Ministry of Economy Trade and Industry Agency for

Ministry of Economy, Trade and Industry Agency for Natural Resources and Energy Renewable Energy Policy in Japan October 2017 Takuya YAMAZAKI Director, Renewable Energy Division Agency for Natural Resources and Energy (ANRE) Ministry of Economy, Trade and Industry (METI)

Power grid in Japan l Grid network has been historically developed by 10 general utilities whereas capacity of interconnecting grids are limited. This leads to difficulty in electric power interchange in Japan. l Expansion of interconnection grids are under discussion for introducing more REs. Frequency: 60 Hz Frequency: 50 Hz Hokkaido 5 GW 0. 6 GW *The figures below indicates the maximum electricity demand in 2015. 5. 6 GW 16. 7 GW Chugoku 11 GW 5. 6 GW Okinawa 2 GW Kyushu 15 GW 2. 4 GW Hokuriku 5 GW Kansai 26 GW 1. 4 GW Shikoku 5 GW Tohoku 14 GW 12. 6 GW 0. 3 GW 5. 6 GW Tokyo 50 GW Chubu 25 GW Frequency Change 1. 2 GW 1

Electricity Market Reform Roadmap 【 1 st Step】 Apr. 2015 Sep. 1 st reform Establishment of OCCTO* 【 2 nd Step】 Apr. 2016 【 3 rd Step】 Apr. 2020 *The Organization for Cross-regional Coordination of Transmission Operators Establishment of EMSC** **The Electricity Market Surveillance Committee 2 nd reform Full Liberalization of Retail Market Transitional Period of Regulated Retail Tariffs 3 rd reform （※Within 2015: Transition to new regulatory authority） Abolishment of Regulated Retail Tariffs Legal Unbundling 2

Generation mix Renewable energy 9. 6％ (hydro: 7. 3%) Nuclear 25％ Renewable energy 15％ (hydro 7. 3%) Nuclear 1. 6％ Renewable energy 22 - 24％ Nuclear 22 - 20％ Geothermal 1. 0 to 1. 1% Biomass 3. 7 to 4. 6% Wind 1. 7% Solar PV 7. 0% Hydroelectric 8. 8 to 9. 2% Thermal power 68％ Thermal power 83. 4％ LNG 27％ Petroleum 3％ Coal 26％ FY 2010 FY 2016 (1, 065 billion k. Wh) FY 2030 3

Support measures for renewable energy (1) Support with subsidies (1997 -) (2) Support by imposing the use of a certain amount of renewable energy on power companies (the RPS system) (2003 -2012) (3) Support by setting fixed prices for purchase of renewable electricity (2009 -) Ø 2009: Excess Electricity Purchasing scheme was launched Ø July 2012: Feed-in Tariff (FIT) scheme was launched (Act on Special Measures Concerning Procurement of Electricity from Renewable Energy Sources by Electricity Utilities) Ø April 2017: the FIT scheme was revised 4

Tariffs (JPY/k. Wh) Solar PV (10 k. W or more) Solar PV （Less than 10 k. W） FY 2012 FY 2013 FY 2014 FY 2015 Fy 2016 FY 2017 FY 2018 FY 2019 ４０ ３６ ３２ ２９ ２７ ２４ ２１ TBD ※ 3 ４２ ３８ ３７ ３３ ※ 2 ※ 2 With real‐time power control system ２２ Wind ３１ ３３ ３５ ５５ Auction (２ MW or more), starting from Oct. 2017 ２８ ３０ 22 (20 k. W or more) ※ 3 ２６ ２８ ※ 2 21 55 (less than 20 k. W) Geothermal ４０ ２４ Hydraulic Power 26 (15000 k. W or more) 40 (less than 15000 k. W) ２０ １９ TBD ※ 2 (15000 k. W or more) (less than 15000 k. W) 20(5000 k. W or more but less than 30000 k. W) ２７ (1000 k. W or more but less than 5000 k. W) ２ 4 (1000 k. W or more but less than 30000 k. W) ２９(200 k. W or more but less than 1000 k. W) 29 ３４(less than 200 k. W) 34 ３９（Biogas） 39 ３２ Biomass ２４ ２６ 36 ３６(Offshore) ２６ ※ 2 ４０ 40 (less than 2000 k. W) 32 (2000 k. W or more) ((Wood fired (less than 2000 k. W) power plant (Wood fired power plant (Timber from forest thinning)) ３２ (2000 k. W or more) ２４(Wood fired power plant (Other wood materials)) (Timber from forest thinning)) ２ 4 ２１ (20000 k. W or more) ２４(less than 20000 k. W) １３(Wood fired power plant (Recycled wood)) 13 １７(Wastes (excluding woody wastes)) 17 5

