane into the existing infrastructure by 2030 and increasing this to 90% by 2050. The remaining 10% of natural gas replacement required to achieve carbon neutrality will be achieved through direct hydrogen utilisation, biogas, and other decarbonisation strategies, with the goal of matching the cost of current LNG prices.

In June 2021, the Public-Private Council for Methanation Promotion was established to further these efforts. This council includes a diverse group of stakeholders, such as gas companies from the supply side, steel companies from the demand side, trading and shipping companies involved in the hydrogen and CO₂ supply chain, research institutes such as the New Energy and Industrial Technology Development Organization, financial institutions including the Development Bank of Japan, as well as representatives from academia and government.

Meanwhile, many local governments and agricultural co-operatives are operating ventures that provide electricity and heat to local communities using biogas produced from livestock waste and organic waste.

Both synthetic methane and biogas production enterprises are regulated under the Gas Business Act and the High Pressure Gas Safety Act, depending on the scale of the operation. As of 1 January 2024, there were 27 companies registered as Gas Producers under the Gas Business Act, encompassing major gas producers, petroleum and other energy-related companies, power generation companies, and steel companies. Additionally, in accordance with categories under the High Pressure Gas Safety Act, each business site must either obtain a licence from the prefectural governor or submit a notification for the production of high-pressure gas.

In Japan, renewable energy heat sources include solar, biomass, geothermal, hot springs, groundwater, sewage and water sources. Despite the availability of these sources, their utilisation has been slow to progress due to factors such as high installation costs for facilities, an imbalance between heat demand and supply, and a lack of business operators with the necessary expertise. However, efforts to increase the use of renewable heat are supported by national and local government subsidies, the issuance of green heat certificates, and policies and regulations aimed at promoting energy conservation in buildings.

Businesses that provide steam, hot water, cold water, and other heat-transfer fluids to multiple buildings in a specific area through pipelines from a heat source plant (with a heating capacity of 21 gigajoules/hour or more) fall under the jurisdiction of the Heat Supply Business Act. Operators in this sector are required to register under this Act and must meet several obligations. These include ensuring sufficient supply capacity, clearly explaining the conditions of supply to customers, and adhering to safety regulations for heat supply facilities.

In pursuit of its goal of carbon neutrality by 2050, the Japanese government will establish a commercial-scale pilot supply chain for low-carbon hydrogen that aims to expand the use of low-carbon hydrogen for the realisation of the “Green Transformation” (GX). To facilitate this, the government plans to provide financial support to suppliers, focusing on price differentials, and will also promote the development of a low-carbon hydrogen hub. This initiative is designed to foster an environment that supports the stable and cost-effective supply of large volumes of low-carbon hydrogen in Japan. It aims to identify and meet potential demands in surrounding areas, thereby enhancing the international competitiveness of Japanese industries.

In line with this strategic direction, the Act for the Promotion of a Hydrogen Society was enacted in May 2024. The first round of price differential support projects under this Act is anticipated to be determined through an auction by the end of this year.

Regarding biofuels and other carbon-recycled fuels, specific recycling laws for food, construction materials, waste, and other materials have been established under the Basic Act for Establishing a Recycling-Based Society. This Act promotes the recycling and utilisation of various resources, including biomass, and has facilitated effective recycling practices. Additionally, the Livestock Waste Act mandates the proper management and effective utilisation of livestock manure.

Looking ahead, the “Roadmap”, which was published as a reference for the basic policy toward the GX, states that over the next ten years, efforts will be made to promote the use of decarbonising fuels such as sustainable aviation fuel (SAF), synthetic fuels, and synthetic methane. This will be achieved through technology development, demonstration research, and capital investment, alongside the development of regulations, systems, and the establishment of international rules. Specifically, for biomass-derived SAF, the Roadmap aims to replace 10% of fuel consumption by Japanese air carriers with SAF by 2030, with a projected public and private investment of JPY1 trillion over the next decade in the development of production technology, large-scale demonstrations, and capital investment.

