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Opinion | Real Estate

November 2013
POWERING UP
Reform is needed to stop the delay in completion of approved renewable energy projects

By Seth Sulkin

The Ministry of Economy, Trade and Industry (METI) in October released the latest data on renewable energy installations. The ministry was shocked to find that only a small fraction of the projects that had received approval had actually been completed.

Since July 2012, when METI introduced an above-market sales price (feed-in tariff) to promote renewable energy, the atmosphere has been like that of a gold rush. People have been fighting to secure large tracts of land, in the middle of nowhere and that previously had been considered useless.

However, according to the latest data, as of June 30 this year only 7.1 percent of commercial solar projects approved by METI had been completed.

METI officials have blamed the low figure mainly on the bad faith efforts of developers delaying construction while holding out for solar panel prices to drop. In addition, they believe that unidentified brokers are tying up projects in the hopes of big profits.

As a result, METI sent out a survey to those who had obtained approval for projects of more than 400 kilowatts to find out if and when completion is expected, and the reasons for delay.

If set properly, a deadline on METI approvals could eliminate technically, economically, and legally unfeasible projects that are tying up precious grid capacity.

However, if set poorly, a deadline could reduce—or entirely wipe out—the value of vast tracts of land on projects with legitimate reasons for requiring a long development period, and kill the domestic market for renewable energy.

What METI does not seem to recognize is that the main reason for the delays is Japan’s government system. Compared with the United States, where the federal government’s powers are limited by the constitution, Japan’s central government enjoys vast control over matters great and small.

Moreover, unlike the US president, Japan’s prime minister has quite limited power. Thus, each Japanese government ministry operates largely as a separate fiefdom, and matters crossing ministerial boundaries can easily fall through the cracks with nobody in a position to adjudicate from above.

Thus, METI is in charge of regulating the energy industry; but building a power plant requires land. The Ministry of Land, Infrastructure, Transport and Tourism is usually in charge of land regulation; but farmland that is to be used for a power plant is under the control of the Ministry of Agriculture, Forestry and Fisheries. In addition, some approvals can be made at the prefectural level, while others require the relevant minister’s personal approval.

Shopping centers, homes, and offices require a building permit. In the process of reviewing a building permit application, the issuing body checks not only the technical integrity of the building design, but compliance with all relevant national and local laws and regulations.

For large-scale solar power sites, which typically include trees, mountains, and various land classifications, there is no one-stop agency to hand out approvals. While the local utility checks the technical details of a power plant’s design, no government body checks a project for legal and regulatory compliance unless the developer seeks this approval.

Thus, I suspect that many companies building solar plants on land they previously owned, and using cash or corporate loans, are not bothering to obtain the necessary development permits.

Given the various local and/or national government approvals needed, the time for land preparation, lead time for ordering equipment, and an installation period of six to 12 months or more, it is only natural that a low percentage of projects have been completed thus far.

There was a heavy concentration of projects in February and March 2013, that secured the first year’s feed-in tariff of ¥42 per kilowatt-hour, so even projects not requiring any development permits won’t be up and running until early 2014. In addition, large-scale projects requiring forestry law approvals won’t come online until 2015.

There are many weird and wacky landowners and brokers making life difficult for developers, but if METI and other ministries could create a one-stop shop that would streamline development approvals, the renewable power industry would really thrive.

Without legislative reform to get around the problem of ministerial fiefdoms, the three-year window for obtaining renewable energy project approvals will pass with little to show.

Seth

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Seth Sulkin is president and CEO of Pacifica Capital K.K.

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