Utility scale slipping

The reduction of Japan’s feed-in tariff (FIT) for solar from the start of the next fiscal year in April, as well as the introduction of a reverse auction system for utility-scale projects — are among the most anticipated changes in store for the country’s PV market in 2017. Planned tariff cuts and a new bidding system for big projects are only part of a broader series of reforms announced that will profoundly reshape Japanese solar development in the years to come.

The Ministry of Economy, Trade and Industry (METI) has approved roughly 80 GW of PV capacity since the introduction of the FIT system in July 2012. Statistics from the International Renewable Energy Agency (IRENA) show that Japan’s cumulative solar installations hit approximately 33.3 GW at the end of 2015, suggesting that roughly 50 GW of approved capacity remains unbuilt.

“The realization rate is low for large-scale projects,” says IHS senior solar analyst Susanne von Aichberger. “The government has therefore implemented several legal changes to the FiT program aimed at reducing the share of projects that have been put on hold.”

Significant Change

One of the most significant changes is a new rule requiring developers that failed to sign grid-connection agreements by the end of July 2016 to finish their approved projects within three years from the start of the next fiscal year on April 1, 2017.

It remains to be seen how METI will deal with projects if they are not completed on time. However, it’s likely that the ministry will scale down the FIT rates granted to such developers by a certain percentage for each year their projects remain uncompleted beyond April 1, 2020. METI may also simply decide to shorten the FIT periods for such installations from the usual 20 years, according to Baker McKenzie. “The three-year rule is likely to have a major impact on the feasibility and bankability of many approved solar projects,” the law firm said in a research note published earlier this year.

However, other amendments to Japan’s FIT legislation will ensure that some of the 50 GW of METI-approved capacity that remains unbuilt will be finished in the year ahead. In particular, one change that could facilitate the completion of stalled projects is the elimination of a rule that has prevented developers from changing PV module suppliers after their projects have been approved by the ministry.

However, CIS solar specialist Solar Frontier — which expects Japan to account for around 65% of the 950 MW of solar panels it will ship throughout the world in 2017 — sees an opportunity in the relaxation of this rule, which has been one of several factors contributing to project delays.

Although a company spokesperson acknowledges that as much as “half of the 50 GW of cases that are currently in a so-called holding pattern will go unrealized.” The Tokyo-based manufacturer plans to leverage its relationships with companies such as Japan Renewable Energy (JRE) to provide its thin-film modules to developers that will start looking to change suppliers in 2017.

Another key amendment to the FIT law that will facilitate the completion of unbuilt capacity is that developers will be able to reduce the sizes of their unfinished projects by as much as 20% without losing their locked-in FIT rates. This is important because many projects in the early years of Japan’s FIT regimes were approved before adequate land surveys were conducted. By allowing holders of those approvals to scale back their plans to correspond with the space limitations of their planned construction sites, METI will make it easier for numerous stalled projects to be completed. “We are ultimately predicting a scale of 20–30 GW (of the unbuilt 50 GW) to actually come into operation,” says a Solar Frontier spokesperson.

Financing Issues

Taken together, these changes to the FIT law — which the government will enact from the start of the next fiscal year in April 2017 — could significantly reshape Japan’s utility-scale solar market in the years to come. “The existing pipeline will be reduced after March 31, 2017,” says von Aichberger at IHS.

The research firm expects Japan to announce 8.7 GW of PV installed in 2016, and then 8.4 GW over the next 12 months, which is considerably lower than the 13.2-14.3 GW forecast that Bloomberg New Energy Finance (BNEF) issued last February and down from about 10 GW of new capacity additions in 2015.

Von Aichberger and other industry players are reluctant to speculate on how much Tokyo will lower the FIT, which is currently set at 24 Yen/kWh ($0.21) for projects above 10 kW in size and 31-33 Yen ($0.29)/kWh for systems below 10 kW in size. However, media reports that surfaced in mid-December suggest that the authorities plan to completely eliminate the solar FIT in gradual stages by 2020.

Beyond the declining FIT, a number of other factors have been weighing on growth at the utility scale since last year. Suitable sites on which to build large projects are becoming increasingly scarce. And the spectre of unlimited curtailment — a right granted to utilities in early 2015, after Kyushu Electric and other power companies began temporarily denying grid access to solar developers on claims of network instability — has made it increasingly difficult to finance big projects.

“We think the actual curtailment risk is very low, but (we) don’t want to deal with trying to finance those projects with unlimited curtailment risk,” says Nate Franklin, country manager for Pacifico Energy. “We avoid areas/utilities subject to unlimited curtailment. We think they’re too hard to finance.”

Due to the decline of the FIT rate in recent years, the Tokyo-based company also does not consider building any projects that are below 50 MW in size.

The developer — which completed nearly 132 MW of capacity at three sites over the past 12 months — does not expect to finish any projects in the coming year. However, while Franklin acknowledges that the utility-scale opportunity in Japan is shrinking, he remains optimistic about the upcoming launch of the government’s reverse auction system.

“We still see opportunities for large-scale projects,” he says, noting that METI appears set to auction off as much as 1.5 GW of utility-scale capacity in the upcoming fiscal year. “We plan to participate in those auctions.” He also says that 2018 and 19 — when Pacifico Energy expects to finish a 96.2 MW array in Miyazaki prefecture — will “be big years for completed projects.”

But with less capacity set to come online in the years ahead, it’s also possible that Japan’s major utilities will gradually become less resistant to accepting more variable renewables into their service areas. That could open up more opportunities to install batteries, as storage solutions have barely been deployed at the utility scale in Japan thus far, aside from a handful of state-linked demonstration projects.