History of renewable energy introduction n The main driver shifted to RPS in 2003, Residential Surplus Electricity Purchasing Scheme in 2009 and then, to FIT in 2012. n After introduction of Feed-in-Tariff in 2012, deployment of solar PV increased dramatically (170% increase since 2012). (10 MW) 6000 5000 Average annual growth rate 26％ Solar PV Wind power 4000 Middle and small hydropower Geothermal Average annual growth rate 9% Biomass 3000 Average annual growth rate 5% 2000 1000 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 Excess Electricity Purchasing Scheme RPS System 2012 2013 2014 2015 FIT scheme 2016 (FY) 6

Renewable energy introduction and 2030 Energy Mix ＜Generation Mix＞ Renewable energy 12％ Nuclear 25％ Renewable energy 22 - 24％ Geothermal 1. 0 to 1. 1% Biomass 3. 7 to 4. 6% Solar PV 7. 0% Nuclear 22 - 20％ LNG 27％ Petroleum 16％ Coal 31％ Base load ratio: 56% (1, 065 billion k. Wh) Geothermal Biomass Wind LNG 27％ Petroleum 3％ Coal 26％ FY 2013 Target[B] （March 2017） （FY 2030） 0. 5 GW 1. 4 - 1. 6 GW 3. 1 GW 6. 0 - 7. 3 GW [B]/[A] (maximum case) Wind 1. 7% Hydroelectric 8. 8 to 9. 2% FY 2010 Current [A] FY 2030 Solar PV Hydro 3. 4 GW 38. 5 GW 48. 1 GW 10 GW 64 GW 48. 5 - 49. 3 GW 2. 9 2. 1 3. 0 1. 7 1. 0 * Values are approximate. 7

Renewable energy introduction after FIT started n 35, 392 MW of renewable energy capacity has been newly deployed from July 2012 (when FIT started) to the end of March 2017. n Solar PV accounts for more than 95% of capacity of renewable energy facilities that certified and started operation, after FIT started. <Deployment of renewable energy (as of the end of March 2017)> <Public burden> (MW) Before FIT started (until Jun 2012) After FIT started (from Jun 2012 to Mar 2017) 120 000 Transition of Surcharge 105, 136 MW 100 000 2012 80 000 2013 60 000 35, 392 MW 40 000 2014 20, 600 MW 20 000 2015 0 Geothermal Biomass Wind Solar PV (non-residential) Solar PV (residential) Mid to small sized Hydro (less than 30 MW) Started operation 500 2 300 2 600 900 4 700 15 851 789 28 753 4 745 Received certification but not start operation 88 12 417 6 972 79 047 5 493 9 600 239 1 118 2016 2017 Surcharge unit price per k. Wh 131 0. 22 yen/k. Wh 329 0. 35 yen/k. Wh 652 0. 75 yen/k. Wh billion yen (195 yen/mon) 1, 322 1. 58 yen/k. Wh billion yen (410 yen/mon) 1, 803 2. 25 yen/k. Wh 2, 140 2. 64 yen/k. Wh billion yen (57 yen/mon) (91 yen/mon) (585 yen/mon) (686 yen/mon) 8

Challenges for renewable energy to be a major power source Cost competitiveness ü Higher tariff (e. g. Non-residential solar PV 21 JPY/k. Wh ( 190 USD/MWh)) → Introduction of auction scheme for solar PV above 2 MW 9

Challenges for renewable energy to be a major power source Unbalanced introduction of solar PV ü Solar PV accounts for more than 95% that started operation ü Hundred thousands of uncommissioned solar PV projects → Further foreseeability on coordination of regional stakeholders and adaptation of regulation → Stricter rule for authorization to solve uncommissioned solar PV projects → Three-year tariff setting for wind, geothermal, biomass and hydro 10

