Around 3.8GW of corporate PPAs have been disclosed to date in Japan. There is an acceleration of announced deals every year but overall this is still a small volume. The major constraints around the Japanese corporate PPA market are as follow:
- A lack of new renewable assets, mainly due to land constraint, EPC availability and grid connection delays. This is particularly an issue for offtakers looking for additionality
- A gap between asset costs and offtakers willingness to pay. There are 2 major misunderstandings when considering renewable energy costs; that decarbonizing the energy system results in lower energy costs, and that the cost of renewable energy will keep decreasing because it has historically been so.
- A lack of understanding of PPA structuring, risks and benefits by the majority of industrial offtakers, requiring years long education and negotiations on deals
This explains why a large number of PPAs are signed with already online smaller projects (often high voltage, as the above physical constraints are lower) with embedded subsidies (FIP or FIT to FIP). The price gap between such assets and a greenfield x10MW PV project can be 3¥/kWh+.
However, a number of factors are likely to push corporate PPA demand and prices up in Japan in the mid-term.
- A potential gap between availability of NFCs and retailers requirements to procure up to 60% of their corresponding retail volumes by 2040. This potential regulatory change assume that the energy mix will be close to the 7th basic energy plan targets, which is far from obvious given the physical constraints impacting new renewable development
- Possible electricity procurement issues if the current OCCTO demand scenarios realize, with total demand increase of 20% by 2040 driven mainly by datacenters. In the meantime fossil fuel power plants retirements are accelerating, and METI is already pointing out potential supply issues in the next 10 years. Until now, most stakeholders assumed that energy would be cheap and readily available in the future but this is not a given anymore.
- The cost of new renewable power will likely continue to go up. Today more than 50% of the total costs come from construction and these are unlikely to decrease. Factoring in inflation and increasing financing costs we will likely see the cost of new projects continue to increase. METI is also discussing the abolition of FIP subsidies from FY2027 for new ground mounted solar plants
- Carbon pricing will also play a role in increasing the attractiveness or corporate PPAs. In several of its committees METI is already using assumptions of 5¥/KWh to 7¥/kWh equivalent CO2 pricing by 2040. It is also increasingly considering the increase of NFCs ceiling prices.
- The ongoing revision of GHG scope 2 accounting rules could also create a spread between the different regions, with a wider gap between assets and demand in regions like Tokyo and Kansai
Ultimately all players involved in the PPA market should at least consider and prepare mid-term and long-term scenarios out of the “business as usual”. Assuming higher power prices volatility, a high price of carbon, recognizing the physical constraints on the procurement of not only renewable power but also just power, and finally the factors behind the rising cost of renewable projects.