Japan’s Secondary Solar Market Showing Strength: Q&A

By Iain Wilson, Bloomberg NEF editor. This article first appeared on the Bloomberg Terminal

Japan’s solar market growth is slowing slightly. Bloomberg NEF’s latest market outlook showed the country will probably add less solar capacity this year as large-sized, or mega, solar project development loses steam.

But one area of heightened activity in solar is the secondary market. That’s according to Yoichi Katayama, a partner in the Tokyo office of international law firm Orrick, Herrington & Sutcliffe LLP and a member of the firm’s Energy and Infrastructure Group.

“The secondary market for solar projects is quite active,” Katayama said recently in an interview with BNEF. “The timing is right. Initial developers have built up their portfolios and now they’re looking for an opportunity to cash out. The strength in the secondary market for solar will continue for this year and next year — maybe even for two or three more years.”

Orrick is an active participant in Japan’s renewable sector. In 2014, Orrick advised Setouchi Future Creations LLC in securing debt and equity financing for what was then Japan’s largest solar project in Setouchi, Okayama prefecture. Earlier this year, Orrick advised Pattern Energy Group LP and Green Power Investments on the $326 million sale of 206 megawatts of renewable projects in Japan to Pattern Energy Group Inc.

BNEF spoke to Katayama and Minako Wakabayashi, an Orrick partner and also a member of its Energy and Infrastructure Group, about the state of renewable investing in Japan.

Q: What role does a legal firm like Orrick play in the renewables industry in Japan?

Yoichi Katayama (YK): We provide legal services and legal advice involving all aspects of development and financing of projects.

When a solar project is developed, we are involved in the acquisition of the project site. We are also involved in the application of permits. We represent the sponsor, or borrower, in obtaining non-recourse project financing. From the inception of a development through the completion of the project, we are involved in every aspect.

Q: What’s the outlook for Japan’s renewable energy sector?

YK: We’re still at the inception. It’s the third inning in a sense. The feed-in tariff is the basis or platform for the growth, but Japan lost 20 years. Compared to the U.S. and Western Europe, the introduction of FIT regulation was delayed. When some countries in Europe were hitting the 25 percent to 30 percent renewable energy mark, that’s when the Japanese government started to focus but it has quite a way to follow.

Clearly, renewable energy will be a critical source of energy for Japan. While there are many challenges, overall there are great prospects for the market.

Q: What are the biggest challenges at the moment?

YK: The biggest challenge is transmission lines. The location of renewable sources (particularly wind) in Japan is limited to the Hokkaido and Tohoku areas. Transmission lines to those areas are quite an issue and getting interconnection capacity in those areas is very difficult for renewable developers. The government needs to put more support into enhancing the main transmission line from Tohoku to the Kanto area, otherwise the scarce transmission line capacity will act as a bottleneck to the development and growth of renewables in Japan.

Unlimited curtailment imposed in Hokkaido and Tohoku significantly hinders project finance. The bottleneck stems from transmission line capacity. If that’s resolved, the unlimited curtailment issue will be resolved so developers can expect normal financing. It will be extremely difficult to finance large-scale renewable projects like wind projects under such unlimited curtailment.

Q: How much curtailment are developers and banks willing to accept?

YK: It’s a difficult question. In the U.S. — in California and Texas — investors and developers can quantify the curtailment issue. Using a scientific quantification of the risk, they can make the investment decision for curtailment-exposed projects. But Japan is a black box. The utilities don’t disclose the same kind of information about their supply/demand so it is very difficult to assess and quantify the risk. Since it is difficult to quantify, it is very difficult to set out what would be an acceptable level of risk.

Q: Do you see an increase in M&A activity in Japan’s renewables sector?

YK: The secondary market for solar projects is quite active. The timing is right. Initial developers have built up their portfolios and now they’re looking for an opportunity to cash out. The strength in the secondary market for solar will continue for this year and next year — maybe even for two or three more years. For wind, new large-scale development has just started, so not much activity has been seen in the secondary market.

Q: Who is behind the development of most wind projects in Japan?

YK: It’s a combination. Foreign developers have strongly penetrated the market but traditional Japanese players continue to be very active.

Q: What is the outlook for the wind market? Is it a combination of offshore and onshore or mostly offshore?

Minako Wakabayashi (MW): The Japanese government is trying to push offshore because of the various land issues. However, the regulation has been delayed. Developers were looking forward to getting the new regulations for general deep seawater areas to promote offshore wind. The government has submitted a draft of that regulation at the last Diet. However, a lot of issues were before the Diet so the regulation didn’t go through. We’re hoping the new regulations will kick in as soon as possible to promote offshore.

Q: Does that mean offshore wind development will be delayed until those regulations are passed?

MW: There are two types of developers. One tries to develop offshore wind in areas that won’t be covered by the new regulations, so they’re trying to secure offshore sites through local regulations. A lot of newcomers have come into the offshore market that way. The second type is waiting for the new regulations, so that kind of development has been delayed.

Q: What are the questions around regulatory issues you hear most often?

YK: Since the offshore regulations are up in the air, everyone is very anxious about what the guidelines will say. Foreign sponsors with experience in offshore wind are very anxious to see the parameters of the new regulations. Other questions include those regarding transmission lines — the bidding system for capacity. It’s not clear and it’s not transparent from the foreign sponsor’s point of view. There are a lot of detailed changes to the rules and so on. Those are the two main concerns.

Q: What is your assessment of Japan’s most recent long-term energy plan? The plan calls for nuclear to account for 20 percent to 22 percent of the country’s power supply by 2030. Coal is targeted at 26 percent.

YK: I don’t think that it is realistic. Everywhere else in the developed countries, coal is being abandoned. I don’t understand why the Japanese government sticks to such an abandoned and obsolete energy source. In terms of the nuclear and coal components, Japan is not being realistic.

Q: Land availability is always a concern in Japan. How can the issue of ownerless land be resolved as it pertains to solar development?

MW: As of now, government regulation says that ownerless land can only be used for public purposes, not for solar or wind projects. However, the government is now trying to introduce a second round of regulation applicable to the ownerless land that would allow for more general usage. The new regulation may kick in as a new law rather than an amendment to the current law. The market is hoping there’ll be a way to use this kind of land for renewables in the coming years.

Q: What about regulations around solar panels on buildings or agricultural land?

MW: The building of rooftop is problematic from the perfection (the right to demonstrate the right to a rooftop) perspective. There’s no legal perfection system for only rooftop so that presents a problem from the project financing point of view. Since there’s no clear perfection system for just the rooftop portion of a building or house, there’s a hesitation to have commercial-scale rooftop solar systems. In terms of agricultural, there’s a restriction over the usage of certain lands. We deal with a lot of those issues and we have a great deal of experience working with authorities to change the categories of agricultural land, or exclude land from restricted areas, or apply new laws so that land can be used for wind and solar.

Q: Are you optimistic about the outlook for renewables in Japan?

YK: Overall, yes. Renewable energy should be a main source of energy, especially for a country like Japan with scarce resources. In reality, Japan will have difficulty meeting its nuclear and coal targets, so obviously renewable energy needs to be expanded and promoted more. I believe the Japanese government will provide more support for the transmission line system and the EIA (environmental impact assessment) system to make renewables work; otherwise, it will be extremely difficult to achieve its energy targets. The Japanese government is also promoting hydrogen, and we are starting to get involved in some hydrogen projects. This is an area that is very promising and we see it as having good potential.

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