Japan Begins Feed-in Tariff Scheme to Accelerate Renewable Energy Promotion

JFS Newsletter No.110 (October 2011)

Japan needs to immediately and drastically increase its use of renewable energy, from the perspectives of mitigating global warming, ensuring energy security (Japan's current energy self-sufficiency rate is only 4%), revitalizing regional economies, developing renewable energy-related technologies (a field that is accelerating worldwide), and strengthening Japan's competitiveness in energy-related fields.

The Great East Japan Earthquake of March 11 and the following accident at the Fukushima Daiichi nuclear power plant owned by Tokyo Electric Power Co. (TEPCO) have added further urgency to the need for increasing the use of renewable energy. Coincidentally, on the morning of March 11, a proposed law on renewable energy was approved by a Cabinet meeting. This law included provisions for a feed-in-tariff (FIT) scheme to promote renewable energy in the country; it was deliberated by the Upper House, adopted and came into effect on August 26, 2011.

Its official name is the Law on Special Measures Concerning Procurement of Renewable Energy Sourced Electricity by Electric Utilities. Under this law, electric utilities are obliged to purchase electricity generated from renewable energy sources at a certain price during a certain period of time prescribed by the national government. Electric utilities are, in turn, permitted to require each customer to pay a surcharge for electricity use according to the amount they use. The law also provides for the implementation of necessary measures to prevent regional imbalances in the amount of surcharges levied.

The FIT scheme is designed to oblige electric utilities over a fixed number of years to buy electricity generated from renewable energy sources at a certain price that is higher than production costs and calculated based on the cost of setting up the system. The aim is to promote renewable energy by reducing the risk involved in investing in and setting up renewable energy generation facilities. It is said that more than 50 countries around the world have adopted this kind of system. Germany, which introduced a FIT system on a full-scale basis in 1990 for the first time in the world, succeeded in dramatically expanding its photovoltaic (PV) power generation business and the share of renewable energy in its electricity demand.

In FIT schemes, the rate charged (tariff) for electricity generated at newly established power generation facilities is fixed during a certain period of time. However, facilities established sooner get a higher rate than those established later in the expectation that increasing the number of the facilities will lead to reductions in their cost. In this context, by regularly revising tariffs, electric utilities can reduce investors' risk as they recover their initial outlay, while the nation as a whole can reduce subsidies for these facilities over time. The surcharge is collected from consumers according to the amount of their electricity use, to provide the balance of subsidies paid out.

With a view to promoting renewable energy in Japan, electric utilities have voluntarily purchased electricity generated from renewable energy, while the national government has adopted the Renewable Portfolio Standard (RPS) Law, under which local governments have granted subsidies. Against this background, Japan once boasted the largest production of PV power in the world. However, subsidies for PV power generation were discontinued in 2005, and Japan's PV power production has been surpassed by Germany and other countries. One result was a shrinking domestic market for PV power generation.

Under Japan's RPS Law, which was introduced in 2003, electric utilities are obliged to use electricity generated from renewable energy and some other sources at a certain ratio in proportion to their annual sales of electricity. Electric utilities are required to achieve these numerical targets for renewable energy by: (1) generating electricity from renewable sources on their own, (2) purchasing electricity generated from new energy sources by others, or (3) purchasing a "New Energy Certificate" equivalent to the RPS required (RPS value) from an electronic account. However, this law did not lead to the widespread use of renewable energy, because numerical target were set too low, together with other factors.

Outline of the RPS System
http://www.rps.go.jp/RPS/new-contents/top/toplink-english.html

The Ministry of Economy, Trade and Industry (METI) revived subsidies for PV power generation in January 2009 and announced in February the introduction of a PV electricity buyback program that was applied to surplus electricity generated and could reduce the period of initial investment recovery to about 10 years. At first, this program was scheduled to begin in 2010, but it began ahead of schedule on November 1, 2009.

There are two parts to the electricity buyback program - a "total electricity purchasing" scheme and an "excess electricity purchasing" scheme. The total electricity purchasing scheme is designed to guarantee the purchase of all electricity generated from renewable energy sources while allowing the electricity sellers to cover their own consumption with grid-connected power. Meanwhile, the excess electricity purchasing scheme is intended to guarantee the purchase of excess power exceeding the consumption of sellers. The advantages of the total electricity purchasing scheme are said to be that it applies even to facilities that do not generate much excess electricity and citizen-funded power generation facilities, as well as to facilities owned by electric utilities. Meanwhile, the excess electricity purchasing scheme is thought to help promote energy conservation.

Japan adopted the excess electricity purchasing scheme at that time (in 2009). Initially, electric utilities were required to pay 48 yen (62 U.S.cents) per kilowatt-hour for surplus solar electricity over a 10-year period. The buyback price for new PV power facilities went down every year to the point where the current surplus price is 42 yen (54 U.S.cents) for a residential PV system and 40 yen (51 U.S.cents) for a non-residential PV system. These programs and subsidies did bear fruit, leading to increased production and introduction of PV panels again in Japan.

This scheme, however, applies solely to PV power generation and does not help promote other renewable energy sources. Thus, in order to achieve substantial advances in the introduction of renewable energy, as noted above, the national government enacted the Law on Special Measures Concerning Procurement of Renewable Energy Sourced Electricity by Electric Utilities, which introduces the FIT scheme.

This scheme will start on July 1, 2012 and the relevant sources of energy include PV, wind, hydro (small- and medium-scale hydropower systems generating electricity less than 30,000 kilowatts), geothermal and biomass for total electricity purchasing. The PV power systems dealt with under this law are ones scaled for factories and other facilities that generate 10 kilowatts or more of electricity, as opposed to smaller units for residences (which will be applied for excess electricity purchasing).

