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 22.9% of the energy mix in FY2023. 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. The 7th Basic Energy Plan states that Japan will continue to aim to make renewable energy its principal power source in order to decarbonise the electricity sector.

Renewable energy sources currently being introduced in Japan, ranked by their share of the energy mix, are as follows: solar (9.8%), hydro (7.6%), biomass (4.1%), wind (1.1%), and geothermal (0.3%). The following points are particularly noteworthy.

• Solar photovoltaic (PV) – Japan has the highest installed solar capacity per unit of flat land among developed economies, with deployment steadily expanding. Costs for solar energy have declined enough to enable projects outside the feed-in-tariff (FIT) and feed-in-premium (FIP) schemes. However, installation growth has slowed due to limited suitable sites.
• Wind power – Onshore wind sites in flat areas are limited, while offshore wind offers large-scale potential in regions such as Hokkaido and Tohoku. Geographic challenges, local co-ordination, and lengthy permitting remain issues. Expansion will require grid enhancements, including subsea high-voltage direct current links between Hokkaido and Honshu.
• Geothermal – Japan has the world’s third-largest quantity of potential geothermal resources, and it sees this as a stable baseload source that can support regional revitalisation.

Additionally, the 7th Basic Energy Plan states that, in pursuing carbon neutrality by 2050, Japan will advance the use of hydrogen, carbon capture and other technologies, particularly in sectors that are difficult to electrify. These emerging technologies are expected to complement solar, wind, and other mainstream renewables in driving Japan’s energy transition.

In Japan, investment in renewable energy continues to grow, with a particular focus on solar, biomass and wind power. Notably, the third round of offshore wind power auctions allocated roughly 1.07 GW across two projects in December 2024, and the construction of over 4 GW of offshore wind capacity is now in progress nationwide. Investments in hydrogen, ammonia, and carbon capture and storage (CCS) technologies are also advancing, with pioneering projects in progress.

Corporate renewable power procurement has surged as well. An increasing number of companies are signing long-term power purchase agreements (PPAs) to directly source green electricity.

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 FIT and 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 initiatives have introduced significant changes. In 2025, the GX Promotion Act was amended to strengthen Japan’s carbon reduction regime. This landmark amendment mandates a domestic emissions trading scheme for large emitters from FY2026. In the offshore wind domain, legal reforms are expanding the scope of development. In June 2025 the revision to the Renewable Energy Sea Area Utilisation Act to extend its coverage to Japan’s exclusive economic zone (EEZ) was approved. This will establish a permitting system allowing offshore wind projects in the EEZ beyond territorial waters, opening up vast new areas for development. Lastly, the Hydrogen Society Promotion Act’s enforcement in October 2024 brought into operation a subsidy auction for low-carbon hydrogen supply, and the CCS Business Act established a licensing framework for CO₂ storage projects.

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 can be 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.

Additionally, new domains are being brought into the regulatory fold: the 2024 CCS Act introduced a licence requirement for CO₂ storage operations, ensuring that any future commercial carbon capture and storage projects will be conducted under stringent safety regulations.

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, except for certain specific limitations under laws such as the Civil Aeronautics Act, Radio Act or Broadcasting Act. However, the Foreign Exchange and Foreign Trade Act (FEFTA) remains the primary legislation governing foreign investment, including in the renewable energy sector.

Under FEFTA, foreign investors are required to submit a prior notification for “inward direct investments” (tainai chokusetsu toushi) in certain circumstances. These investments include activities such as acquiring shares, setting up a new company, or lending money under specific conditions. This notification requirement applies if the Japanese company or its subsidiary is engaged, or plans to engage, in a “designated industry” (shitei gyoushu), which category includes electricity, gas and heat supply.

The notification must be submitted to the Minister of Finance and the minister with jurisdiction over the relevant industry, via the Bank of Japan, 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 includes a variety of sources, including solar, wind, hydro, geothermal, and biomass. Since the introduction of a FIT scheme under the Renewable Energy Special Measures Act in 2012, Japan’s renewable energy legal framework has undergone several significant reforms. Depending on the type and scale of the energy source, the FIT scheme is gradually being replaced by the FIP scheme, while a bidding system is also being introduced for determining procurement/reference prices under the FIT/FIP scheme. These changes aim to enhance pricing efficiency and better integrate renewables into the market.

