Offshore wind development and regulation in Japan

Overview of offshore wind regulatory regime

To encourage development of offshore wind projects, in 2016 Japan amended the Ports and Harbors Act to introduce auctions for long-term occupation rights over certain port areas. Subsequently, in 2018, Japan enacted the Act on Promotion of Use of Marine Areas for Development of Marine Renewable Energy Generation Facilities (the Offshore Wind Act) to enable business operators to operate offshore wind projects in those areas outside these port areas but still within Japan’s territorial waters (referred to here as the “general sea area”).

Essentially, pursuant to the Offshore Wind Act, the Ministry of Economy, Trade and Industry (METI) and the Ministry of Land, Infrastructure, Transport and Tourism (MLIT) are empowered to designate certain prescribed general sea areas as "Promotion Areas”.  The occupation rights for such designated “Promotion Areas” will be made available to interested parties by way of public auction process.

A successful bidder will receive the right to occupy the relevant Promotion Area for a term of 30 years¹ and be eligible to receive subsidies on the sale of electricity generated at the Promotion Area for a term of 20 years.  Under both the second and third round auctions, the relevant subsidies took the form of a feed-in-premium (FIP) price, the specific amount of which to be determined per the relevant auction.²  

This note provides a brief update on (i) the status of these auctions, (ii) the factors that will be considered by METI and MLIT in assessing bids, and (iii) general financing considerations in Japan.

Summary of offshore wind projects in Japan

Japan aims to achieve 10 GW of installed offshore wind capacity by 2030 and 30 to 45 GW by 2040. To meet this target, Japan commenced auctioning occupation rights for Promotion Areas in FY 2021 and plans to secure an average of 1 GW offshore capacity annually over the next ten years through this process. Here is a brief look at the results of the first and second round auctions held pursuant to the Offshore Wind Act as of 31 December 2023:

On 19 January 2024, METI and MLIT announced the third round auction bidding rules and schedule for the following two Promotion Areas (third-round auction):

• Southern side of Sea of Japan (Aomori Pref.)
• Yuza (Yamagata Pref.)

The bid submission deadline is 19 July 2024 and the auction results are scheduled to be announced in December 2024.

Bidder Eligibility

Subject to any revisions to the applicable third round auction bid rules, businesses who wish to participate must satisfy two requirements:

• The bid must be submitted by a Japanese legal entity, which can be a special purpose company.
• The business plan must comply with and address each of the items outlined in the applicable bidding rules and requirements.

This means that international investors can participate by bidding through a Japanese subsidiary or Japanese entity formed together with the participating partners. The business plan must describe all of the parties contemplated to be involved in the project (such as the EPC contractor, O&M vendor and other consultants).

How are bids assessed?

METI and MLIT score each bid out of a total 240 points, divided equally into “Tender Price” and “Project Feasibility.” Tender Price points are allocated as follows:

(Lowest tender price received)/(The bidder's price)  × 120

The bidder with the lowest tender price will receive the full 120 points.

For Project Feasibility, METI and MLIT will initially assess the business plan and consider the capability of the bidder team to successfully implement the business plan (80 points), and how the bidder proposes to coordinate with local stakeholders and positively impact/contribute to the local economy (40 points). After conducting this initial assessment, METI and MLIT will then arrive at each bidder’s score by using the following formula:

(Individual bidder's score)/(Highest score out of bidders)  × 120

The bidder with the highest score after METI and MLIT’s initial assessment will receive the full 120 points for Project Feasibility.

Other requirements

All bidders must provide a security deposit valued at JPY500/kW of the proposed output capacity of the project. The winning bidder must also provide further security deposits of:

• JPY5,000/kW within eight weeks of being notified of the award: and
• JPY13,000/kW within 24 months of being notified of the award.

Unless forfeited due a to a breach of the prescribed bid rules, the deposits are refunded after the auction is complete (for unsuccessful participants) and/or when operations start (for the winning bidder).

Update on the bidding rules for the third round auction

Generally, the third round auction has followed the rules adopted in the second round auction. As a notable change from the second-round auction, the bid rules with respect to the Promotion Area in the Sea of Japan within the territory of Aomori Prefecture, provide that bidders are encouraged to consult with the Ministry of Defence (MOD) and required to submit a certificate issued by the MOD confirming that the business plan will not interfere with the activities of Self-Defence Forces and the US military forces in the area.

Challenges for offshore wind projects in Japan

1. Project finance

In Japan, fishing rights are proprietary rights under the Fisheries Act, and, therefore, in the event of a conflict, a local fishery can seek injunctive relief or indemnities against an offshore wind developer for interference in their operations. Offshore wind project developers are encouraged to proactively enter into compensation agreements with local fisheries. It is important to consider whether such agreement appropriately captures all of the relevant parties (including, any local fisheries cooperative or other collectives). One helpful tool in this process is to check the register of fisheries rights holders published by the Fisheries Agency. As evidence of the importance of fisheries in the development process of Japan’s offshore wind industry, fisheries are invited to participate as “interested parties” in the consultation process to identify Promotion Areas. It would be practically important to track the records on the consultation process to commence the discussion with the relevant fisheries.

Further, the occupation rights gained through auction are technically different from a general proprietary right. This can create difficulties when attempting to use these rights as collateral/security in secured transactions or to have the lender hold a step-in right to take over the project, because any transfer of the rights (even nominally) requires METI and MLIT’s approval.  

2. Regulatory issues

Required Licenses/Permits

A successful bidder, as developer of the offshore wind project, will be required to obtain, at minimum, the following approvals and permits to proceed with the construction of the project:

• formal METI/MLIT approval of the offshore wind project business plan (kobo senyo keikaku) that was submitted pursuant to the auction process (the Approval);
  • Note that upon the announcement of the auction result (the Selection), METI/MLIT will usually make comments on the submitted business plan. To obtain the Approval, the successful bidder will, generally, be required to reflect and accommodate all such comments to the business plan. The Approval must be obtained by the Renewable Energy Approval deadline (as described below);
• formal METI approval of the electricity generation business plan (renewable energy hatsuden jigyo keikaku) (the Renewable Energy Approval), pursuant to the Renewable Energy Act, for the offshore wind project;
  • Note that the successful bidder must apply for the Renewable Energy Approval within one year from the date of the Selection.
• an occupancy permit for the relevant Promotion Area issued by MLIT (the Occupancy Permit);
  • the successful bidder must apply for and obtain the occupancy permit by the commencement date of the development activities at the relevant Promotion Area as specified in the business plan.

Development Process

Offshore wind projects are subject to Environmental Impact Assessment (EIA) requirements under the Environmental Impact Assessment Act (Act No. 81 of 1997). This process generally takes four to five years and requires formation of a consultation council consisting of key stakeholders from the local authorities, government and local businesses.  The EIA process will involve the preparation and publication of (a) a notice on the contemplated initial environmental impact consideration items (hairyosho), (b) the scoping document (hohosho), (c) draft environmental impact statement (junbisho) and (d) the final environmental impact statement (hyokasho). To minimize the burden on business operators, the Japanese government is currently considering assuming control over items (a) and (b) (it is expected that this approach will be implemented in 2024).

Decommissioning Process

The business plan for the offshore wind project, which will be submitted in the course of the auction process, should also include the decommissioning plan for the project, and such plan must be in compliance with the applicable regulations such as the Waste Management and Public Cleansing Act and the Act on Prevention of Marine Pollution and Maritime Disaster. Adhering to these requirements may influence the project cash flow. Under the current bidding rules, there is scope to leave or dispose of some facilities parts in the relevant sea area, but doing so is subject to approval from the Ministry for the Environment.