Insights into recent developments in Japan’s offshore wind sector

The Japanese government’s Strategic Energy Plan sets the path for energy policy in Japan. It is formulated at least once every three years by the Ministry of Energy, Trade and Industry (“METI”). The 6th Strategic Energy Plan was approved by the Japanese Cabinet in October 2021. Its projections include targets for both 2030 and 2050. Formulation of the 7th Strategic Energy Plan is underway.

The 6th Strategic Energy Plan projects a significant increase in the contribution from renewable energy, which means there will need to be a rapid scaling of Japanese renewables to achieve the targets. Wind power currently accounts for 0.9% of the energy mix in Japan. For wind to, as projected, meet 5% of the energy mix in Japan by 2030, there will consequently need to be a large number of new wind projects. To reinforce all of this, the government has also set a target of 30–45 GW of offshore wind by 2040.

Looking further into the future, the 6th Strategic Plan targets carbon neutrality by 2050, with the government looking to continue rapid growth in renewable energy (including solar, wind and geothermal) as well as baseload nuclear energy.

Given this background, it is not surprising that the Japanese government, and corporate investors, are engaging with the Japanese renewables market. This interest has included recent M&A in the energy sector including ENEOS’ purchase of Japan Renewable Energy for approximately JPY200bn ($1.4bn) and NTT Anode Energy and JERA jointly purchasing Green Power Investment for approximately JPY300bn ($2bn). In addition, Infroneer Holdings, a Japanese infrastructure company, recently purchased Japan Wind Development from Bain Capital for JPY200bn ($1.4bn).

As part of this renewables expansion, the offshore wind market in Japan represents an area of key interest. This is due to, amongst other things:

• Potential for growth – Japan’s offshore wind installed capacity currently stands at around 300 MW (see table, above) but is planned to expand to over 5.7 GW by 2030. Looking further ahead, Japan has over 50 GW of offshore wind capacity in the early planning stages.
• Geography – Japan’s maritime jurisdiction, including its exclusive economic zone, is 4.47m km² (the 6th largest in the world). Due to the water depth off the Japanese coast, there is considerable interest in floating offshore wind and Japan is one of the early adopters of this technology. The Japan Wind Power Association estimates long-term potential to be about 128 GW for fixed and 424 GW for floating offshore wind.
• Investment climate and environment – As already noted, Japanese renewables are attracting significant interest from both domestic and international investors and there is a developed regulatory framework, coupled with a stable business climate, to facilitate the development of major offshore wind projects.* With recently proposed legislation, this will also apply to international investors considering floating offshore wind projects in Japan’s Exclusive Economic Zone.

The regulatory framework

Japan is developing a regulatory framework for its growing offshore wind sector.

The three regulatory frameworks that govern different areas of the Japanese coastline are as follows:

1. Ports/harbours are governed by the Port and Harbour Act. After the amendment to this Act in 2019, wind farm developers can obtain occupation permits for their use of certain designated zones (within ports and harbours) for up to 30 years.
2. General (aka Territorial) Sea Area (coloured light yellow in the map below) is governed by the Marine Renewable Energy Act. This extends up to 12 nautical miles from the coast. This law also stipulates developers selected through public tender are permitted to use sea areas for up to 30 years.
3. The Exclusive Economic Zone (coloured white in the map below) is not currently governed by Japanese legislation. METI is trying to establish new legislation for utilising the EEZ.

In the current market, the most important of these regulatory frameworks is the Marine Renewable Energy Act, which came into force in 2018. It is under this legislation that the auction process for offshore wind farms off the coast of Japan is governed. To develop a project, the Japanese government will designate an area first as a “Preparatory Area” and then as a “Prospective Area”. At “Prospective Area” stage there will be a variety of investigations and consultations by government departments and a public notice to stakeholders about the designation of the zone. After this stage, the area will, if it is proceedable, become a “Promotion Area”. See map below.

