Japan is a country which relies mainly on fossil fuels to meet its energy needs. However, the events at the nuclear power plant in Fukushima following the 2011 earthquake and tsunami have shifted energy policies towards greater renewables adoption. While a FiT scheme was launched earlier, this gave way to auctions in 2017, which have since been the key policy instrument driving Japan’s transition to renewables. A recent report by the International Renewable Energy Agency (IRENA) titled “Renewable energy auctions in Japan: Context, design and results” outlines the status of renewable energy deployment in Japan, the current regulatory framework for renewables uptake and the country’s experience with renewable energy auctions. Following are selected extracts from the report.
Japan’s energy and electricity sectors
Japan is the fifth largest energy supplier and consumer in the world. To meet its energy demand, Japan relies mainly on fossil fuels, which provided more than 95% of the total primary energy supply in 2018. With almost negligible domestic production of fossil fuels, Japan depended on imports for 99.7% of its oil, 99.3% of its coal and 97.5% of its natural gas needs in 2018. Historically, nuclear energy generated up to one-third of Japan’s power. Following the 2011 Great East Japan Earthquake, however, and the consequent accident at the Fukushima Daiichi nuclear power plant, all nuclear power plants were shut down and only a small number have re-opened since.
Even though most of that nuclear capacity has been replaced by fossil fuels, since 2011, renewables have assumed a growing role in electricity generation. The share of renewables in the generation mix increased from around 10% in 2010 to 16% in 2018. Nevertheless, this share was still much lower than the global average of 25% in 2018.
The deployment of renewable energy in Japan has been driven by plans to diversify the electricity mix, achieve environmental and socio-economic goals, and increase energy security. At the same time, Japan pledged to reduce total CO2 emissions by 26% between 2013 and 2030 as part of its commitments to the Paris Agreement. This placed environmental concerns at the heart of the country’s renewable energy plans.
Japan is currently on track to reach this emissions goal: emissions from the power sector in 2019 were 3% lower than they were in 2010. But the power sector still accounts for about 40% of total emissions, with these peaking in 2013, as fossil fuels replaced nuclear power. Renewable energy, along with energy efficiency, are thus now the main pillars of Japan’s efforts to reduce emissions.
Moreover, a heavy reliance on fossil fuels, which are almost fully imported, has also meant a low level of energy self-sufficiency in the country. This level fell, in fact, from 20% in 2010 to just 9.6% in 2017 because of the nuclear phase out. Renewables currently account for 70% of Japan’s domestic production of energy, with an increase in renewable energy supply therefore able to help the country reach its energy self-sufficiency target. This goal is 24.3% by 2030.
Renewable energy policy and regulatory frameworks in the electricity sector
National plans and targets for renewables: The 5th Strategic Energy Plan of 2018 set energy policy objectives of ensuring, first and foremost, stable supply (energy security), while achieving low costs by enhancing efficiency (economic efficiency), but also safeness (safety). At the same time, the plan calls for maximum efforts to pursue environment suitability (environment). In keeping with this, renewables are set to play a more important role in achieving these priorities. The renewable energy targets, however, have not been updated.
Electricity market structure and reforms: Following reforms in 2000, 2005 and 2008 that fostered retail competition and third- party access rules, the Act for Partial Revision of the Electricity Business Act was passed in 2013 with three objectives: 1) to secure a stable electricity supply; 2) to reduce electricity rates; and 3) to expand choices for consumers and business opportunities.
Renewable portfolio standard from 2003 to 2012: The first measure Japan used to promote renewables was a renewable portfolio standard (RPS). Introduced in 2003, this mandated generation targets for renewables (excluding large hydro). It has been difficult to assess the effectiveness of the RPS, however, as it allocated high risks to developers (Ito, 2015).
Administratively set tariff from 2009 to 2021: In 2009, the first FiT was introduced to remunerate excess solar production fed into the grid. That programme was expanded in 2012 (the “FiT Act”) to cover all solar generation – not only the excess – as well as hydro projects below 30 MW. in size, wind, geothermal, biomass and any other sources recognised as renewable by the Japanese cabinet. The FiT Act replaced the RPS.
