Article

Various Investors Turning to Solar Power Plants

A feed-in tariff (FIT) started in Japan in July 2012. An FIT is a mechanism in which electric power companies can buy electricity from renewable energy power at a fixed price for 20 years. Since the FIT began, a wide range of investors have joined in—from individuals to REIT.

April 23, 2018

Long-term, stable revenue from electric power

The amount of power generated by a solar power plant can be predicted on the basis of past meteorological data and the power generation results of previous operators of the plants. Since the FIT began, many solar power generation facilities have begun operations, and the things needed for stable operation of these facilities—such as companies’ knowledge and experience in managing them and insurance that covers the risk of natural disasters, etc.—are widely available. Plus, solar power plants don’t require huge costs for due diligence—such as the surveying of wind conditions that is necessary in order to decide whether to invest in wind farms—and unlike biomass power plants, long-term, stable fuel doesn’t need to be procured for them. All of these are reasons for the popularity of solar power plants.

Securing revenue through new developments

At the same time, some companies are concerned about a series of price reductions in the fixed purchase prices. The 40 yen/kWh price at the start of the program in 2012 was the peak. That has since declined: to 36 yen/kWh (2013), then to 32 yen/kWh (2014), 29 yen/kWh (April 1 to June 30, 2015) to 27 yen/kWh (July 1, 2015 to March 31, 2016), 24 yen/kWh (2016), and 21 yen/kWh (2017). The price is planned to drop to 18 yen/kWh in 2018. Fixed purchase prices have fallen to half the price they were at the start of the system or lower, casting a shadow on profitability. When the fixed purchase prices were 40 yen/kWh, the loans made up about 90% of initial investments, but are now as low as about 60%—leverage is also being lost. However, Shinpei Fujie of the JLL Japan Capital Market Department, who is familiar with investment in solar power plants, shows no hesitation as he says, “Even if purchase prices are 18 yen/kWh, developments with a gross ROI of over 10% are still possible.”

Initial cases of high purchase prices do produce a lot of income. However, in cases in which selling prices are determined based on the amount of power generated, such as those in which plants are already in operation, many plants are actually producing more electricity than predicted based on conservative meteorological data—many companies predict the amount of energy that will be generated based on data by NEDO (the New Energy and Industrial Technology Development Organization. These are regarded by many companies as conservative figures.) Because of this, the trade price also tends to be relatively high. There have also been cases in which plants were planned without carrying out land surveys and other steps necessary to development planning, as well as more than a few cases in which companies cannot start development for one reason or another—for example, construction costs might be unexpectedly high.

On the other hand, even with projects with the 18 yen/kWh purchase price, an operator can reduce the intermediate margins and keep down the initial investment to the project by acquiring the project as a greenfield project—projects for which negotiations with landowners and applications with the Japanese Ministry of Economy, Trade and Industry and electric power companies are finished, but construction has not started yet—and directly contracting the construction work to a facility constructor. JLL not only brokers the sales of solar power plants, but also suggests high-voltage pressure greenfield projects with no bidding process to general companies. We can introduce facility constructors and financial institutions according to your needs, and we recognize that projects suitable for highly profitable investments are still a possibility.

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