Is Japanese offshore wind in trouble after Mitsubishi rethink?

Mitsubishi’s decision to review its plans for a trio of early offshore wind projects may have shaken confidence in Japan’s ability to fulfil its ambitions for the sector, but the government in Tokyo will hope enough momentum has since been built up to keep things on track.

Critics argue that the conglomerate's aggressively low bidding in that first tender created expectations about price levels that impacted subsequent rounds, making it difficult for sponsors to move away from the auction floor price.

“Although it was not really a surprise, Mitsubishi’s decision [to reevaluate its Round 1 projects] has likely angered developers losing out in the Round 1 auctions as well as prefectures and municipalities where the projects would be developed,” says Masataka Nakagawa, Japan country manager with renewables consultancy firm OWC.

Qualified success

The Round 3 tender saw an all-Japanese consortium made up of JERA, Green Power Investment and Tohoku Electric selected ahead of two other proposals for the 615MW Aomori project in the Sea of Japan (South).

Another consortium with Marubeni, Kansai Electric, BP, Tokyo Gas and Marutaka was selected ahead of three other proposals for the 450MW Yamagata project.

Both projects were awarded at the 3 yen/kWh 'zero-premium' floor, with commercial operations set for June 2030.

The result still fell below expectations in some quarters because public data on pre-tender activities suggested at least 15 interested companies had decided not to bid.

Among them was Mitsubishi and other past bidders such as Mitsui, Itochu, Electric Power Development and RWE. Other prominent pullouts included Japanese duo Cosmo Energy Holdings and Renova.

“Over the last year or so, we have seen certain European jurisdictions struggling to attract offshore wind bids,” comments Martin Lucas, a partner with international law firm Watson Farley & Williams.

“Japan is still a relatively new offshore wind market but it has seen quite a few megawatts awarded, so it's still definitely heading in the right direction.”

The firm's published commentary described Round 3 as “a modest, but nonetheless vital step forward and milestone in the Japanese government’s goal of achieving carbon neutrality by 2050”.

Scoring was based on a feasibility points system with criteria to assess which projects were deemed to the most economically beneficial, as well as socially and environmentally sustainable, with relations with the fishing industry given prominence.

With so much convergence on price and proposed commercial operations dates, the feasibility criteria played a decisive role.

“Round 3 can be considered a success from the government’s point of view; two projects were awarded to experienced consortia at the auction floor price, and these companies promised ambitious levels of local content with attractive benefits to local communities,” Nakagawa adds.

“However, as the industry notes, an auction is not a wind farm, and the final investment decision and buildout of these Round 3 projects is not guaranteed,” he cautions.

Round 3 was less of a success measured against Japan’s stated objective of encouraging foreign sponsors to invest in its offshore wind projects, as BP was the only non-Japanese winner.

There are some suggestions that non-price criteria might not be helping here.

“Foreign developers are discovering that they face challenges in a Japanese auction system where key non-price criteria pivot around local stakeholders and providing socio-economic benefits,” says Nakagawa.

But key international sponsors have been embedding themselves deeply.

"Japan is a country where you need to build relationships, and it takes time and commitment to do that. I've been working with international sponsors for a long time, and they invest enormously in building these relationships," says Christian Orton, Tokyo counsel with Watson Farley & Williams.

Similarly, several of Japan’s big conglomerates and trading houses remain keen on deepening their own presence in key European offshore wind markets such as the UK.

"The lessons learnt will be vital when building out the Japanese offshore wind market," Lucas says.

Japanese targets

The Japanese government aims to have 10GW of offshore wind power capacity in place by 2030, and 30-45GW by 2040 and has reaffirmed its target of awarding 1GW of offshore wind capacity per year.

Limited nearshore access, favourable wind potential in deeper waters and Japan's own determination to pursue opportunities in its Exclusive Economic Zone offshore, point to a significant reliance on floating offshore wind technologies for meeting these ambitions.

