Making headway in Japanese offshore wind the challenges which remain

Japan's much anticipated offshore wind legislation, passed in November 2018¹, has been an undoubted success in attracting key international and domestic players to the new market.  Challenges remain however, and in this article we take a closer look at the some of the key issues that continue to attract the close scrutiny of industry participants.

Early success, but well-versed issues remain 

With the first "Round One" auction already concluded (with a consortium led by Toda Corporation being named the winning bidder for the 16.8MW Goto floating offshore wind farm in Nagasaki prefecture), and with the remaining three Round 1 auctions set for conclusion in October/November 2021, the Japanese government is setting a steady pace in respect of the development of the industry in these early and critical years. 

Notwithstanding this initial success, followers of the Japanese offshore wind market will be aware of the same key issues being raised with the Ministry of Economy, Trade and Industry ("METI") and the Ministry of Land, Infrastructure, Transport, and Tourism ("MLIT") on a regular basis since the approval of the Marine Renewables Energy Act in 2018, with more detailed interrogation of such issues manifesting during the Round One bidding process following publication of the various auction guidelines.

In our previous briefings on the Japan offshore wind market², we commented on a variety of challenges that in our view will require ongoing attention and collaboration between the authorities and industry participants as the market develops.  Following the conclusion of the Round One bidding process, dialogue between the industry participants and METI/MLIT did indeed demonstrate a wide breadth of issues, but it was also clear that a priority category of material challenges has emerged, as identified consistently by industry participants involved across the Round One projects.  In this priority category, we would place:

• Grid capacity and transmission;
• Port capacity and location;
• Environmental approval process; and
• Local community and fishery collaboration. 

Grid capacity and transmission

The Japanese grid and transmission network has in the past been a cause of concern for industry participants for well documented reasons, such as grid curtailment (not just a theoretical risk following 13 October 2018, when solar curtailment first took place in mainland Japan, by the regional utility Kyushu Electric Power Company), the "first come first serve" rule (where power generation facilities that are constructed first have the right to secure as much capacity as required), and the unplanned nature of transmission line enhancements (carried out at the request of generators rather than pursuant to any long-term strategy).  These grid issues are compounded by the planned large-scale offshore wind promotion zones often being located far away from the power consumption centres such as the Kanto and Kansai regions. Transmission issues are also intensified by the monopolies developed by the country's regional power utility companies. 

Progress has been slow in this area, giving rise to the concern that such grid issues could prevent Japan from delivering on its ambitious 30-45 GW target of offshore wind output capacity by 2040.  Encouragingly, there has however been positive indications that Japan will ultimately deliver in this area.  For example, Japan is currently testing and developing its own version of the UK's Connect and Manage regime which is expected to improve the grid constraint issues mentioned above.  Critically, the government is also investigating how it can double its regional electrical grid capacity under a grid "masterplan", expected to be finalised in 2022.  This would potentially cover new routes connecting Japan's islands, including undersea cables between Hokkaido and Honshu for example, and METI working together with the utility companies to address transmission issues.  

Whether this grid masterplan ultimately sets out the solutions which, if implemented, would result in Japan's grid network being fit for purpose for long-term major offshore wind development, and also whether such masterplan will be delivered at the pace required to match the offshore wind targets of Japan, remains to be seen.  The success of the implementation of the grid masterplan will be a key determining factor in whether Japan realises its offshore wind potential over the next decade and beyond.

Environmental approval process

The length of Japan's environmental impact assessment ("EIA") process is gaining increasing attention, scrutiny, and criticism as international developers are brought up to speed with what is required by their domestic joint venture partners.  The EIA process can be fraught, and it is not unheard of for it to take up to eight years to complete, with perhaps a four to five year process currently representing a typical time period.   

Factoring in such a long time period for the EIA, in the context of an auction system where the 20 year FIT tariff runs from a specified scheduled commercial operation date, means that bidders will inevitably need to incur significant expense prior to submission of the bid in order to ensure that they are far enough along the EIA process to give themselves, their shareholders, and lenders, comfort that the EIA process will be completed in line with the desired construction timetable.  

As with the grid issue discussed above, there have also been encouraging signs this year that Japan is taking meaningful strides to address the EIA concerns of the industry.  It is for example investigating a deregulation of the EIA process in order to facilitate the expanded use of renewable energy sources.  While this is a positive step, going by the concerns raised by industry participants to-date as to the length of the EIA process, the authorities must significantly improve the process if the offshore wind industry is to build upon the initial momentum generated by the Marine Renewables Energy Act.  The efficient removal of unnecessary red-tape and unduly burdensome administration is not perhaps something that is synonymous with public authorities in Japan, but this in an area where improvements are undoubtedly required if the industry is to fulfil its potential over the coming years.

