【Edition ＃6】Can Japan Achieve Decarbonization by its PPA Scheme?

As the global transition to renewable energy intensifies, industries that emit large amounts of greenhouse gases are playing an important role to reduce greenhouse gas emissions to virtually zero by 2050.

As of June 2023, 410 companies are members of RE100（84 Japanese companies）, an international initiative driving the transition to 100% renewable electricity. Corporate PPAs (Power Purchase Agreements) are seen as a key to this transition away from greenhouse gases.

This section discusses the basics of PPAs and the characteristics and situation of PPAs in Japan.

What is PPA（Power Purchase Agreement）scheme?

1. Third Party Model:The PPA (Power Purchase Agreement) scheme is a system in which electricity consumers (companies, government, homes owners, etc.) lease the roofs of buildings or idle land they own to PPA providers, who install solar power generation facilities on them to procure renewable energy electricity. It is also called the “third-party model” because the owner of the power generation equipment is not the customer but a third party, the PPA operator.
2. Free from Management：Customers are required to pay the PPA operator for the electricity they use, but they can leave the management and operation of the solar power generation facilities to the PPA operator during the contract period.
3. Long Contract Period：The contract period is generally 10 to 25 years, and the customer takes over the solar power generation facilities after the contract period expires.

Corporate PPA

PPA by a legal entity such as a company or municipality is called a “Corporate PPA”. There are several types of Corporate PPAs, which are classified according to whether the power generation facilities are located on or off the company's premises.

1.On-site PPA

On-site PPA is a method in which a solar power generation facility is installed on a customer-owned site (including leased land), and electricity is delivered to a factory, office, or other demand location on the same site via on-site wiring.

The mechanism is simple and "compelling" to the consumer because the power generation facilities are actually right in front of them. However, the system cannot be installed if there is insufficient space on the site, and even if it could be installed, it may not provide enough electricity to meet demand.

2 Off-site PPA

Off-site PPA is a method of supplying electricity by installing solar power generation equipment outside of a company's premises and transmitting power from there. Since the power is transmitted from a remote location, it uses the power grid of a power transmission and distribution company.　There are two types of Off-site PPA.

1)Physical PPA

Physical PPA (Physical PPA) is a method in which electricity generated by solar power generation facilities installed in remote locations is delivered to consumers (purchasers of electricity) via the power grid. Because of this, transmission fee is charged by the grid operator and addedon the electricity rate.

The customer purchases the environmental value at the same time as purchasing the renewable energy electricity. Electricity rates are generally contracted at a fixed price.

2)Virtual PPA

In a Virtual PPA (Virtual PPA), customers do not have a one-to-one correspondence with the PPA provider's electricity, which is transmitted from a remote location, but instead purchase electricity from a retail electricity provider via the market.

Since there is no actual purchase of electricity, it is possible to purchase only the environmental value from the PPA provider while maintaining the existing electricity contract.

In addition, there is no need to pay the transmission fee which is required for Physical PPA.

Contract Scheme of Virtual PPA

The contract scheme between the customer and the PPA provider is as follows:

1. a power purchase contract is concluded between the customer and the PPA provider
2. the PPA operator sells the electricity generated to the market/retail electricity provider at market price and earns income
3. consumers purchase electricity from the market/retail electricity provider
4. the PPA operator and the customer settle the difference between the agreed price and the market price of electricity, and the environmental value is transferred to the customer

Virtual PPA is a scheme that allows direct trading of “non-FIT non-fossil certificates (designated as renewable energy)”.

Advantage of Corporate PPA

(1)? Concrete approach to decarbonization management

PPA is a concrete approach to decarbonized management. Both onsite and offsite PPAs can obtain non-fossil certificates, and enabling electricity purchasers to join RE100 (Renewable Energy 100%: an international initiative that aims to achieve 100% renewable energy for electricity used by businesses).

This initiative is in line with Goal 13 of the United Nations Sustainable Development Goals (SDGs), which calls for “concrete measures to address climate change,” and at the same time, joining RE100 and demonstrating a corporate commitment to procuring 100% renewable energy will make a significant contribution to corporate branding.

