As Goldman Sachs Group Inc. (GS:US) and billionaire Masayoshi Son lead a swarm of investors exploiting Japan’s solar power subsidies, the world’s biggest, Sumitomo Corp. (8053) is betting on wind.
The trading house, Japan’s second-largest investor in power generation outside utilities, will add wind farms and at least two biomass plants to take advantage of the above-market rates for electricity from renewable sources the government introduced in July. Sumitomo’s local utility, Summit Energy Corp., expects profits from wind power to triple in as many years, said the unit’s president, Shinichi Kitamura.
Sumitomo’s focus is in part a response to a rush into solar projects that’s pushing up land prices and salaries, as well as luring investors from gambling parlor operators to asset managers. While government data show that Japan can build wind farms at a cheaper price and with higher returns than solar, 99 percent of applications for the new tariffs are for electricity generated from sunlight.
“With so many companies rushing in we are seeing a solar bubble forming and land prices are rising,” Kitamura said in a Sept. 7 interview. Japan’s ambitions in renewable energy look more manageable in wind energy, he said.
Prime Minister Yoshihiko Noda announced on Sept. 14 an energy policy that calls for a phaseout of nuclear energy over the next three decades and to triple generation from renewable sources. The ruling Democratic Party of Japan last month recommended renewable energy make up about 40 percent of Japan’s total by the early 2030s, from the current 8 percent that mostly comes from hydropower.
To help meet the target, Japan introduced subsidies known as feed-in tariffs on July 1 that require utilities to buy power from renewable energy providers at premium prices. As a result, investment in solar, wind and other forms of clean energy may jump to $17.1 billion this year from $8.6 billion in 2011, Bloomberg New Energy Finance estimates.
The rate introduction follows the examples of Germany, Spain and Italy, who since 2004 overtook Japan as the global leader in terms of installed solar capacity. The rates are now being cut across Europe as the volume of solar projects they created make subsidies unsustainable at their original levels.
The lessons of Europe show that those that get in early reap the most benefit before tariffs rates are cut. Of all the renewable energy types available in Japan today the quickest to set up on a utility scale is solar, said Dean Enjo, an analyst with CLSA Asia-Pacific Markets in Tokyo.
“Right now Japan is in a power crisis and the immediate response will be in solar,” Enjo said. “Solar farms can be scaled up in months. Biomass, geothermal, wind, they are all viable sources, but they take a lot of time and have a lot of red tape involved.”
From October, all wind power developers will need to make an environmental assessment of noise pollution from humming turbines and to show profit feasibility, after some wind farms failed to make money. Geothermal projects can take as long as a decade to develop, Summit’s Kitamura said.
In the two months after Japan started offering feed-in tariffs, applications for 155 solar projects each with a capacity of at least 1 megawatt were made, government data show. Wind power attracted 14 applications and biomass just one.
Projects to add more than 1,150 megawatts of solar plants have been announced this year in Japan, compared to none last year, according to BNEF. Those estimates, which exclude residential installations, mean about 110 megawatts of utility- size solar capacity may be commissioned this year, up from 10 megawatts last year, BNEF said in an Aug. 31 report.
Among the most ambitious plans is Orix Corp. (8591), a finance and leasing company that seeks to spend more than its annual net income of 86 billion yen ($1.1 billion) on solar plants.
Japan Asia Group, a Tokyo-based brokerage and an aerial surveyor that started looking at renewables three years ago, last month pledged to invest 150 billion yen to build 500 megawatts of solar power across the country by March 2015. The amount exceeds Japan Asia’s revenue over the last two years.
Solar investors such as Toshiba Corp. (6502), which makes solar equipment, are being joined by companies as varied as asset manager Sparx Group (8739), Mitsui Chemicals Inc. (4183) and pachinko parlor operator Novil Corp.
Sparx’s announcement that it would build a solar plant helped its stock jump the most in a month on Sept. 7 in Tokyo.
“The solar market is the most lucrative to investors and it’s going to be the one heating up for at least the next three years,” CLSA’s Enjo said.
The attraction for investor lies in the feed-in tariff. At 42 yen per kilowatt-hour for 20 years of a solar project it’s triple the 14.59 yen per kilowatt-hour industrial users paid for electricity during the 12 months ended in March. That’s grabbed the attention of investors outside Japan.
A group including International Business Machines Corp. (IBM:US) and Goldman Sachs won approval to build Japan’s largest solar plant of 250 megawatts in the southern city of Setouchi, which will cost as much as 86.1 billion yen, the local council said Sept. 13 on its website. That would be Goldman Sachs’s second renewables investment in Japan after it bought 5.1 percent of Eliiy Power Co. a lithium-ion battery maker, last year.
“We expect the clean technology and renewable energy industry to play an increasingly important role in Japan, and we remain focused on this area,” Ankur Sahu, Goldman Sach’s co- head of merchant banking in the Asia Pacific, said in an e- mailed statement.
Sumitomo, a trading house with 5,810 megawatts of capacity worldwide, decided against investing in some advanced stage solar projects because of rising costs, Summit’s Kitamura said. Summit Energy operates two wind farms and three thermal generators in Japan, one of which can burn biomass.
Hamamatsu, a city west of Tokyo, last month said it received 23 bids for a project to build two solar plants with a total capacity of 3 megawatts.