In the FIT scheme, the purchase price is the major key component. If the purchase price is too low, the scheme will not be appealing as an incentive to invest in renewable power systems, and will not lead to the wider use of renewable energy. On the other hand, if the purchase price is set too high, the share consumers will have to pay to help subsidize the scheme will be too costly. Therefore, it is critical to consider all players and how to determine the purchase price in order to strike a balance between popularization of renewable energy and consumers' share of the burden.

The initial bill proposed by the ruling Democratic Party of Japan (DPJ) set forth that the purchase price would be determined by an advisory council set up within METI, but this idea was criticized as lacking in transparency. In the end, it was decided that a third-party body established with the approval of the Diet, named the "Procurement Price Calculation Committee" (consisting of five members), will determine the price. Plans call for the committee to be launched under the Agency for Natural Resources and Energy, a department of METI, by the end of 2011.

The configuration and scale of power generation facilities will most likely be taken into consideration in determining the details of the purchase price. The government is now determining the amount of the surcharge to be added on to electricity supply rates in order to recover the subsidies for renewable electricity purchase. In its preliminary calculation, it plans to temporarily set this surcharge at 0.5 yen per kilowatt hour for fiscal year 2020. This means that an average household will pay 150 yen (about US$1.94) more per month for electricity in 2020.

The surcharge will be reduced by 80 percent or more for energy-intensive industries (industries with a ratio of electricity use to sales volume exceeding eight times the average ratio for the manufacturing industry), such as steel and chemical manufacturing. Also, businesses and households in the earthquake-affected areas will be exempted from the surcharge until March 2013. The government is said to be considering appropriating revenues from taxes on petroleum and coal, while promoting a power resources development tax; both would accrue to special energy accounts to make up for reduced and exempted surcharge revenue in order to relieve businesses in other industries and regular households from further burdens.

As for the period during which this electricity purchase scheme will apply, METI says it will be ten years for residential PV power systems, the same period as under the current system, and 15 to 20 years for other renewable power generation systems. The new law, however, stipulates that the FIT scheme will be reviewed at least every three years and that if any changes are made to the government's Basic Energy Plan, the scheme will be reviewed based upon the content of the revised plan.

There are some issues to consider in the law that introduces this FIT program. One is the provision that allows electric utilities to refuse to purchase electricity "if there is a likelihood that a hindrance to securing a smooth supply of electricity will occur." Measures should be included to ensure that the electric utilities do not take advantage of this provision as an excuse to refuse to support the expansion of renewable energy.

Furthermore, the power transmission network needs to be adequately upgraded and expanded because power generation plant sites (mainly in Hokkaido, the northernmost prefecture, the Tohoku region in northern Japan, and the Kyushu region in southern Japan) are located far away from power consuming areas (the greater Tokyo metropolitan area, Osaka, Nagoya, etc.). Currently in Japan, two different frequencies are used; 50 Hertz (Hz) in the east, around Tokyo, and 60 Hz in the west, around Osaka. The reason behind this situation dates back to the Meiji era in the late 19th century when power generators were first imported. At the time, 50 Hz power generators were imported from Germany to eastern Japan and 60 Hz power generators were imported from the United States to western Japan. Ever since then, these two different frequencies have been used, making it difficult to flexibly transfer electric power between the eastern and western areas. This situation is also said to be a factor blocking wider use of renewable energy in Japan.

Although the government has decided to introduce the FIT scheme, many electric utilities say that it will be difficult for them to make investment decisions until the purchase price is actually determined. Even so, the renewable energy market is gradually being invigorated by a series of announcements of installations of large-scale PV power plants by corporations such as Softbank Corp., Japanese major mobile phone service provider, NHK, Japan's public broadcasting corporation, Kokusai Kogyo Group, a company providing green energy services and Daiwa House Industry Co., a major company in the Japanese housing industry.

It has also been reported that Rakuten Inc., one of Japan's major Internet shopping site operators, is planning to make inroads into the residential PV power generation system market by providing loans and other financial services in addition to installation services. In addition, NTT DoCoMo, Inc., Japan's leading mobile carrier, is said to be considering developing a scheme to install solar panels and wind power generation systems on their base-station steel towers, which currently number about 90,000 nationwide, and to sell the excess electricity generated on these towers.

Residential solar panels are now sold at high-volume home-appliance retailers, rapidly boosting the number of households that are installing solar panels on their roof. Both the national and local governments have subsidy programs for PV power generation systems, but some local governments have already exhausted their funds for these programs because residents rapidly snapped up the subsidies. According to Yano Research Institute Ltd., a marketing research and consulting firm, Japan's domestic market for PV power generation systems is expected to grow to 1,725 billion yen (about US$ 22.4 billion) by fiscal 2020, a 263.2 percent increase over fiscal 2010.

Since the FIT scheme was introduced, more progress has been seen in the construction of wind power turbines and test demonstrations of offshore wind power generation systems. New plans to construct geothermal power plants have also begun rolling for the first time in several decades; although Japan has the world's third largest geothermal generation potential, its actual generation volume ranks eighth worldwide.

The decision to introduce a FIT scheme is a big step towards the wider use of renewable energy in Japan. The legal framework itself, however, is not enough. The purchase price and other conditions need to be determined to ensure and enhance its effectiveness. We, the citizens, have to carefully monitor how the scheme unfold and make proposals for improvement as needed.

See also: The Current Renewable Energy Situation in Japan
http://www.japanfs.org/en/pages/030010.html

Written by Junko Edahiro