(2) Zero initial cost

The biggest advantage of the PPA model is that it can be implemented with zero initial cost.

To develop and own solar power generation for their own consumption requires large initial cost.

With the PPA model, you can start with zero initial cost and leave the management and operating costs to the PPA operator. This even means the PPA operator will bear the risk during the solar power generation operation.

(3) Lower electricity prices

While electricity prices continue to rise, the price of solar panel is lowering.? So it is now “cheaper to make electricity than to buy it”. The PPA model allows customers to keep their electricity rates low even though the PPA providers secure a certain level of profit.

The specific price of electricity depends on the scheme of the PPA model and the details of each contract, but if we consider the “actual electricity price + environmental value”, the price can be considerably reduced.

Disadvantages of the PPA Model

On the other hand, the PPA model has some disadvantages.

(1)? Long-term contract term

PPAs are generally long-term contracts of 10 to 25 years. This is because the PPA operator does not benefit unless power is generated for a long period of time, due to the relationship between the useful life of the PV equipment and the electricity price.

In the case of on-site PPAs, companies must maintain a certain amount of space for a long period of time, and there may be cases where changes in the nature of the business make it impossible to implement changes to the site or building even if they wanted to. This poses a risk to corporate activities.

There is also the risk that a fixed price contract over a long period of time could become relatively expensive if normal electricity prices fall due to changes in global conditions.

(2)? Self-ownership model may have greater economic benefits

We mentioned in the advantage of the PPA model that the risk during solar power operation can be transferred to the PPA operator, but this means, on the flip side, that the cost to the PPA operator is incurred as the risk is transferred.? If you are willing to accept the risk, the self-ownership model, where the installation of the PV equipment allows you to pay no electricity costs or sell surplus electricity to generate revenue, is more economically advantageous.

?Expansion of Corporate PPA in Japan

Despite some challenges, Japan’s corporate sector, especially major companies, is gradually embracing PPAs as part of their decarbonization strategies. Companies like Amazon, Google, and local firms have begun to invest in these agreements to meet their renewable energy commitments.

At the same time, the benefits of corporate PPAs are increasing in terms of economics, as the import price of fossil fuels has skyrocketed since 2022, causing electricity prices to rise significantly.

Recent corporate PPA situation in Japan can be summerized as below;

(1) Majority of renewable energy is Solar Power Generation

The majority of corporate power purchase agreements (PPAs) concluded in Japan are for solar power generation. The cost of solar power averaged around 11 yen/kWh (kilowatt-hour) in FY2023, but the contract unit price of corporate PPAs has risen with the increase in demand. Nevertheless, customers can expect to benefit from the economics, as electricity prices remain high.

(2) Market price is expected to fluctuate

In FY2022, the wholesale electricity market was in an abnormal state with average annual transaction prices exceeding 20 yen/kWh due to soaring fossil fuel import prices, etc. In FY2023, the electricity supply-demand situation improved and prices dropped to less than 11 yen/kWh.

Market prices will continue to fluctuate due to various factors. Among corporate PPAs, market price fluctuations affect the cost of electricity procurement for customers in virtual PPAs.

(3) New system will be introduced in FY2024

A new system that will affect electricity rates will be introduced in FY2024. The new system is the introduction of a “generation-side charge,” under which power generators will pay a portion of the transmission and distribution networkcharges, and a “capacity contribution,” under which retail electricity providers and others will pay a portion of the charges to ensure supply capacity.

As with regular electricity rates, there is a significant possibility that the contract unit price of off-site PPAs will be affected. On-site PPAs, which will not be subject to the new system, will benefit more.

(4) Expansion of offshore wind power generation

Renewable energy power will be expanded through offshore wind power generation. The scale of the power plants is large, so large corporate PPAs can be concluded. For the time being, the cost of generating electricity is higher than that of solar power, but a feed-in premium (FIP) can be applied to keep the contract unit price low. The combination of virtual PPAs and FIP can also reduce the impact of market price fluctuations.