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Environment

Japan struggles to cut its high solar power costs

Government and businesses do not see eye to eye on profitability

A mega solar farm built by Orix. The government has tried to encourage price cutting through auctions, but progress has been slow. 

TOKYO -- With some of the highest solar power costs in the world, Japan introduced an auction system last year to remedy the situation through competition. But that plan hit a stumbling block in the second round of bidding this summer, as it failed to award a single contract to solar farm operators whose desired prices far exceeded government targets.

A feed-in-tariff system was introduced in 2012 to promote the adoption of renewable energy, which has higher costs than thermal or water power, by buying energy from producers at favorable prices. Though renewable energy has taken root as a result, it has also kept costs from falling because the higher rate is passed onto consumers through their electricity bills. 

Concerned with reducing this burden on businesses and households, the Ministry of Economy, Trade and Industry installed an auction system in fiscal 2017 for mega solar farms 2,000 kW or larger. The format would promote competition by having builders of solar power plants provide their desired purchase price and award contracts starting with the lowest tender.

New solar power projects smaller than 2,000 kW still qualify for the feed-in-tariff system and have their energy purchased at a fixed price. 

In the first round of bidding last fall, the lowest accepted price was 17.2 yen (15 cents at current rates) per kilowatt-hour, far lower than the feed-in-tariff price of 24 yen in fiscal 2016. Yet there were also several contracts awarded at the upper limit of 21 yen set by the government. The ministry therefore decided to conceal the cap this time, until it received the results.

The upper limit for this summer's bidding was 15.5 yen, according to the Green Investment Promotion Organization, which was in charge of the auction. No contracts were awarded, however, because the lowest tender from the nine bidders was 16.47 yen. The failure to award a contract this time will make it harder for operators to lower costs going forward.

An economy ministry official said the cap was "ambitious but sufficiently profitable." A ministry survey found that over 100 commercial solar plants, including mega solar projects, would even be profitable at a price below 10 yen.

But participating bidders said they did not foresee the ministry reducing the upper limit so much. The third auction will take place in the second half of fiscal 2018. 

Greater difficulty securing development sites like old golf courses for mega solar farms also contributed to the botched bidding. Negotiations to buy land for these large projects have often run into trouble because they involve purchasing the rights from hundreds of landholders.

"Issues like acquiring land have held up our current developments, so we plan to enter from the next auction onward," said Chiba-based solar developer Hina, which was awarded a contract in the first round of bidding.

Other hurdles include significant security deposits to participate in the auction and a lack of available capacity on big power companies' grids.

There is also little need for solar power companies that began generating when the feed-in-tariff system began to take on projects whose purchase price will be lowered by bidding, since those initial contracts pay 40 yen per kilowatt-hour for 20 years.

"It will be hard to encourage companies to cut costs because Japan's feed-in-tariff system fixes the purchase price of renewable energy," said Hitoshi Honna, president of eRex, a power company that works with renewable energy.

Japan's solar power generation costs are high compared to the rest of the world and double that of Europe. As solar power generation grows more difficult at home, companies like Orix are shifting investing to other domestic renewable energy sources like geothermal power as well as solar power plants abroad.

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