IEEJ：September 2022© IEEJ2022

IEEJ Webinar

Corporate Procurement of RenewableElectricity
The Institute of Energy Economics, Japan●Sichao KAN, Hiroko NAKAMURA, Akiko SASAKAWA, Yoshiaki SHIBATA
Yu NAGATOMI (Former IEEJ member)

Outline(1) Background(2) Major Issues(2-1) High cost and Issues onRenewable Development(2-2) Issues on Procurement
Options

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(3) Policy Recommendation
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Background Corporate buyers have become an important driver of renewable development in recent years.
 The number of Japanese companies joining RE100, a global renewable energy initiative forcompanies committed to 100% renewable electricity consumption, reached 69 by April 2022 fromonly 3 companies five years ago (2017).

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 However, Japan is one of the most challenging places in the world for companies to switch to100% renewable electricity according to a RE100 survey report. High costs and limited supply arecited as the two largest problems.

The IEEJ team conducted this study to reveal the main challenges in corporate
renewable electricity procurement in Japan and what policies and/or regulations
are needed to make Japanʼs renewable electricity market more friendly to corporate
buyers.
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Outline(1) Background(2) Major Issues(2-1) High cost and Issues onRenewable Development(2-2) Issues on Procurement
Optionss

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(3) Policy Recommendation3

Major Issues: High cost and Issues on Renewable PowerDevelopment (Land Use)
Limited land suitable for renewable development is cited as thebiggest issue

 A mountainous country, Japan is not home to as wide an area of flat land compared to othercountries and most of the low-cost flat land suitable for renewable power generation plants has
already been developed.
 Geographic constraint is not the only reason behind the land use issue.
 The acquisition of land suitable for renewable projects can be time-consuming becauseof complex land use approval procedures, and more so when property rights are unclear.
 Land use constraint is one of the biggest reasons for high renewable power generation cost inJapan and hinders further renewable energy development.

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Other issues behind high renewable development cost Time consuming Environmental Impact Assessment process can also result in high cost in somecases.
4Major Issues: High cost and Issues on Renewable
Development (Grid Connection & Utilization)
Issues on grid connection and grid utilization
 Similar to the land constraint issue, most sites close to grid connection points are alreadyoccupied by existing power generation plants.
 Utilizing the existing grid system is of significant importance in achieving the 2030 renewableenergy target. One such measure is the “non-firm” connection rule.
 Under the “non-firm” connection rule, a new power generation plant can be connected to thegrid even if there is no free grid capacity, on condition that its output will be first in line to be
curtailed without compensation in the event of grid congestion.

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 The unpredictability of how much un-compensated curtailment will happen for a renewableproject connected to the grid under the “non-firm” connection mechanism, or how thecurtailment will impact the projectʼs revenue, is cited as a big concern by the renewable
developers.

5Outline(1) Background(2) Major Issues(2-1) High cost and Issues on
Renewable Development(2-2) Issues on ProcurementMethods

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(3) Policy Recommendation
6Major Issues: Limited Procurement Options (Overview ofRenewable Electricity Procurement Methods)
Onsite RE power generationoo

Renewable power generation system
at consumer company site.
Onsite RE power generation system
usually can only meet part of theconsumerʼs electricity consumption.

Agreement (PPA) between consumer company
and renewable power generator*PPA: Power Purchase Agreement

Physical PPA

Green electricity from retailers

oooooConsumers need to pay premiumfor green electricity.
Consumers cannot designate power
generation plant.

Environmental Attribute Certificate
（EAC）
ooo
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Offsite corporate PPA︓direct Power Purchase

EACs in Japan include: Non-fossil FuelCertificate (NFC), J-credit、Green
Electricity Certificate.
Most EACs issued in Japan are NFCs.
EACs without tracking information cannot
be used for reporting under international
initiatives such as RE100.

*NFC: Non-fossil Fuel Certificate

Physical delivery of RE electricity fromgenerator to consumer company.
Wheeling contract with grid operator.
RE electricity and associated EAC (NFCin Japan) is sold in a set.

Virtual PPA （VPPA）
ooo

Physical delivery of RE electricity fromgenerator to consumer company is notneeded.
Even without physical delivery of electricity, theconsumer company and generator sign anelectricity purchase contract (electricity andassociated EAC (NFC in Japan)).
VPPA enables consumer company more
flexibility in renewable electricity procurement(free from constraint of location).

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Major Issues: Limited Procurement Options (Overview ofRenewable Electricity Procurement Methods)
 Globally, share of purchasing renewable electricity through corporate PPA in growing.

Renewable Electricity Procurement Methods by RE100 Companies
Green Electricity byRetailer
Corporate PPAIEEJ © 2022

EACs

EAC=Energy Attribute Certificate（⽇本の場合は、⾮化⽯証書等）; PPA=Power Purchase Agreement
出所︓RE1008Major Issues: Limited Procurement Options (Corporate PPA)

oooo

Self-wheeling rule
Non-FIT/FIP project iseligible
Need to sign wheeling
contract with grid operator
and know-how on balancing
Buyer is exempted from FIT
surcharge

Electricity
Paymentfor elec. Wheeling fee,and NFC imbalancing
penaltyElectricity

Physical PPA Buyerʼs credibility and capacity to guarantee a long-term electricity purchase agreement is cited to be the biggest concern forcorporate PPAs
 For corporate PPAs to be an attractive choice for renewable power generators, they need to promise a revenue level
equivalent to that of FIT and FIP projects.