Owners of small power generation facilities, such as solar installations under 50 kW and wind installations under 20 kW, should be aware that these are regulated under the Electricity Business Act. While owners of these facilities are exempt from the requirements to appoint a chief electrical engineer and comply with safety regulations, they must ensure that their installations comply with the “Technical Standards” set by an Ordinance of METI. These facilities may also be subject to on-site inspections by ministry officials.

If an inspection reveals that an installation does not meet the required Technical Standards, the owner must voluntarily make the necessary repairs. Depending on the condition of the facility, there may also be an order to temporarily suspend operations. Continued operation without addressing the issues may lead to the issuance of a “Technical Standards Compliance Order” under the Electricity Business Act, and this non-compliance will be publicised on the METI website.

These small power generation facilities are eligible to sell electricity under the FIT system, as outlined in the Renewable Energy Special Measures Act, provided they are certified under this Act. However, failure to comply with the Technical Standards may result in the revocation of this certification.

In Japan, the electric power transmission and distribution business is predominantly managed by TSOs (see 3.1 Electricity for further discussion of these), rather than public grid operators. According to the Electricity Business Act, these utilities must obtain a licence to operate, and they are typically major electric power companies that were formerly known as general electric power utilities (ippan denki jigyousha). The transmission and distribution of electricity, including that derived from renewable energy sources, is facilitated through the grids owned by these TSOs without any differentiation from electricity generated from conventional sources. However, electricity from renewable sources is treated differently in terms of curtailment priority compared to other types of electricity.

Furthermore, projects involving grid storage batteries with a capacity of 10,000 kW or more that are directly connected to a TSO’s grid fall under the definition of “power generation business” under the Electricity Business Act. As such, they are subject to the same regulatory framework as power generation companies. Grid storage batteries also feature in the “long-term decarbonisation power supply auction” support programme, which was introduced in 2023. The first auction, held in January 2024, saw a total of 1.09 million kW being auctioned. Additionally, the introduction of grid storage batteries is supported through various subsidy programmes provided by both national and local governments.

TSOs implement curtailment of power generation (i) to balance supply and demand across the entire grid within their respective areas, and (ii) to limit the electric current within the thermal capacity limits of specific transmission lines.

The curtailment of power generation for balancing purposes is implemented according to a specific rule: the curtailment of power generation by thermal power plants, the use of power by pumped-storage hydropower plants for pumping water, and the transmission of power to the grids of other TSOs are carried out before curtailing power generation by variable renewable energy such as solar and wind.

In order to address potential grid congestion, the rule for transmission line usage is shifting from the traditional priority system to a merit order system, under which generators connect to the grid on a non-firm basis. This new approach favours renewable energy sources with low marginal generation costs.

All power producers are required to commit to complying with curtailment of power generation under the aforementioned rules when entering into grid connection agreements with TSOs.

In addition to the supply of power generated from renewable energy sources through the TSO’s general transmission and distribution grid, the supply of power within the same premises via on-site PPAs and through private lines is also permitted. Furthermore, specialised licences are available for businesses that conduct transmission and distribution to specific areas (which may or may not be connected to the TSO’s general transmission and distribution grid) or to specific premises.

Gas from renewable sources, such as biogas, is generally used for the generation of electricity and/or heat on the same site, for example, at a sewage treatment plant or a waste treatment facility, or at an adjacent site connected by pipelines. Such small-scale transportation is generally not regulated.

In principle, the transportation of gas through pipelines is regulated as either a “general gas pipeline service business” (as defined in the Gas Business Act) or a “specified gas pipeline service business” (as defined in the Gas Business Act). These regulations include both a code of conduct with customers and safety standards. Essentially, the same regulatory framework will apply if gas from renewable sources is injected into the public gas grid, although revisions to safety standards and methods may be discussed.

The use of heat from renewable sources is still limited. A certain type of heat supply through pipeline is regulated under the Heat Supply Business Act as described in 3.3 Heat.

The development of a large-scale hydrogen supply chain and the necessary infrastructure for it is just beginning in Japan. It is expected that the government’s support programmes under the Hydrogen Society Promotion Act will accelerate progress in this area.

