Japanese FIT

Author: | Published: 5 Dec 2012
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Yutaro Fujimoto
On March 11 2011, just a few hours before the now infamous Great East Japan Earthquake, the Japanese Cabinet adopted the Act on Special Measures Concerning the Procurement of Renewable Energy by Operators of Electric Utilities, setting out the legal framework for the establishment of a feed-in tariff (FIT) programme in Japan. The Japanese FIT programme places an obligation on electric utility companies to purchase the electricity generated from renewable energy sources, such as solar, wind, hydro and biomass, at a set price and term, which will be established annually by the Minister of Economy, Trade and Industry on an annual basis. The programme contemplates that the additional costs incurred by electric utility companies to purchase such electricity will be passed along to the end-consumer, but subject to certain adjustments at the decision of the Minister and the Agency for Redistribution.

The objective of the Act was originally to strengthen the energy independence of Japan by encouraging the use of solar, wind, or other domestic renewable resources while addressing environmental concerns such as global warming. Following the Great East Japan Earthquake and, in particular, the public outcry against nuclear power following the disaster at the Fukushima Nuclear Plant, the Act garnered significant public attention as a means to develop alternative sources of energy for Japan. As a result, the Japanese Diet accelerated its approval of the Act. It came into force on July 1 2012.

Businesses have also expressed a great deal of interest in the Act. It provides suppliers of renewable energy with long and stable contractual terms, which facilitates the financing of renewable energy projects. Renewable energy sources are freely available. Solar and wind generation facilities in particular are relatively easy to operate and maintain once established, as compared to traditional methods of power generation. Renewable energy generation facilities can also make use of underdeveloped land, although a close proximity to the electrical grid is important. Because of these reasons, a number of companies are contemplating entering the power generation market in Japan, with respect to solar power in particular. The Minister heightened this interest by setting a relatively high fixed price and corresponding long term for qualifying projects commencing this fiscal year (being from April through to the end of March in Japan). In fact, there are a few large scale solar power stations scheduled to commence next spring.

There are two main concepts under the Act of particular importance to prospective suppliers. The first is the duty of electric utility companies to accept agreements at the fixed price and term and to connect the supplier's generation facilities to the grid, unless there are statutory reasons for refusal. The Act and the Ordinance for Enforcement by the Minister, as supplemented by the answers of the Ministry of Economy, Trade and Industry (METI) to public comments, set out the reasons an electric utility company may refuse a supplier's terms and include: (i) the electric utility company's obligation to compensate for damages not attributable to it; (ii) the supplier's refusal to provide reasonable cooperation, such as with the reading of meters; (iii) the supplier's refusal to bear statutory expenses required to connect such generation facility to the grid; and (iv) the supplier's refusal to follow statutory regulations with respect to the maintaining a consistent power supply.

In response to the attempt of certain electric utility companies to force suppliers to use their standard form agreements, whose terms were in contradiction with the purpose of the Act, the METI published a model power purchase and connection agreement. The model agreement, the METI says, is an example and does not address all of the items raised in its public answers; despite this, it will likely be quite influential on contract negotiations between suppliers and electric utility companies.

The second key concept under the Act is the requirement to obtain the Minister's approval for a supplier's generating facility to qualify for the preferential terms set out in the Act. As prescribed in the Act and the Ordinance, and supplemented by the METI's public answers, in order to obtain approval for a generating facility suppliers must provide evidence of: (i) the securing of a maintenance system for such facility; (ii) confirmation as to the site and structure of the generating facility; and (iii) the generation specifications, such as performance and capacity. The filing process is done by way of document submission. It is not necessary for the construction of the generation facilities to have commenced at the time of this submission. Approvals are announced regularly on the METI web site. 146,899 facilities had been approved as of October 31 2012.

Prospects

It is well known that Japan has energy issues. If the Act and the Japanese FIT are successful, this will significantly improve the energy situation in Japan. The Act and the Japanese FIT have only just commenced and there remain various legal and technical issues and uncertainties associated with them. In addition, since the FIT passes the costs for clean energy to consumers, the system may be difficult to maintain, as examples in Europe and North America have shown. The Act says the Minister has to take special care in deciding the fixed price over the next three years to ensure that the programme makes sense to suppliers from a financial perspective. It is, therefore, desirable, in the long term, to find a way to reduce the fixed price by cutting the cost of power generation so that consumers can avoid having to pay significantly elevated prices for electricity. Given the importance of this issue, many stakeholders in this project, including legislators, must strive to solve these outstanding issues and to ensure the success of the Act and the FIT programme.

Yutaro Fujimoto