This article was written as of March 2024.

Many changes have occurred recently in the energy industry that are leading towards carbon neutrality, as outlined below.

1. Commencement of Long-Term Decarbonized Power Plant Auction

The Organization for Cross-regional Coordination of Transmission Operators (the "OCCTO") announced a Long-Term Decarbonization Power Plant Auction (the "Auction") schedule in September 2023. The deadline for the bidders to make their bids for the first Auction is scheduled for January 2024, and the registration process for power plants for the Auction began in October 2023.

In Japan, the capacity market (yoryo shijyo, "Capacity Market") already opened in 2020. In this market, an auction is conducted 4 years prior to the fiscal year when the supply capacity is actuallydelivered and the awarded power plants will supply electricity and receive corresponding payments for each upcoming one-year period, as long as they comply with the requirements listed under the capacity reserve agreement made between the awarded power plant and the OCCTO.

The Auction is being held as a special auction within the Capacity Market. The power plants eligible for this Auction are (i) decarbonized power plants (including for rechargeable batteries), and (ii) LNG-fired thermal power plants which plan to mix hydrogen or ammonia into the natural gas component (including after replacement), each of which fulfill certain requirement to be qualified respectively, such as capacity requirements prescribed per power source.

The winning Auction bidder will be determined by a "multi-price system". In other words, each bidder will bid by providing information on (i) capacity of the planned power plant, and (ii) bidding price (yen/kW/year) for each bidding power plant. In principle, all the bids are lined up in descending order of bidding price, and the bids are to be awarded in such order until the total capacity achieves the pre-determined aggregated planned capacity.

The awarded bidder will be entitled to receive its bidding price during the applicable period (20 years or longer) as long as it continues to fulfill the stated requirements, such as the requirement to maintain supplies and to comply with the decarbonization roadmap that it submits at the timing of the Auction.

2. Introduction of Generation-Side Tariff

A Generation-Side Tariff has been discussed since 2020 (see our previous newsletter) and now is slated for introduction in FY2024. This new Tariff requires power generation operators to pay part of the wheeling charges necessary for the maintenance and expansion of the power transmission and distribution system. As of the date of this Legal Update, the Ministry of Economy, Trade and Industry ("METI") has already reflected this framework in the relevant regulatory regime, and the affected transmission system operators (i.e., utility companies) are in the process of applying for METI’s approval to revise their general terms and conditions (including wheeling charges) for wheeling services in accordance with the regulation.

Although the regulation clearly provides that the power plants which utilize a FIT or FIP scheme will not be subject to the Generation-Side Tariff during the FIT or FIP applicable period, the payment obligations of the Generation-Side Tariff will be generally applied to all the power plants that provide electricity to the transmission and distribution system.

Therefore, operators that are interested in or planning for a non-FIT/FIP electricity generation business will need to take the Generation-Side Tariff into account when planning and conducting their business.

3. Discussion of Legal Framework on Carbon Dioxide Capture and Storage ("CCS")

Carbon Dioxide Capture and Storage ("CCS") is a collective designation used to describe a range of methods used to capture emitted carbon dioxide (CO₂) and to transfer and store it in underground or in sub-seafloor reservoirs. CCS is considered essential to achieve carbon neutrality by 2050, especially in Japan.

The Japanese Government, mainly the Agency for Natural Resources and Energy ("ANRE") and the Ministry of Environment ("MoE"), discussed a legal framework and regulatory regime for CCS and these authorities published, respectively, a "(Draft) Interim Summary Report on Institutional Measures for CCS" ("ANRE Report") on December 5, 2023, and a "(Draft) Preservation of Marine Environment in relation to CCS under the Seabed" ("MoE Report") on December 12, 2023.

In the ANRE Report, ANRE has drafted an outline of a legal framework for CCS. This legal framework covers the CO₂ storage business and pipeline transportation business. With respect to the CO₂ storage business in particular, the ANRE Report introduces a number of new concepts, such as (i) the concept of a "Trial Drilling Right" and a "Storage Right", which allows right holders to prevent and remove a third parties’ interference or infringements on the right holders’ trial drilling and/or storage activities, and (ii) new third party access rights, according to the operation of which an operator of a storage business may not reject a third party’s offer to utilize CO₂ storage methods without a reasonable ground. Also, the ANRE Report refers to a storage business operator’s monitoring obligations; to governmental obligations to be put in place relating to the management of CCS storage businesses after an operator closes its storage business; and to safety measures for conducting a CCS business.

On the other hand, CCS operations in sub-seafloor reservoirs is already regulated under the Act on Prevention of Marine Pollution and Maritime Disaster. In the MoE Report, the MoE suggests certain amendments and adjustments to the existing legal framework for the storage of materials under the seabed, such as (i) establishing a permit system that covers the entire project for operations that last longer than 5 years, and reviewing the contents of the permit at regular intervals, (ii) not limiting the specific CO₂ capture methods (e.g., the use of a chemical absorption process using amine) and reducing the concentration levels of the CO₂ to be stored, (iii) updating monitoring regulations to reflect the best available technologies, (iv) enabling the permitted operators to close their storage business by taking measures in accordance with a plan prepared in advance, (v) (for the case of a business transfer) establishing a mechanism to appropriately transfer obligations imposed on the original operator, and (vi) preparing a scheme which ensures that the project will be properly terminated in the same manner as was permitted for the original operator, even if permission is revoked or the original operators are no longer in business due to bankruptcy or other reasons, and (vii) establishing a system for the export of CO₂ for a CCS business to a sub-seafloor location overseas.

Both of these reports underwent a public comments process, and on February 13, 2024, the Government submitted to the Diet a new Bill to set up the legal framework for CCS businesses.

4. Regulatory Framework on Rechargeable Batteries

Many business operators have continued paying attention to the business of rechargeable batteries in Japan.

Under the amendment to the Electricity Business Act, which was enacted in April 2023, grid storage batteries (i.e., those batteries that are directly connected to the grid rather than being attached to a power plant), the operational discharge of which have a capacity of 10 MW or more, are included in the definition of a "Power Generation Business" (hatsuden jigyo). Accordingly, these are subject to the same regulations as those in force for other business operators that conduct a Power Generation Business. Such regulations include notification requirements to METI that apply to the time of the commencement of the business, and to the obligation of such businesses to participate in the OCCTO. In addition, beginning December 2022, grid storage batteries have been treated as "power storage facilities" under a Ministerial Ordinance stipulating technical standards for electrical facilities. As a result, grid storage batteries will be subject to the same level of safety regulations as solar power generation facilities.

In terms of the safe operation of rechargeable batteries, based on the diversification of types of rechargeable batteries, the Fire Service Act and its ordinances have changed the unit for the threshold applied to rechargeable batteries from an Ampere-hour (Ah) basis to a kilowatt-hour (kWh) basis.

5. Discussion of Support Systems and Safety Measures for the Transition to a Hydrogen-based Society

The Japanese Government has recently revised its Basic Hydrogen Strategy in June 2023, which includes a hydrogen industry strategy and a hydrogen safety strategy. On December 8, 2023, a "(Draft) Interim Summary Report" on hydrogen was published. The report mainly refers to (i) a support system covering price gaps between hydrogen and other energy sources, (ii) a support system on the creation and development of hydrogen hubs, and (iii) safety measures on the production, transportation, and utilization of hydrogen. On February 13, 2024, based on the report, the Government submitted to the Diet a Bill to set up a new legal framework for hydrogen businesses. This Bill aims to promote a hydrogen-based society, in which a certified hydrogen business operator can be subsidized to close such price gaps and to create and develop hydrogen hubs.