Challenges for renewable energy to be a major power source Grid constraint ü Local grid constraint (e. g. suitable for variable renewable energy but limited regional demand/interconnection capacity) ü Grid connection on a first-come-first-served basis → Establish organization for cross-regional coordination of transmission (OCCTO) → Further discussion on the implicit auction for interconnections, Connect & Manage scheme, etc. → Transmission enhancements Hokkaido 5 GW Chugoku 11 GW Okinawa 2 GW Kyushu 15 GW Kansai 26 GW Shikoku 5 GW Hokuriku 5 GW Chubu 25 GW Tohoku 14 GW Tokyo 50 GW 11

Reference

Basic mechanism of FIT scheme l Under the FIT scheme, if a renewable energy producer requests an electric utility to sign a contract to purchase electricity at a fixed price and for a long-term period guaranteed by the government, the electric utility is obligated to accept this request. Sale of electricity produced Those engaged in the power generation business from renewable energy sources using renewable energy sources Electricity supply Electric utility Solar PV edium-scale Small- and m power hydraulic Wind power Purchase of electricity at a fixed price for a government guaranteed period Payment for the purchase cost Submission of the collected surcharge Collection of surcharge together with the electricity charge Surcharge adjustment organization (organization to collect Electricity customers and distribute the surcharge) Biomass Geothermal power Those who generate power at home Deciding tariffs and durations, respecting the opinion of the special committee (every fiscal year) ・Approval of facilities (Government confirms whether the facility can generate electricity stably and efficiently. The approval is cancelled when the facility no longer satisfies the requirements. ) Decision of surcharge unit price per k. Wh (every fiscal year) Minister of Economy, Trade and Industry Opinion on tariffs and duration Special committee for determination of tariff s and durations Government 13

Ratio of renewable energy n Ratio of electricity generation by renewable energy in Japan is 15. 0 % (FY 2016). n On the other hands, ratio of electricity generation by renewable energy except hydro is only 7. 7%. 100% 90% 80% 70% Nuclear 14, 3 Nuclear, 1. 6 Nuclear 20, 6 Gas 9, 8 Oil 1, 0 Gas 18, 9 Gas 29, 7 60% 50% 40% 30% Nuclear 19, 3 Nuclear 20, 9 Gas 31, 9 Nuclear 77, 6 Thermal Power 83. 4 Oil 6, 2 Coal 44, 3 Renewable Energy 30. 7% Hydro 3, 0 Coal 19, 0 Renewable Energy 35. 3% Hydro 10, 1 Oil 0, 6 Renewable Coal 22, 8 Energy 25. 9% Hydro 1, 9 Renewable Energy 16. 4% Renewables 24, 0 Gas 3, 5 Oil 0, 4 Coal 2, 2 Hydro 9, 7 20% Renewables 27, 7 10% Renewables 25, 2 0% Germany Spain Oil 0, 9 UK Coal 34, 2 Renewable Energy 13. 6% Renewable Energy 15. 0% Hydro 5, 8 Hydro 7, 3 Renewables 6, 7 Renewables 7, 8 Renewables 7, 7 France US Japan Source： Japan: （FY 2016 Data, Estimates）。 Except Japan: FY 2015 Data. IEA Energy Balance of OECD Countries (2017 edition) 14

Renewable Energy Policy in the next decade Long-term Energy Supply and Demand Outlook (July 2015) 4. Major Approaches in Each Field 2) Renewable energy Ensure compatibility between maximum introduction and expansion according to the individuality of each power source, and inhibition of public burden. To this end, expand positively utilization of geothermal, hydroelectric and biomass powers stably operable independent of the natural conditions, thereby securing base load power sources and reducing dependence on the nuclear power plants. For solar and wind powers which fluctuate greatly in output depending on the natural conditions, introduce and expand them to a maximum extent through utilization of large-scale wind power, and so on, while reducing costs and considering inhibition of public burden. From these viewpoints, improve the environment so that renewable energy can be introduced at low cost, through measures to various regulations and restrictions, support for geothermal power generation accompanied by high development risk, improvement of electric system and expansion area of electric system operation, technological development for higher efficiency, lower cost and advanced system operation technology, and the like. The feed-in tariff serves as the driving force for promoting introduction of renewable energy. On the other hand, considering one-sided introduction of solar power generation, concerns about increased public burden, progress of the electric power system reform, and the like, and based on the characteristics and reality of renewable energy, review the system so as to allow well-balanced introduction between renewable energies, and compatibility between maximum introduction and expansion, and inhibition of public burden. 15