The auction process for “Promotion Areas” will involve preparation of guidelines for occupancy, submission of action plans for occupancy and then selection of the most appropriate business operator. Items that are evaluated in the selection process include price, experience of the developer, proposed timing for the commencement of commercial operation, the quality of the development plan, the stability of the electricity supply and contributions to the local community.

Importantly, for the purposes of developing the power generation market in Japan, an amendment was introduced to the Act on Special Measures Concerning Procurement of Electricity from Renewable Energy Sources by Electricity Utilities, in April 2022. This created a framework for a feed-in-premium system to replace a feed-in-tariff system. This restructure creates opportunities for developers that can accurately predict movement in the market and/or changes in demand as they can take advantage of such dynamic pricing. But it also introduces greater risk for developers as they may miscalculate the profitability of the project overall.

It is also to be noted that Japan’s Foreign Exchange and Foreign Trade Law is relevant to developers engaging with the Japanese offshore wind market. This regulation imposes certain restrictions on foreign direct investments in key sectors of the Japanese economy, which includes the power generation business. Foreign developers will need to notify the competent authority in Japan and receive confirmation prior to any investment. In practice, this permission is often granted relatively easily and without issue.

Offshore wind rounds

Japan has held two offshore wind tenders to date.

The first tender round for offshore wind projects concluded in 2021, with the same consortium, led by Mitsubishi Corp and Chubu Electric Power, being awarded the occupancy permits for each of the three fixed-bottom projects: Noshiro-Mitane-Oga (494 MW), Yurihonjo (845 MW), and Choshi (403 MW).

The only floating offshore wind project, Goto (16.8 MW), was won by a consortium of six led by Toda Corporation.

The winning price for the fixed-bottom projects was far lower than the upper price limit set in each auction. This resulted in the market questioning whether the consortium could cover their costs for the projects. Such speculation, and the fact that the same consortium won all three bids, resulted in the government updating the auction rules in October 2022 to facilitate certain key changes, including:

• speed of execution of a project was given more weight;
• if any of the bidders’ proposed price was less than the price at a zero premium, an equal score for pricing will be given to all bids below the zero premium; and
• the government could limit the grid capacity that a single bidder was able to win at once.

In the second tender round for offshore wind projects the auctions were conducted based on the feed-in-premium regime and pursuant to the revised auction rules. Of the four auctioned projects, results for three of the projects were released on 13 December 2023, with Oga-Katagami-Akita (315 MW) being awarded to a consortium of JERA, J-Power, Itochu and Tohoku Electric, commercial operation date 30 June 2028, Murakami-Tainai (684 MW) awarded to a consortium of Mitsui, RWE and Osaka Gas, with a commercial operation date of 30 June 2029, and Saikai-Enoshima (420 MW) awarded to Sumitomo and TEPCO Renewable Power, with a commercial operation date of 31 August 2029.

The award of the fourth and final site in the second tender round, Happo-Noshiro (375 MW), was announced in March 2024. It was awarded to a consortium of Japan Renewable Energy Corporation (JRE), Iberdrola, and Tohoku Electric Power, with commercial operation scheduled for 2029.

These auction results demonstrate the Japanese government’s success in diversifying the consortia of developers that are awarded offshore wind projects in its waters and procuring European investment.

The third tender round is anticipated to require bid submissions by the end of July 2024 for two areas: Sea of Japan (600 MW) and Yuza (450 MW).

Offshore wind in the EEZ

A government panel recommended in 2023 that legislation be enacted to allow development of offshore wind in Japan’s EEZ. So, this is a space to watch moving forward. It will involve a revision to the Marine Renewable Energy Act and the government of Japan is planning to enact the revision before the end of 2024.

This is anticipated to include allowing bidders to hold exclusive rights to an area for an offshore wind project in the EEZ for up to 30 years.

The development of wind farms in the EEZ is anticipated to follow a “two-stage formula”:

1. the government will first design a “zone for taking applications” and issue a provisional permit; and
2. prospective developers will form a council with local parties (including fishermen and academic experts) and, if an agreement is reached for the applicable zone, the developer will be provided with a formal permit.

