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A losing bet on green energy

“What if our company goes bankrupt?” shouted an offiacial of a company seeking to generate electric power with solar photovoltaics at a meeting on Oct. 3 at which Kyushu Electric Power Co. explained its decision to suspend receiving applications for sale of electricity from renewable energy sources to the power firm.

Under a scheme known as feed-in tariffs (FIT) that the government instituted in 2011, power utilities are required to purchase at fixed prices electric power generated by other entities by using renewable energy sources. But the scheme has proved to be unworkable as Kyushu Electric’s action was followed by Tohoku, Shikoku, Okinawa and Hokkaido Electric Power companies.

The utilities’ actions have dealt a serious blow to entities planning to build solar power generating facilities and manufacturers of solar panels. Moreover, entities that have already entered into contract with the utilities for green power sales also fear that the deals might prove unworkable.

When the Diet passed the law to create the FIT scheme, the lawmakers failed to learn from the experiences of Germany, where a similar scheme introduced earlier only was causing heavy burdens on both households and businesses. The most ardent proponent of FIT at the time was then Prime Minister Naoto Kan, who was so enthused about spread of green energy that he made the Diet’s passage of the FIT legislation a condition for his resignation.

The current trouble “could have been prevented even after the introduction of the system, had the purchase prices of electricity generated through renewable energy sources been kept at reasonable levels,” comments a newspaper reporter who specializes in energy issues.

Kazuhiro Ueta, a Kyoto University economics professor who argues that Japan should free itself from nuclear power and that a broader use of renewable energy sources is key to solving energy problems, served as head of a committee responsible for determining the prices and duration for the purchase by power companies of electricity generated through renewable energy sources. Ueta set the purchase price for electricity from solar panels at ¥42 per kilowatt hour for the initial year of 2012. He contended that by 2030, electricity coming from renewable energy sources should account for 20 percent of the nation’s total electricity. But that price was very high compared with the ¥30 per kilowatt hour that was being contemplated by those who were thinking of entering into the solar power generating business. The high purchase price quickly caused bubbles of solar panel installation plans.

Ueta insisted that Japan can’t hope to attain a broad use of green energy unless suppliers of such energy are given favorable treatment for the first three years. He said that this would not place a financial burden on citizens because the purchase price will be lowered commensurate with technological progress.

His words now sound like a joke as the scheme has hit a snag halfwaythrough the third year of its existence.

During the past two years, the per kilowatt-hour purchase price of electricity from solar panels was lowered to ¥36 and further to ¥32. But the utilities were flooded with applications from those seeking to sell them electricity from solar panels since the prices of solar panels also fell. As of April, there were solar power facilities with a combined capacity of 71 million kilowatts nationwide. This staggering number came as a surprise even for a high official of the Ministry of Economy, Trade and Industry, which is in charge of the FIT system.

The sudden action on the part of the utilities to suspend acceptance of power-sale applications under FIT has hit the market hard. A company in Miyagi Prefecture had bought property adjacent to its stocking yard in preparation for building a giant solar power generating facility. Its executive says, “We bought the land because we thought that it would have been cheaper than paying rents for the next 20 years. But our project has come to naught.”

In Kyushu, there was a boom of building houses equipped with solar panels that can generate more than 10 kilowatts — the upper limit for ordinary households. Their major selling point was that excess power generated by the panels cold be sold to Kyushu Electric Power, thus generating money to pay back housing loans. Following the utility’s change of course, many troubles are said to have surfaced with customers’ refusal to accept such houses or demand for canceling the contracts.

An example of a large corporation hard hit by the latest change on the part of the power utilities is found in Sanix, Inc., whose stock is listed on the First Section of the Tokyo Stock Exchange. The main line of business for this Fukuoka-based company is termite extermination. Participation in the FIT scheme was to serve as a shot in the arm for Sanix, whose balance sheets had remained in the red for nine consecutive years before returning to black in March 2012. In the 12 months through last March, the company reported a record ¥84.2 billion in sales and an operating profit of ¥4.5 billion.

