Renewable and Clean Energy
Japanese Solar Projects – Cancellation of first round 42 yen project approvals
Since Japan’s Feed-in Tariff ("FIT") program for renewable energy commenced operations in 2012 a major unanswered question has been whether approval holders face a time limit to develop approved projects.
This question has now been largely answered with the Japanese Ministry of Economy, Trade and Industry (“METI”), announcing on 14 February 2014 that, as a result of METI's investigation into solar projects that received the first year tariff, it is in the process of cancelling 672 first round FIT approvals given to solar projects due to the holders of such approvals failing to make satisfactory progress towards project development. METI has also stated that a further 784 first round approvals for solar projects may be cancelled if they do not meet certain development requirements by August 2014.
This client alert details the above METI action and discusses the implications it is likely to have for solar projects in Japan.
Japan’s FIT program was established under the 2011 Special Measures Law Concerning the Procurement by Electric Power Companies of Renewable Energy Electricity (the “Renewable Energy Law”) for electricity generated from solar, wind, hydropower, geothermal and biomass sources.
The first FIT round ran from 1 July 2012 to 31 March 2013. Solar project developers that obtained the necessary approvals during that period have the right to enter into a 20 year power purchase agreement to sell electricity to Japanese utilities at the price of 42 yen/kWh (tax inclusive).
The first round tariff was intentionally set at the high rate of 42 yen/kWh to reflect high solar project costs in 2012 and so to spur rapid development of solar projects in Japan.
However, the Renewable Energy Law did not impose any specific timing on holders of the above approvals to develop their approved solar projects. As a result, first round approval holders had indefinite time to develop their projects. The extent of the delays caused by the lack of a clear deadline was revealed in mid-2013 when METI released figures showing that the overwhelming majority of first round projects had not yet commenced operations.
At the same time as releasing the above figures, METI expressed its concern that some solar project approval holders were intentionally delaying development of their projects in the hope that solar project costs would decrease. METI therefore stated that it would begin investigating projects which had not yet made satisfactory progress towards development.
The action taken by METI following the above announcement has included:
2 Japanese Solar Projects - Cancellation of first round 42 yen project approvals February 2014
METI sending a detailed questionnaire to first round solar project holders (of 400kW or more) in September 2013 requiring them to report back on the status of their projects including whether they had commenced operations and if not, whether they had taken various other action including obtaining firm rights to project land and/or placing orders for modules for their projects; and
a follow up questionnaire being issued to project holders in January 2014 requiring them to report back again on whether they had secured project land rights and/or placed module orders.
In the second questionnaire above, METI informed approval holders that it was considering to cancel those first round approvals which could not satisfy the requirements set out in that second questionnaire.
2. METI's Cancellation Announcement
On 14 February 2014, METI released an announcement setting out the results of the above investigations into first round solar project approvals.
The announcement stated that based on the results of its investigations, METI had separated the 4,699 first round project approvals into the following categories:
Projects that have commenced operations
1,049 projects (1,100 MW)
Projects that have been surrendered
419 projects (900 MW)
Projects not yet in operation
Projects that have secured land and modules
1,588 projects (3,940 MW)
Projects that have secured either land or modules
784 projects (2,580 MW)
Projects that have not secured either land or modules
Projects that are still in consultation with the relevant utilities or which are located in disaster zones
187 projects (1,770 MW)
Other than above
571 projects (2,880 MW)
Projects that did not respond to METI
101 projects (150 MW)
4,699 projects (13,320 MW)
METI has stated that it will now take the following actions:
(a) METI will commence a hearing process by March 2014 against the 571 projects above that have not secured either land or modules and the 101 projects that did not respond to METI's questionnaire; and
(b) METI will give the holders of the 784 projects listed above that have not secured either land or modules until 31 August 2014 to secure both such requirements. Failing this, such holders may also face the loss of their 42 yen/kWh approvals.
The purpose of the hearing process in (a) above will be for METI to confirm if the relevant project has in fact not obtained land rights or placed module
3 Japanese Solar Projects - Cancellation of first round 42 yen project approvals February 2014
orders. So the hearing may be a last chance for approval holders to retain their approvals. Where the holders cannot satisfy METI on these points, their 42 yen/kWh approvals will be cancelled.
The letter attached to METI's second questionnaire above in January 2014 stated that approval holders may withdraw their first round approvals and re-apply for new approvals under the current second FIT round. If so, the same set of documents used for the initial application can be reused by such holders and METI will expedite the process. METI's announcement on 14 February 2014 separately reminds those wishing to secure the FY2013 tariff (37.8 yen/kWh tax inclusive) to submit their applications by 28 February 2014. Approval holders that are subject to the above hearing process therefore appear to have the option to resubmit their applications and accept a lower tariff rather than be subject to the above hearing process.