Key market participants continue to include traditional electric power companies and independent power producers (IPPs). However, deregulation of the power generation segment has allowed broader participation on a notification basis, resulting in an increasing number of entrants from outside the traditional utility sector, particularly in the solar power sector. These companies undertake the development, construction, and operation of generation facilities that connect to grids managed by general transmission and distribution companies (“transmission system operators”, or TSOs).

Electricity generation from renewable energy sources generally requires notification-based registration under the Electricity Business Act. Generators must also comply with various grid connection rules established by the Organization for Cross-regional Coordination of Transmission Operators (OCCTO) and TSOs. Since April 2024, generation-side wheeling charges have been imposed on power producers that are connected to the transmission and distribution networks operated by TSOs.

Additionally, the development of renewable power facilities is subject to land use and environmental regulations, including potential obligations under the Environmental Impact Assessment Act. Additional permits and approvals may be required under other laws such as the Agricultural Land Act and the Forest Act, depending on the site. Given the wide range of regulatory requirements, it is essential to consult with the relevant authorities and legal or technical experts during the development process.

For participants in the FIT/FIP scheme, “project certification” (jigyo nintei) under the Renewable Energy Special Measures Act remains mandatory. However, the use of corporate power purchase agreements (CPPAs) has been expanding, particularly in response to growing decarbonisation commitments from corporate energy users. These CPPAs enable direct procurement of renewable electricity outside the FIT/FIP framework.

Amendments to the Renewable Energy Special Measures Act in 2024 introduced new requirements, including the obligation to hold local stakeholder briefings for renewable energy projects at the time of project certification or when making certain changes to certified plans (including any change of control as a result of M&A transactions involving both project special purpose vehicles and sponsors). Other new measures include suspension of subsidies for operators deviating from their certified plans and strengthened obligations for certified operators to appropriately supervise external contractors such as engineering, procurement and construction (EPC) and operation and maintenance (O&M) service providers. These amendments aim to ensure the sound development and operation of renewable energy projects by enhancing project accountability, improving community relations and addressing issues arising from inadequate project management by delegated entities.

In Japan’s renewable energy sector, the gas industry continues to advance decarbonisation initiatives in pursuit of carbon neutrality by 2050. Methanation, which synthesises methane from CO₂ and hydrogen, remains a central focus, as it enables the utilisation of existing infrastructure, such as city gas pipelines and gas-consuming appliances. Major gas utilities lead this technology’s development, aiming to introduce 1% synthetic methane into the existing supply by 2030 and expand this to 90% by 2050. The remaining 10% is expected to be covered by biogas, direct hydrogen use and other decarbonisation technologies, with the ambition of achieving price parity with current LNG.

The Public-Private Council for Methanation Promotion, established in June 2021, continues to facilitate collaboration among a broad range of stakeholders, including energy suppliers, industrial users, research institutes such as the New Energy and Industrial Technology Development Organization (NEDO), financial institutions including the Development Bank of Japan, trading and shipping firms involved in hydrogen and CO₂ logistics, as well as representatives from academia and relevant government agencies.

From late 2024 through to mid-2025, concrete demonstration projects have been launched or advanced under government-funded schemes, particularly through the Green Innovation Fund administered by NEDO. Notably, INPEX is developing a methanation demonstration facility in Nagaoka City, Niigata Prefecture, scheduled to begin operation in 2025. This facility will produce synthetic methane by reacting hydrogen with captured CO₂ and will inject the product into existing city gas pipelines. Additionally, Osaka Gas completed construction in March 2025 of a demonstration plant at the Osaka–Kansai Expo site, utilising solid oxide electrolysis cell (SOEC) technology to produce e-methane from renewable electricity and CO₂. These projects aim to evaluate the feasibility of methanation under both urban and regional conditions and are part of broader efforts to integrate carbon capture and utilisation (CCU) technologies within circular local energy systems.

In parallel, municipalities and agricultural co-operatives continue to operate local energy ventures that supply electricity and heat using biogas from livestock manure and organic waste.

Regulatory oversight remains grounded in the Gas Business Act and the High Pressure Gas Safety Act. As of 1 June 2025, 26 companies were registered as “gas producers” under the Gas Business Act, including not only major city gas operators but also petroleum firms, power producers and steelmakers. Under the High Pressure Gas Safety Act, operators are required to obtain licensing or submit production notifications based on output capacity.

