30 March 2012

By Kari Williamson

The development of wind and solar projects in Japan will generate highly attractive returns under the feed-in-tariffs recently proposed by the Japanese Government, despite the much higher costs for solar in Japan than elsewhere in the world, the analyst says.

The feed-in tariff programme, set to start in July 2012, is part of policy measures to diversify Japan's energy mix after the Fukushima nuclear disaster last year.

If the Japanese Government implements the rates it is now proposing, they will rank among the world’s most attractive support mechanisms for renewables, Bloomberg New Energy Finance says.

The analyst estimates that under the proposed tariffs solar and wind projects could achieve equity returns as high as 44% and 51%, respectively. This could lead to a surge in project proposals, particularly for the solar photovoltaic (PV) industry.

Depending on how projects are treated by Japan’s traditionally conservative planning regime, Japan could see a cumulative 20 GW of wind and solar capacity by 2014, requiring total investments of up to US$37.5 billion over the next three years, assuming costs stay near current levels.

In the longer term, renewable costs will decline, enabling accelerated renewable deployment across the country despite aggressive reductions in the very generous initial tariffs on offer.

Yugo Nakamura, Head of Japan Research at Bloomberg New Energy Finance, says: “The Government faces the challenge of picking the best rate for stimulating renewable energy investment while not over-paying for clean power. With the very high rates which have been proposed there is a very real risk that Japan will experience the same boom-bust cycles we’ve seen in other countries.”

10.7 GW by 2014

Because of the attractive returns offered to investors from the proposed feed-in tariff, Bloomberg New Energy Finance says over 10 GW of new solar and 0.7 GW of new wind could be installed by 2014, requiring annual investments of $US12.5bn over the next three years.

New solar project development will take off immediately while new wind capacity is expected ramp up from 2015 onwards due to longer lead times in developing wind projects.

Japan could become the third largest solar market in the world by 2014.

Milo Sjardin, Head of Asia at Bloomberg New Energy Finance, comments: “The feed-in-tariff scheme has the potential to significantly alter Japan’s energy future. The country may build enough distributed solar capacity over the next three years to equal the electricity output from almost three nuclear power stations, and do so in a fraction of the development time. To enable further renewable deployment beyond that, the country will likely have to liberalise its power sector.”