“Gas facilities” (as defined in the Gas Business Act), including pipelines and storage facilities, used in the “gas business” (as defined in the Gas Business Act) are subject to safety regulations under the Gas Business Act. However, since many of the hydrogen facilities constructed to date have been for small-scale or experimental projects, they have often been exempted from these regulations or have been subject to limited provisions thereof.

Facilities for the production, storage, and use of high-pressure gas are subject to the High Pressure Gas Safety Act.

The trade in and supply of renewable electricity to end users is primarily conducted by registered electricity retailers, either by directly procuring electricity generated from renewable energy sources or by obtaining renewable energy certificates (see 5.5 Renewable Energy Certificates and (Corporate) Power Purchase Agreements).

In recent years, corporate PPAs (whether physical or virtual) between power producers or aggregators and end users have been rapidly increasing (see 5.5 Renewable Energy Certificates and (Corporate) Power Purchase Agreements). However, in an off-site physical PPA arrangement, an end user must enter into a contract with a registered electricity retailer, whether through a bilateral agreement or a tripartite arrangement involving a power producer or aggregator, because the supply of electricity to end users via the TSO’s general transmission and distribution grid generally requires registration as an electricity retailer, with limited exceptions.

The market for the trade and supply of gas from renewable sources is still small. As described in 4.3 Gas, the majority of such gas is used on-site. Its supply to households is rare, with most instances being experimental.

On the other hand, methanation is being considered by major gas retailers. Basically, the same regulatory framework will apply if gas from synthetic methane is injected into the public gas grid, although revisions to safety standards and methods may be discussed.

The market for the trade and supply of heat from renewable sources is still limited. A certain type of heat supply through pipelines is regulated under the Heat Supply Business Act as described in 3.3 Heat.

There is no established market or public platform for trading hydrogen and other biofuels in Japan. Thus, at time of writing (September 2024), suppliers and offtakers need to trade hydrogen and other biofuels through bilateral, over-the-counter (OTC) contracts. As is often the case, the contractual structure tends be similar to that used in trading contracts for conventional fuels or commodities such as LNG and power.

If a supplier intends to supply hydrogen or other biogas to third-party offtakers through pipelines, such supply will be considered to be a gas retail business, and subject to the registration requirement under the Gas Business Act. Also, even if the gas retail regulations are not applicable, the regulations under the High Pressure Gas Safety Act can be applied to the supply of hydrogen and other biogas to the extent that such gas falls within the technical definition of “high pressure gas”. On the other hand, if hydrogen and other biogas are supplied as alternative fuels for power generation, then the relevant regulations under the Electricity Business Act will also be applied.

Renewable energy certificates are called “Non-Fossil Certificates” (NFCs) in Japan. NFCs generated from renewable energy sources can be used by offtakers to offset carbon emissions as well as in their reporting for global initiatives such as RE100, CDP and SBT.

Currently, there are two types of market for NFC trading: the market for FIT-Based NFCs and the market for non-FIT NFCs.

FIT-Based NFCs

The market for FIT-based NFCs is a trading platform for NFCs generated from renewable energy projects developed based on the FIT regime. Developers of FIT-based projects are entitled to receive a certain fixed tariff per kWh from the government over a certain fixed period (typically, 20 years) and such tariff is ultimately funded by taxpayers through electricity bills. Thus, the environmental attributes from such FIT-based projects are legally considered to belong to the public, and as a consequence, FIT-based NFCs are sold by the governmental agency (Organization for Cross-regional Coordination of Transmission Operators, or OCCTO) on a market where licensed retailers and end-users (corporate buyers) can purchase such NFCs through a multi-price auction held on a quarterly basis.

Non-FIT NFCs

On the other hand, the market for non-FIT NFCs is a trading platform for NFCs generated from renewable energy projects developed outside the FIT regime (including projects developed based on the new FIP regime). The environmental attributes from projects developed outside the FIT regime are legally considered to belong to developers (generators), and as a consequence, developers (and aggregators) are allowed to sell non-FIT NFCs on a market where licensed retailers can purchase such NFCs through a single-price auction held on a quarterly basis.

