The five solar energy auctions held by the Japanese government between 2017 and January 2020 have been widely described as “disappointing,” partly because the capacity allocations fell below expectations. The procurement exercises also attracted a low number of international developers.
However, the International Renewable Energy Agency (IRENA) says that the industry should not see the outcomes of the auctions as completely negative.
“Relatively high auction prices do not necessarily tarnish an auction’s success,” it said in its new “Renewable energy auctions in Japan: Context, design and results” report. “The average awarded prices were close to the cost of electricity for solar PV power in Japan, underscoring the price discovery attributes of auctions.”
Final average prices dropped around 35% from JPY 19.64 ($0.189)/kWh in the first auction in late 2017 to JPY 12.57 ($0.121)/kWh in the exercise that was finalized in January 2020. However, compared to global average prices, which IRENA pegged at around $0.058/kWh in 2018, prices in Japan are still too high.
Japan has only allocated 574 MW of solar in the auctions, even though the Ministry of Economy, Trade and Industry (METI) has sought to assign 1,663 MW. On one occasion, in the September 2018 auction, no capacity was awarded, as the bids were all above the ceiling price.
“The challenge in solar PV auctions has mainly been in retaining qualified bidders, as many dropped out during the process,” IRENA said. “Developers indicated that constraints regarding grid connection and land availability, as well as strict bond confiscation rules in the first round, reduced their interest in placing bids.”
IRENA said the fourth and fifth auctions were the most promising in terms of final prices and participation by small and new players.
“Indeed, many winners were not established market players, suggesting that experience is not a determining factor in winning an auction in Japan,” the analysts wrote, adding that economies of scale do not seem to have played a major role in the auctions, as the lowest bids came from projects below 2 MW in size.
It is difficult to secure permits for a solar park above 40 MW in size in Japan. There is a long approval process, and this adds to high land costs and grid congestion.
“The prevalence and competitiveness of plants below 2 MW is related to the requirement of appointing a dedicated chief electrical engineer above that project size, which raises costs significantly,” IRENA said, noting that such costs can account for up to 50% of O&M expenditure.
The researchers also said that the average cost of a large-scale PV project in Japan stood at around $2,070/kW installed in 2019, which compares to a global average of $995/kW installed.
“Compared to Germany and France, which had total installed costs for new projects in 2019 of USD 899/kW and USD 979/ kW, respectively, the gap is even larger,” they said.
IRENA attributed these higher costs to local preferences for more expensive modules and inverters that are manufactured in Japan.
“Indeed, half of all modules and almost three-quarters of all inverters installed were produced by domestic manufacturers,” IRENA added, noting that local PV component producers are known to sell high-quality products, but not at the lowest available prices.
If economies of scale are achieved, prices of locally PV components will drop. And if international best practices are adopted, large-scale PV costs could fall by two-thirds by 2030, making solar the cheapest electricity source, IRENA said.
The solar procurement process could be improved with the introduction of auctions specifically tailored to zones, sites, or even projects, IRENA said. This could help overcome the aforementioned grid and land issues.
“Importantly, design elements beyond price must foster the connectivity and co-ordination between the energy sector and the rest of the economy,” IRENA concluded.
The report does not include an analysis of Japan's sixth solar auction, which was held at the end of 2020. In that procurement exercise, METI assigned 368.8 MW of solar, although it had originally planned to award 750 MW. The lowest price offered was JPY 10.00/kWh and the highest JPY 12.0 for an average price of JPY 12.57.
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