Japan juggles Mitsubishi dilemma as rival offshore wind developers call for 'fairness'

The Japanese government is battling to get its offshore wind plans back on track with new proposals that include retroactive help for Mitsubishi's stalled wind farm projects, but building consensus around such contentious issues may point to a longer wait for the country's fourth tender, analysts warned.

Japan’s Ministry of Economy, Trade and Industry (METI) is now trying to find a formula for rescuing these Round 1 projects, but is running into opposition from some of the companies outbid by Mitsubishi in that inaugural tender.

Mitsubishi's mitigation options were narrowed by the fact that pricing in the round was fixed to a feed-in tariff (FIT), but critics say the conglomerate bid too aggressively.

Adjustments were made to the offshore wind auction model after that first round, including a shift to feed-in premiums (FIPs), which leave developers the option of going to the corporate power market rather than selling all output to Japan’s grid operator OCCTO.

But this shift was only applicable from Round 2 onwards, and no such relief was available to Mitsubishi when the headwinds struck.

Round 3 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 and another consortium made up of Marubeni, Kansai Electric, BP, Tokyo Gas and Marutaka see off three other proposals for the 450MW Yamagata project.

The global downturn in offshore wind fortunes and retrenchment of companies such as Orsted and Shell have been keenly felt in Japan, where the government has put clean energy at the heart of the nation’s energy security strategy.

Earlier this year, adjustments to the auction system were made in response to the fact that Round 3 projects were awarded at the 3 yen ($0.02)/kWh floor, leaving non-price criteria to dictate the outcome.

"Some industry players were saying that these mechanisms that were encouraging low pricing were prohibitive to their operations,” recalls Christian Orton, Tokyo counsel with international law firm Watson Farley & Williams.

After a review of bid evaluation criteria, the government tweaked its operational guidelines in January to introduce a new price mechanism to help lift FIP bids above the auction floor and bolster support for projects.

A “quasi-zero” premium level, set initially at 14 yen/kWh, would score almost as many points as the zero premium price, but some developers still questioned whether this would be enough to alleviate cost risks for future auctions

The Japanese government has since set off on a broader quest to underpin a successful fourth tender while looking at what can be done to convince Mitsubishi to carry its own projects to fruition.

Consultations have covered a range of themes including a possible extension of project duration to 40 years, from the current period of 30 years and the possibility of capacity auctions to allow utilities and industrial buyers to lock power sales into multi-year terms.

Mitsubishi dilemma

But it is the Mitsubishi dilemma that has dominated the consultation process due to a controversial proposal that would allow the Round 1 projects to convert its contracts to FIPs with retroactive effect, thereby gaining access the corporate power markets.

From a government perspective, finding a way to make these projects work would result in much less delay to the projected ramp of offshore wind than re-tendering the areas from scratch, points out Shinichiro Abe, Japan director with engineering consultancy Ramboll.

Even with such delays, re-tendering Round 1 would add two to three years of timeline to any solution that keeps the original projects alive, Abe argues.

Introducing such a measure will not be plain sailing, however, and comments submitted by developers during consultations on these proposed changes showed that the government may struggle to build the consensus it seeks.

'Significant country risk'

In a pubic process where 18 developers submitted comments, several questioned the legality of the proposed conversion to FIPs.

Around half — particularly those that submitted unsuccessful bids in Round 1 – opposed the proposal on the grounds that applying the change retroactively would unfairly benefit Mitsubishi.

Japan's Green Power Investment Corp was one of those arguing that Round 1 should be re-tendered if the government wanted to change the offtake terms.

In its representation, JERA warned that changing bidding rules retroactively anywhere in the world "is considered a significant country risk".

Some, including Green Power Investment hinted that such a measure would only be considered fair if they too received their own remedial measures for projects awarded in subsequent rounds.

Others, such as UK developer SSE, urged caution in introducing measures that could undermine confidence in a competitive auction system, but preferred to focus on calling for more effective indexation mechanisms.

The big picture

METI is now left with a difficult decision to balance its pursuit of offshore wind targets with the risk of undermining the credibility of the auction system.

"This is not a Japanese problem. It is a response to a worldwide slump in offshore wind caused by soaring costs and consequential delays to projects.”

Mitsubishi has been keeping a low profile, stating only that it is monitoring discussions on possible rule changes with METI and continuing to review its business plans in the light of the revision now under discussion.

Auction delay?

The complexity of such issues, and the patient efforts to build consensus, lead most observers to conclude that the timetable for a Japan's fourth offshore wind tender is slipping.

“These are such significant discussions around that they will probably need more time,” says Abe.

A government decision to take a centralised approach to investigations of soil conditions, site conditions and wind conditions could act as yet another drag on the timeline for Round 4, he says.

Market players are predicting that the timeline for the tender has probably slipped from late 2025 to mid-2026, but this approach is broadly endorsed.

"I think Japan would probably rather spend the extra time getting to a really good position on things that can truly get the offshore wind sector in Japan back on track, even if that takes longer than had originally been anticipated,” Lucas states.

More measures

These time pressures aside, Japan’s government has underlined its determination to press forward with its ambitions for floating wind with two recent measures.

Last week, two more areas were given the necessary approvals to be included in the Round 4 tender's approved areas for promotion.

“The addition of Matsumae and Hiyama in Hokkaido.. is an encouraging sign for the progress of Round 4 of the auctions, and a wider reflection of the fact that, at government level, offshore wind in Japan is maintaining a consistent level of momentum,” says James Ballantyne, a senior associate with Watson Farley & Williams.

Opening up the EEZ also underlines Japan’s ambitions to become a leading global player in floating offshore wind, amid repeated commitments on developing and efficiently operating base ports necessary for maintenance and building a "competitive and resilient domestic supply chain" and an effective workforce.

"The problems that the industry has been facing have been complicated. But what we're seeing from Japan is a continuity," says Orton.

"They are not changing their minds in terms of targets, as some places have. They are staying on course, and they're introducing laws to allow it to happen. The EEZ expansion is just another example of that.”