“We would love to see utilities offer limited curtailment in exchange for doing storage — (it) could really help the market to develop,” Franklin says. “But now there is no contractual benefit to doing so, as unlimited curtailment still applies, though the actual risk could be mitigated.”

New Opportunities

While the importance of the utility-scale market is fading, other long-anticipated opportunities will start to open up in 2017. For example, project owners are now required to demonstrate compliance with new operation & maintenance (O&M) requirements. And companies such as Kyocera — which currently services 280 MW of PV capacity throughout Japan — plan to expand their focus on the growing O&M business in the years to come.

The Kyoto-based group is also increasingly focusing on installing industrial-use arrays — it has several in development at the moment — in response to the fading importance of utility-scale build-out. “We will continue to steadily implement such projects,” says a Kyocera spokesperson.

The company also sees a range of new opportunities in the increasing focus on self-consumption of solar-generated electricity, which is intensifying with the growth of the residential PV market, despite expectations that the government will cut the FIT rate for small rooftop systems in the upcoming fiscal year.

“It is expected that tariffs will fall below the electricity rate in the near future, with the market shifting from the conventional style of selling generated electricity to implementing solar power generation for self consumption,” the company says, noting that this shift will present more opportunities to deploy storage at the residential level in the years ahead.

Solar Frontier also agrees that the gradual shift to self-consumption will push suppliers to innovate: “The key to win in these difficult market conditions is to focus on the market in which we can differentiate ourselves by pursuing added-value solutions based on CIS technology,” says a spokesperson for the Tokyo-based company.

But even at utility scale, the Showa Shell Sekiyu subsidiary remains optimistic that it can compete in the face of declining installations, as it feels that METI’s revisions to the FIT policy are aligned with the natural maturation of the solar market.

“Central to the revisions is the establishment of a mid-term price target, a multi-year price setting, a top runner system and the introduction of an auction system,” a spokesperson says, adding that large-scale projects accounted for 70% of its PV module shipments in Japan in 2016.

“From the perspective of improving economic predictability and of pushing to reduce manufacturers’ costs and promoting innovation, we support the revision… we will be able to adjust smoothly.”

Industry Trends

With the growth of Japan’s utility-scale PV sector in decline, much of the innovation in 2017 could play out in terms of how projects are financed. In 2016, for example, property developer Takara Leben turned heads by giving investors access to revenues from an aggregated portfolio of its solar plants.

The 8.7 billion yen ($765 million) offering — Japan’s first listed infrastructure fund — sparked a flurry of excitement when it was launched. Other companies quickly followed suit, with property developer Ichigo Green Infrastructure Fund Investment listing a similar solar-focused fund in December.

“Expect more public offerings such as Ichigo and Takara Leben,” says Nate Franklin, country manager for Tokyo-based developer Pacifico Energy, adding that he also expects more private funds to start making acquisitions in Japan’s nascent secondary market for operational PV assets. “Costs of capital should come down as the secondary market develops.”

Beyond financing, industry players are more tightlipped about the technological developments that they have in store. At the utility scale, Franklin expects developers to start installing more 1500v inverters.

On the module side, Kyocera says the growing focus on the self-consumption of PV-generated electricity in the residential market — driven in large part by the government’s Zero Energy House (ZEH) policy — is opening up new areas in which to innovate in terms of cell efficiency, storage and cost reductions.

“In a market based on self consumption, we believe that long-term reliability will become a stronger selling point for solar modules,” a company spokesperson says.

Kyocera is targeting households with its RoofleX solar panels, which it began offering in 2016 in seven shapes and sizes tailored to the configurations of standard Japanese rooftops. It also plans to start selling a new Home Energy Management System (HEMS) in 2017.

Thin-film PV specialist Solar Frontier agrees that the gradual shift to self-consumption will push suppliers to innovate. “We can differentiate ourselves by pursuing added-value solutions based on CIS technology,” says a spokesperson for the Tokyo-based company.

In mid-December, the Showa Shell Sekiyu subsidiary announced plans to target the residential rooftop market — its “main focus” in 2017 — with its new SmaCIS panels, which will also come in several shapes and sizes. It will start producing the modules, which will be specially designed for quick installation on Japanese homes, at its 900 MW factory in Miyazaki prefecture from April 2017.

And in 2018, Solar Frontier plans to start producing new bendable panels for factory rooftops. “This next-generation product is perfectly suited due to its lightweight nature and the level of freedom in how it can be installed,” a spokesperson says.

At the utility scale, the growing importance of self-consumption is also driving companies to develop “virtual power plant” (VPP) projects, in which distributed renewable-energy installations are aggregated to operate as single, large power plants.

Last July, a consortium of 14 companies led by regional utility Kansai Electric Power announced plans to jointly develop a state-subsidized VPP pilot in cooperation with the Agency for Natural Resources and Energy (ANRE), an entity under METI.

And in September, Kyocera revealed that it had started working with ANRE on a subsidized demonstration project to test the use of automated demand response (ADR) systems for VPPs above 50 MW in size. The company hopes to develop an accurate ADR system that could be used in time for the launch of a market via the Japan Electric Power Exchange (JEPX) in April 2017.

“Technologies for local production and consumption — in addition to self consumption of energy — will be developed to connect multiple locations through networks and optimize the supply and demand of power in communities,” Kyocera says.

SB Energy — the renewables unit of telecoms giant SoftBank — also sees the development of VPPs as a “key technology” to watch in Japan in 2017. But the Tokyo-based company — which has already built 508.6 MW of solar capacity in the country, with an additional 148.4 MW now under construction — declined to comment on how the shift away from utility-scale development will affect its business.

“Lots of power plants were installed from 2012 and it has caused some output restrictions,” a company spokesperson says. “VPPs will be one of the solutions for power generators (to) install much more renewable power in Japan.