6/30/2013

Japan's Feed-in Tariff Program: First Year's Impact 1/2

Japan introduced a feed-in tariff (FIT) program for renewable energy in July 2012. The program is aimed at stimulating renewable energy development through government-backed long-term contracts with a predetermined purchase price (tariff). If successful, it should enable Japan to reduce the reliance on nuclear energy and greenhouse gas emissions at the same time, which are two major goals of the national energy policy today.

Official Mascots for Japan's FIT Program
(Source: Agency for Natural Resources and Energy) 

Scheme

The tariff rates (fixed purchase price) were determined by an independent expert panel, which  reviews them every year and if necessary revises them. Based on the technology type and facility scale, the tariff rates are varied to expedite the investment on all kinds of renewable energy. The figure below shows the rates and contract duration for FY 2012 and FY 2013 (Japan's fiscal year begins in April).
 
(Source: Agency for Natural Resources and Energy)

Due to the urgent needs for new power plants amid a moratorium on the restart of nuclear power plants, the expert panel gave very favorable rates to various renewable energy sources for FY 2012. The rates were however lowered for FY 2013 as many critics argued the 2012 rates would result in the extraordinary return on investment when the investors are protected from financial risks through guaranteed long-term contracts.

Impact

Japan's Agency for Natural Resources and Energy publishes the monthly statistics on renewable energy development, and the figure below summarizes the cumulative renewable energy development, including authorized projects under construction, as of Feb 2013. The below statistics shows that the introduction of the FIT program triggered an explosive growth of utility-scale solar (PV), when other energy sources are yet to gain traction.

(Source: Agency for Natural Resources and Energy)

The likely factors of the concentrated investment on utility-scale solar are (1) favorable purchase price, (2) environmental assessment waiver, and (3) siting advantage. The tariff rate was determined based on a national study over the life cycle costs of electricity generation in 2011, but the costs of solar panel has dropped sharply since then, which enabled the investors to exploit the price differentials between the actual costs and the tariff rate. The second factor also favors utility-scale solar, as the lengthy environmental assessment process, which normally takes at least three years, is not required for PV projects if the project area is 50 ha or less and does not cause adverse impact on land use. Utility-scale solar also has siting advantage as it can also be build anywhere, while most wind, geothermal, and biomass power plants usually have to be situated in remote areas with little transmission infrastructure to major energy consumption centers. These factors gave utility-scale solar competitive advantage over other renewable energy, causing the overconcentration of investment on a single energy source, at least for now.

The next blog will discuss the impact on national and regional fuel mix for electricity generation and future of the FIT program.

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