This updates our September 13, 2011 Client Alert entitled “Outline of Japan’s Feed-In Tariff Law for Renewable Electric Energy,” which summarized “The Act on Special Measures Concerning the Procurement of Renewable Electric Energy by Operators of Electric Utilities” (the “Act”). The Act and the related regulations (the “Implementing Regulations”) went into effect on July 1, 2012.

This Client Alert summarizes key features of the Act and the Implementing Regulations as modified for fiscal year

2013, organized into the following sections:

  1. FY2013 Rate Changes
  2. Facility Approval
  3. Power Purchase Agreements
  4. Interconnection
  5. Model PPAs

 

  1. FY2013 RATE CHANGES

The Act requires the Ministry of Economy, Trade and Industry (“METI”) to publish, prior to the beginning of each fiscal year (i.e., April 1), the fixed price (in yen per kilowatt hour) to be paid by Japanese electric utility operators under power purchase agreements (“PPA”) for electricity generated using renewable energy sources covered by the Act (solar, wind, hydroelectric, geothermal and biomass, “Renewable Electricity”) as well as the required duration of such agreements. On March 29, 2013, METI published purchase prices and purchase terms for the 2013 fiscal year in METI Notice No. 79 (the “FY2013 Notice”). In the FY2013 Notice, the fixed purchase price for electricity generated by solar power is approximately 10% less than it was in the previous fiscal year.1 Prices for all other categories of Renewable Electricity remain unchanged from the previous year. The established duration of PPAs for each category of Renewable Electricity also remains unchanged from the previous year. See Tables 1 and 2 below for a summary of the purchase prices and purchase terms published in the FY2013 Notice.

Click here to view tables.

  1. FACILITY APPROVAL

The Act requires electric utility operators in Japan to enter into PPAs with a Renewable Energy supplier that has obtained approval from METI for its generation facility (a “Qualified Supplier”). Each applicant seeking facility approval must submit to METI 2 the prescribed application form along with the required attachments (including wiring diagrams and structural drawings)3 to demonstrate to METI that it satisfies, among others, the basic criteria4 set out below.

  • Maintenance System. The applicant must demonstrate (by attaching documents that describe its proposed maintenance plan) that it will have a maintenance and inspection system for the facility based in Japan throughout the entire purchase term. Such system must demonstrate that the applicant (or its designated maintenance services provider) will be prepared to commence necessary repairs within three months after a problem occurs. 
  • Facility Specifications. The applicant must provide facility design specifications along with descriptions (including manufacturer information and product codes) of key products (e.g., solar panels, etc.) used in the facility and specify the location of the facility. 
  • Metering System. The applicant must demonstrate that the generation facility will have systems in place to accurately measure the amount of Renewable Electricity supplied.

Facilities with an output capacity of 500kW or more also require submission of the following as evidence of the right to use the facility site (the “Site”):

  • if the applicant owns the Site, a copy of the real property registry showing that the applicant is the registered owner;5 
  • if the applicant is leasing the Site, a copy of an executed lease agreement for the Site; or 
  • if the applicant does not yet own or lease the Site at the time of its application, a prescribed form to which the current owner of the Site affixes its name and seal.6

Under the Implementing Regulations, once its facility has been approved, a Qualified Supplier is required to submit to METI (i) on a one-time basis shortly after its facility begins commercial operations, a breakdown of actual costs incurred in the installation of its facility (including the design costs, facility purchase cost, construction costs and connection costs) and (ii) on an ongoing basis, a breakdown of the annual costs required to operate and maintain such facility (including labor costs, repair costs and land lease costs, as applicable).7

  1. POWER PURCHASE AGREEMENTS

The Electric Utility Operator’s Obligation to Enter into a PPA

Under the Act, Japanese electric utility operators are required to enter into PPAs with Qualified Suppliers unless an exception under the Implementing Regulations applies. The Implementing Regulations provide two major categories of exceptions to the general requirement above. Electric utility operators are not required to enter into a PPA with a Qualified Supplier if:

  1. the PPA (i) contains material misrepresentations (e.g., with respect to the capacity of the electricity generation facility) or includes any provision that contravenes existing law or (ii) requires the electric utility operator to pay damages for reasons not attributable to the electric utility operator or in an amount in excess of the actual damages resulting from a breach of contract by the electric utility operator; or
  2. the Qualified Supplier does not agree to include certain provisions in a PPA (the “PPA Mandatory Provisions”).

