Japan is a country with limited natural energy resources and as such, energy legislation in Japan can essentially be divided into legislation concerning electricity and that concerning gas.
Given the high level of public interest attached to the provision of electric utilities, certain market entry regulations have long been in place. However, because of the Great East Japan earthquake and the subsequent accident at the Fukushima Daiichi nuclear power plant in 2011, government energy policy is currently in the midst of vast and rapid structural change. As of 31 March 2019, all but nine nuclear power plants are currently under suspension in Japan and over recent years other measures to secure alternative resources (including increasing the supply of renewable energy sources and traditional thermal power), conserve existing energy supplies and increase local energy production have been discussed concurrently with a review of the current industry regulations. As a result, the current legislation is in a transitional phase. There are three headline changes affecting the regulation of electricity markets. Firstly, under the Electricity System Reform programme, entry into the electricity retail business was fully liberalised as of 1 April 2016. In preparation for this, a new regulatory authority for monitoring the new liberalised market was established in 2015. Secondly, the legal unbundling of the electric power transmission function and sector from the existing dominant power suppliers will be implemented on 1 April 2020. In addition to these two changes, feed-in tariffs (FITs) were introduced in 2012 and the renewable energy market has been rapidly expanded since then. In response to rapid expansion of the renewables market, the FIT system has been continuously revised to address several problems.
The gas industry in Japan can be divided into the following two major enterprises: the town gas industry, which is the primary source of natural gas to consumer residences through piping; and the liquefied petroleum gas (LPG) industry, which provides LPG via cylinders to consumers in areas where piped gas is not yet available. Significant reform liberalising the town gas retail business was implemented on 1 April 2017. As a result, subcategories of the town gas-related business was reorganised and entry into the retail gas business has been relaxed (i.e., only registration is required). Entry into the LPG industry requires registration with the relevant authority, and the prices for the provision of LPG may be freely set by the provider.
The energy industry in Japan, which encompasses electric power, gas and other energy resources, is regulated by the Ministry of Economy, Trade and Industry (METI) or, more specifically, the Ministry’s Agency for Natural Resources and Energy and the Electricity and Gas Market Surveillance Commission. The Ministry of Economy, Trade and Industries Establishment Act grants the Ministry jurisdiction over various matters including comprehensive policies in relation to energy and mineral resources and the securing of the stable and efficient provision of gas, electric power and heating to Japan. In addition to these matters, comprehensive policies in relation to energy and mineral resources and the securing of the stable supply of energy are handled by the Ministry’s Agency for Natural Resources and Energy, and the monitoring of the liberalised electricity markets, as well as compliance with a code of conduct for network sectors, is handled by the recently established Electricity and Gas Market Surveillance Commission.
The Organization for Cross-regional Coordination of Transmission Operators (OCCTO) is not a governmental organisation but is an independent organisation constituted by all of the electricity business entities pursuant to the Electricity Business Act (EBA). The OCCTO’s remit is to monitor the electricity supply–demand balance and frequency, and order electricity business entities to supply electricity to other electricity business entities. The OCCTO has the power to instruct or recommend electricity business entities to ensure stable electricity supply subject to Article 28-40, Item 6 of the EBA.
Other governmental agencies regulate certain aspects of the energy industry in Japan, including the Ministry of Environment, the Nuclear Regulation Authority and relevant local governments.
Main sources of law and regulation
The EBA is the main source of legislation regulating businesses involved in the generation, transmission and distribution, and sale of electric power. In addition to this, the Electricity Business Act Enforcement Orders and the Ordinance for Enforcement of the Electricity Business Act further provide detailed regulations for the enforcement and governance of the system provided under the EBA. A number of relevant orders and ordinances ruling the generation, transmission and sale of electricity have also been enacted.
As for nuclear power, regulation is provided in the Atomic Energy Fundamental Act, the Act on Compensation for Nuclear Damage and other specialised legislation.
The Gas Business Act (GBA) is the primary source of legislation regulating businesses involving town gas. In addition to this, the Gas Business Act Enforcement Orders and the Ordinance for Enforcement of the Gas Business Act further provide detailed regulations for the enforcement and government of the system provided under the GBA.
The primary source of legislation regulating businesses involving LPG is the Act Concerning the Securing of Safety and the Optimisation of Transaction of Liquefied Petroleum Gas (the LP Gas Act). In addition to this, the LP Gas Act Enforcement Orders and the Ordinance for Enforcement of the LP Gas Act further provide detailed regulations for the enforcement and government of the system provided under the LP Gas Act.
