Renewable energy auctions in Japan: Context, design and results

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. In addition, events at the nuclear power plant in Fukushima following the 2011 earthquake and tsunami marked an important turning point for Japan’s energy policy (Kucharski and Unesaki, 2017) and the diversification of the electricity mix. The first energy policy revision following these events, namely the 4th Strategic Energy
Plan (2014), aimed to minimise dependency on nuclear power and to accelerate the uptake of renewables. At the same time, Japan pledged to reduce total CO2 emissions by 26% between 2013 and 2030 (METI, 2018) 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 (IRENA, 2020b). 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 (METI, 2020b). 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 (METI, 2015). In addition, the renewable energy industry is a large employer and source of income for the country. In 2019, the Japanese solar industry alone employed around 240 000 people at various links of the value chain. Because solar PV capacity additions in 2019 were almost half the volume of the year before, this.

was a reduction of 10 000 jobs from 2018 (IRENA, 2020c). The deployment of other technologies such as biomass, wind and geothermal can also add economic value, create jobs, and reinforce the country’s position as a leader in technological
advancement and innovation export. Finally, renewables can help reduce the power
system’s costs by 2030. Indeed, falling costs and more mature technologies have already placed renewables as the lowest-cost source of power generation in many countries (IRENA, 2020d; IRENA, 2019a). While coal and combined cycle gas turbine (CCGT) are still cheaper generation sources than renewables in Japan, the levelized cost of electricity (LCOE) of solar PV decreased by 64% from 2011 to 2019, and could decrease another 62% by 2030 (IRENA, 2020d; IRENA, 2019a; IRENA Renewable Costs Database). Furthermore, policy makers aim to bring the generation cost of solar PV down from JPY 16.9/kWh (USD 153/MWh) 5 in 2018, to JPY 7/kWh (USD 64.1/MWh) 6 by 2025. This would imply a 59% reduction in cost (IRENA, 2019a; METI, 2019b). Electricity market structure and reforms Market liberalisation efforts have fostered a friendlier environment for renewables in Japan. These efforts began in 1995, with the liberalisation of power generation, allowing independent power producers (IPPs) to compete with the then
vertically integrated electric power companies (EPCos). Following reforms in 2000, 2005 and 2008 that fostered retail competition and thirdparty 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.

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 (REI, 2019). 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 (see Chapter 3
of IRENA, 2019c) 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.

The relatively high auction prices in Japan do not necessarily tarnish an auction’s success, as much depends on the relative competitiveness of the options available. In fact, renewables are not the only expensive power generation sources in Japan; the country has also some of the world’s costliest coal-fired and CCGT generation (IEA
and NEA, 2015). That said, a combination of factors drives prices in any country’s renewable energy auctions.

Resource availability
Japan is not blessed with abundant solar resources, as in arid and semi-arid regions (the Middle East, North Africa, and North America). The country’s average annual global horizontal irradiation ranges between 990 kWh/m2 and 1 660 kWh/m2. The highest levels (greater than 1 400 kWh/m2) fall on just 33% of the country’s total land area, which is mostly located in eastern and southern regions (Figure 11). The average
specific PV power output over these areas is 1 372 kWh/kilowatt peak (kWp) per annum
(p.a.), which is comparable to the average of 1 376 kWh/kWp p.a in northern Bangladesh or 1 365 kWh/kWp p.a. in south-western Cameroon (World Bank, 2019a). Yet, the development of solar PV projects in these locations, specifically Hokkaido in the Northeast and Kyushu in the South, presents great challenges, as they are far from load centres and have limited grid capacity.

Credibility of the off-taker

The creditworthiness of Japanese public utilities improved between 2012 and 2018,
when the World Bank’s Regulatory Indicators for Sustainable Energy (RISE) gave the country the highest indicator score. This improvement occurred just in time for the utilities to be able to shoulder the additional responsibilities allocated to them through the revision of the FiT act in 2016.Consequently, Japan’s counterparty risk assessment ranks among the best in the world (World Bank, 2019b) and is therefore not considered a constraint.

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