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The renewable energy sector in Japan is showing active growth, with currently 16-18% of domestic energy production being generated from renewable energy sources, compared to 9% in 2010. The Ministry of Energy, Trade and Industry’s (METI) agency for Natural Resources and Energy forecasted as recently as September 2019 that this figure will increase to 22-24% by 2030.
Their main growth areas by 2030 are predicted to be in Solar (64 GW) and Wind Energy (10 GW) production, followed by Hydro and Biomass Energy as set out in Figure 1 below.
As the reduction in Feed In Tariffs (FITs) continue year-on-year in the Japanese market, developers are struggling to maintain the traditional financial model (Internal Rate of Return - IRR) for new projects as the market becomes more competitive and manufacturing costs are on the rise with the effect of the 2020 Olympic Games.
Further fuelled by the lack of large, open spaces in areas of Japan, there is a significant interest in the industry to shift its focus to smaller scale, rooftop panels for an off-grid production of energy.
Previously such movements were hindered by various risk elements such as cost, environmental and leasing contractual restrictions but the development of mass production methodologies of smaller panels have further opened up the market to developers. There is currently strong competition from international Original Equipment Manufacturers (OEMs) in the Japanese market, with many major Japanese panel makers branching out by developing and offering products such as fuel cells and storage batteries.
Natural Catastrophe trends have shifted, with frequent occurrences of wind-damaged solar panels in Japan, resulting in exposure reviews. Furthermore, the recent international market movement has affected the Japanese domestic insurance market, with non-loss affected programmes experiencing rate increases of 130%~300%.
The impact of Typhoon Faxai in September 2019 resulted in 934,000 households without electricity. The economic impact is estimated to be over US$8 billion and floating PVs were also affected in its course. A 13.7 MW floating project at the Yamakura dam was damaged by 120mph winds, which saw panels being torn off and stacking up causing the modules to overheat, resulting in fires. Such large-scale losses are also a factor for caution for the solar developers in Japan.
On November 30 2018, “Act of Promoting Utilization of Sea Areas in Development of Power Generation Facilities Using Maritime Renewable Energy Resources (Act No. 89 of 2018, hereinafter referred to as the “Act”)” was approved by the Japanese government and came into force as of April 1 20192.
The act sets uniform standards in certain sea areas designated by the authorities to be offered under public bid, with selected operators obtaining exclusive area use for a maximum of 30 years. This enables developers and operators to have certainty in land usage, driving a smoother introduction of offshore wind projects in Japan.
An additional catalyst for the offshore wind market in Japan is being driven by the development of Jack-up vessels by Japanese firms to increase availability locally. Many of the vessels are due to be completed in 2022 to prepare for the demand in Japan and the APAC territory.
There are currently over 20 offshore wind projects in the planning stage in Japan, with the projection that tenders for projects will accelerate in 2020 through to 2021.
The risk profile for Offshore Wind projects in Japan varies significantly compared to the more traditional risks seen in the European sector. In Japan traditional risks are coupled with the natural element, with Japan being exposed to considerable earthquake, wind and tidal catastrophes. There are significant works carried out by turbine makers for new equipment to be developed to withstand windspeeds of up to 70m/s compared to the traditional 40m/s-50m/s as they prepare to enter into Japanese and Asian markets.
Typhoons Hagibis and Faxai were 2019’s costliest natural catastrophes, costing US$10 billion and US$8 billion to the insurance market respectively. The changing trend of cyclones noted by geoscientists is the extreme precipitation associated with the traditional wind forces. Recognition of these changes can form a basis for further preventive measures to reduce losses.
There are still large elements of uncertainty for this previously unforeseen risk exposure, but currently this has not diminished the overall interest in developing offshore projects in Japan.
Willis Towers Watson has worked on the Fukushima III project, the world’s largest floating wind turbine project at 344 feet, which is able to withstand 65-foot waves - and even tsunamis.
Japan’s traditional insurance model is often carried out on a direct basis, with approximately 5% of market being placed through brokers. However, there is now a contrasting trend in the Japanese renewable energy industry, as there is a growing requirement for international expertise and market capacity to be deployed in Japan as Japanese developers/lenders start to look outwards for support.
In 2020 Japan’s renewable energy profile will change dramatically, with new project confirmations on large scale offshore wind projects. The solar energy development will also become increasingly closer to mass-produced projects while traditional “Mega Solars” will become less prominent in Japan.
There is still some uncertainty with regard to elements of natural catastrophe and its effects on this industry, but there are no signs of any deterrence from the developers to drive this movement forward.
Katsuyoshi Hoshino is Account Executive, Japan Global Practice Group in Willis Towers Watson London.
1 All data in this article is from https://www.meti.go.jp/english/press/2019/0315_003.html 2 https://www.meti.go.jp/english/press/2019/0315_003.html