DirectIEEJ © 2022

ooo

Non-FIT projectConsumer company needs
to have direct transaction ofnon-FIT NFC with generator.
If consumer company
concludes VPPA contract thedirect transaction of non-FIT
NFC is permitted
Tracking of NFC is required
Globally, most VPPAs are direct
VPPA

Paymentfor elec.
and NFC

Electricity
MarketPaymentfor elec.
and NFC(CfD)
Ele supply
Electricity

oWheeling fee,
imbalancing
penaltyooElectricity

Wheeling contract andbalancing is conducted byretailer
Buyer needs to pay FIT
surcharge
Most corporate physical
PPAs recently areindirect PPA

IndirectElectricity

Virtual PPA

oo

Retailer

Electricity

NFC

MarketRetailer
NFCooConsumer company does
no need to have directtransaction of non-FIT
NFC with generator
Tracking of NFC is required

Elec. supply
Electricity

9Major Issues: Limited Procurement Options (NFC market andtracking)
FIT NFC

Non-FIT NFC(Market for Renewable Attribute)*FIT projects(Market for Full-fill Sophisticated Act Mandate-withrenewable attributes)*FIP projects, non-FIT/FIP renewable projects, postFIT projects

o Transaction method: Auctiono Transaction method: Auction, direct contracto Consumer companies and brokers canparticipate in FIT NFC auctiono Consumer companies with a VPPA contract canhave direct transaction of non-FIT NFCs withrenewable power generators when the renewableprojects meet certain criteria

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 NFC tracking system, covering both FIT NFCs and non-FIT NFCs, is managed by JEPX.
 Further improvement is needed to make the NFC market and NFC tracking system be as
developed as REC (Renewable Energy Certificate) in the United States or the GO (Guaranteeof Origin) system in Europe
10Outline(1) Background(2) Major Issues(2-1) High cost and Issues on
Renewable Development(2-2) Issues on Procurement
Options

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(3) Policy Recommendation
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Policy Recommendation: Cost Reduction & Expand Renewable
Supply(1) Accelerate the implementation of local
decarbonization initiatives and collectinformation on land ownership andrequired conditions for land acquirement
approval during the wide area zoningprocess One measure to reinforce local decarbonization
based on the is Wide Area Zoning (revision of Act on
Promotion of Global Warming Countermeasures) National and prefectural environmental
regulations, as well as local environmental andsocial concerns, are the major issues to beconsidered in the zoning process.

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 Japanese Environmental Impact Assessment process
can be expected to be be streamlined with theimplementation of Wide Area Zoning.
 On the other hand, during the wide area zoning
process, information collection regarding landownership and providing the information torenewable developers can help bring down
renewable power generation cost.

Overview of EIA procedures in Japan
PublicLocal gov.

Screening: determin whether EIA is necessary

Developer

Central gov.

Project planning

Permission agency

Opinion from governor

Decision
EIA needed

EIA methodology (scoping)

Draft EIA methodology

OpinionOpinionFinal EIA methodology

Implementation of assessment
EIA result

Draft EIA result
Opinion from MOE minister

OpinionOpinion

Revised EIA result

Opinion from permission agency

Final EIA result

Reflect EIA results on projects

Evaluation by permission agency
Implementation of project
including environmental
protection measures

Source: https://www.cas.go.jp/jp/seisaku/jouhouwg/hyoka/dai1/sankou6.pdf

12Policy Recommendation: Cost Reduction & Expand Renewable
Supply(2) Improve grid integration condition for renewable projects
 To improve the predictability of grid connection and grid utilization data regarding power generation plants as wellas the grid operation status need to be properly disclosed to electricity market participants.

 Germanyʼs Market Master Data Register (MaStR) is a good example.

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ooAll electricity and gas market participants are required to register with MaStR.
Plant information, including the name, address, location, technology, performance value registered with MaStR is madeavailable to the public.

Source: https://www.marktstammdatenregister.de/MaStR

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Policy Recommendation: Improvement of Environment for
Corporate RE Procurement(3) Develop a user-friendly NFC market and improve the renewable tracking system
 Several factors that can be improved regarding the NFC market and the NFC tracking system include:
oooProviding required information to consumer company for verifying additionality
Revising the current NFC effective period to one year after the generation period of the NFC
Making the tracking system compatible with the latest international standards such as RE100 criteria

 Further improvement of the renewable tracking system and NFC market, to make a system as developed as REC
in the United States or GO in the Europe the relevant rules regarding the renewable tracking system and NFC market needto comply with those of the whole electricity system.

(4) Scale up the corporate PPA (physical and virtual) market. Rapidly disclose relevant marketregulation revision information companies and develop government guidance for corporate
PPA Detailed information of such market rule revision should be disclosed and reached to the companies
rapidly.
oFor example, the latest rule revision of the NFC market enables consumer companies with a VPPA contract to have directtransaction of non-FIT NFCs with renewable power generators when the renewable projects meeting certain criteria.

 Government guidance is also helpful for scaling up corporate PPA marketIEEJ © 2022oIn a corporate PPA, the buyerʼs credibility is an important factor in assessing the bankability of the renewable project. The lackof expertise on evaluating emerging schemes can also make banks hesitant in financing corporate PPA for renewable projects.
Government guidance on evaluating the bankability of corporate PPA can facilitate the financing of such renewable projects.
14Policy Recommendation: Improvement of Environment for
Corporate RE Procurement(5) Introduce consumer relief measures to reduce FIT surcharge burden Japan has introduced auctions and has moved from FIT to market mechanism based FIP mechanism to reduce FIT surcharge.

 In the short term, newly contracted corporate PPAs contribute little to the reduction of the FITsurcharge caused by projects already approved.
 Further consumer relief measures are needed.

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oOne example is Germanyʼs case. As a consumer relief measure, the Germen government has abolished the FIT surcharge
as of July 1, 2022 and has instead set up a climate fund to support renewable energy (to pay already existed FITsurcharge). The fund will be financed by revenue from carbon pricing and the government budget.

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Thank you!

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Contact:report@tky.ieej.or.jp