Sumitomo sees ‘solar bubble’ with rejection of nuclear power

by Yuriy Humber and Tsuyoshi Inajima

Bloomberg

As Goldman Sachs Group Inc. and billionaire Masayoshi Son lead a swarm of investors seeking to exploit Japan’s solar power subsidies — the largest in the world — Sumitomo Corp. is betting on wind.

Trading house Sumitomo, Japan’s second-largest investor in power generation outside utilities, will add wind farms and at least two biomass plants to take advantage of the above-market rates for electricity from renewable sources the government introduced in July.

Sumitomo’s utility, Summit Energy Corp., expects profits from wind power to triple in as many years, according to the unit’s president, Shinichi Kitamura.

Sumitomo’s focus is in part a response to a rush into solar projects that is pushing up land prices and salaries, and luring investors from pachinko parlor operators to asset managers. While government data show Japan can build wind farms at a cheaper price and with higher returns than solar facilities, 99 percent of applications for the new tariffs are for electricity generated from sunlight.

“With so many companies rushing in we are seeing a solar bubble forming and land prices are rising,” Kitamura said in a Sept. 7 interview. Japan’s ambitions in renewable energies look more manageable in wind power, he said.

Prime Minister Yoshihiko Noda announced Sept. 14 an energy policy that calls for a phaseout of nuclear energy over the next three decades and for electricity generated by renewable sources to triple. The ruling Democratic Party of Japan last month recommended that renewable energies account for about 40 percent of the country’s total power supply by the early 2030s, compared with the current 8 percent that mostly comes from hydropower.

To help meet this target, the government introduced a feed-in tariff system July 1 that requires utilities to buy power from renewable energy providers at premium prices. As a result, investment in solar, wind and other forms of clean energy may jump to ¥1.3 trillion this year from ¥670 billion in 2011, based on Bloomberg estimates.

The new system follows the examples of Germany, Spain and Italy, who since 2004 have overtaken Japan as the global leader in terms of installed solar capacity. Rates are now being cut across Europe as the volume of solar projects they created make subsidies unsustainable at their original levels.

The lessons of Europe show that those that get in early reap the most benefit before tariffs rates are cut. Of all the renewable energy types available in Japan today, the quickest to set up on a utility scale is solar, said Dean Enjo, an analyst with CLSA Asia-Pacific Markets in Tokyo.

“Right now, Japan is in a power crisis and the immediate response will be in solar,” Enjo said. “Solar farms can be scaled up in months. Biomass, geothermal, wind — they are all viable sources, but they take a lot of time and have a lot of red tape involved.”

From October, all wind power developers will need to make an environmental assessment of noise pollution from humming turbines and to show profit feasibility, after some wind farms failed to make money. Geothermal projects, meanwhile, can take as long as a decade to develop, Summit Energy’s Kitamura said.

In the first two months of the feed-in tariff, applications for 155 solar projects with a capacity of at least 1 megawatt were filed, but only 14 for wind power and one for biomass, government data show.

Projects to add solar plants with a combined capacity of more than 1,150 megawatts were announced this year, compared with none last year, according to Bloomberg data. Those estimates, which exclude residential installations, mean about 110 megawatts of utility-size solar capacity may be commissioned this year, up from 10 megawatts last year, according to an Aug. 31 report by Bloomberg.

Among the most ambitious plans is under Orix Corp., a finance and leasing company that is looking to spend more than its annual net income of ¥86 billion on solar plants.

Japan Asia Group, a Tokyo-based brokerage and an aerial surveyor that started looking at renewables three years ago, last month pledged to invest ¥150 billion to build solar plants with a capacity of 500 megawatts across the country by March 2015. This amount exceeds the brokerage’s revenue over the last two years.

Solar investors such as Toshiba Corp., which makes solar equipment, are being joined by companies as varied as asset manager Sparx Group, Mitsui Chemicals Inc. and pachinko parlor operator Novil Corp. Sparx’s announcement Sept. 7 that it will build a solar plant helped its stock jump the most in a month.

“The solar market is the most lucrative to investors and it’s going to be the one heating up for at least the next three years,” CLSA Asia-Pacific Markets’ Enjo said.

The attraction for investors lies in the feed-in tariff system. At ¥42 per kwh for 20 years of a solar project, it’s triple the ¥14.59 per kwh that industrial users paid for electricity in the last fiscal year. That has grabbed the attention of investors outside Japan.

A group including IBM Corp. and Goldman Sachs won approval to build Japan’s largest solar plant, with a capacity of 250 megawatts, in Setouchi, Okayama Prefecture, at a cost of up to ¥86.1 billion, municipal authorities said Sept. 13. That would be Goldman Sachs’s second renewables investment in Japan after it bought 5.1 percent of Eliiy Power Co., a lithium-ion battery maker, last year.

“We expect the clean technology and renewable energy industry to play an increasingly important role in Japan, and we remain focused on this area,” said Ankur Sahu, Goldman Sach’s cohead of merchant banking in the Asia-Pacific region.

Sumitomo, a trading house with 5,810 megawatts of capacity worldwide, decided against investing in some advanced stage solar projects because of rising costs, Kitamura of Summit Energy said. The company operates domestic two wind farms and three thermal generators, one of which can burn biomass.

The city of Hamamatsu, Shizuoka Prefecture, said last month it received 23 bids for a project to build two solar plants with a total capacity of 3 megawatts.

The winners, which included Chubu Electric Power Co., agreed to pay “several times” the minimum land price set by Hamamatsu for the bid, Kuniatsu Suzuki, an official in the city’s new energy promotion headquarters said Sept. 25.

Though the effect has yet to be felt nationwide, the amount of space that solar plants need will push up land prices because suitable areas are limited, said Takashi Ishizawa, head of real estate research at Mizuho Securities Co.

With land prices falling in Japan for the last 21 years, according to the Land, Infrastructure, Transport and Tourism Ministry, renewable energy investment may help the country in its fight against deflation that has dragged on the economy for decades.

“There are many players entering this business fighting for land and the competition will be pretty fierce from now on,” Kazunobu Watanabe, chief planning officer of Japan Asia Group, said in a briefing in Tokyo. The company’s aerial land surveying unit provides it with leads from its network with local governments, he said.

The number of job openings in renewables almost tripled this year and most of that is due to “aggressive” demand from solar projects, said Kazuyoshi Ofuchi, owner of Pathfinders Executive Search Co., which specializes in recruitment for the power industry.

Engineers and business development staff are being offered 20 percent more to join solar projects compared with similar industry positions, as there’s a shortage of experienced talent, Ofumi said.

Son’s mobile phone operator, Softbank Corp., may already be hedging its solar bet. After unveiling in August a 230 megawatt renewable program that was almost 90 percent solar, Softbank said Sept. 14 it may add a 1,000 megawatt wind farm in Hokkaido, which would be the largest in Japan.

The push into wind does not mean Softbank believes the solar sector is experiencing a bubble, company spokesman Naoki Nakayama said Sept. 25, adding that the details of the Hokkaido project are not yet decided. “Some people may call it a bubble, but it’s not that simple,” he said.

Despite greater regulation in the wind industry, the three-year window Japan set for projects to receive feed-in tariff approval is stimulating investment, Summit Energy’s Kitamura said.

“There will be a flood of applications trying to lock in the good rates before they expire,” Enjo of CLSA Asia-Pacific Markets said. “If there is to be a big bubble it would be in the year before everybody knew that these rates would drop heavily.”