New feed-in tariff system a rush to get renewables in play 

On July 1, a new law takes effect requiring utilities to purchase electricity generated from five renewable energy sources at a fixed price for a set length of time, under what is known as a feed-in tariff system.

The law was approved on the morning of March 11, 2011, by then Prime Minister Naoto Kan’s Cabinet, just a few hours before the Great East Japan Earthquake and monster tsunami hit, claiming some 19,000 lives and putting the government’s long-pushed nuclear power goals totally out of public favor.

It was the last piece of legislation passed in the Diet on Aug. 26, over stiff opposition from industry lobbies, utilities, and the Ministry of Economy, Trade, and Industry. Kan quit later that day.

What is a feed-in tariff?

The feed-in tariff is an amount paid by a government to businesses, individual households and other organizations to generate renewable electricity. That power is then sold to the utilities at a fixed rate over a set period of time.

The utilities, in turn, can require their customers to pay a surcharge for electricity generated from renewable sources, depending on the amount they individually use.

What is the purpose of the FIT?

The goal is to encourage investment in renewable electricity generation by ensuring that providers of such power can profit over a certain period of time, and that prices will remain stable for the purchases required by the utilities.

The feed-in tariff costs more than the price of producing renewable energy and is based on the cost of setting up production and distribution systems, thus reducing the investment risks posed by building facilities to generate renewable power.

What is the nature of Japan’s feed-in tariff and what are the rates?

The utilities will be required to enter contracts with providers of five renewable types of energy: solar, wind, geothermal, minihydro and biomass. The providers must first gain METI’s approval.

In late April, METI’s Agency for Natural Resources and Energy proposed tariff breakdowns.

For solar, there are two categories. Solar power firms producing more than 10 kw can charge ¥42/kwh over 20 years. Those producing under 10 kw also can charge ¥42/kwh, but only for 10 years.

Wind power firms producing more than 20 kw can charge ¥23.10/kwh for 20 years, while firms yielding under 20 kw can get ¥57.75/kwh, also for two decades.

Geothermal plants producing more than 15 megawatts get ¥27.30 for 15 years, while those producing under that amount get ¥42/kwh, also for 15 years.

There are three tariff rates for minihydro, but they are all for 20 years. Minihydro firms producing between 1 and 30 megawatts can charge ¥25.20/kwh. The rate for producers of between 200 kw and 1 megawatt is ¥30.45/kwh. Minihydro producers generating less than 200 kw have a rate of ¥35.70/kwh.

Biomass tariffs are also set for 20 years. They are classified into biogas from sewage sludge, the sludge itself (which is burned), forest thinning, whole timber and recycled wood. For biogas that comes from sewage sludge, the rate is ¥40.95/kwh. For solid sludge, the rate is ¥17.85/kwh. For biomass made from forest thinning, the rate is ¥33.60/kwh. For whole timber biomass, it’s ¥25.20/kwh, and for biomass made from recycled wood, which often comes from construction projects, the rate is ¥13.65/kwh.

These numbers are not final, as the agency is soliciting public comments until Friday. The final decision on the tariff system will be made in early June.

How do these rates compare with those in other countries?

For wind power under 20 kw, the tariff is the highest in the world, while for larger wind farms, the ¥23.10/kwh tariff is over twice that charged in France and Germany.

For solar, the ¥42/kwh charge for small solar plants is cheaper than Switzerland’s tariff, but still twice that of France and Germany. For large solar plants, Japan’s tariff is almost three times higher than in those two countries.

And, unlike some other countries, when Japan set its solar tariff, it did not differentiate between large and small solar plants.

In addition, it is unclear if the two tariffs for wind power may eventually apply to offshore wind farms as well as traditional land-based windmills. METI says that, at present, calculating the cost for offshore wind farms is difficult.

Why are the tariffs so high?

There is a specific section in the new tariff law that calls on METI to aim for large-scale renewable energy use over the first three years of the new tariff. To accomplish this goal, the law adds, METI is supposed to give special consideration to the profits of renewable energy suppliers.

Thus it is hoped high tariffs will encourage large-scale investment by current and new players in the renewable energy field, especially since the internal rates of return under the new system range from 4 percent for some biomass forms to 13 percent for geothermal, 8 percent for wind farms over 20 kw, and between 3.2 and 6 percent for solar.

Won’t the high tariffs spell higher bills for consumers because the utilities will pass on the cost of renewables?

The Agency for Natural Resources predicts there will be a cost increase of ¥0.2 to ¥0.4/kwh. This means an increase of ¥70 and ¥100 for 300 kwh – roughly what the average household consumes each month

Why was there so much opposition in certain parts of the government to the tariffs?

Liberal Democratic Party maverick Taro Kono, who defied his party by backing feed-in tariffs a dozen years ago, said the opposition stems from vested interests: the nuclear power lobby, meaning pronuclear politicians in his own party as well as in the ruling Democratic Party of Japan; the pronuclear METI; the utilities; and powerful business lobbies like Keidanren, whose members include firms that build nuclear reactors or consume large amounts of electricity and fear massive price hikes via renewable energy.

However, with the Fukushima nuclear crisis and growing antinuclear public opinion, combined with a push by entrepreneurs like Softbank’s Masayoshi Son to ramp up use of renewables, the Kan government was compelled to push through the FIT law, in the hope that Japan could increase its renewable energy usage and eventually get rid of nuclear power and reduce fossil fuel use.