But Sanix started facing financial problems after Kyushu Electric Power stopped receiving new applications for electricity sales under the FIT scheme. Sanix is said to have been forced to ask banks for new loans and have fallen into arrears in its payments to other companies, while its stock price, which exceeded ¥1,600 in May, has fallen to a third of that level. Sanix has thus been pushed into an inferno as the banks that know its past history are reluctant to provide new loans, according to an official of a business research company.

Those who made exorbitant profits in the bubbles created by the FIT scheme were not limited to corporations selling and installing solar panels. Leasing companies made contracts for solar panels throughout the country to the point of forming a bubble.

But should a company like Sanix falter, disasters would fall on those leasing companies because they can only claim ownership of the solar power generating facilities. If the landowners of the property on which such facilities were installed demand that the land be returned to its original condition, leasing companies would have no other choice but to dispose of the facilities.

In the case of solar panels with an expected power-sale period of 20 years, many of the leasing contracts were made valid for an unusually long period of 15 years on the assumption that the purchase by power companies of electricity generated by the solar panels is guaranteed and that the market values of the panels are unlikely to depreciate much.

But with the recent change of attitude by the utilities, there has emerged an oversupply of solar panels on the market. There is also a risk of the market values of the panels being pushed down further because no one has confirmed that they will last 20 years.

Uncertainties confronting leasing companies have been aggravated as they themselves have started entering into the solar power generation business on their own. A high-ranking official of a major leasing firm says that Orix Corp., the leader in the leasing business, has committed to solar power projects in a scale exceeding ¥200 billion while other major leasing firms each have committed in a scale of about ¥100 billion. Although an official in charge of credit control of a certain leasing company warned about the risk, the top management did not listen.

A high-ranking executive of a leading leasing company has been quoted as saying at a board meeting, “We will no longer be here when any problem arises.” His statement is irresponsible but he apparently does not notice the imminent dangers.

The about-face by the utilities has shocked many of those who jumped at the solar power business. And there is no prospect at all for the situation to turn better.

This is an abridged translation of an article from the November issue of Sentaku, a monthly magazine covering political, social and economic issues.

  • Richard Solomon

    This may have been an innocent mistake on Kan’s part but why is it being allowed to continue? Could it be that PM Abe does not want solar power to succeed in Japan? Is he so invested in restarting the nuclear power plants that he is willing to let solar power plants fail? Otherwise, would he not step in and salvage the situation with government action?

    • rossdorn

      Take some time and find out what in Japan is meant by “Nuclear Village”. That will answer all your question.

      And also consider that in any democracy in the rest of the world, a prime ministre who makes decisions like would be voted out of office…. not in Japan.

      It is sort of líke the second world war was… the people allowed things to happen without any resistance, so, let them pay the price.

      Where is the problem?

    • Starviking

      What action? Forcing the electricity companies to take all the renewable energy at an inflated price? Then watch consumers’ bills skyrocket – and wait for the grid to be blown by intermittent power spikes.

    • forsetiboston

      Solar power plants, if they covered the entire surface of the islands of Japan would not provide enough base load generation “period.” So, in order to provide base load generation what is a country like Japan to do? Continue to burn coal/lng/bunker “c”? That has already tarnished their greenhouse gas emission record not to mention is steadily draining their coffers. This week in California, a sunny and solar rich state has had on average ~14h/day of 0MW output, of course that happens during the early AM and in the evening when most households are at their peak consumption.

      It’s not that Japan doesn’t want to give solar a chance – its that unlike many other countries they don’t make decisions with their hearts. While we would all love for power to be “free” from the sun, the reality is that it can not provide enough power when it is required. Not in Japan, not in Germany, not anywhere. Hit up google for a search on “brown coal in Germany” to see how solar works for their country. They shut off nukes, and fired up brown coal plants, it’s genius really.

  • Starviking

    The fault here is with Kan, and the green ‘visionaries’ whose mantra was “If you build them (renewable projects), cash will come”.

    Anyone with any sense could see that oversupply could be an issue, and that increased penetration into the electricity market would need investment in grid and storage technologies. Investments which were not made.

    • forsetiboston

      Not to mention for every 1kw of intermittent solar/wind you invest in 1kw of (most likely) LNG, the 50% less dirty, dirty fuel to produce power when the renewables have a bad “sun/wind” day.