Why The Japanese Solar Market Could Be Poised For A Slowdown

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The Japanese solar market has proven to be one of the key growth levers for the photovoltaics industry over the past two years, driven by the void created by the suspension of the country’s nuclear power plants; attractive incentives and the availability of cheap funding for solar power projects. The country is now the world’s second largest solar market in terms of annual capacity additions. The surge in Japanese installations have helped solar companies to largely offset declines in markets such as Spain and Germany, which had previously accounted for a bulk of global panel demand. According to Bloomberg New Energy Finance, Japan’s investment in solar technology rose to about $30 billion in 2013, or almost triple the 2010 level, with about 7 gigawatts (GW) of new capacity being installed through the year. However, the Japanese solar industry has been facing some headwinds of late, as utility companies have been unable to accommodate the flood of new installations on the electric grid and also due to concerns that the government will scale back its solar incentives. [1] In this note, we take a look at some of the factors that could contribute to a slowdown in the Japanese solar market.

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Feed-In-Tariffs Distorting The Market, Cuts Could Impact Installations
Demand in the global solar market is very often driven by government policy rather than by the fundamental economic viability of solar as an energy source, and the market is characterized by boom and bust cycles that are brought about by the introduction and rollback of government incentives. Subsidies have played an especially crucial role in building the Japanese solar market, since the country offers the highest feed-in-tariffs (FIT) in the world. FITs require utility companies to buy solar power from producers at rates that are above market electricity prices. Japan’s FIT program was initiated following the Fukushima nuclear disaster in 2011, as the country sought to diversify its energy mix away from nuclear power and bolster its renewable capacity. Current FITs, excluding taxes, stand at around 32 yen ($0.29) per unit for solar PV for large installations and 37 yen ($0.33) unit for residential installations, which is almost double the German feed-in-tariff and about three times the average electricity price in the United States. However, the government has been successively revising the FIT downwards over the last two years and this trend is likely to continue, potentially reducing the incentives for providers to install solar panels.
Grid Connectivity Issues and Higher Electricity Prices
The high feed-in-tariffs have enabled investors to earn attractive returns on investments in solar projects, bringing about  a surge in photovoltaic installations in the country. However, the new solar capacity is having some adverse impacts on the Japanese electricity market. Firstly, solar is taking a toll on the electricity bills of end customers, who ultimately bear the higher feed-in-tariffs paid by utility companies. Consumer electricity prices in Japan have risen by 28% in the last 4 years, partly driven by higher renewable energy related costs. [2] The current surge in solar capacity is also reportedly overwhelming the country’s electric transmission and distribution systems. Japan’s electricity grid is organized to serve 10 separate distribution areas and is not integrated by a single centralized transmission system, and the intermittent nature solar and other renewables can result in a sudden surge or dip in electricity supply, which could stress and potentially damage the grid. [3] Five out of the country’s ten electric utility companies have indicated that they would be restricting new grid access for solar projects, citing infrastructure constraints. This could potentially impact solar growth, particularly for installations above 50 kilowatts (KW).

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Unlike commercial and residential solar installations, which can be mounted on rooftops, utility-scale solar installations are typically ground-mounted and require large swathes of land. This is proving to be a significant issue in Japan. The country’s population density is very high, with around 343 people living in each square kilometer compared to around 231 in Germany and 141 in China. Additionally, around 73% of the country’s land is either mountainous or forested, leaving little suitable land for solar projects. [4] The lack of suitable land could prove to be a hindrance to the growth of the utility-scale solar sector in Japan. Additionally, the recent decline in crude oil prices could play a role in influencing investment in renewable energy in Japan, at least in the near term. Japan uses a significant amount of imported LNG for its electricity generation, and since the price of LNG is influenced by crude oil prices, there is a possibility that utility companies will increasingly utilize their natural gas-based electricity generation capacity instead of investing in sources such as solar, if oil prices remain under pressure for an extended period of time.

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Notes:
  1. Trina Drops as Japan Outlook Sinks Chinese Solar Makers, Bloomberg,October 2014 []
  2. Minister Obuchi Quits, + Japan Feed-In Tariff & Energy Update (In Depth), Clean Technica, October 2014 []
  3. Power Companies in Japan Move to Restrict Solar, Scientific American, October 2014 []
  4. Japan: Solar’s Real Deal?, Renewable Energy World, June 2013 []