TOKYO (Reuters) - The Japanese government is threatening to cut existing solar power project subsidies angering the power producers and investors that say the cuts will undermine their profitability and violate earlier agreements.

FILE PHOTO: Solar panels are seen at a solar power facility as snow covered Mount Fuji is background in Nakai town, Kanagawa prefecture, Japan, March 1, 2016. REUTERS/Issei Kato/File Photo

The Ministry of Economy, Trade and Industry (METI) last month proposed that companies granted permits for solar projects between the fiscal years of 2012 to 2014 under so-called Feed-In-Tariffs that guarantee minimum power prices submit applications by March 2019 to connect to the grid.

Companies that miss the deadline will see their price guarantees under the tariffs of 32 to 40 yen ($0.28 to $0.36) per kilowatt hour (kWh) cut to 21 yen per kWh. Public comments for the proposal are due by Wednesday.

Japan introduced the FIT to spur solar developments to fill the power gap after the country closed its nuclear power plants following the 2011 Fukushima disaster. Japan’s FIT levels are among the highest in the world, compared to $0.19 per kWh in Germany and at least as much as those in Spain.

METI has said the cuts are necessary to reduce the public burden of the FIT subsidies, which are added to consumers bills. At the same time, METI is likely unhappy with the amount of unfilled permits. Data from the ministry shows 23 percent of the total capacity approved in fiscal year 2012 is not operating, with 49 percent approved in 2013 and 59 percent approved in 2014 also not operating.

Investors and operators in solar projects are angry with the proposals, threatening lawsuits against the government for breaching the earlier contracts. A similar decision by Spain in 2013 led to compensation payments to investors.

“Litigation will inevitably ensue from Japan and abroad, and it will be difficult to convince the public that there is no risk of the government losing when the proposed changes so blatantly disregard the foundations of the FIT scheme,” according to a note to clients from law firm Orrick reviewed by Reuters. Orrick confirmed the authenticity of the document.

METI estimates show the subsidy cut could affect 23.5 gigawatts (GW) of solar capacity, or nearly 44 percent of the amount the government approved in the three-year period after the FIT scheme was created in 2012.

Japan’s total installed power capacity is around 250 GW, with 44 GW coming from solar.

“The suddenness of the proposal, its almost immediate implementation, and ambiguity around implementation could put future and existing investments at risk,” said a group of business lobbying groups in Japan from the United States, Europe, Australia, New Zealand and Canada in a statement on Friday.

The changes could also “undermine market participants’ confidence in the security, stability, and predictability of Japanese market rules,” the groups said.

Beyond Japanese investors, BlackRock and Goldman Sachs group's GS.N Japan Renewable Energy are among the biggest investors in the solar sector in Japan.

BlackRock declined to comment, and Japan Renewable Energy could not immediately comment.

GRAPHIC - Japan's energy mix - reut.rs/2f6XOIT

An official who declined to be identified from a Japanese renewable power producer that submitted comments to METI said that some operators with bad intent have deliberately delayed projects. However, she argued that large-scale solar projects do take a significant amount of time to push forward because of environmental mitigation measures and discussions with nearby landowners.

The company told METI a unilateral schedule for automatic cuts is hard to deal with.

Several investors and lawyers involved said the changes will likely see many projects canceled.

Banks that have built up project finance teams to handle the billions of dollars of investment that has flowed into renewables in Japan have stopped or cut funding for projects, one investor said.

The investor spoke on the condition of anonymity because of the sensitivity of the issue.

The Japanese Bankers Association requested that projects which already have signed loan contracts be exempted from the new rule, saying that a significant reduction in FIT price would threaten default on payments, it said in its comments to METI.

($1 = 112.8800 yen)