FITs are a proven method for jump-starting public and private investment in renewable electricity generation. Those who produce renewable electricity know that, by law, they can make a certain profit over a certain period of time. Just as important is the fact that an FIT means price stability on required renewable purchases by the utilities.
Full Online Feature
On July 1, 2012, Japan’s new Feed-in Tariff (FIT) law went into effect, requiring utilities to purchase electric power from renewable energy suppliers at a fixed price over a set period. The tariff marks the culmination of a 12 year effort that began in 2000, when pro-nuclear bureaucrats and industrial lobbyists helped defeat an earlier push for an FIT that had been supported by renewable energy advocates in the ruling and opposition parties.
The road to the new FIT law had an auspicious start. It was initially approved by former Prime Minister Naoto Kan’s Cabinet on the morning of March 11, 2011, just hours before the massive earthquake and tsunami hit, leading to the Fukushima disaster. And it was the last piece of legislation passed in the full Diet on August 26 — after weeks of stiff opposition from industry lobby groups, the utilities, and the Ministry of Economy, Trade, and Industry — before Kan resigned that same day.
What is an FIT? It’s an amount of money paid by a government to businesses, individual households, and other organizations that are involved in generating renewable electricity. This electricity is sold to the utilities at a fixed rate, or a tariff, over a certain period of time. The utilities, in turn, can require their customers to pay a surcharge for renewable-generated electricity.
The FIT system has been adopted in over 50 countries since first being introduced in the United States in 1978. Various public and private studies over the decades, including one by the European Commission in 2008, have concluded that FITs are a proven method for jump-starting public and private investment in renewable electricity generation. Those who produce renewable electricity know that, by law, they can make a certain profit over a certain period of time. Just as important is the fact that an FIT means price stability on required renewable purchases by the utilities. The FIT price is higher than the production of renewable energy, and is based on the estimated fixed costs of renewable energy production and the system to distribute it.
The law that the newly-introduced FIT is a part of requires Japan’s utilities to sign contracts with renewable energy producers in five specific areas: solar (PV), wind, geothermal, mini-hydro, and a number of different kinds of biogas/biomass (see charts). Renewable energy producers in these five categories must first gain the approval of the Ministry of Economy, Trade, and Industry to sell their electricity, and therefore must meet certain financial and technical standards the government judges to be sufficient to guarantee not only that the firms will deliver the amount of electricity promised, but also that they can do so in a safe and stable manner.
In late April 2012, METI’s Agency for Natural Resources and Energy, which is tasked with putting the new law into practice, proposed the tariff system that went into effect. For solar, there are two categories. Solar power firms producing over 10 kilowatts are to receive a contract price of 42 yen/kWh over a period of 20 years. Those producing under 10 kilowatts will also receive 42 yen/kWh, but for a 10 year period.
Wind power firms that generate over 20 kW will receive 23.10 yen/kWh for 20 years, while firms producing under 20 kW will receive 57.75 yen/kWh, also for two decades. Geothermal plants producing over 15 MW get 27.30 yen for 15 years, while those producing less than 15 MW are to get 42 yen/kWh, also for 15 years.
There are three tariff rates for mini-hydro, but are all for 20 years. Firms producing between 1MW and 30 MW receive a rate of 25.20 yen/kWh. Those producing between 200kW and 1MW receive a rate of 30.45 yen/kWh. Mini- or rather micro-hydro producers generating less than 200 kW will receive a rate of 35.70 yen/kWh.
Biomass tariffs are also set for 20 years, and have been divided into a number of different types including sewage sludge gas, the sludge itself (which is burned), forest thinnings, whole timber, and recycled wood. The tariff rate for biogas that comes from sewage sludge is 40.95 yen/kWh. For solid sludge, it’s 17.85 yen/kWh. For biomass sources made from forest thinnings, the tariff is 33.60 yen/kWh. For whole timber biomass sources, it’s 25.20 yen/kWh and for biomass made from recycled wood, which often comes from construction projects, the rate is 13.65 yen/kWh.
