The Journal The Authority on Global Business in Japan

On July 1, 2012, Japan’s Ministry of Economy, Trade and Industry introduced a feed-in-tariff (FIT) scheme requiring companies to purchase all electricity generated from renewable resources—such as geothermal, biomass, small hydro, solar and wind—at guaranteed rates for set periods, adjusted annually or mid-year. The result was a rush of investment.

Ali Izadi-Najafabadi, head of Japan and Korea for Bloomberg New Energy Finance, spoke about the past five years of solar independent power projects to members of the American Chamber of Commerce in Japan at Tokyo American Club on July 18, hosted by the Alternative Investments Subcommittee.

GETTING FIT
Since the regulations came into force, more than 300,000 non-residential solar projects have been built.

Izadi-Najafabadi explained that the program’s success is subjective, and compared Bloomberg’s latest data with that of the Japanese government.

The government set different FIT rates for each technology to ensure investors got similar returns. But the focus was on equipment costs and did not take into account the challenges unique to each technology. The government continues to try to rectify this.

Currently, Japan relies heavily on fossil fuels, but Izadi-Najafabadi expects there to be higher-capacity renewables available by 2040, meeting about 40 percent of the country’s energy needs.

ENERGIZED INVESTMENT
As designed, the FIT program mostly benefits solar energy, in which many investors have seen good returns. Majority attention is still focused on that sector, but broader investment is in decline.

“Overall, investments started to rise significantly after 2012, when the FIT program was introduced, peaked in 2014 at more than $40 million, and since have been coming down.”

The solar market, in particular, is slowing. A key reason is that, on September 24, 2016, Kyushu Electric Power Co., Inc. announced that it would stop accepting new solar grid connection applications. This resulted in a government review that set capacity limits on how many solar projects can connect to the grid in many parts of Japan. Wind was also limited, and projects commissioned beyond these limits would face the risk of curtailment without compensation.

“Japan is a country faced with energy demand decline, so the need for investment in generation capacity is going down and the boom you see today on the renewable side is FIT-driven.” Due to electricity market reform, he added, coal projects are being closed and a lot of the new retailers are competing with each other and incumbents.

RENEWABLE FUTURE
Izadi-Najafabadi sees the market stabilizing overall, so what happens next?

For wind, Japan has a capacity of just over three gigawatts. Expansion of this is slowed by environmental impact assessment (EIA).

Other challenges in developing wind projects in Japan include a non-transparent process for granting grid connection permits—governed by each utility—and limited transmission infrastructure in regions with the best wind resources.

But growth is happening. Izadi-Najafabadi said there were a record number of wind projects approved in January and February of this year, spurred in part by an application process that can now begin before the EIA is concluded. However, with a small domestic market, cost reduction is challenging.

SOLAR SURGE
Returning to solar, growth is not without challenges. Japan’s topography makes large-scale, ground-mounted solar arrays difficult—and thus costs are higher—but “we expect solar to come down,” said Izadi-Najafabadi. The forecast is that solar will be cheaper than coal by 2025.

“We expect a combination of rooftop photovoltaic [systems] and storage to become competitive with residential power prices sometime around 2030,” he predicted. This will pose a significant challenge to utilities.

“The biggest challenge with the FIT program is really the fact that the government did not take a holistic view of all renewables, and identify the technical and non-technical challenges,” he concluded.

Still, FIT continues to move along and grow capacity, something critical to Japan’s ability to power its society and economy in the future.

Maxine Cheyney is a staff writer at Custom Media for The ACCJ Journal.
Japan is a country faced with energy demand decline, so … the boom you see today on the renewable side is FIT-driven.