Everything made sense in Japan, even though I could not understand anything I heard or read. From the flow of the train stations to the bow from my barista every morning, I delighted in how a system could be designed so well without language. In the end, almost everything made sense: their renewable energy investments were incomprehensible to me, even when explained in English and Excel models.
Japan experienced an early solar boom off the back of generous subsidies. Japan was heavily promoting renewables, particularly solar, in the wake of Fukushima, a nuclear incident in 2011 caused by a tsunami that turned out to be surprisingly benign. Due to scares of a similar fall-out to Chernobyl, they wanted to diversify their power grid. At its peak, nuclear provided 31% of Japan’s electricity in 1998. By 2023, that figure was a mere 7%, with 68% of electricity sourced from higher-emissions fossil fuels (roughly half from coal and the other gas).
I interned at Vena Energy in the summer of 2019, where many of my colleagues were Spanish, having experienced similarly explosive growth there. As lavish tariff subsidies came to an end, they went in search of new markets and landed on Japan. Even in 2019, projects could still be awarded tariffs of $0.37 per kilowatt-hour if they had applied for permissions prior to a certain date. This was close to 60% more expensive than fully loaded retail power prices in the UK. Renewables elsewhere, including in Africa, were building at a cost of less than 10 cents per kilowatt-hour.
Japan also seemed to have conditions conducive to solar development. Renewables projects are capital intensive but have low running costs, which means finance costs are especially important for the overall end price of a electricity. At that time, interest rates were mind-bogglingly low, even by the standards of our low-interest rate environment of the 2010s. Projects were being financed at 1% interest rates and 90% or higher leverage. Equity returns could also be in the order of 8-10%, unless you worked for a foreign developer who required higher returns.
The subsidies worked, at least over the past 10 years. Japan now has the 15th highest share of electricity generated from solar in the world, at 11% of total electricity in 2023. However, they were very expensive, and led to market distortions. Through a loophole in the system that did not require specific delivery dates, many developers were awarded high tariffs and then waited years to build projects to benefit from falling solar panel prices. Once the government introduced a time limit and periodic declines to the tariff, developers rushed to build before losing their lucrative pricing, so much so that the grid operator struggled to meet connection demand. As the solar tariff subsidies disappeared, investors were far less interested in building new solar.
Despite advantages in capital costs and government commitment, renewables were difficult to develop in Japan for two reasons: civil works and permitting.
Projects in the hills could be two to three times more expensive than a similarly sized project in Kenya because of the sheer volume of land to be cut away. I visited one of these sites under construction and marvelled at the enormity of the land and trees to be felled. The narrow, winding roads also made it difficult to get equipment to sites. For example, some wind turbines were simply too big to navigate corners, requiring the development of new roads alongside projects.
Permitting also took an inordinate amount of time and required endless environmental studies. In Japan, as in most countries, exotic and banal birds come out of the woodwork as national icons to be protected at all costs when someone wants to build a renewable project. Projects must ensure that the site will not be disruptive to their habitats. The back and forth with local government also required frequent community visits and had unpredictable timing and criteria for approval.
Japan subsidised renewables so extensively, even though the project costs were so large, because it was eager to meet its climate goals while ensuring it had reliable and safe electricity. Yet it struck me at the time that a better way to manage our global emissions reduction challenge would be to build projects where they make the most economic sense, and finance them with the least-cost capital available.
If Japan had lent to projects in, say, Kenya, and claimed the renewable offsets as their own under climate agreements, they could have saved immense sums on investments and supported the development of another country in the process. Years later, Dan Schrag and Ely Sandler of Harvard Kennedy School published research on Article 6, a poorly understood provision in the Paris Agreement which would enable just that. Beyond just Japan, if more projects could be financed this way, it could do so much for economic development abroad while reducing costs and resistance to power plant decommissioning at home.
In this case, presumably a limitation could be that the offtaker and entire credit profile is no longer Japanese, which is an attribute investors look out for.