After the Fukushima incident in 2011, the Japanese government decided to undertake significant reform of the energy regulation system. The regulations for electricity businesses are also undergoing substantial changes at the moment. Prior to the new EBA (which came into effect on 1 April 2016), licences for electricity businesses were required when the intended activities fell within one of five categories, and only 10 prominent regional companies (which used to be categorised as general electricity utilities) were allowed to supply electricity to general consumers and businesses (low-voltage electricity) in their respective markets. However, the amendment to the EBA to liberalise the entire retail electricity market has streamlined regulated electricity business into three simple categories (i.e., electricity retail businesses, generation businesses and transmission and distribution businesses) to adjust to the liberalised retail market and promote a level playing field for competition between the general electricity utilities and other electricity business entities.
Electricity retail business
A company running an electricity retail business (the sale of electricity to general and large-scale consumers and businesses) is required to be registered by the METI. For a company to be registered as a retail company, it is first required to become a member of the OCCTO. Then an application document must be filed to the METI. The METI and the Electricity and Gas Market Surveillance Commission will then examine the application. An application for the register will be accepted unless the business entity’s activities are found to fall under certain negative requirements, including a lack of ability to procure electricity to respond to the maximum demand of its customers and being unable to properly operate an electricity retail business. In anticipation of the market liberalisation, many retail entities have entered this new market with various types of electricity price plans. As of 11 April 2019, 595 entities are registered as retail companies.
Electricity generation business
Companies that generate and supply electricity in excess of 10,000kW to retail companies are required to file with the METI to commence their generation business. They are also required to apply for membership of the OCCTO before filing. Under the old regulation structure of the EBA, independent power producers did not need approval or to file for the commencement of their generation business (provided they filed the price and met the other required terms of the supply of electricity), but under the new EBA, generation business entities are required to file their generation business and are also subject to certain obligations. For example, generation companies are required to submit a plan stating the amount of electricity generation that can be produced by a unit of the facilities they possess. Additionally, by a standard contract with general transmission and distribution companies, generation business entities are required to report their estimation of supply for the next 30 minutes.
Electricity transmission and distribution business
The electricity wheeling service industry is classified into three subcategories: general transmission and distribution, transmission and specific transmission and distribution by the amended EBA; and each is covered by a different regulatory scheme. Entry to this area has not been liberalised even following the amendment of the EBA because these businesses are responsible for ensuring that all consumers have sufficient access to electricity.
Of the different companies in the three categories, the most prominent are general transmission and distribution companies. General transmission and distribution companies are business entities providing electricity wheeling services through their own transmission lines throughout their service area. Those intending to engage in the general transmission and distribution business are required to obtain approval from the METI in advance. The company must submit a business plan to the METI, which must be satisfied that the plan is feasible. Its facilities also need to be capable of covering the electricity demand. To gain approval, the company must submit a 10-year plan, as do companies in the other two categories above.
A transmission company supplies the electricity to general transmission and distribution companies throughout its own grid. Those intending to engage in the wheeling industry are also required to obtain approval from the METI.
In contrast to these two, specific transmission and distribution companies, which transmit electricity to a specific point, are only required to notify the METI.
These three types of electricity business entities are all under an obligation to be a member of the OCCTO to allow the OCCTO monitor and coordinate the whole electricity market. Members of the OCCTO have to provide information about the amount of electricity produced by their facilities, etc. on a continuous basis. The OCCTO can instruct its members to maintain a balance of electricity supply and demand in the market to ensure the stable supply of electricity to consumers.
In line with the Electricity System Reform, the amendment to the GBA, which came into effect on 1 April 2017, significantly changed the town gas regulation, which is called the Gas System Reform. This amendment implements full liberalisation of entry into the gas retail business, which accounted for 36 per cent of the total town gas supply as of October 2016. The amendment includes reform of the business licence categories that streamline the regulated gas business into three simple categories: gas retail business, generation business and transportation (pipeline) business.
A company operating a town gas retail business is required to be registered with the METI from 1 April 2017. Before 1 April 2017, approval from the METI was required to do business and removing this requirement is one of the main purposes of the Gas System Reform. Applications for the relevant registration involve the necessary submission of application forms in which statutorily required data, such as gas generating facility and other necessary information, are described. As in the case of an electricity retail business, an application for registration will be accepted unless the applicant’s activities are found to fall under certain negative requirements, including the lack of ability to procure gas to respond to the demand of its customers and being unable to properly operate a gas retail business. In principle, the entire application and registration process will require around one month to complete.