The PPA Mandatory Provisions include the following:

  • Japanese Law, Language and Jurisdiction – a provision in which the parties agree (i) to submit to the exclusive jurisdiction of Japanese courts for all matters arising in connection with the PPA, (ii) that the PPA will be governed by Japan law and (iii) that at least one version the PPA will be written in Japanese (and, if the PPA is also written in another language, that the Japanese version will prevail); 
  • Anti-social Forces – a representation by the Qualified Supplier that it is not itself an anti-social force or affiliated with any anti-social force; 
  • Wheeling Charges – if the PPA contemplates that a Qualified Supplier will interconnect with an electric utility operator that is different from the purchasing electric utility operator, a provision in which the Qualified Supplier agrees to pay the additional costs required to be paid by the purchasing electric utility operator to receive electricity via the interconnecting electric utility operator (provided that the purchasing electric utility operator has provided documentation to the Qualified Supplier specifying such additional costs and the basis of such costs); 
  • Allocation – if the Qualified Supplier intends to supply Renewable Electricity to multiple electric utility operators, a provision in which the Qualified Supplier agrees to determine in advance the amounts of Renewable Electricity per day to be supplied to each electric utility operator and not change such allocated amounts after the designated time on the day prior to the day the Renewable Electricity is supplied to the electric utility operators; 
  • Metering – a provision allowing the electric utility operator to (i) verify the measurement for the purchased Renewable Electricity monthly on a date designated by the electric utility operator and (ii) notify the Qualified Supplier thereof in a manner designated by the electric utility operator; 
  • Inspection – a provision allowing the electric utility operator’s staff to enter the premises where the Qualified Supplier’s approved facilities and substations and switching stations controlled by the Qualified Supplier are located, as needed to verify the measurements of electricity supplied by the Qualified Supplier or to repair or replace metering equipment; and 
  • Monthly Payment – a provision requiring monthly payments for the purchased Renewable Electricity to be made by the electric utility operators (i) in the month immediately following the month in which the amount of Renewable Energy purchased is verified (on a date designated by the electric utility operator) and (ii) by transfer to a deposit account designated by the Qualified Supplier.

PPA Pricing and Purchase Term

The Implementing Regulations provide that the purchase price and purchase term under each PPA is to be the purchase price and purchase term published by METI that is in effect as of the date that both of the following conditions have been met: (i) the electric utility operator has received a copy of a prospective electricity supplier’s interconnection application (see Section 4 below) and (ii) METI has approved such prospective electricity supplier’s generation facility. Note that the purchase term actually commences on the date electricity is first supplied by a Qualified Supplier to an electric utility operator under a PPA. The Act does not allow METI to change the established purchase price and purchase term after a PPA is executed, except if there are significant changes in the economy that are impacting (or threaten to impact) the electricity market (e.g., sudden inflation or deflation). While the Act does not provide further details as to what specific economic conditions would trigger METI action in this regard, METI has indicated on several occasions that it does not intend to exercise its right to change the established purchase price and purchase term of an executed PPA in the foreseeable future. For example, in a hearing before the House of Representatives’ Committee on Economy, Trade and Industry on July 27, 2011, the Minister of Economy, Trade and Industry recognized that unpredictable pricing changes by METI in this regard would make it difficult for renewable energy projects to develop reliable business plans.

  1. INTERCONNECTION

The Electric Utility Operator’s Obligation to Interconnect

Under the Act, electric utility operators are required to interconnect their electricity transmission and other electricity facilities with the electricity generation facilities of a Qualified Supplier, unless (i) doing so may interfere with the electric utility’s access to a stable supply of electricity or (ii) an exception under the Implementing Regulations (described further below) applies. Note that although the obligation to interconnect and the obligation to execute a PPA are conceptually separate obligations, the Act does not require the parties to enter into an interconnection agreement separately from a PPA. Thus, provisions concerning the interconnection could be included in the PPA if the interconnecting electric utility operator is the same as the purchasing electric utility operator (METI’s model PPA uses this approach—see Section 5 below).