While noting the above, the unsurprising resistance to such deregulation in local communities needs to be acknowledged, taken into account, and appropriately addressed.  Conservation societies (for example) remain concerned with the potential harmful effects of wind farms such as bird strikes, marine life consequences, and loss of habitat.  Transparent and consistent dialogue with all stakeholders will be required in order to achieve a balanced and reasonable position which promotes renewable energy generation while simultaneously ensuring that the impact of an offshore wind farm on the surrounding environment can be effectively and appropriately managed to the satisfaction of all affected parties.

Port capacity and location

Base port construction is underway at four locations throughout Japan to strengthen the soil bearing capacity necessary for the installation and maintenance of offshore wind turbines³.  These base ports are at Noshiro, Akita, Kashima, and Kitakyushu.  While such progress is encouraging, port congestion and availability were raised as consistent concerns of the industry during Round One dialogue with METI and MLIT.  The limited circumstances in which successful bidders will be entitled to claim an extension to its scheduled commercial operation date⁴ only serves to heighten the concern of the industry in relation to port availability and available supporting infrastructure.  In this context, the Japan Dredging and Reclamation Engineering Association estimates that to achieve deployments of 10 GW by 2030, and 15 GW thereafter, seven and then 10 base ports nationwide will be required respectively⁵.  A clear pathway as to how such port capacity will be achieved by the Japanese government would be well received by the industry. 

METI has in response stated that as part of its offshore wind strategy, it will review the functions required of Japan's future base ports, taking into account the schedule for power grid development and designation of promotion zones, as well as the trend towards larger wind turbines⁶.

Increased transparency and communication from METI/MLIT in relation to its development plans for these future base ports will be a key determining factor in promoting the confidence required within the industry to invest at the level needed for Japan to meet its offshore wind targets.

Fishery collaboration

Relationships with the local communities, and the local fishery associates in particular, quite rightly continue to be given a high level of priority by developers.  Clearly developers are keen to establish a collaborative and mutually beneficial relationship with the local community and fishing industry, but the ambiguity of the auction rules in this area has been problematic, and has arguably led to unnecessary uncertainties and potential tension between the stakeholders.

As a result, a range of issues have developed in this area, such as how far out into a "region" the benefit of the offshore wind project needs to be felt in order to score well in the auction assessment; what level of approval is required from the relevant fisheries association in advance of the application for the occupancy permit; and the level/mechanics of the contribution required for the local region and fishery fund.  The legislation, auction guidelines, and government dialogue on this point have not always provided certainty in respect of the issues raised, leaving industry participants in less than optimal second-guessing territory.  

The hope is that as the industry develops, and as more auctions take place, increased guidance will become available (based on past experience and "lessons learned") which will help assist developers in their decision making process and endeavours to build collaborative and long-lasting relationships with the local community.  

As evidenced by the Goto project, encouraging evidence already exists with regard to how the relationship between developer and local community can be effectively developed and become mutually beneficial, with the local fishing association now stating that, after initial concerns, it considers that the Goto project "offers the opportunity for coexistence and co-prosperity for all those involved, and that it will lead to the revitalisation of the local community⁷".  This positive example can be attributed to the transparent sharing of data in terms of the potential positive effect of the offshore wind farm on the marine environment, and detailed dialogue with the local community demonstrating how the project can benefit the local area (for example, in terms of tourism as well as a new economy in the context of the operations and maintenance of the wind farm).  

Other worthy mentions

Given the infancy of the Marine Renewable Energy Act, the issues discussed above are focussed on the front-end development of an offshore wind farm.  Other projects are however more advanced given that they are instead being progressed under the Port and Harbor Act regime.  

Such projects can provide a useful reference point for issues which may arise under the Marine Renewable Energy Act in the future.  Examples of such issues relate to limitations on installation vessels arising from current cabotage restrictions; uncertainty regarding the process and timeline for ClassNK certification and METI approvals; and industry confidence in CPT geotechnical investigations in Japan.  As more offshore wind projects are developed in Japan, these are topics which will no doubt attract the increased focus of the industry going forward as it seeks to commit significant investment to the Japan offshore wind industry and develop supply chains so as to bring down the cost of offshore wind production to the level that the Japanese government is ultimately seeking.