The expanded FIT scheme of 2012 had been the main policy instrument promoting renewables in Japan. It resulted an annual renewable capacity growth rate of 22% by 2017 since it was introduced, compared to 5% under the RPS and 9% under the first FIT scheme. Between 2010 and 2019, the renewable capacity (excluding large hydro) expanded 2.7-fold and the renewables share in the power mix (excluding large hydro) increased from 2.5% in 2010 to 9.1% in 2018. Strong growth of solar PV generation, which surged from 0.3% to 6% in the generation mix, led this increase. In fact, solar projects have accounted for around 90% of the added capacity since 2012, placing Japan as the second country in the world by solar capacity and the third in solar generation, followed by bioenergy.
With the certified volumes of both solar PV and bioenergy technologies increasing significantly – and despite the tariff decline for solar PV -, planners realised that the annual purchase cost of the FiT scheme would reach JPY 3.6 trillion 11 (USD 33 billion) by 2019, which would almost have reached the targeted yearly cost of JPY 3.7 trillion to JPY 4 trillion for the year 2030.
Hence, even though significant amounts of renewable capacity have been added, this has been achieved at a relatively high cost. Indeed, one of the main challenges of a FiT scheme is to set an adequate tariff level in a rapidly changing environment. Furthermore, between a quarter and more than a half of the projects that were approved during 2012 (23%), 2013 (49%) and 2014 (59%), had not been implemented by the end of 2018. Among the main causes for delayed FiT project implementation were a missing mandatory time frame and grid connection difficulties. As a result, the government announced a legislative change for projects that had not come online by a deadline. This reduced FiT support to JPY 21/ kWh or less, instead of initial price.
Moreover, the FiT scheme in general offers fixed prices to generators with no price signals, giving them little incentives to produce electricity when most needed. Although for solar PV, the bulk of generation coincides with periods of peak demand, especially in summer, more provisions can be considered for increased renewable energy deployment. A system in which renewables’ generators could help manage supply-demand balances was thus considered necessary.
Consequently, policymakers in Japan explored alternatives to deploy renewables more competitively, in a timely manner and addressing system’s needs. They chose to adopt auctions, which can be designed in a way that eases the integration of renewable energy and ensures timely project completion. In 2020, a feed-in-premium (FiP) scheme was announced. It will be introduced in 2022, in addition to FiT scheme.
Renewable energy auction results
Auctions have the potential to support Japan’s objectives given their following strengths:
• Through a power purchase agreement (PPA), auctions can provide stable revenues for developers and thus certainty regarding price – as a FIT does – while also committing quantities to help policy makers achieve renewable targets, which is comparable to an RPS.
• Their ability to discover real prices, if designed to achieve that objective, can help deploy renewables in a cost-effective fashion.
• Auctions are flexible in design and can help achieve broader policy objectives. Indeed, renewable energy auctions are increasingly being used around the world to achieve objectives beyond price, including timely project completion, the integration of variable renewable energy, and supporting a just and inclusive energy transition.
In 2016, the FiT Act was revised to enhance competition in the market and reduce prices, with Japan’s first renewable energy auctions then announced. As of October 2020, Japan had conducted five solar PV auctions and two biomass auctions. Moreover, it had plans to conduct an offshore wind auction.
The first five rounds attracted a large number of participants, with 29, 19, 38, 146 and 110 bids registered, respectively, and the majority of those bids were qualified. In fact, in the second, third and fourth rounds, the capacities of the qualified bids exceeded the volumes auctioned (corresponding to 15, 32 and 107 bids, respectively). Even in the first auction, qualified bids (23) corresponded to almost 80% of auctioned volume. However, only 9, 9, 16, 71 and 72 bids were placed after qualifying. As a result, the first, second, fourth and fifth rounds were undersubscribed, with participating capacity below auctioned capacity.