As of 1 April 2019, the number of town gas retail business operators was 68. It should be noted that regional monopolies have been recognised in relation to town gas retail business operators and, accordingly, the percentage of operators for the service areas in large metropolitan areas is understandably high. The share of the largest operator, Tokyo Gas (service area: Kanto region with Tokyo as its main focus), currently accounts for about 38 per cent of the market whereas the combined share of the three major corporations (Tokyo Gas, Osaka Gas and Tohou Gas) providing service areas in large metropolitan areas accounts for about 73 per cent (based on sales volume as of March 2016). The Gas System Reform aims to change the situation by furthering competition in the town gas retail business under the relaxed requirements for entry into the gas retail business.
Before 1 April 2017, a town gas generation business was not required to obtain a registration or licence, or file other documents with the METI. However, after 1 April 2017, companies that generate town gas are required to file with the METI.
Under the new regulation, a town gas transportation business is categorised into two subcategories under the new GBA: general gas transportation business and specific gas transportation business. A general gas transportation business is a business that transports gas through its gas pipeline throughout its service areas. In order to operate a general gas transportation business, approval from the METI is required and the business is subject to certain regulations and controls by the METI as explained below. On the other hand, a specific gas transportation business is a business that transports gas through its gas pipeline to a specific point. Only notification to the METI is required in order to operate a specific gas transportation business.
The purpose of this two-tier regulation is to expand the gas pipeline network, which is established on an area basis (especially in urban areas) by separating the gas between the various networks. General gas transportation business operators now have to make their gas pipelines readily available due to strict regulations imposed by the METI, while specific gas transportation business operators may operate their businesses without strict control by the METI.
The LP Gas Act stipulates that necessary registration for the sale of LPG must be obtained from the METI when intending to establish sales offices catering to two or more prefectures and from the prefectural governor when catering to only one prefecture.
Registration involves the necessary submission of application forms in which statutorily required data, such as details of the sales office, gas storage facilities and other necessary information, are described. Applicants will be registered with the corresponding authority (either the METI or the prefectural governor) as long as there are no applicable statutory grounds for denial of the application.
Registrations will require 30 days to process or 15 days if the registration is applied for via the relevant authority’s electronic information processing system.
As of 31 March 2018, the number of business operators that had obtained the necessary registrations and were currently engaged in the sale of LPG was18,516. Entry barriers to this section of the industry are low and a large number of small and medium-sized businesses have been entering into the LPG industry in which even retail rates are not regulated. While all-electric technology products were widely spread by the electric power companies to replace the use of gas, this figure is approximately one-third of when LPG sales were at their peak (54,000 operators in 1967).
iiiOwnership and market access restrictions
The only existing restrictions on foreign investment in the electric power industry or the gas industry are those imposed by the general laws regulating the entry of foreign investment in Japan stipulated in the Foreign Exchange and Foreign Trade Act. For example, if a foreign investor were to obtain 10 percent or more of the shares of an electric power or gas utility (including both town gas and LP gas), intend to set up a branch for the conduct of electric power or gas business or otherwise engage in any such activities, the Foreign Exchange and Foreign Trade Act requires that the relevant authorities be notified in advance of such activities. Furthermore, in the event of the performance of any such activities requiring advance notification of the relevant authorities, a follow-up report after the performance must also be submitted accordingly. Both prior notification and follow-up reports must be submitted to the Bank of Japan, which in turn will facilitate the submission of the notifications and reports to the Minister of Finance or other relevant minister in charge. The relevant authorities have the power to provide a recommendation or an order to suspend such foreign investment, if it hinders national security, public order or public safety.
ivTransfers of control and assignments
The prior approval of the METI is necessary in the event of a transfer of the whole business of a general transmission and distribution company or in the event of a merger or demerger whereby the surviving entity completely absorbs any such business. The criteria for granting such an approval are the same as those for the original grant of approval to operate such businesses. A merger or demerger of other types of electricity business entities obliges them to notify the METI. Notification to the METI is also required upon the handover of any equipment or facilities to retail companies, power suppliers and any types of transmission companies.
