Japan’s Long-Term Decarbonization Power Source Auctions: A Game-Changer for Energy Storage

This article delves into the upcoming Long-Term Decarbonization Power Source Auctions in Japan and the significant impact it will have on the energy storage market. With a focus on battery energy storage systems (BESS) and their role in achieving carbon neutrality, this auction presents a game-changing opportunity for both developers and investors in the renewable energy sector.

Introduction

Japan, a country committed to achieving carbon neutrality by 2050, is set to embark on its first-ever Long-Term Decarbonization Power Source Auction in January 2024. This auction is specifically designed to promote investment in new carbon-free and low-carbon electricity sources, with a focus on battery energy storage systems. The aim is to drive the decarbonization of the Japanese power industry and pave the way for a sustainable energy future.

Background: The Need for Long-Term Decarbonization

In July 2023, the Japanese Agency for Resources and Energy (ANRE) released the Auction Guidelines, providing the framework for the upcoming Long-Term Decarbonization Power Source Auction. This initiative follows the draft Interim Report by the Ministry of Economy, Trade and Industry (METI) and the draft Auction Rules by the Organization for Cross-regional Coordination of Transmission Operators, Japan (OCCTO). The auction offers eligible power sources a 20-year fixed revenue, providing stability and certainty for investors and project developers.

Eligible Power Sources

The Long-Term Decarbonization Power Source Auction opens doors for various renewable and low-carbon energy sources. While the specific power sources are still under consideration, the following are expected to be included:

1. Hydro power
2. Hydrogen/ammonia co-fired thermal power
3. Nuclear power
4. Geothermal power
5. Biomass power
6. Battery energy storage systems (BESS) and pumped hydro
7. Solar power
8. Onshore wind power
9. Offshore wind power
10. LNG-fired thermal power

It's worth noting that the power sources eligible for this auction cannot already be subject to the Feed-in Tariff or the Feed-in Premium regimes. Additionally, a BESS cannot be co-located with another power source, ensuring fair competition and diversification of energy generation.

Eligible Applicants and Registration Process

To participate in the Long-Term Decarbonization Power Source Auction, applicants must meet certain eligibility criteria. They must either be a domestic entity established under the laws of Japan, with their principal office in Japan, or a consortium that will incorporate a Special Purpose Company (SPC) within one year of the bid award announcement. The registration process for potential bidders is set to begin in October 2023, with interested entities required to register with OCCTO.

Support Mechanism: Stable Revenue for Successful Bidders

The support mechanism for successful bidders in the Long-Term Decarbonization Power Source Auction is a 20-year fixed revenue model. This means that the revenue generated from the auctioned price will remain constant for the entire duration of the contract. However, there is a provision that requires the successful bidder to return 90% of their total profit generated from other transactions. This creates an incentive for bidders to focus on the long-term stability of their projects and aligns with Japan's goal of achieving carbon neutrality.

Requirements and Penalties

Projects awarded support through the Long-Term Decarbonization Power Source Auction must adhere to specific requirements and face penalties for non-compliance. These requirements ensure that the projects are viable, contribute to the decarbonization goals, and maintain their capacity throughout the contracted term. For example, a BESS project must be able to start supplying power within four years from the bid award and contract execution. Failure to meet these requirements may result in penalties imposed by OCCTO.

The Capacity of the Auction and Future Rounds

The total capacity allocated for all power sources in the Long-Term Decarbonization Power Source Auction is expected to be 4GW. Within this capacity, 1GW is allocated specifically for BESS and pumped hydro. It's important to note that the initial target capacity is set at a modest level, allowing room for future auctions that can benefit from technological innovations and advancements in the energy storage industry. The scale of future rounds will be determined by the results of the initial auction and the trends in technological innovation identified by METI.

The Role of Battery Energy Storage Systems (BESS)

Battery energy storage systems (BESS) play a crucial role in the decarbonization of the Japanese power industry. With their ability to store excess renewable energy and provide it to the grid when needed, BESS ensures a stable and reliable energy supply. The Long-Term Decarbonization Power Source Auction presents a significant opportunity for BESS developers to participate and contribute to Japan's transition to a low-carbon future.

Implications for Developers and Investors

The Long-Term Decarbonization Power Source Auction opens up new avenues for developers and investors in the renewable energy sector. With a 20-year fixed revenue model, the auction provides long-term financial stability for projects and attracts investment in the development of low-carbon power sources. This creates a favorable environment for project developers and investors alike, fostering innovation and driving the growth of the renewable energy market in Japan.

Conclusion

Japan's Long-Term Decarbonization Power Source Auction marks a significant milestone in the country's journey towards carbon neutrality. By incentivizing the development of renewable and low-carbon power sources, including battery energy storage systems, this auction sets the stage for a sustainable energy future. The support mechanism, eligibility criteria, and long-term revenue model create a favorable environment for developers and investors, driving innovation and propelling Japan towards its decarbonization goals. With the auction set to begin in January 2024, stakeholders in the energy storage industry eagerly anticipate the opportunities it will bring.