The solar power industry is witnessing a boom of sorts in Japan, the world’s third largest economy. Attractive new incentives and measures to supplant the country’s besieged nuclear power facilities have boosted domestic solar shipments by 80% y-o-y during Q3, according to a report by the Japan Photovoltaic Energy Association (JPEA). Foreign manufacturers have also made significant headway in the market with imports almost tripling since last year.  We believe that solar equipment manufacturers SunPower (NASDAQ: SPWR) and First Solar (NASDAQ: FSLR ) are well placed to capitalize on rapid growth in the Japanese solar space.
Attractive Feed-In-Tariffs Are Driving Growth
The Japanese government introduced feed-in-tariffs (FIT) in 2009, allowing residential solar power users to sell excess electricity that they generated to utility firms at a premium price. Following the Fukushima disaster of 2011, the government outlined plans to phase out the country’s nuclear reactors by 2030. Given that nuclear power accounted for about 30% of Japan’s electricity generation prior to the disaster, replacing it leaves a lot of growth opportunity for energy resources like solar power. 
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To encourage investment in large scale solar projects, in July this year the government extended its FIT program requiring utilities to pay about 42 yen per kilowatt hour ($0.52) of electricity to solar power developers provided that the plant sizes are above 10 KW. These tariffs will be effective for 20 years. This rate is extremely attractive to developers as it is about three times the rate paid by Japan’s industrial customers last year. The rates are also about double those offered in Germany. According to analysts with Bloomberg New Energy Finance, these incentives could add up to 3.2 GW of capacity worth about $9.6 billion. On the back of these subsidies, Japan is expected to overtake Germany as the world’s second largest solar market for solar products.
While Rooftop Sector Continues To Grow, Utility Offers New Opportunities
SunPower, a manufacturer of monocrystalline solar panels, is well-positioned to grow in the Japanese rooftop market. The firm’s panels offer the highest energy density, meaning that they occupy less space per watt and are better at capturing sunlight. This gives them a critical advantage in Japan, considering the country’s inferior solar insolation and space constraints.
Japan has among the highest costs per watt for residential solar panel installations with prices upwards of $6 per watt – more than double the price per watt in Germany. SunPower’s premium panels will be a good fit for the Japanese rooftop market given that consumers in Japan care not just about prices but also about the technology, long-term reliability and quality of the panels. The firm can also leverage its supply agreement with Toshiba to strengthen its position in the market.
The Japanese market has been primarily driven by rooftop installations over the last few years, however the new FIT regime will encourage development of larger scale projects. This could provide opportunities for First Solar, which is a leading manufacturer of thin-film modules and a developer of utility scale solar projects. The firm has vast experience in delivering megawatt scale solar farms. Although First Solar’s panels have a lower conversion efficiency, their cost per watt is lower, making them attractive for large scale applications where space is not at a premium.
Although First Solar has been decidedly cautious about exposing itself to markets with high subsidies, we believe that Japan will prove to be attractive given the long-time horizon of the incentives and the fundamental shift required in the country’s energy mix. The firm is beginning to make inroads into the Japanese market and already has a demonstration project underway.Notes:
- Japan Domestic Solar Shipments Rise 80 Percent JPEA Says, Bloomberg [↩]
- Solar Boom Heads To Japan Creating $9.6 Billion Market, Bloomberg [↩]