Lastly, there does seem to be an undercurrent of concern amongst industry participants as to how the subjective evaluation criteria of the auction rules under the Marine Renewable Energy Act will be applied by METI (which, by way of reminder, accounts for 120 of the 240 points on offer, with the second batch of 120 points awarded on the basis of pricing).  The publication of the methodology and reasoning applied by METI to its assessment of Round One bids would assist unsuccessful bidders in analysing the areas in which it needs to improve for future bids, and provide much needed clarity for industry participants on other aspects of the auction rules for future rounds, which are currently being left open to the interpretation of the bidder.  At present, the subjective nature of the evaluation criteria arguably leads to increased risk being priced into the bid, with increased buffers built into the construction programmes which could sensibly be avoided.  

While the competitive tension of the bid process may to an extent protect METI (and ultimately the consumer) from the inclusion of such contingencies, increased clarity and transparency on the bidding process at an early stage in the development of the industry in Japan will accelerate the pace at which the industry can achieve Japan's ambitious target of JPY8-9/kWh by 2030-2035⁸.  Interestingly, the Yurihonjo auction guidelines contained additional language which referenced bids being used for the purposes of considering policy changes in the context of delivering a long-term, safe, and effective energy business⁹.  It is unclear at this stage how METI intends to take advantage of this provision, if at all. 

Should METI decide to not disclose information, at least to some extent, in relation to how it has applied the subjective evaluation criteria to the bids received in Round One, it is hard not to see this as an opportunity missed in terms of improving the process and efficiency of the bidding process for "Round Two" and beyond.

Concluding remarks

All of the issues discussed above will be well-known to industry participants in the new Japanese offshore wind market.  Solutions to these issues are being discussed in detail and developed by all key stakeholders in various forums, and such dialogue is indeed encouraging.  However, the key theme running through each issue is the speed, efficiency, and cost at which the Japanese government can deliver the solutions for which the industry is lobbying.

While the grid and port infrastructure issues discussed above can be viewed as medium to long term issues, clear and regular communication from METI and MLTI in the short-term regarding how it intends to implement the relevant solutions, in particular in relation to timing and cost, will help industry participants plan for their future investment into the Japanese offshore wind market with increased confidence.  

Other issues, such as the length of the EIA process, and the perceived lack of clarity in the Marine Renewable Energy Act auction rules in certain areas, can be viewed as shorter term issues which are readily fixable by actions that can be taken in the near future, such as removing unnecessary red-tape from the EIA process, and METI releasing detail on how it has applied the subjective evaluation criteria to the Round One bids (acknowledging that commercially sensitive aspects of submitted bids must be protected). With the Round Two promotion areas and promising areas being developed at an encouraging pace, positive steps in respect of these shorter term issues would be a most welcome development indeed. 

_{1. The Act on Promotion of Use of Marine Areas for Development of Marine Renewable Energy Generation Facilities ("the Marine Renewables Energy Act")}

_{2. Making headway in Japanese offshore wind – one year on, 18 December 2019; Offshore Wind in Asia: Recent Developments and Future Opportunities, 10 June 2020; Making headway in Japanese offshore wind – Auction guidelines face bidder scrutiny, 7 December 2020; Making headway in Japanese offshore wind - Bidder scrutiny of auction rules continues, 9 March 2021; Renewable energy development: Commercialisation of Floating Offshore Wind, 15 March 2021}

_{3. Overview of the Vision for Offshore Wind Power Industry （1st）(provisional translation), Public-Private Council on Enhancement of Industrial Competitiveness for Offshore Wind Power Generation, 15 December 2020}

_{4. Making headway in Japanese offshore wind – Auction guidelines face bidder scrutiny, 7 December 2020}

_{5. 洋上風力発電建設の課題と　拠点港湾のあり方について}

_{6. Overview of the Vision for Offshore Wind Power Industry （1st）(provisional translation), Public-Private Council on Enhancement of Industrial Competitiveness for Offshore Wind Power Generation, 15 December 2020}

_{7. Japan harnesses offshore wind to power the future, Reuters Plus, March 2021}

_{8. Overview of the Vision for Offshore Wind Power Industry （1st）(provisional translation), Public-Private Council on Enhancement of Industrial Competitiveness for Offshore Wind Power Generation, 15 December 2020}

_{9. Chapter 10(3)(5) of the Yurihonjo Auction Guidelines}