January 24, 2016

Reviewing the feed-in tariff system

http://www.japantimes.co.jp/opinion/2016/01/24/editorials/reviewing-feed-tariff-system/#.VqSrcVKDmov

The trade and industry ministry plans to revise the law governing the feed-in tariff system introduced in 2012 to promote introduction of renewable energy. Through the amendment, the government hopes to achieve a cost-effective expansion of green energy use and hold down the financial burden on consumers.

Since renewable energy in Japan remains more expensive than in other countries, it is reasonable to devise measures to reduce the cost added on to electricity bills. But in so doing, the government needs to take the utmost care so that its emphasis on efficiency will not discourage potential renewable energy producers from entering the market or force out community-based small-scale operators.

The system started in July 2012, following the shutdown of the nation’s nuclear reactors in the wake of the March 2011 disaster at Tokyo Electric Power Co.’s Fukushima No. 1 plant. By requiring the major power companies to purchase at fixed prices electricity generated by solar, wind, geothermal, biomass and medium- to small-scale hydro power, the system aims to facilitate investments in renewable energy sources and expand the use of electricity from such sources. The cost the utilities have paid for the purchases is tacked on to consumers’ electricity bills.

Japan adopted the feed-in tariff system based on the experiences of other countries, especially in Europe, where it contributed to expanded use of renewable energy. The system has indeed led to a steady increase in the amount of electricity generated from renewable sources, although its share in the nation’s total power supply still remains small. As of the end of March 2015, the amount of such electricity grew 1.9 times from before the system was introduced. The share of such energy rose from 10.4 percent of the power market in fiscal 2011 — 9 percent from hydro power and 1.4 percent from other renewable sources — to 12.2 percent in fiscal 2014 — 9 percent from hydro and 3.2 percent from other sources.

However, solar power accounts for a lopsidedly large portion of power generated from green sources — 96 percent of such electricity produced in the first three years after the system was introduced. Since the prices at which the utilities were required to buy electricity from solar power suppliers were set relatively high, large numbers of businesses sought certification as power suppliers. Yet fewer than 30 percent of the certified solar power-generation facilities have so far gone into operation. Many of the certified operators are believed to be putting off installing solar panels until the cost of panels goes down so they can maximize their profits.

The trade and industry ministry’s plan to revise the feed-in tariff system is largely motivated by the prospect that the amount the power companies pay to buy green-source electricity — which is added to electricity bills — will increase greatly. The cost for fiscal 2015 is expected to reach ¥1.32 trillion, translating into a yearly burden of ¥5,688 for each household, according to the internal affairs ministry.

The trade and industry ministry is considering introduction of a bidding system in which prospective renewable power producers submit tenders — in place of the current system of setting fixed prices — if it would be effective in reducing the burden on consumers. As a first step, it is thinking of using a bidding system for solar power facility operators. In certifying the operators as power suppliers under the system, priority will be given to those who offer their electricity at the cheapest prices. There is a certain limit to the total cost of purchasing the power. Certification for the operators may be revoked if they fail to install and start operating solar panels.

For green energy sources whose lead time from the planning phase to the launch of operation is longer, such as wind and geothermal power, a system of presenting to prospective operators in advance the fixed purchase prices to be in force for the coming several years will be introduced.

The bidding system may make it difficult for prospective operators to correctly predict future price trends, thus complicating their investment plans. Hesitation on the part of operators to make new investments may create a situation in which the combined supply of electricity will fall short of the quota. The ministry needs to make sure that the steps under consideration will not hamper or disturb prospective operators’ investments and entry into the green energy market.

Community-based small-scale operators may give up offering tenders from the beginning due to their weak technological and commercial footing. Since these operators can play an important role in reviving local economies, the ministry should take necessary steps to prevent large-scale operators from eliminating smaller firms and effectively securing regional monopolies.

The structure of Japan’s electricity industry, in which major utilities own and manage transmission lines in addition to generating electricity, is partly responsible for the high cost of renewable energy. The setup allows the major power firms to refuse or reduce the purchase of electricity from green operators under certain conditions. The separation of power generation and transmission under the ongoing wave of liberalization has to wait until 2020. The ministry should review the overall power industry structure and take necessary steps to help lower electricity bills while expanding the use of green energy.