The transfer or acquisition of all or part of a general gas transportation business requires authorisation from the METI before it can be effective, as does the merger or demerger of any entity that is a general gas transportation business operator whereby all or part of the business is succeeded by the surviving company. The criteria for the grant of the required authorisation are the same as those for the original grant of approval to operate such businesses. Only post facto notification is required for transfer of the business or merger or demerger of the town gas-related business (i.e., town gas retail business, town gas generation business and specific gas transportation business).
In the case of LPG businesses, however, in the event of any transfer of the business in its entirety or of any merger or demerger whereby the surviving entity completely absorbs the business, the succeeding entity is only required to notify whichever is relevant of the METI or the prefectural governor.
IIITRANSMISSION/TRANSPORTATION AND DISTRIBUTION SERVICES
Integrated system for the production and transmission of electric power
In Japan, following the end of World War II and up until 1995, the production and transmission of electric power, as well as its assorted related retail operations, were run as a single integrated utility by 10 electric power companies, each with a regional monopoly over the 10 main regions of Japan.
However, amid the institutional reform post-1995, Japan realised the liberalisation of its electric power generation and retail sectors. That being said, the electric power transmission sector is still very much dominated by the aforementioned 10 power companies (former general electricity utilities).
Because the electric power distribution grid is public infrastructure, measures have been implemented to prevent general electricity utilities from abusing their dominant market positions and to ensure the transparency of the electric power industry. Specifically, anti-trust measures that have been implemented include, the compulsory notification of electric power transmission details; the requirement of equal treatment of consumers; and the compulsory separation of the electric power transmission division accounts of general electric power business operators from their other divisions.
Government policy on separation and unbundling of electric power transmission sectors
As part of the Electricity System Reform, the amendment to the EBA passed in 2015, which aims for the legal unbundling of the transmission sector to ensure the neutrality of all entities engaged in electricity-related business. No electricity company can run an electricity retail business or generation business with a transmission business in the same entity from 1 April 2020, unless otherwise permitted by the METI. That means that the 10 former general electricity utilities, except for Okinawa Electric Power Company, must split those departments to an affiliate or others by that date.
The main obligations and areas of concern for general transmission and distribution companies regarding separation and unbundling are (1) development of a system for information management, (2) rules concerning company names, trademarks and advertising, (3) entrustment and undertaking by such companies, (4) rules concerning transactions among group companies and (5) restriction on holding concurrent positions by directors and employees.
Regarding the development of a system for information management, such companies are required to be physically separated from generation and retail group companies (i.e., being located on different floors with restricted entry)when such companies share the same building, as well as identifying and limiting access to information systems in cases where such systems are shared. In addition, they are required to develop their business status monitoring and surveillance systems.
Companies are generally restricted from using company names and trademarks that are likely to be associated with those of generation and retail group companies, and they are also prohibited from advertising to take advantage of the generation and retail business of other group companies.
Regarding entrustment and undertaking by such companies, such companies are in principle prohibited from entrusting their services in transmission and distribution to their own subsidiary companies. In exceptional cases, they may make such entrustments where the subsidiary companies are not under the control of generation or transmission companies. In addition, general transmission and distribution companies are in principle prohibited from undertaking the services of generation and retail group companies. However, in exceptional cases where the undertaking of such services does not impair the competitive relationships among electricity suppliers, such services may be undertaken.
Transactions among group companies are allowed to the extent that such transactions do not impair the competitive relationships thereof.
Directors of generation and retail business group companies are generally prohibited from acting as directors of general transmission and distribution group companies concurrently. In exceptional cases, a concurrent position may be held where the holding of such a position does not impair the competitive relationships thereof. Additionally, the foregoing restriction also applies to an employee who plays an important role in either of the group companies.
Obligations undertaken by general transmission and distribution companies
Because transmission facilities and the business conducted with them are mostly owned by the former 10 general electricity companies, to secure the effective liberalisation of other sectors, these companies are required to provide neutral treatment to retail companies. General transmission and distribution companies are not allowed to refuse to execute a grid connection contract without reasonable grounds. The EBA provides that the electricity supply-demand balance and frequency must always be maintained within a certain threshold. General transmission and distribution companies must also provide final assurances to each consumer to deliver electricity where consumers do not have a contract with any of the retail companies. General transmission and distribution relationship companies are also responsible for the delivery of electricity to consumers on Japan’s remote islands.