Since issuing the above announcement METI has been writing to first round approval holders to notify them which category their project falls into based on the above table. Most such approvals holders are therefore now likely to be aware of METI's decision on their projects.
The above cancellation action by METI is not unexpected. It has been clear since late 2013 that METI’s investigations were likely to result in at least some first round 42 yen/kW approvals being cancelled. METI’s 14 February 2014 announcement has therefore provided some needed clarity on the factors METI will examine when considering such cancellation.
Below we comment on some key points arising from METI's 14 February 2014 announcement.
The first set of projects for which approvals are likely to be cancelled are the 571 projects which have not yet secured either project land or modules. This group is likely to include a number of projects which applied for approvals in the first few months of the first FIT round without securing clear land rights. This was possible because in that initial period, it was not necessary to lodge evidence of rights to land when applying for the FIT approval. Anecdotally, it appears that this led to various applications either being lodged by different parties over the same plots of land (where a landowner was talking to different developers) or lodged over land prior to the developer acquiring firm rights to such land.
Although a requirement to obtain a certificate from a landowner showing the grant of land rights was introduced in late 2012, such a certificate was not a binding contract between a developer and a landowner, but only a statement of the landowner’s consent for the land to be used for a solar project. A binding land lease or land purchase agreement therefore still needed to be negotiated for such land.
METI’s September 2013 questionnaire asked approval holders to provide evidence of land rights such as land ownership or lease documents. It appears from the follow up questionnaire in January 2014 and the February 2014 announcement that many approval holders were not able to provide such evidence. It is likely that many of the 571 projects in this category are projects that have not been able to secure rights to land. This may be because of the issues above or because approval holders have delayed entering into a binding land lease or purchase agreement while seeking either
4 Japanese Solar Projects - Cancellation of first round 42 yen project approvals February 2014
financing or a buyer for their project approvals. For many such holders time therefore seems to have run out on their project approvals.
Hokkaido and Disaster Zones
The above list includes 187 projects which are still in consultation with utilities or are located in disaster zones. Many projects in this category are likely to be located in Hokkaido where grid access issues have led to delays in approval holders reaching final agreements with the Hokkaido Electric Power Company Inc (HEPCO) on grid access. Those projects appear to have been granted more time to resolve such access issues before being subject to further action by METI. From our discussions with METI in relation to Hokkaido, it appears that once the grid access issue is resolved, approval holders will then be required to demonstrate that their projects have secured land rights and placed module orders or risk possible loss of their approvals.
The projects in the disaster zones are located in disaster hit areas where issues such as ascertaining the land right holder or land decontamination problems have delayed progress. These areas will also be subject to the 31 August 2014 deadline.
The above list includes 784 projects for which only either land rights or module orders have been confirmed. Such projects now have until 31 August 2014 to secure both land rights and module orders.
This category is likely to include a large number of projects with secured land rights but which have held off placing module orders whilst they complete feasibility studies, negotiate financing or seek to sell their approvals to third parties that are better able to develop the project. Alternatively, some may be projects that have arranged to internally supply modules, but have struggled to finalize land rights or convert project land to the proper category for a solar project. Projects in this category now have a clear deadline to work towards keeping their project approvals. Holders of approvals in this category will therefore need to work diligently to complete feasibility studies and all other action necessary to give them the confidence to enter into module supply agreements by 31 August 2014.
The above METI action is likely to impact heavily on the solar projects market in Japan. Project holders that have delayed development in the hope of costs falling or with the intention to sell their approvals to third parties for a profit now face clear deadlines for project development. Approval holders that are not able to meet such deadlines will face possible loss of their valuable first round approvals.
METI's action is also likely to impact on approvals obtained in the current second FIT round (i.e at the rate of 37.8 yen/kWh). Holders of such approvals are likely to be subject to similar requirements in future as are now being imposed on first round 42 yen/kWh approval holders. They will also therefore face pressure to develop their projects promptly over the course of the coming year or face the risk of losing their approvals.
In summary, whilst the METI action will create hardship for some groups of first round approvals it provides clarity on the timing for projects to be developed and so should lead to more rapid development of solar projects in Japan.
For further information please contact
Ean Mac Pherson
+81 3 6271 9468
+81 3 6271 9739
Baker & McKenzie (Gaikokuho Joint Enterprise)
Ark Hills Sengokuyama Mori Tower 28F 1-9-10, Roppongi, Minato-ku Tokyo 106-0032, Japan Tel + 81 3 6271 9900 Fax + 81 3 5549 7720 www.bakermckenzie.co.jp
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