In addition, non-FIT NFCs can also be traded by OTC (bilateral) contracts between generators (aggregators) and licensed retailers or end-users (corporate buyers). Both physical PPAs and virtual PPAs are available options for OTC trading of non-NFCs, but the contractual structuring needs to be carefully analysed with due consideration given to various legal and regulatory restrictions. Long-term corporate PPAs are fairly common, especially in renewable projects developed with project financing.

The market for the development of onshore renewable energy projects (especially, solar and onshore wind) is already quite mature in Japan. Due to the limited availability of remaining land for a large-scale development, there have been a decreasing number of large-scale solar and onshore wind projects (ie, those producing more than 10 MW) on a green-field basis in recent years. On the other hand, there have been a growing number of transactions in the secondary market for large-scale solar and onshore wind projects on a brown-field basis.

In the process of green-field development, the most important starting point is to secure a suitable site and grid connection capacity. Also, if a governmental subsidy is necessary, a developer needs to obtain the governmental approval under the FIT or FIP regime and develop/operate its project subject to all the relevant regulations under the Renewable Energy Special Measures Act. A project site is typically secured by a lease contract with the owners of the relevant land. Public land owned by the national or local governments is sometimes secured through a permit or a tender.

An environmental impact assessment (EIA) can be required by both national law and the local ordinances in the case of a large-scale development beyond certain thresholds. If applicable, the EIA process could take a few years in total.

The contractual arrangement in development and operation phases is more or less similar to renewable energy projects in global markets. Single-point engineering, procurement and construction (EPC) arrangement in solar projects are common, but in other renewable projects such as onshore wind, multi-contract structures where the main turbine and the balance of plant (BOP) are undertaken by different contractors and suppliers are more typical.

As a result of the rapid increase in renewable energy projects (especially, solar projects) all over Japan, there has been a growing number of disputes and disagreements between developers and local residents. A strong objection from local residents may have a material adverse impact on the sustainable development and operation of projects, and developers therefore need to carefully proceed with the engagement of local stakeholders from the early stages of development.

Compared with the maturity of the market for onshore projects such as solar and onshore wind, offshore wind in Japan, which is an island nation, still has tremendous potential to grow. Naturally, the government is very keen to promote offshore wind development with the official target of developing 10 GW by 2030 and 30–45 GW by 2040. Offshore wind is currently the hottest area in Japanese renewable energy markets – as a sort of final frontier where developers can find growing opportunities to develop large-scale projects on a green-field basis.

Since offshore wind development requires the long-term occupation of public water (ocean areas), developers are not allowed to develop a large-scale offshore wind project unless selected as the operator through an auction procedure held by the government for each designated sea area under the regulatory framework provided in the Renewable Energy Sea Area Utilisation Act. Roughly speaking, a number of ocean areas (typically, three to four areas with 0.5 to 1.0 GW in each area) are designated for auction procedure every year. As at time of writing (September 2024), the auction results have already come out for four projects in Round 1 and four projects in Round 2, and an auction is currently being implemented for two further projects in Round 3. Almost all of these existing projects are bottom-fixed (only one of them is floating).

It should be noted that the current auction system is not a centralised one, and therefore, a selected bidder needs to proceed with project development by themselves with no centralised mechanism to streamline the process for site surveys, relevant permits and the EIA. Having said that, a selected bidder will be afforded the necessary grid connection and the preliminary consensus with major local stakeholders, including local fishery unions. The government is currently discussing the introduction of a more centralised auction system to some projects in the near future.

The contractual arrangement in development and operation phases is more or less similar to offshore wind projects in European and other markets. Typically, we see a multi-contract structure where major components (such as wind turbines, foundations, subsea cables and onshore/offshore substations) will be undertaken by different contractors and suppliers.

As the latest trend, the National Diet (Japanese legislature) is currently discussing a new bill to introduce a new regulatory framework to enable developers to develop and operate large-scale offshore wind projects without an auction procedure in designated sea areas within the exclusive economic zones (EEZ) outside the national boundary of Japan. This new legislation could potentially unlock the door to massive floating offshore wind project development with a GW-class size all over Japan in the near future.