In Japan, renewable energy heat sources include solar, biomass, geothermal, hot springs, groundwater, sewage and other water sources. Although development in this sector was historically slow – due to high installation costs, supply-demand imbalances and a lack of experienced operators – it has shown steady growth in recent years. This progress has been supported by national and local subsidies, green heat certificate schemes and policies aimed at promoting decarbonisation in buildings.

The 7th Basic Energy Plan recognises natural renewable heat – such as solar thermal, geothermal, snow and ice, hot springs, seawater, river water and sewage – as a regionally specific yet important energy source. It emphasises the importance of deploying these technologies in ways tailored to local economic and geographic conditions. To support this, the government is promoting the installation of heat supply systems and encouraging area-wide networks that enable heat-sharing among multiple users.

Additional regulatory momentum comes from the Buildings Renewable Energy Utilisation Promotion Zone scheme, introduced in April 2024 under the amended Building Energy Efficiency Act. This scheme allows municipalities to designate zones where the use of renewable energy is to be actively promoted, and targeted technologies under this scheme include renewable heat sources such as solar thermal, geothermal and biomass, thereby facilitating broader deployment of renewable heat in new construction and urban development.

Businesses that supply heat via pipelines with a capacity of 21 gigajoules/hour or more remain regulated under the Heat Supply Business Act. Operators must register under the Act and comply with obligations such as ensuring sufficient supply capacity, providing clear explanations of supply conditions to customers and adhering to updated safety regulations. Since FY2024, a new emissions factor framework has been introduced, allowing registered heat suppliers to offer environmentally credited (carbon-offset) heat through the use of carbon credits and similar instruments. This enables end users to reflect the environmental value of the supplied heat in their own carbon accounting and reduce their Scope 2 CO₂ emissions (indirect emissions resulting from the generation of purchased or acquired electricity, steam, heat, or cooling that a company uses) accordingly.

In pursuit of its goal of carbon neutrality by 2050, the Japanese government continues to advance the development of a commercial-scale pilot supply chain for low-carbon hydrogen as part of its “Green Transformation” (GX) initiative. Following the enactment of the Act for the Promotion of a Hydrogen Society in 2024, detailed regulations were promulgated in 2025 to clarify eligibility, procedures, and support mechanisms under the Act. In particular, the government launched the first call for price differential support projects, with awards expected by the end of 2025. These measures aim to incentivise stable and large-scale hydrogen production and supply.

The 7th Basic Energy Plan further emphasises the role of hydrogen and ammonia as key decarbonisation fuels, setting ambitious targets for their introduction and use in power generation and industry. The plan also highlights the importance of building resilient supply chains, promoting domestic production and securing stable imports of renewable energy carriers, including hydrogen and biofuels.

For biofuels and other carbon-recycled fuels, the regulatory framework is anchored in the Basic Act for Establishing a Recycling-Based Society, which promotes the recycling and utilisation of biomass and other resources. The Livestock Waste Act mandates the proper management and effective utilisation of livestock manure. In 2024, the government updated its policy to further encourage the production and use of sustainable aviation fuel (SAF), synthetic fuels and synthetic methane. The revised GX Roadmap and the 7th Basic Energy Plan now target the replacement of 10% of the jet fuel used by Japanese airlines with SAF by 2030, supported by a combined public and private investment of JPY1 trillion over the next decade. This will be achieved through ongoing technological development, demonstration projects and the establishment of new regulatory and certification systems including alignment with emerging international standards for SAF and other decarbonised fuels.

Overall, the production sector for hydrogen and renewable fuels in Japan is characterised by a strong government-led policy framework, active financial support mechanisms and a focus on building integrated supply chains and regulatory systems, as reinforced by the 7th Basic Energy Plan, to accelerate the transition to a low-carbon economy.

Owners of small-scale renewable energy generation facilities, such as PV installations under 50 kW and wind installations under 20 kW, remain subject to regulations under the Electricity Business Act. These owners continue to be exempted from the requirements to appoint a chief electrical engineer and from certain safety management obligations. However, it is still mandatory for such facilities to comply with the “Technical Standards” established by the relevant METI Ordinance. Facilities may be subject to on-site inspections by ministry officials to ensure compliance.

If an inspection identifies non-compliance with the Technical Standards, owners are required to undertake necessary repairs. In some cases, authorities may issue an order to temporarily suspend operations until compliance is achieved. Persistent non-compliance can result in a “Technical Standards Compliance Order” under the Electricity Business Act, and details of such non-compliance may be publicised on the METI website.