These tariffs are among the highest in the world and for small wind farms (under 20 kW), the tariff is the highest in the world. For larger-scale wind farms, the 23.10 yen/kWh tariff is over twice that charged in France and Germany. For solar power, the rate of 42 yen/kWh for smaller solar plants is cheaper than Switzerland’s tariff. But it’s still twice that of France and Germany. And for mega-solar power, where many Japanese firms are making plans to operate, the tariff rate is almost three times higher than in those two countries.
European renewable energy experts have pointed out the solar tariff does not differentiate between large and small-scale solar plants. In addition, it’s unclear if the two tariffs for wind power may eventually apply to offshore wind farms as well as traditional land-based windmill installations. METI says that, at present, calculating the cost for offshore wind farms is difficult. But it’s also true that, compared to the U.S., Germany, Holland, and Denmark, Japan’s major manufacturers are way behind in terms of offshore wind power and this energy form is not a high priority in either the corporate or political worlds.
Critics charge the new tariff system tilts the playing field in favor of a few major industrial firms METI has long been close to, and will discourage innovative small and medium-firms that cannot afford the development and entry costs. There are also concerns about flexibility. As Paul Gipe points out in a May 3, 2012 analysis of the new tariff for Wind-Works.org, Japan has only two types of tariffs, and one price for solar, while Germany, until recently, had six different types of tariffs for solar. And, in a move clearly designed to appease the monopolistic utilities, Japan’s FIT does not guarantee renewable electricity producers will have access to a grid connection, but forces them to pay for all grid connection costs.
Defenders of the new FIT counter that while the playing field may not exactly be level for all, the high tariff prices are great way to ramp up renewable energy use as quickly as possible, given the pressing energy crisis Japan faces without nuclear power plants and all of the attendant financial and environmental problems of suddenly increasing fossil fuel imports. They point out that the Japanese government can always go back in a few years, revise the law and reduce the tariffs to allow more competition and make other adjustments, especially if supply deregulation is carried out.
Big profits stand to be made, though, and this is by design. There is a section in the FIT law calling on METI to aim for large-scale renewable energy use over the first three years of the tariff. To accomplish this, the law says, METI is supposed to give “special consideration to the profits of renewable energy suppliers.’’ As the internal rates of return, i.e. the pre-tax profits, under the new tariff system range from four percent for some biomass forms to 13 percent for geothermal, eight percent for wind farms over 20kW, and between 3.2 and 6 percent for solar, it’s clear there are going to be some big winners in the coming years.
How much will the new FIT cost consumers? The Agency for Natural Resources predicts there will be a cost increase of 0.2 and 0.4 yen/kWh, which translates into an increase of 70 and 100 yen for using 300 kWh of electricity, roughly what the average Japanese household consumes per month.
On the other hand, large-scale electricity users, especially manufacturing firms, are going to see their bills go up by a lot more than that, at least in the beginning. But the FIT is also an opportunity for all large-scale electricity users to review carefully how they use electricity and determine whether they really are using it as effectively as they claim. As Winifred Bird demonstrates in “Energy Efficuency,” (page118), there is still much the average business in particular can do to increase efficiency, and thus lower their utility costs, even further.
There are cost and logistical concerns among both renewable energy supporters and opponents about whether the structure of Japan’s new FIT is the best way to ensure that renewables become safe, stable, and cost-effective sources of electricity. But the question is also political. MP Taro Kono fought against his own ruling Liberal Democratic Party for an FIT a dozen years ago. He watched as it was defeated by Japan’s nuclear power lobby — pro-nuclear politicians, the pro-nuclear METI, the utilities, business lobbies like Keidanren, whose members include firms that build nuclear reactors or consume large amounts of electricity, and the mainstream media which relied heavily on advertising from the utilities (see article on Kono on page 48).
Nevertheless, a huge first step has been taken with the new FIT. Regardless of how it could be adjusted or who will profit financially in the short-term, renewable energy (excluding major hydropower projects), which only accounts for about 1 percent of Japan’s total electricity supply at present, now has an unprecedented chance for growth.