Installation may become more attractive at the residential and commercial level as consumers look to cut their electricity bills.
Japan’s distributed solar capacity is expected to become an increasingly important growth driver in its solar power sector over the coming decade as the country’s feed-in tariff (FiT) scheme for utility-scale projects is phased out amidst the underperformance of the competitive auctions mechanism, a report by Fitch Solutions revealed.
A previous analysis by the firm highlighted that Japan's solar capacity boom, which has been driven by attractive FiT, will tail off as the last of the FiT backlog projects are developed over 2019 and 2020.
The transition of projects with a capacity larger than 500kW as of 2019, to competitive auctions away from attractive FiTs, seeks to address the high costs associated with Japan's renewables expansion. This comes especially as the idling of nuclear facilities following the Fukushima disaster, coupled with rising LNG and coal imports, have led to a spike in retail electricity prices.
That said, Japan has struggled to manage the transition to an auctions system, with less capacity than expected having been awarded and cost deflation having been limited.
In the country's three first auctions, bids have trended at over $130/MWh (JPY14,200/MWh), which is substantially higher than comparably sized solar power markets, Fitch Solutions highlighted. The limited success was attributed to significant security deposit requirements, high labour costs, limitations to grid capacity availability and difficulties in acquiring land in suitable locations.
“As such, whilst a backlog of FiT projects will sustain robust solar capacity growth rates in the next two years until it has run its course, we expect growth to slow from 2021 an onwards,” Fitch Solutions said. This is due to the auctions scheme becoming the main driver of large-scale solar capacity deployment in Japan, by extension leading to a slowdown in growth given the issues.
Fitch Solutions also forecasts annual capacity additions to average 3.3GW between 2021 and 2024, which is a slowdown compared to the equivalent 5.5GW of added annual capacity forecasted over 2019 and 2020.
Whilst large-scale projects are facing deployment obstacles, Fitch Solutions added that it expects growth to pick up at the back-end of its 10-year forecast.
“In large part, we expect distributed solar capacity to increasingly pick up the slack in Japan over the coming decade, with annual average capacity additions averaging 4GW between 2024 and 2028,” the firm highlighted.
In line with increasing retail electricity prices, residential and commercial & industrial (C&I) consumers could look to deploy their own solar capacity in order to reduce their grid consumption and supply surplus generation back into the grid.
As well, small-scale projects under 500kW reportedly have continued access to Japan's feed-in-tariff scheme, with residential feed-in-tariffs having been insulated from the feed-in-tariff cuts that were implemented on projects between 10kW and 500kW in March 2019.
“The residential FiT will thus stay at $0.22-$0.24 (JPY24-26)/kWh depending on region, whilst projects bigger than 10kW faced a 22% cut, with the new FiT amounting to $0.13 (JPY14)/kWh as of 1 April,” Fitch Solutions noted.
Whilst the continued attractive FiT for solar installations smaller than 10kW could stimulate near-term growth in the segment, Fitch Solutions forecasts that both residential and C&I consumers will shift from grid-feed in towards self-consumption over the coming decade.
Furthermore, given Japan's vulnerability to natural disasters, the firm also underlined that distributed generation can help consumers ensure greater energy security in scenarios where grid access is temporarily unavailable.
“This informs our relatively upbeat long-term outlook for Japan's solar capacity sector, which we expect will be increasingly driven by distributed solar projects, should the Japanese government fail to remedy the challenges facing the over 500kW solar facility category,” they said.
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