Small-scale facilities remain eligible to sell electricity under the FIT/FIP schemes, as provided by the Renewable Energy Special Measures Act, provided they obtain and maintain necessary certification. 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, rather than public grid operators. Under the Electricity Business Act, TSOs are required to obtain a licence and are typically major electric power companies formerly known as general electric power utilities (ippan denki jigyousha). Electricity from renewable energy sources is transmitted and distributed through the TSO-owned grids without physical differentiation from conventional sources. However, electricity from renewable sources is treated differently in terms of curtailment priority compared to other types of electricity.

Grid-connected storage batteries with a capacity of 10,000 kW or more are classified as “power generation business” under the Electricity Business Act, and are subject to the same regulatory framework as generation facilities. These grid-connected storage batteries also feature in the “long-term decarbonisation power supply auction” (LTDA) support programme, which was introduced in 2023. The first auction, held in January 2024, saw a total of 1.09 million kW being auctioned, and in the second auction in January 2025, 1.37 million kW of power storage was 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 addition, starting in FY2026 or 2027, FIT-based power plants will be subject to the curtailment before FIP-based power plants.

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.

Currently, 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.

In the 7th Basic Energy Plan, the government of Japan has set a target to inject an amount of synthetic methane or biogas equivalent to 1% of the total supply volume of gas into the nation’s pipelines by FY2030.

The use of heat from renewable sources is still limited. The supply of heat through pipelines, above a capacity of 21 gigajoules/hour, 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 infrastructure necessary for it to operate 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 while the government aims to increase the volume of biogas distributed through pipelines by 2030. 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. The supply of heat through pipelines, above a capacity of 21 gigajoules/hour, 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 the time of writing (August 2025), 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 to 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 markets 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 under the FIT regime. Developers of FIT-based projects are entitled to receive a certain fixed tariff per kWh from OCCTO 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 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 under 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 as well as accounting treatment. 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 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 greenfield 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 brownfield basis.

The most important starting point when developing a green-field renewable energy project is to secure a suitable site and grid connection capacity. Also, if a government subsidy is necessary, a developer needs to obtain government 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 arrangements in development and operation phases are broadly similar to renewable energy projects in global markets. Single-point EPC arrangements 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. Strong objections from local residents may have a material adverse impact on the sustainable development and operation of projects; developers therefore need to proceed carefully, ensuring that they have the engagement of local stakeholders from the earliest stages of a 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 growth potential. 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. Also, the Japanese government has recently (August 2025) published its official target to develop “floating” offshore wind projects of up to 15 GW by 2040. Offshore wind is currently the hottest area in the Japanese renewable energy market – as a sort of “final frontier” where developers can find growing opportunities to develop large-scale projects on a greenfield 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 the time of writing (August 2025), the auction results have already come out for four projects in Round 1, four projects in Round 2 and two projects in Round 3, and a new auction will be implemented for two further designated areas in Round 4 soon. Almost all of these existing projects are bottom-fixed (only one of them is floating).

It should be noted that the existing auction system is not a centralised one, a selected bidder must therefore proceed with the project development by themselves without the aid of a centralised mechanism to streamline the process for site surveys, grid connection 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 for some projects from Round 4 onward.

The contractual arrangements in the development and operation phases are broadly 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.

In an important recent development in this area, the National Diet (the Japanese legislature) has passed a bill introducing a new regulatory framework to enable developers to develop and operate large-scale offshore wind projects without a competitive 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 developments of GW-class size in the waters off Japan in the near future.

It is quite common for developers to use project financing for the development of 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 greenfield development of renewable energy projects.

The biggest hurdle is securing 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 the offtake risk was therefore 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 securing 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 more important, but also more challenging, for all the project participants (developers, contractors, suppliers and financers) to optimise the risk allocation in a project, so as to share various risks intrinsic to projects for the purpose of achieving bankability.

Mini-Perm Loans

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 going forward.

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 2025, and this cost 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 FIT tariff 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, while maintaining the S+3E balance (safety, energy security, economic efficiency, and environmental compatibility). In February 2025, it approved the 7th Basic Energy Plan, which prioritises decarbonisation of power generation and electrification, positioning renewable energy as a principal power source to be deployed to the maximum extent possible while ensuring coexistence with local communities and minimising the public burden. 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, 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 in power generation.