Floating demo projects

Connected to the viability of the EEZ for offshore wind projects in Japan will be the ability to develop, and scale, floating offshore wind in a cost-effective way, given that all projects in the EEZ will need to be floating.

To facilitate progress in the floating sector, the government of Japan:

• is preparing a new roadmap for floating offshore wind power, and
• has started accepting applications for companies to run projects for floating wind turbine demonstration projects. The four candidate areas include: two
  in the northernmost prefecture of Hokkaido, one in the Akita prefecture and one in the Aichi prefecture. These demonstration projects range from 8 – 30 km from the shore, in depths between 70 and 400 m and projected installed capacities in the range 10 – 90 MW.

Issues for the offshore wind investor

• Japanese partnership – under the Marine Renewable Energy Act, a foreign investor may be a sole shareholder of a BidCo. However, given the auction guidelines provide that assessment criteria include “ability to co-ordinate with local administrative authorities”, “co-ordination and coexistence with surrounding shipping routes, fisheries, etc” and “ripple effects on the local economy”, it is practically necessary to work with a Japanese partner to be successful. This is because having a Japanese partner ensures the appropriate strong relationship with local municipalities and residents can be appropriately managed. This certainly reflects the standard approach that consortia are taking.
• Changes of control – per the auction’s guidelines released for the first, second and third rounds, share transfers in the Bidco are possible, but the relevant authority retains the right to approve all changes to the project plan (kobo-senyo- keikaku), which includes changes of control in the Bidco. The guidelines state that the relevant authority will certify a change in parties if the share transfer (i) has a low impact on the certainty of the project’s implementation and (ii) does not significantly change the composition of the consortium members.

The guidelines clarify that the relevant authority’s judgment will require particularly careful consideration if the share transfer results: (A) before commercial operations date, in the shares of the consortium members falling below 2/3 of the total shares in the Bidco and (B) after commercial operations date, in the shares of consortium members falling below 1/2 of the total shares in the Bidco.

• Local stakeholders – an investor will need to have a good level of in-person support in Japan to interact with local stakeholders to progress any offshore wind project, not least in connection with the active fishing industry.
• Local content – 40 of the 240 points in the Japanese official bidding rules are apportioned for local contribution. On a relative scale compared to other jurisdictions, this is a low proportion. But investors still need to consider the existence of the expertise, know-how and functionality for scaling wind farms at pace in Japan.
• Availability of long term PPAs – a key consideration for any offshore wind project in Japan is its ability to find suitable offtaker(s) willing to commit over the long term. This is compounded when considering the amount of power generated by offshore wind projects, which will usually require the developer to arrange PPAs with several offtakers. Balancing the competing interests of each offtaker is likely to represent a challenging aspect of achieving a bankable PPA structure in the Japanese offshore wind market. Also, note the importance of this construct in the context of the feed-in-premium system.
• Competition with other jurisdictions – in a world in which many jurisdictions are opening up their waters for offshore wind development, offshore wind investors have to consider the relative merits of different markets and opportunities. Accordingly, such investors will weigh up the issues/considerations listed above (together with others) to consider whether the Japanese offshore wind market represents the opportunity they are looking for in their portfolio of offshore wind assets.
• Consenting timelines – consenting can be one of the most time-consuming stages of offshore wind development, taking three to five years on average, and there may be challenges and delays in consenting early large projects in Japan whilst mitigating for potential environmental and social impacts.
• Technical challenges to offshore wind development in Japan – installations in Japan to date have been small, pre-commercial, scale. Japan poses some technical challenges moving to large commercial projects. These challenges include the occurrence of earthquakes and typhoons, and potential grid integration issues.
• Supply chain development – whilst Japan has an extensive pipeline of offshore wind projects, the national supply chain is relatively inexperienced compared to mature markets, and there is no domestic wind turbine manufacturer. It is expected that Japan will work to increase local capabilities to capture the economic benefits available from offshore wind development.

This article first appeared in Modern Power Systems magazine.