It is quite common for developers to use project financing for a development of a large-scale renewable energy projects in Japan. There are quite a number of Japanese banks which are ready to provide project financing for renewable energy projects with competitive margins.

Having said that, in recent years, developers have seen a higher hurdle for achieving “bankability” in project financing for green-field development of renewable energy projects.

The biggest hurdle is how to secure a stable cashflow over the long term. Under the old FIT regime, the offtake arrangement at the fixed price over the long term (typically 20 years) was legally guaranteed, and therefore, the offtake risk was quite limited for lenders. However, under the new FIP regime, developers need to find and negotiate with suitable offtakers by themselves. Thus, lenders need to carefully scrutinise the creditworthiness and the bankability of each offtaker as well as the detailed contents of offtake agreements.

Another hurdle is how to secure appropriate risk allocation between developers and contractors/suppliers. In recent years, there has been growing uncertainty in global markets, including Japan, over issues such as the COVID-19 pandemic, the war in Ukraine, global inflation, disruptions to global supply chains, and a weak Japanese yen. It is becoming both more important, but also more challenging, for all the project participants (developers, contractors, suppliers and financers) to optimise the risk allocation to share various risks intrinsic to projects for the purpose of achieving bankability.

Unlike other markets, long term project financing over ten to twenty years (minus a tail period) has been widely used to date in the Japanese project financing market and it is rare to see the use of mini-perm loans with refinancing risks. However, given the current market environment, Japan may see the use of mini-perm loans for projects with higher risks more often.

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

Since the FIT mechanism was introduced in 2012, the development of renewable power plants (especially, solar power plants) has boomed and the annual cost for power purchase has exponentially increased to approximately JPY4.8 trillion as of 2024, and this coset is expected to further increase in the coming years. Thus, in an effort to reduce the additional burden on households and businesses, METI has worked to shift from FIT to FIP systems with more market risks transferred to developers.

In June 2020, the National Diet enacted a major amendment to the Renewable Energy Special Measures Act in order to implement the fundamental reform of the existing FIT framework, which came into effect on 1 April 2022.

Under the new framework, the government will move away from the old 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 (a contract for difference (CfD) mechanism) 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 OTC transactions in order to reduce the burden on the public (Japanese taxpayers) to subsidise renewable energy sources.

Given that many solar power plants were rapidly developed all over Japan by numerous developers, including those with limited capability for operation and financing, how to secure decommissioning costs to safely remove and dismantle retired solar power plants without causing environmental issues in the future has become a serious policy issue.

Even under the old FIT regime before a major reform in 2020, developers of solar power plants with a capacity of 10 kW or more were required to make necessary reserves to secure adequate decommissioning costs at the end of the FIT period (20 years). However, in order to ensure that necessary funds will be more effectively secured, the new legislation enacted in 2020 introduced a new system for external reserves by means of directly withholding the required amounts from the revenue from PPAs to be reserved by OCCTO.

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

In case of renewable energy projects other than solar, developers are usually required by lenders to build up necessary reserves for decommissioning costs at the end of the project’s term. Also, in offshore wind projects, an appropriate plan for decommissioning needs to be included in the bid documents and subject to the government’s evaluation in the auction procedure.

The government has announced an ambitious target to achieve carbon neutrality by 2050, which will necessitate a substantial increase in renewable energy capacity, particularly in solar, wind, and hydrogen. To support this goal, the government has formulated the Green Growth Strategy, which identifies key sectors for innovation and investment, including offshore wind, hydrogen, and carbon recycling.

To secure the necessary funding, more than JPY150 trillion is expected to be invested in the decarbonisation sector by both the public and private sectors over the next ten years. This investment will be catalysed by the government’s issuance of GX Economic Transition Bonds. As a result, decarbonisation-related investments are anticipated to grow rapidly in the coming years.

Focusing on specific areas, in the field of offshore wind power, there is ongoing discussion over implementing a system within the EEZ. In addition, hydrogen- and ammonia-related technologies are gaining considerable attention. These energy sources are expected to be crucial in “hard to abate” sectors, such as steel and chemicals, where alternative technologies are limited and conversion is difficult. They are also seen as key in the mobility sector and power generation.