In 2017, with its feed in tariff scheme becoming increasingly fiscally unsustainable, Japan introduced renewable energy auctions
Japan has opted for auctions as the key policy instrument at the heart of its national transition to renewable energy technologies in recent years, says a report.
The analysis by the International Renewable Energy Agency (IRENA) shows the nation has long been a major energy importer, relying heavily on fossil fuels to meet household and community electricity needs as well as transport and industrial energy demand.
It added that although Japan, which is the fifth-largest power supplier and consumer in the world, initially opted for nuclear plants to diversify its energy mix, the disaster at Fukushima in 2011 prompted a “fundamental shift” in Japanese energy policy.
In October 2020, Prime Minister Yoshihide Suga committed to achieving net-zero emissions by 2050 and plans revealed in December 2020 targeted a tripling of renewables’ share in the power mix to at least 50% by the mid-century.
IRENA said: “With nuclear power increasingly excluded from the future energy mix, renewable energy technologies have become a central element in Japanese power and energy planning.
“Auctions, meanwhile, have emerged as the key policy instrument driving the national transition to renewables.”
Renewable energy auctions in Japan are price-centred and prioritise simple design elements
IRENA’s report outlines Japan’s experience with auctions for solar, wind and biomass power generation – and notes that the nation’s renewable auctions are “price-centred and tend to prioritise simple design elements”.
In 2017, with the feed in tariff (FiT) scheme becoming increasingly fiscally unsustainable, the country introduced renewable energy auctions.
As of October 2020, it had conducted five solar photovoltaic (PV) and two biomass auctions, according to IRENA.
The nation also initiated a zone-specific offshore wind auction in June 2020, while a feed in premium (FiP) scheme announced in 2020 to promote renewable energy use was set to be introduced in 2022.
To date, the energy watchdog highlights that bidders have been awarded almost one-third of the originally announced volumes from the five solar PV auctions, with 574 megawatts (MW) awarded out of the total 1.7 gigawatts (GW) auctioned. No biomass project has yet been contracted through renewable energy auctions.
The challenge in solar PV auctions has mainly been in retaining qualified bidders, as many dropped out during the process.
The report said developers indicated that constraints regarding grid connection and land availability, as well as strict bond confiscation rules in the first round, reduced their interest in placing bids.
Average awarded prices in the solar PV auctions fell by more than 35% between the first and fifth rounds.
Despite that, IRENA notes that PV prices in Japan are still above the global average and are also high compared to those achieved in other countries with similar macro-economic conditions and levels of solar energy development.
But the agency insists that relatively high price results “do not necessarily tarnish an auction’s success”. The average awarded prices were close to the existing costs of electricity for solar PV power in Japan, underscoring the price discovery aspect of the auction process.
High prices of solar power generation in Japan due to installation and building costs
The report highlights that the main factor behind the high cost of generation of solar power in Japan is the relatively high installation and building prices, as well as the cost of modules and inverters, while risk perception can also explain the higher rates.
It added that developers must factor in the risk of high curtailment costs without compensation and grid connection uncertainties.
In the Japanese context, IRENA said economies of scale due to grid connection and land availability constraints “do not play a major role”. Consequently, the increased participation of small and new players in the fourth and fifth rounds “did not prevent prices from falling”.
The agency believes many of the challenges that the nation’s auctions have faced can be tackled through “auction design elements that go beyond price reduction”.
It added that these elements can focus on smoother grid integration of renewables, ensuring timely project completion, and/or supporting a just and fair energy transition.