Although the auctions succeeded at attracting bidders initially, design elements —including strict qualification requirements, selection criteria, and compliance rules – may have deterred participants further along in the process. This was likely coupled with difficulties in securing land and grid access.
The first auction awarded 141 MW at an average awarded price of JPY 19.64/kWh (USD 174.1/ MWh). The second auction, held in September 2018, awarded no capacity, as the bids were above the ceiling price. The third auction, held in December 2018, awarded 197 MW at JPY 15.17/kWh (USD 135/MWh), while the fourth, in September 2019, awarded 196 MW at JPY 12.98/kWh (USD 123/MWh). Finally, the fifth auction, held in January 2020, awarded 39.8 MW at JPY 12.57/kWh (USD 115/MWh).
Interestingly, while prices continued falling in the fourth and fifth rounds, at the same time, there was an increased participation by small and new players. Indeed, many winners were not established market players, suggesting that experience is not a determining factor in winning an auction in Japan.
The lowest bids – as low as JPY 10.5/kWh (USD 99/MWh) – were all for projects below 2 MW, implying that economies of scale do not seem to play a major role in the Japanese context. This is mainly due to the difficulty of securing land and obtaining grid-connection permits – factors which mostly impact large-scale projects. In fact, large solar PV projects (above 40 MW) will be subject to stricter environmental assessment rules.
In the fifth round, all the awarded projects ranged between 792 kW and 2 MW. This may have contributed to a significant drop in capacity allocation, however, with a total of less than 40 MW awarded out of the 416 MW auctioned. Initially, 450 MW had been planned, with some of the capacity not awarded in the fourth round being rolled over. Importantly, the prevalence and competitiveness of plants below 2 MW is related to the requirement of appointing a dedicated chief electrical engineer above that project size, which raises costs significantly. All in all, despite a price decrease by one-third from the first to the fifth auction, the average winning bids were still high compared to other countries with similar context.
Renewable energy has yet to make a significant dent in Japan’s energy and power mixes. This is despite the fact that in its early years, Japan’s FiT scheme fuelled rapid renewable energy deployment. But this deployment soon became fiscally unsustainable. Japan used two-thirds of its intended budget for renewable deployment to get only one-third of the way towards its renewable targets.
In this context, auctions were chosen as the next policy instrument to support Japan’s energy transition in a cost-effective fashion. Accordingly, Japan’s renewable energy auctions are price- centred and prioritise simple design elements over complex ones. Indeed, of the major utility-scale solar PV markets in the world, costs in Japan are among the highest. Consequently, the auction price outcomes are also still relatively high when compared to international benchmarks, even after considering resource quality differences. That said, a closer look shows that the auction prices are in fact close to the country’s solar PV costs, underscoring the auction’s attributes to discover competitive prices in a determined context.
Auctions still have challenges, however. In particular, undersubscription has been a persistent issue. First, a FiP scheme will be introduced in 2022 in addition to an existing FiT scheme, which may discourage the participation in auctions. Second, strict completion bond confiscation rules, paired with land availability and grid access constraints, were identified early on as factors hurting developers’ interest in entering auctions, or submitting bids once qualified. Even though these confiscation rules have since been relaxed, undersubscription has persisted, suggesting that grid connection and land availability constraints remain core developer concerns.
To that end, auction design elements that go beyond price minimisation can be contemplated. While auctions that pursue complementary development goals may not reduce electricity prices in the short-term, the long-term benefits may outweigh the costs. These benefits include ensuring timely project completion (an issue observed in the FiT scheme), supporting a just and fair energy transition, or a smoother integration of renewables into the grid. The introduction of zone, site, or even project-specific auctions, for instance, can help overcome the grid and land barriers in Japan. In fact, this type of auction is planned for the first offshore wind round, where transmission needs can be addressed in advance and the risk of land access and grid connection can be carried by the auctioneer, instead of the developer.
IRENA’s report can be accessed here