As most activities involved in the electricity business are controlled by information technology, it is urgent for businesses in the sector to establish a reliable cybersecurity system. The Basic Act on Cybersecurity stipulates that Critical Infrastructure Information (CII) operators shall make an effort to assure cybersecurity voluntarily and proactively. Because there is no regulation that clearly stipulates the concrete actions a CII should take with regard to IT protection, a strategy for cybersecurity committee established by the Cabinet has announced that the security criterion for CII operators will be clarified. It is clear that electricity business entities, especially general transmission and distribution companies, fall within the definition of CII operators, and will almost certainly be required to adapt their processes in line with any changes to the security requirements.
Terminalling, processing and treatment
After importation, LNG meant for the town gas industry is converted into gas and sent through pipelines or transported by tanker lorries, and stored in gas storage facilities for supply to consumers. The facilities for processing, transportation and storage are mainly owned by the gas utility business operators, who supply the gas to consumers.
Pipelines that are used for gas transportation and gas holders that are used for storage of gas are regulated by the GBA and the technical standards for gas facilities prescribed by ministerial order. Likewise, tanker lorries are regulated by the High-Pressure Gas Safety Act and the Safety Regulations for General High-Pressure Gas.
The transportation and storage of LPG are regulated by the LP Gas Act and the High-Pressure Gas Safety Act. More particularly, whereas storage and transportation at distribution and wholesale levels are regulated by the High-Pressure Gas Safety Act, the storage and transportation supply level to general end-users are regulated by the LP Gas Act.
Government policy on separation and unbundling of town gas transportation sectors
As part of the Gas System Reform, as in the case of the Electric System Reform, for a town gas-related business, the legal unbundling of the transportation sector is scheduled for April 2022 to ensure the neutrality of all entities engaged in a gas-related business. This reform is expected to apply to three major players: Tokyo Gas, Osaka Gas and Tohou Gas. By April 2022, these companies will have to separate those sectors and transfer them to an affiliate or other entity.
Obligations undertaken by general gas transportation companies
Since gas pipelines are dominantly owned and operated by a few operators, such as the three major players, in order to secure the effective liberalisation of other sectors, general gas transportation business operators are prohibited from refusing to execute a transportation contract without reasonable grounds. Also, the terms and conditions of such contracts and amendments are required to be approved by the METI in advance.
iJapan Electric Power Exchange
The Japan Electric Power Exchange (JEPX) exists for the benefit of all electric power-related transactions. It was founded on 28 November 2003 as a market for the commodity trading of electric power and serves as an intermediary for electric power spot trading, forward transactions and other similar transactions. (It is possible to undertake both buy and sell orders through the JEPX.) To participate in electric power commodity trading on the JEPX, membership as a trade affiliate is necessary. As of 1 April 2019, 161 companies were trade affiliates of the JEPX. As of 1 April 2019, JEPX has the spot market opening 365 days and established a market in which members can trade electricity until one hour prior to its actual use. This market enables electricity business entities to adjust the amount of electricity they provide until the last minute.
The JEPX is managed by a general incorporated association comprising electric power companies and other such entities. It is a private exchange that operates and is regulated by its own market rules.
iiTerms and conditions of supply
As explained above, the amendment to the EBA that came into effect on 1 April 2016 liberalised entry into the electricity retail business, but provides a provisional measure that requires former general electric utilities (utilities allowed to retail electricity at low voltage market before the liberalisation) to continue to provide the existing terms and conditions until 2020 at earliest in order not to let the electricity price raise unreasonably. Additionally, all retail companies are subject to regulations in certain codes of conduct such as to deliver explanations and documents in relation to certain matters, for their supply to customers.
Similarly to the electricity sector, on 1 April 2017, entry into the town gas retail business was fully liberalised. However, certain town gas retail business operators specified by the METI shall continue to supply gas under the terms and conditions approved by the METI. Further, gas retail companies are also subject to regulations on certain codes of conduct such as to deliver explanations and documents regarding the terms of certain matters for their supply to customers.
No such obligations are imposed on LPG business operators.
In addition to the market for trading electric power commodity on the JEPX, the OCCTO is preparing to set up an auction system to trade the capacity to generate electricity in the future, which is called the capacity market. The first auction is expected to be held by the end of March 2021. It is expected that at the auction electricity generation business operators will submit bids for the capacity to generate electricity four years after the auction and the OCCTO will pick the operators and fix the price of electricity to secure the capacity to generate electricity four years after the auction and then pay the consideration to the operator. The amount of the consideration to be paid by the OCCTO to the operator will be borne by electricity retail business operators (i.e., electricity retail business operators will be required to contribute to the OCCTO to fund such amount).