Recently the Ministry of Economy, Trade and Industry (METI) outlined new proposals aimed at boosting investor interest and prevent the risk of delay or abandonment of projects.

These proposals follow a call for comments on revised auction guidelines. Changes include a partial indexation of the feed-in premium secured at auction, and with scope for passing on part of rising construction costs to utilities.

For its review of bid evaluation criteria, the government has also discussed a price mechanism to help lift Feed-in tariff proposals above the auction floor. A “quasi-zero” premium level, suggested at 14 yen/kWh, would score almost as many points as the zero premium price.

The “quasi-zero premium level” is intended to maintain competition but also provide a level of financial support, consistent with the government’s aim to ensure successful completion of projects.

“This could reduce price reduction pressures and increase the importance of non-price factors. However, the quasi-zero premium level suggested may be significantly lower than project costs and this would not help to solve this issue,” Nakagawa reflects.

There also plans for more scrutiny of bidders’ risk mitigation, an increase of bid bonds and proposed changes to the evaluation of project schedules in assessing bids.

Is Japanese offshore wind on track?

The overhaul of the operational auction guidelines addresses economic challenges that include inflation and the weaker yen, but the changes reflect a long-running effort to make the Japanese process competitive, says Orton.

“This has been the case since the auctions were introduced in 2018", he says, pointing to past improvements to site selection and grid connection processes and a recent shift in the onus for geographic surveys from sponsor to the government.

"I think that what they are trying to do is to streamline their process to.... keep attracting foreign direct investment and convincing multiple players in the Japanese market to engage in projects, and to make sure that those projects go ahead."

Japan has moved more quickly to address inflationary pressures affecting the sector than some European governments, reckons Westwood Energy’s Senior wind analyst Bahzad Ayoub, who recalls how long it took for the UK to react to warnings before increasing its budget for Contracts for Difference power deals.

The current review and amendment process is supposed to be concluded by the end of March 2025, which marks the close of Japan’s fiscal year.

This leaves little room for delay if the offshore wind tender is to be concluded this year, as the government has previously indicated it will.

“There have been statements made by the government that they would like to maintain 1GW a year. In order for that to happen, they're going to have to have an auction this year,” says Orton.

Mitsubishi's choices

Japan has so far auctioned 3.5GW of capacity and may still be on track to reach its 10GW target of awarded capacity by 2030, but there is some concern about the impact of Mitsubishi’s decision to reevaluate and possibly even cancel its Round 1 projects.

“Cancellation of these projects could damage offshore wind’s social license, jeopardise the achievement of offshore wind targets, impact energy security, and job creation prospects,” warned Nakagawa.

This is not seen as the likeliest outcome, however, given the capital commitments made since 2021.

The “extremely competitive” bidding that allowed Mitsubishi to sweep the board in 2021 was a surprise to everybody, notes Lucas,

“I think it's really too early to speak knowledgeably about what's going to happen with this Mitsubishi situation. It needs to play out a little bit further before we know.”

Japanese authorities are unlikely to take a passive position. "The Japanese government is known to work constructively with industry participants when things are not going well, and the success of the offshore wind industry is important to the energy mix of Japan,” he adds.

In yet another example of Japan’s determination to facilitate the expansion of offshore wind, Tokyo has outlined plans to streamline the regulatory process for special cabotage exceptions to allow more scope for foreign flagged vessels to operate in waters that are otherwise restricted.

With the announcement last year that Japan plans to expand offshore wind development into the waters within its ‘Exclusive Economic Zone’, reforms to cabotage rules for offshore wind construction, operation and maintenance vessels are seen as important to the successful development of the industry.

"These are complex issues for the Japanese government to address, but this is another example of them really looking at the challenges and trying to find solutions that converge with international standards” Orton observes.

The Japanese government has been addressing concerns expressed by developers, especially international sponsors, about labour restrictions affecting their ability to bring international workers into the country.