I. Introduction of FIT in July 2012 On July 1, 2012, the Act on Special Measures concerning Procurement of Renewable Energy Sourced Electricity by Electric Utilities (Act No. 108 of 2011) (the “RE Act”) came into effect and a feed-in-tariff (“FIT”) system was introduced in Japan in an effort to promote the use of renewable energy.
The RE Act imposes an obligation on electric utility operators (“Utilities”) to purchase electricity generated using renewable energy sources including solar energy (“Renewable Electricity”) from renewable energy electricity suppliers (“Suppliers”) at prices and for time periods designated by the Ministry of Economy, Trade and Industry (“METI”).
The length of the procurement period under the power purchase agreement (the “Procurement Period”) (which is currently twenty years) and the prices (the “Procurement Price”) payable during such Procurement Period as currently determined by METI are quite favorable to Suppliers, and thus, there has been a recent flood of companies building large solar and other power plants based on renewable energy.
In response to the introduction of FITs, each Utility prepared standard terms and conditions (yakkan) (“Utility Terms”) as part of the grid connection agreement (“GCA”) and a form of power purchase agreement (“PPA”) which the Utility expected to be accepted by Suppliers without any amendments. However, Utility Terms are typically drafted in favor of Utilities and may not be consistent with the RE Act. For example, under many Utility Terms, despite the 20-year Procurement Period, the contracting term was only one year with an option to renew each subsequent year, which technically enabled the Utilities to terminate the contract before the expiration of the Procurement Period. The more serious concern was that many Suppliers faced difficulties in obtaining bank financing for their projects because Utility Terms do not allow the Supplier to assign any of its rights and/or obligations under the GCA and PPA.
II. Model ContractOn September 26, 2012, METI released a model contract to be used for GCAs and PPAs (the “Model Contract”). The Model Contract can be found here http://www.enecho.meti.go.jp/saiene/kaitori/dl/2012denki_keiyaku.doc (only in Japanese).
In its press release, METI described the Model Contract as complying with the RE Act and “other provisions defined in the related laws and regulations, while considering practical requirements and other procedures related to fundraising activities” of suppliers. According to METI, it released the Model Contract because Utility Terms (i) vary in terms of contents, some of which included terms that were not always consistent with the RE Act; and (ii) were not drafted for Suppliers to be able to obtain financing from banks.
The Model Contract was drafted for use under the following circumstances:
As METI notes, the Model Contract is an example of a GCA and PPA and can be modified as appropriate to reflect the nature of energy sources, sizes of facilities for power generation and other circumstances of a particular project as long as the contract is in compliance with the RE Act and other applicable regulations.
This publication/newsletter is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer.