Japan's Complicated Solar Plans

The anticipated passage of legislation to introduce feed-in tariffs in Japan, or the guaranteed rates at which public utilities must buy electricity produced by the sun, wind and other renewable energy sources, is raising expectations that large-scale solar power generation will grow rapidly.

But three issues – higher costs, tight land regulations and the difficulties of cooperating with electric power companies – will likely create huge business obstacles to the development of massive solar power plants. Still, companies are now positioning themselves to cash in on a potential solar bonanza.

Power projects

West Holdings Corp., a renewable energy company listed on the Jasdaq market, has launched a new project to build a large solar farm with a capacity of 1.5 megawatts in Toho, Fukuoka Prefecture. Next summer, Kyushu Electric Power Co. will start buying all power generated at the facility, which will be built on a 12,000-sq.-meter plot of land in a former coal-mining area.

West Holdings, which imports solar cells from China and installs solar power systems for households, plans to build 10 large solar farms across the nation within three years. “When the feed-in tariff scheme kicks in, solar farms will generate far bigger profits than installations of household solar systems,” said Naoto Ikeda, a senior executive at West Holdings. “We cannot afford to miss out on this opportunity.”

There are still only several large-scale solar farms in Japan, as the growth of the business has been slowed by the relative inefficiency of power generation. This makes it difficult to secure sufficient returns on the massive initial investment that is required.

But the new system, which will require utilities to buy all power produced at the solar farms at fixed prices, will boost the profitability of these projects. This is why companies in other business fields are starting to break into the solar business, including Softbank Corp. and Tokio Marine Asset Management Co., which is teaming up with Mitsui & Co.

Some analysts, however, are not so bullish about the prospects for the solar business. They point to the high costs of solar panels as a big barrier to profitability. Even if mass purchases drive down solar panel prices, a 1-megawatt solar plant will still cost at least 400 million yen to build, an official at a trading house said.

The prices and time frames for mandatory power purchases by utilities under the new system have yet to be determined. The most plausible terms are 40 yen per kilowatt-hour for 15 years, or 2 yen lower than the current price at which utilities buy surplus electricity. A 1-megawatt solar farm would generate some 600 million yen over such a time frame under these conditions, for mediocre investment returns of about 2 – 3%. And the returns end up looking even lower if land leases, tax payments and other costs are factored in.

Spanish success

In 2007, Spain established feed-in tariffs at about 10 times higher than the market prices for electricity, over a mandatory purchasing period of 25 years. These terms raised the returns on solar power investment to 15 – 20%, touching off a solar investment boom in the country. As a result, total solar power generation in Spain soared more than 20 times in 2008 from 2006.

However, the basic terms for feed-in tariffs in Japan are considerably less attractive than they are in other countries. Softbank President Masayoshi Son has ruled out massive capital investment in renewable energy, saying he will mainly use bank lending to finance his solar projects.

Another potential drag on the outlook for solar power is the factory location law, which bans power generation facilities from occupying more than half of the land on a power plant site. A provision allowing utilities to restrict the connection of solar power plants to the power grid, in order to secure stable power supplies, is also dimming prospects for the solar power business.

These hurdles must be overcome to promote large-scale solar power generation. The soon-to-be-enacted law to introduce a feed-in tariff scheme is clearly little more than an initial step in these efforts.

SOURCE:  http://www.asiacleantechgateway.com/2011/08/costs-land-rules-utilities-complicate-solar-plans/