The Amendment to the Commodity Futures Act that took effect in 2016 provides that electricity becomes subject to commodity futures trading, which enables market participants to avoid the risk of volatility. The Tokyo Commodity Exchange, Inc aims to launch an electricity future market according to its midterm management plan announced in November 2017.
An infrastructure fund market that enables the listing of funds that invest in certain infrastructure such as electric generation facilities, established by the Tokyo Stock Exchange, Inc in April 2015, has developed over the past four years. Following the first listing of an infrastructure fund in June 2016, five additional infrastructure funds were listed on the market. The six infrastructure funds invest in solar power facilities. The market provides opportunities for a broad range of investors, including retail investors, to invest in infrastructure-related investments and adds an option for developers who, in particular, develop large-size power facilities.
With respect to gas, no particularly noteworthy market developments are currently anticipated or under consideration.
VRENEWABLE ENERGY AND CONSERVATION
The Renewable Electric Energy Act
Japan has been subject to huge developments in the area of renewable energy. The Act on Special Measures concerning the Procurement of Renewable Energy Sources by Electric Utilities (the Renewable Energy Act) was enacted with the objective of introducing FITs (a system whereby the total volume of electricity should be purchased at a fixed price for a fixed term). The Renewable Energy Act became effective on 1 July 2012, and the FIT scheme has been amended several times since then to address certain issues (see ‘Increase in renewable electric energy generation and associated problems’ below). The major requirements for a generator to sell electricity at the fixed price under the FIT scheme can be summarised as follows:
- Execute an interconnection agreement with one of the general transmission companies or one of the specific transmission companies for its renewable energy generation facility.
- Obtain certification by the METI for its plan on the generation business relating to the renewable energy generation facility in accordance with the requirements under the Renewable Energy Act. Renewable energy, which is subject to the FIT scheme, is currently limited to certain renewable energy sources: solar, wind, water (currently statutorily limited only to small and medium hydroelectric generators with an output of less than 30,000kW), geothermal and biomass.
- Execute a power purchase agreement with one of the general transmission companies or the specific transmission companies for a renewable energy generation facility with the above certification. Such transmission companies are obliged to accept an offer by a generator to execute such a power purchase agreement, unless it falls into certain exceptions.
Sales prices and contract terms
Set out below are the changes in sales prices and contract terms granted by the FIT scheme in recent years. In relation to solar power, as a reflection of the sudden drop in price of solar panels, the sales price is falling (as per our further notes below). In comparison, measures have been taken to establish favourable pricing and to support investment in respect of offshore wind power and existing headrace tunnel-type medium and small-scale hydroelectric power generators. A bid system, which was newly adopted by the recent amendment, is applicable to facilities with (1) solar power of 500kW or more; and (2) biomass power (generated by certain wood or agricultural products with a capacity of 10MW or more or by biomass liquid fuel) as of 2019.
|Electricity generated||Sales price (excluding tax)||Contract term|
|Solar power||<10kWh||¥37||¥33 to ¥35 depending on device used||¥31 to ¥33 depending on device used||¥25 to ¥30 depending on device used||¥25 to ¥28 depending on device used||¥24 to ¥26 depending on device used||10 years|
|≥10kWh <500kWh||¥32||¥29 (1 April to 30 June) or ¥27 (after 1 July)||¥24||¥21||¥18||¥14||20 years|
|≥500kWh <2,000kWh||¥32||¥29 (1 April to 30 June) or ¥27 (after 1 July)||¥24||¥21||¥18||Price set through a bid system||20 years|
|≥2,000kWh||¥32||¥29 (1 April to 30 June) or ¥27 (after 1 July)||¥24||Price set through a bid system||Price set through a bid system||Price set through a bid system||20 years|
|Wind power||<20kWh||¥55||¥55||¥55||¥55||¥17 or ¥20 depending on device used||¥17 or ¥20 depending on device used||20 years|
|≥20kWh||¥22||¥22||¥22||¥18 or ¥21 depending on device used||¥17 or ¥20 depending on device used||¥16 or ¥19 depending on device used||20 years|
|Offshore wind power*||¥36||¥36||¥36||¥36||¥36||¥36||20 years|
|Geothermal power||<15,000kWh||¥40||¥40||¥40||¥19 to ¥40 depending on device used||¥19 to ¥40 depending on device used||¥19 to ¥40 depending on device used||15 years|
|≥15,000kWh||¥26||¥26||¥26||¥12 to ¥26 depending on device used||¥12 to ¥26 depending on device used||¥12 to ¥26 depending on device used||15 years|
|Hydroelectric power||<200kWh||¥34||¥34||¥34||¥34||¥34||¥34||20 years|
|≥200kWh <1,000kWh||¥29||¥29||¥29||¥29||¥29||¥29||20 years|
|Existing headrace tunnel-type medium and small-scale hydroelectric power†||<200kWh||¥25||¥25||¥25||¥25||¥25||¥25||20 years|
|Biomass power**||¥13 to ¥39 depending on material used||¥13 to ¥40 depending on material used||¥13 to ¥40 depending on material used||¥13 to ¥40 depending on material used||¥13 to ¥40 depending on material used||¥13 to ¥40 depending on material used||20 years|
|* Offshore wind power: generators that require a vessel for access for construction and operational maintenance.