Exceptions to the Electric Utility Operator’s Obligation to Interconnect

Under the Implementing Regulations, there are four general exceptions to the interconnection requirement above. An electric utility operator is not required to interconnect their electricity transmission and other electricity facilities with the electricity generation facilities of a Qualified Supplier if any of the following apply:

  1. The Qualified Supplier does not agree to pay the following:
  • costs incurred to install or replace electricity transmission/distribution lines; 
  • costs incurred to install, modify or replace equipment needed to adjust voltage for interconnection between an approved electricity generation facility and a substation of the electric utility operator; 
  • costs incurred to install or replace equipment needed to measure the amount of Renewable Electricity sold to the electric utility operator; and 
  • costs incurred to install, change or replace equipment to monitor, protect or control an approved electricity generation facility and equipment necessary to communicate between the Qualified Supplier and the electric utility operator.8
  1. The Qualified Supplier does not provide information that is critical for the interconnection, including the location and output capacity of the approved generation facility.
  2. The Qualified Supplier’s transmission is likely to exceed the capacity of the proposed interconnection point or the capacity of an electric utility operator.9 
  3. The interconnection agreement (i) contains material misrepresentations (e.g., with respect to the capacity of the electricity generation facility) or includes any provision that contravenes existing law or (ii) requires the electric utility operator to pay damages for reasons not attributable to it or in an amount in excess of the actual damages resulting from a breach of contract by the electric utility operator. 
  4. The Qualified Supplier does not agree to include the following in the interconnection agreement:
  • Curtailment – a provision giving the electric utility operator the right to curtail deliveries of electricity by the Qualified Supplier under certain circumstances without compensating the Qualified Supplier for any damages in connection with such curtailment (see additional information regarding curtailment below); 
  • Safety – a provision allowing the electric utility operator’s staff to enter the premises where the Qualified Supplier’s approved facilities and the substations and switching stations controlled by the Qualified Supplier are located, as needed for safety purposes; 
  • Japanese Law, Language and Jurisdiction – a provision in which the parties (i) agree to submit to the exclusive jurisdiction of Japanese courts for all matters arising in connection with the Interconnection Agreement, (ii) that the Interconnection Agreement will be governed by Japan law and (iii) that at least one version the Interconnection Agreement will be written in Japanese (and, if the Interconnection Agreement is also written in another language, that the Japanese version will prevail); and
  • Anti-social Forces – a representation by the Qualified Supplier that it is not itself an anti-social force or affiliated with any anti-social force.

Curtailment

An electric utility operator can refuse to enter into an interconnection agreement that does not give the electric utility operator the right to curtail deliveries of electricity by a Qualified Supplier under certain circumstances. While the terms of curtailment will ultimately be the result of negotiations between the Qualified Supplier and the electric utility operator, the electric utility operator can refuse to enter into an interconnection agreement if the Qualified Supplier does not agree to include in such agreement the right of the electric utility operator to curtail deliveries of electricity by the Qualified Supplier without compensation in at least the following cases:

  1. Reasonable basis. In the case of solar and wind facilities with a generating capacity of 500kW or more, the electric utility operator can curtail Qualified Supplier deliveries of electricity with as little as one day’s prior notice for up to 30 days in the aggregate per year10 without compensating the Qualified Supplier for any damages in connection with such curtailment, subject to the following:
  • the electric utility operator must first (i) decrease the output of any other electricity generation facilities it owns (excluding solar, wind, nuclear, hydroelectric (other than pumped storage type facilities) and geothermal facilities) and (ii) attempt to sell projected excess electricity (e.g., via a wholesale exchange); and 
  • the electric utility operator must provide, promptly after delivering notice of the curtailment to the Qualified Supplier, a reasonable explanation for the curtailment together with evidence that the electric utility operator took reasonable steps (including those described in the first bullet point above) to avoid the curtailment.11
  1. Malfunctions, emergencies, maintenance and interconnections. In the case of all categories and capacities of facilities, the electric utility operator can curtail Qualified Supplier deliveries of electricity without compensating the Qualified Supplier for any damages in connection with such curtailment if:
  • the electric utility operator’s facilities have stopped operating as the result of a malfunction (or the activation of a safety device installed to prevent a malfunction) of the facilities caused (or triggered) by a natural disaster (to the extent this event is not attributable to the electric utility operator); 
  • required to respond to an accident resulting from a person or an object coming into contact with the electric utility operator’s facilities or to protect human life or prevent human injury (to the extent this event is not attributable to the electric utility operator); 
  • the electric utility operator partially or fully suspends supply of electricity to its facilities to inspect or repair to the facilities; and/or 
  • the electric utility operator partially or fully suspends supply of electricity to its facilities to enable a party other than such Qualified Supplier to interconnect to such facilities.
  1. Special circumstances. In the case of all categories and capacities of facilities, the electric utility operator can curtail Qualified Supplier deliveries without compensating the Qualified Supplier for any damages in connection with such curtailment in the event “special circumstances” occur that were not anticipated by either party and it is clear that such special circumstances are not attributable to the electric utility operator. The Implementing Regulations are ambiguous as to the meaning of this provision and under what circumstances it would apply, so the parties may want to clarify this in the interconnection agreement to avoid a future dispute regarding the interpretation of this provision.