The tender winners, which included Chubu Electric Power Co., agreed to pay “several times” the minimum land price set by Hamamatsu for the bid, Kuniatsu Suzuki, an official at the city’s new energy promotion headquarters said Sept. 25 by phone.
Though the effect is not yet felt nationwide, the amount of space solar plants need will push up land prices because suitable space is limited, said Takashi Ishizawa, the head of real estate research at Mizuho Securities Co.
With land prices falling in Japan for the last 21 years, according to the Ministry of Land, Infrastructure, Transport and Tourism, renewable energy investment may help the country in its fight against deflation that has dragged on the economy for decades.
“There are many players entering this business fighting for land and the competition will be pretty fierce from now on,” Kazunobu Watanabe, Chief Planning Officer of Japan Asia Group (3751), said in a briefing in Tokyo. The company’s aerial land surveying unit provides it with leads from its network with local governments, he said.
The number of job openings in renewables almost tripled this year and most of that is due to “aggressive” demand from solar projects, said Kazuyoshi Ofuchi, owner of Tokyo-based Pathfinders Executive Search Co., which specializes in recruitment for the power industry.
Engineers and business development staff are being offered 20 percent more to join solar projects compared with similar industry positions as there’s a shortage of experienced talent, Ofumi said.
Billionaire Son’s mobile phone operator Softbank Corp. (9984) may already be hedging its solar bet. After unveiling in August an 230 megawatt renewable program that was almost 90 percent solar, Softbank said Sept. 14 it may add a 1,000 megawatt wind farm in Hokkaido, which would be the biggest in Japan.
The push into wind does not mean Softbank believes solar is in a bubble, company spokesman Naoki Nakayama said Sept. 25 by phone, adding that the details of the Hokkaido project are not yet decided.
“Some people may call it a bubble, but it’s not that simple,” Nakayama said.
While the relative ease of entering the solar business has invited a rush of different investors, wind power is mostly being developed by specialists in the field, Travis Woodward, an analyst with BNEF in Tokyo, said by phone.
Japan’s wind farm market is led by Sumitomo’s rival Toyota Tsusho Corp. (8015), a trading house that is diversifying away from car sales, according to a CLSA February report. Other players include Electric Power Development Co. (9513), also known as J-Power, Japan Wind Development, and Green Power Investment, which sold a 44 percent stake to Softbank last year.
The wind market allows developers to build larger projects and according to the Ministry of Environment offers greater potential capacity. The country could accommodate 280,000 megawatts of wind capacity onshore and a further 1,600,000 megawatts off the coast, compared to 150,000 megawatts of commercial solar power, the ministry said last year.
In the long-term, wind farms stationed off the coast may be a particularly strong area for Japan, CLSA’s Enjo said.
At present, windy areas in Hokkaido and northern Tohoku lack the transmission capability to reach high-demand areas such as Tokyo. In using more renewable energy, Japan will need to spend 5.2 trillion yen on building and upgrading transmission and distribution grids, according to government estimates.
“Unlocking the potential to make money means securing grid capacity for wind and that’s limited by the utilities,” BNEF’s Woodward said. “An upgrade and more unification of the Japan grid will open more opportunities.”
The cost of wind power generation is estimated between 9.9 yen and 17.3 yen and offshore wind parks between 9.4 yen and 23.1 yen, government estimates show. Solar plants are the most expensive electricity source in Japan, costing between 30.1 yen and 45.8 yen per kilowatt hour.
The higher cost gives solar almost twice the 23.1 yen per kilowatt-hour guaranteed for wind. And yet, the wind tariff is based on an 8 percent internal rate of return, while solar is based on 6 percent, government data show.
As in solar, Japan’s tariff for wind is the most generous in the world and 43 percent higher than that of next-best Italy. The U.K. offers less than half and China about a third, according to BNEF’s Aug. 14 wind market outlook report.
Three Year Window
By the end of 2016, Japan may have 7,600 megawatts of wind capacity, CLSA estimates. The estimate for solar is 17,300 megawatts by the end of 2014, including residential panels.
Despite greater regulation in the wind industry, the three year window Japan set for projects to receive feed-in tariff approval is stimulating investment, Summit’s Kitamura said.
Summit Energy is planning a wind farm in Ibaraki north of Tokyo that will be an 18 megawatt add-on at its 20 megawatt site in the town of Kashima, according to the company’s environmental impact report submitted to the local government.
The Sumitomo utility will also develop a 29-megawatt wind farm in Oga, Akita prefecture, that’s due to start operating in December 2014, the company said in a Sept. 28 statement.
“There will be a flood of applications trying to lock in the good rates before they expire,” CLSA’s Enjo said. “If there is to be a big bubble it would be in the year before everybody knew that these rates would drop heavily.”
To contact the reporters on this story: Yuriy Humber in Tokyo at firstname.lastname@example.org; Tsuyoshi Inajima in Tokyo at email@example.com
To contact the editor responsible for this story: Jason Rogers at firstname.lastname@example.orgJapan’s wind farm market allows developers to build larger projects and according to the Ministry of Environment offers greater potential capacity. The country could accommodate 280,000 megawatts of wind capacity onshore and a further 1,600,000 megawatts off the coast, compared to 150,000 megawatts of commercial solar power, the ministry said last year. Photographer: Tomohiro Ohsumi/Bloomberg