Japan’s total geothermal energy reserves are reportedly the third largest in the world, having the potential to generate over 20 GW of electricity. Japanese companies also control more than half the global market for geothermal turbines and are strongly recognized as leading brands in their field.
Despite this latent potential, Japan has up until now remarkably only received approximately 0.3% (537 MW) of its domestic energy per year from these reserves.
This is expected to change with the advent of recent legislative reform favoring the geothermal energy industry. Global interest is now starting to heat up and significant investment and expansion into Japan is anticipated to follow.
Renewable Energy Law
Feed-in tariffs take effect
The Law on Special Measures Concerning the Providers of Renewable Energy (the Renewable Energy Law) came into force on 1 July 2012, introducing a feed-in tariff mechanism for renewable energy similar to those used in Europe.
The Renewable Energy Law requires utilities to purchase, at fixed prices, energy generated from renewable resources (such as geothermal energy) regardless of the project size. Extra costs resulting from the system will be borne by energy consumers through a surcharge to energy prices.
At what price levels and for how long?
The Ministry of Economy, Trade and Industry (METI) has appointed a committee for determining the price and procurement periods, among other things, which on 27 April 2012 tentatively approved the following feed-in tariffs for geothermal energy. The METI, through its Agency for Natural Resources and Energy, released a draft ordinance adopting these proposals on 16 May 2012.
Click here to view table.
These prices are considered by many as above-market and are certainly attractive as guaranteed revenue for those wishing to participate in the industry moving forward.
The applicable price and procurement period will be determined, on an individual basis, by reference to the date on which the relevant parties enter into a power purchase agreement. Such agreements may be entered into before the start of the construction of facilities giving all participants certainty over the intermediate life of any project before significant investment is committed.
Under the Renewable Energy Law, as a general rule, the new (lower) prices for each subsequent fiscal year, which reflect a decrease in costs, will be determined by 1 April each year. While these prices and their applicable periods are not expected to change significantly for geothermal energy from year to year, there still lies within the system a first-mover price advantage.
Government eases project restrictions on national parks
One of the reasons Japan has been unable to fully utilize its geothermal energy reserves stems from the fact that approximately 80% of those reserves are situated below national parks and other protected areas where development has been heavily restricted.
This is set to change as a recent decision by the Environment Ministry, as part of its overall reform package aimed at promoting the use of renewable energy, eases the standards for building geothermal power stations. This development is encouraging for the industry and will bring significant opportunities in the future.
In particular, the Ministry, through the issuance of its new guidance notice, will permit businesses to dig diagonally into geothermal reserves located below national and quasi-national parks from outside certain restricted "core" areas. It will also permit vertical digging in some less restricted areas provided that all parties concerned reach a consensus in advance and that technology that minimizes the impact such drilling will have on the environment is employed.
Refined Hot Spring Law sets new guidelines for project approval
One other significant reason for the lack of utilization to date has been the difficult and somewhat ambiguous approval process under the Hot Spring Law, which is heavily influenced by Japan’s numerous hot spring owners concerned with the effect geothermal development will have on their businesses.
Recently, however, the Environment Ministry has sought to distill this ambiguity by setting clear and detailed guidelines in relation to the approval process. These guidelines bring much needed certainty and comfort to those looking to invest in geothermal energy in Japan.
The above changes to Japan’s legislative framework surrounding its geothermal energy market bring with them a myriad of timely opportunities for a variety of investors, both domestic and international.
The introduction of fixed prices above-market over lengthy procurement periods will bring certainty to those looking for guaranteed revenue streams.
The recent efforts to remove some of the heavy restrictions surrounding national parks and the introduction of clear guidelines for approval under the Hot Spring Law also add significant weight to Japan’s goal of increasing its reliance on renewable energy.