The Implementing Regulations do not establish limits on the length of the period of curtailment for any of the events described in paragraphs (b) and (c) above. Therefore, the electric utility operator and the Qualified Supplier will need to negotiate how such risks will be allocated and what, if any, limitations will apply to the above cases (provided that such limitations do not result in the electric utility operator’s rights being less than those described in paragraphs (a) through (c) above). In addition, the electric utility operator and the Qualified Supplier may also agree to compensable curtailment (the cases described in paragraphs (a) through (c) are limited to non-compensable curtailment events).

  1. MODEL PPAs

Qualified Suppliers have several options when it comes to the form they use for the PPA for a Renewable Energy project in Japan under the Implementing Regulations.

Utility Model PPAs

Each electric utility operator released its own model PPA on July 1, 2012 (each, a “Utility Model PPA”) and official commentary to the same in late 2012 (see the attached Appendix for a list of links to each of the Utility Model PPAs and the official commentaries thereto). Some of the provisions of Utility Model PPA do not follow the Implementing Regulations. For example, each Utility Model PPA includes a provision that entitles the electric utility operator that is party to the agreement to unilaterally change the purchase price at any time after the PPA is executed. Interestingly, it appears that the utilities recognized the incompatibility of such a provision with the Implementing Regulations and included in their later published comments a general statement to the effect that the electric utility operator would only change the purchase price in accordance with the Implementing Regulations. Notwithstanding the foregoing, each Qualified Supplier will want to ensure that execution version of the PPA excludes such right in order to avoid the risk that would be associated with allowing the electric utility operator to change prices at will. A fixed price PPA is in line with the Implementing Regulations and should be supported by METI as an agreement that an electric utility operator is required to enter into (assuming all other requirements are met).

The METI Model PPA

On September 26, 2012, METI published its own version of a model PPA (the “METI Model PPA”). The METI Model PPA combines the provisions concerning the interconnection and METI’s official commentary.12 The METI Model PPA is designed for a Qualified Supplier that plans to (i) enter into both a power purchase agreement and an interconnection agreement with a single electric utility operator, (ii) supply electricity from a solar energy facility or a wind energy facility with a capacity of 500kW or more, (iii) enter into a PPA based on the METI Model PPA prior to commencement of construction of Renewal Energy facility and (iv) finance its Renewable Energy project. According to a METI press release, the METI Model PPA (i) complies with the Implementing Regulations and (ii) takes into account practical requirements from financial institutions and the Qualified Supplier who needs to raise fund from financial institutions.13 With respect to (ii) above, the METI Model PPA includes, for example, a provision regarding consent to collateral assignment.

Other Alternatives

Although each electric utility operator has drafted their own model PPA, a prospective supplier is not required to use the electric utility operator’s form. METI noted in an official FAQ that a prospective supplier applying for approval under the Implementing Regulations may elect to use the METI Model PPA by deleting the provision in the application that states that the supplier has consented to the provisions of the electric utility operator’s PPA.14 Alternatively, a prospective supplier can use its own PPA form and METI has confirmed in response to public comments that an electric utility operator cannot refuse to enter into a PPA based on the METI Model PPA or a supplier-prepared PPA that is in accordance with the Implementing Regulations.15 Moreover, METI has stated that it may intervene in the event an electric utility operator refuses to accept any proposed form other than its own (assuming the proposed form complies with the Implementing Regulations).16

Notwithstanding METI’s commitment to give Qualified Suppliers flexibility in the form they choose, there is no specific guidance on how differences between a Utility Model PPA and a PPA based on the METI Model PPA or a Qualified Supplier’s original PPA are to be reconciled or how gaps between the basic requirements of the Implementing Regulations and the terms required for a robust commercial contract are to be filled. As a practical matter, it seems that the electric utility operator and the Qualified Supplier will need to negotiate these points and that the resulting PPA will ultimately be a blend of electric utility operator and Qualified Supplier requirements layered on top of the basic requirements of the Implementing Regulations.  

Click here to view Appendix.