† Existing headrace tunnel-type medium and small-scale hydroelectric power: generators that utilise existing headrace tunnels with renewable electric power equipment and hydraulic steel pipes.** excluding biomass power generated by certain wood or agricultural products with a capacity of 10MW or more and biomass power by biomass liquid fuel, which are subject to a bid system
Increase in renewable electric energy generation and associated problems
Following the introduction of FITs, renewable source energy generation – solar power generation in particular – is increasing rapidly. Set out below are recent data on electricity generated by renewable source energy generation facilities and purchased by business operators (in million kWh).
|April 2013 to March 2014||April 2014 to March 2015||April 2015 to March 2016||April 2016 to March 2017||April 2017 to March 2018||April 2018 to March 2019|
|Solar power (<10kWh)||485,686.0||578,017.8||648,628.4||711,688.7||782,689.5||674,397.8|
|Solar power (≥10kWh)||425,466.9||1,317,731.0||2,459,108.0||3,454,952.2||4,261,477.4||3,892,502.2|
On the other hand, problematic businesses, such as those that utilised favourable pricing to obtain facility certification from the METI but delayed commencement of work and attempted to obtain fraudulent profits, had been frequently reported. In response, the following amendments have been made:
- the METI has placed conditions on certified solar power facilities since 2014, requiring them to secure the land title and procure the solar modules;
- the Renewable Energy Act was amended on 1 April 2017 and as a result the certification for a plan for a generation business relating to a renewable energy generation facility will only be granted by the METI where the renewable energy generation facility reaches the stage of certain development, including the execution of an interconnection agreement with certain transmission companies and when there is the prospect of obtaining the necessary land titles;
- any operators that execute a grid connection agreement after 1 August 2016 must commence operation of their project within three years from the date on which the certification was issued by the METI (the COD deadline) (the three-year rule). If an operator fails to meet the COD deadline, the commencement of the FIT period starts from the day following the COD deadline and the project will not be able to fully utilise the FIT period; and
- on 5 December 2018, a new regulation was enforced on pre-operation of solar power projects, the METI ID of which is issued during the period from April 2012 to March 2015 and to which the three-year rule does not apply because a grid connection agreement was executed before 31 July 2016. Under the new regulation, (1) an application for the start of grid connection construction (GCCA) to a utility should be received by the utility by 31 March 2019 and (2) operation shall commence by 31 March 2020 (or, if the GCCA is received after 31 March 2019, one year after the GCCA is received by the utility).
Further, a rapid increase in renewable energy generation has caused a lack of capacity in transmission lines in some areas. Currently, new solar and wind-power projects in certain areas are subject to unlimited restrictions on the output from renewable energy generation facilities that satisfy certain requirements, including that they expect an oversupply of electricity. Kyushu Electric Power Company implemented the country’s first power curtailment of output on two consecutive days from 13 to 14 October 2018. Although transmission companies have recently embraced policies to expand the capacity of transmission lines, this issue is still yet to be fully resolved.
Environmental issues have been raised in relation to solar power projects, which include erosions of soils, effects of lights reflected by solar panels and deforestation. In light of the issues, on 17 January 2019, the Ministry of the Environment announced that it would subject solar power projects of 40MW or more to environmental assessment based on the relevant laws and regulations, which is expected to come into force from April 2020 or later. If the environmental assessment is in place, the assessment process could be a considerable burden on solar power projects of 40MW or more.
