Data analysis: Japan’s solar boom


Japan’s solar power sector had a record year in 2016 but with one of the world’s most generous feed-in-tariffs (FIT) set to be faded out, the boom could be short-lived.

Since the first solar FIT was approved at ¥42 ($0.38) per kWh in June 2012 and despite subsequent successive cuts, Japan has had one of the most generous FIT tariffs in world.

The lavish FIT tariffs, which are set by the Ministry of Economy, Trade and Industry (METI), have helped fuel a boom in greenfield solar power expansion.

In 2013, Japan over took the US as the second biggest solar market in the world in terms of installed capacity with 7,047MW completed, compared to 4,840MW in the US and 10,950MW in the world’s largest market China, according to Mercom Capital Group figures.

In 2016, the number of solar financing transactions to reach financial close nearly doubled to 21 and transaction volumes more than doubled, to $2.3 billion, IJGlobal data shows.

The boom may be about to lose steam, however. After peaking at 10,800MW in 2015, solar power installation is expected to stay flat in 2016 and dip to 8,000MW in 2017, according to Mercom Capital forecasts.

One factor is the government’s decision to start holding reverse auctions for solar tariffs from this financial year starting in April 2017. The maximum bid has been set at ¥21, half of the original 2012 solar FIT tariff. The government is planning to auction 500MW of capacity.

Still at $0.19 per kWh, Japan’s new baseline solar FIT remains well above rates in comparable developed markets such as Australia, where the soar FIT roughly averages $0.05 per kWh.

As a result, “solar in Japan should remain profitable, even with the government introducing reverse auctions from this year,” Conergy Japan managing director Hideyuki Otaka told IJGlobal during an interview in Tokyo.

Another factor that may slow growth is the cancellation of legacy solar FIT rate licences if the developers have not started development on their projects by April 2017. One upside would be to weed out the local landowners who applied for solar FIT licences in the past and pave the way for professional solar developers to dominate the market, according to Otaka.

The government’s decision, in part driven by the policy to encourage other renewable sources of energy such as wind, may also have other knock-on effects. In a country that is three-quarters mountainous, finding plots of land large enough to build utility scale solar farms has always been a challenge and Otaka expects lower FIT tariffs will further complicate land acquisition.

One issue that developers will not have to worry about is financing. Spreads on 20-year project financing loans are now hovering in the 50bp to 100bp over Tibor range, much to the delight of developers but the mortification of bankers. With the smaller regional banks aggressively lending to developers, “we are worried we may not have seen the bottom yet”, bankers at the major banks have told IJGlobal.  

Regardless, the market will continue to evolve, according to Otaka. “The next big trend in Japanese solar will be rooftop and battery storage,” he said.