November 14, 2012 / 10:23 AM / 5 years ago

TEXT-S&P rpt:Japan's new renewables rules spark boom, challenges

(The following statement was released by the rating agency)

Nov 14 - Renewable energy in Japan got a shot in the arm on July 1, 2012, when a law went into force directing electric power utilities to purchase clean energy at mandated, above-market rates, Standard & Poor’s Ratings Services said in a report published yesterday. The new Renewable Energy Act (REA) and associated regulations governing the feed-in tariff (FIT) system guarantee prices for 15 to 20 years for investors in solar, wind, geothermal, hydropower, and biomass energy projects launched between July 1, 2012, and March 31, 2013. The new law and regulations fix prices in power purchase agreements (PPAs) between renewable power producers and regulated utilities in Japan, increasing investment certainty and helping mitigate the risk of construction overruns.

“The fixed prices and guaranteed periods contained in PPAs support new investors in renewable energy, in our view,” said Tokyo-based Standard & Poor’s credit analyst Hiroki Shibata. “The central government is yet to fix prices for projects after March 31, 2013, and it may choose to alter pricing and procurement periods in response to material changes in either electricity prices for end users or other economic conditions. But while we may see some incremental changes to such terms in the next couple of years, we expect PPAs to remain favorable to investors as the government encourages expansion of this new energy market during this time.”

At present, Standard & Poor’s does not expect the government to change the agreed terms of the FIT or other incentive mechanisms retroactively, as has occurred to the detriment of investor confidence in some European nations. Japan’s fledging renewable energy sector would be hard hit if the same were to happen here, in our view.

We see a boom occurring in investor interest in the renewable energy sector in Japan. However, we don’t expect utilities to encourage more PPAs than they are obliged to under the law. We also predict some overinvestment will occur in Japan’s renewable market, as was the case in Spain and Germany, which could force the government to make significant changes to its FIT in the future, especially if the market continues to expand rapidly in the next two to three years.

“Avoiding abrupt policy changes may be a challenge for the government,” Shibata said.

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