Enactment of the Re-Energy Area Usage Act
As Japan is an island nation, marine renewable energy businesses such as offshore wind power generation have been regarded as key businesses from the perspective of energy policy. However, there was no law providing for unified rules for long-term occupancy of general sea areas that are Japanese territories and inland waters. This had been an obstacle to commencing such businesses in these sea areas. To address this issue, on 30 November 2018, the Act on Promotion of Utilisation of Sea Areas for the Development of Marine Renewable Energy Generation Facilities (the Re-Energy Area Usage Act) was passed by the Diet and came into force on 1 April 2019. The Re-Energy Area Usage Act allows for the long-term use of certain designated general sea areas for the purpose of offshore wind renewable energy projects upon approval by the governmental agency, and is expected to promote such projects.
In terms of gas-related renewable energy, biogas has been generating a lot of attention in recent years. Biogas is a flammable gas produced by the fermentation of organic waste such as raw sewage, food waste and livestock excretions, a feature that allows it to be harvested at sewage treatment plants, food factories and other such locations. Major town gas utilities such as Tokyo Gas and Osaka Gas have in recent years established guidelines for and promoted the purchase of biogas. Additionally, several local governments began to produce biogas in a sewage facility or refuse disposal facility.
VITHE YEAR IN REVIEW
The electric power industry regulations have, following the events at Fukushima in 2011, already witnessed great reforms. First, the electric system reform started, including full liberalisation of entry into the electricity retail business, and the following phase of the reform, including legal unbundling of the electric power transmission function and sector from the existing dominant power suppliers, will be implemented in 2020. Second, the introduction of FITs has encouraged the emergence of new entrants to the renewable energy industry and the renewable energy market has been expanded, but the FIT system is being revised to address several problems, including a newly adopted bid pricing system for solar power generation of a certain size and for biomass power generation of a certain type and certain size.
As explained above, the gas system was reformed along the same lines as the electric system reform, and from April 2017 the full liberalisation of entry into the gas retail business was implemented and new regulations for gas transportation businesses (especially general gas transportation businesses) have been imposed to make gas pipelines available to gas retail business operators. Furthermore, from 1 April 2022, the gas transportation (pipeline) business sector of three major companies (Tokyo Gas, Osaka Gas and Tohou Gas) will be unbundled.
Two remarkable trends in renewable energy have been seen. The Re-Energy Area Usage Act came into force on 1 April 2019 to allow the long-term use (up to 30 years) of certain general sea areas for offshore wind power projects. In addition, a bid that was implemented on solar power of 2,000kW in 2018 resulted in ¥14.25 at its lowest bid price.
VIICONCLUSIONS AND OUTLOOK
The events at Fukushima in 2011 served as the main catalyst for the reforms that the electric power industry has recently been facing. The full extent of these reforms and their effects, however, remains to be seen. As of 31 March 2019, all 48 nuclear power stations in Japan except nine are stopping operations. In the meantime, the Nuclear Regulation Authority issued new nuclear power station safety standards in July 2013 and, as of December 2018, 12 nuclear power stations are in the process of review for restart under the new safety standards (15 stations have already passed). However, it is still unclear when and how many nuclear power stations will restart operations.
Under these circumstances, Japan will become increasing reliant on its remaining sources of energy, that is, oil and LNG. These traditional sources of fuel are regarded as more stable and reliable; however, because they are ultimately non-renewable resources, this in and of itself introduces an entirely different set of issues. At the end of the day, Japan’s energy requirements may push it in the direction of renewable energy such as those discussed above. The output of such energy sources is, however, substantially smaller compared with nuclear energy, not to mention inherently unstable and less reliable. Accordingly, Japan’s demand for alternative and reliable sources of energy may even result in renewed interest in the gas industry, which in turn will surely lead to further developments in this field.
With all facets of the energy industry shifting so rapidly at the moment, the only thing that can be said with any certainty is that change is imminent. Exactly how and what form this change will take remains to be seen, and it is certainly worth keeping a close eye on Japan in the years to come.
1 Reiji Takahashi, Norifumi Takeuchi and Wataru Higuchi are partners, Kunihiro Yokoi is a special counsel, and Keisuke Hayashi and Kei Takada are associates at Anderson Mōri & Tomotsune.