FIT Reform (2016) 1．New authorization system (to solve uncommissioned PV projects*） l Includes the procedure to check the project feasibility (eg. Requirement for a grid connection contract). ３．Cost effective FIT tariff for PV l Establishes the mid & long term price targets to improve foreseeability. l Introduces tendering system for larger scale PV. l Applies for previously accredited projects (transitional measures for commissioned projects). l Modifies an exemption rate for electricity‐intensive business depending on their energy‐saving efforts. ２．Project validity scheme ４．Longer period FIT tariff * 340 thousand projects of 2012 -2013 not commissioned (30%) l Requires ü maintenance & inspection during the project, ü compliance of removal & disposal after the project. l Determines 3 years FIT tariffs for wind, geothermal, biomass, small & mid scale of hydro to secure longer foreseeability. l enables an administrational order to improve & rescission of accreditation for violations. ５．Electricity system reform l Changes the obliged FIT power purchaser from retailors to TSO/DSO to enable cross‐regional coordination. 16

Cost Reduction of PV Generation System (Example) l Currently, PV systems in Japan cost about twice those in Europe. l Target is the market level = independent industry: Non-residential: JPY 100 k/k. W by 2030; Residential: JPY 200 k/k. W by as early as 2020 Current: JPY 300 k/k. W (twice European price) Module, PCS： 1. 7 times • Cost difference between domestic and foreign prices of international distribution products • Residential PV system cost is 3 times as high as that in Europe due to the distribution structure for residential systems Converge with the international price through competitiveness and technology development Construction, Mounting, etc. ： 2. 1 times JPY 10 k /k. W • Few PV‐specific installers, the methods are not most efficient • Additional cost due to Japan’s specific disaster response, site environment 35, 0 30, 0 25, 0 20, 0 15, 0 10, 0 5, 0 0, 0 Reduce the costs by optimizing methods and technology development PV System Cost Comparison between Japan and Europe (Non-residential) 28. 9 14. 8 15. 5 14. 1 7 8. 5 Japan (2016) 日本（2016年） モジュール・PCS Module, PCS Europe (2014) 欧州（2014年） Construction, 事費・架台・BOS Mounting, BOS Target For non-residential ・JPY 200 k/k. W by 2020 （≒Generation cost: JPY 14/k. Wh*) ・JPY 100 k/k. W by 2030 （≒Generation cost: JPY 7/k. Wh*） *Target of NEDO’s technology development strategy For residential ・JPY 300 k/k. W by 2019 （≒Sales price: residential electricity bills JPY 24/k. Wh) ・JPY 200 k/k. W ASAP （≒Sales price: residential electricity bills JPY 11/k. Wh) 17

Outlook of Wind Generation Cost Reduction l Our target is to reduce generation cost to JPY 8 -9 /k. Wh by 2030 so. TSCthat wind power energy will be self-sustaining (without the support by FIT) Electronic, Information & Machinery Unit 【Status】 JPY 13. 9 /k. Wh (the world average is JPY 8. 8/k. Wh) Turbine：JPY 160 k （1. ４ times the world average） ・hover at high level due to high tariff and uncertainty of grid connection, EIA, etc. Promotion of Competition Stronger wind power industry Construction : JPY 122 k （1. 6 times the world average） ・Geological limit, smaller‐ scale generation Larger‐scale Wind Farms Larger Turbines O & M：JPY 9 k /k. W/year (twice the world average) Duration： 20 years ・Monopoly/Oligopoly by turbine makers and O&M companies ・Not efficient O&M Promotion of Competition More efficient O&M 【 2030 Target】 JPY 8 -9 /k. Wh by 2030 and Self-sustaining wind power energy Turbine & Construction：JPY 239～ 253 k/k. W O&M ：JPY 4. 1～ 4. 6 k/k. W/year Duration： 25 years 18

Auction scheme 19 · Target for bidding for the moment: solar power generation for business of 2 MW or more. · Implementation time: The first round will be held in October, 2017 ※Trial period: FY 2017 and FY 2018 (three times in total for 2 years). · Bid amount: Total 1 to 1. 5 GW in 1 st to 3 rd times. The first round is 500 MW. · Maximum price: 21 yen / k. Wh for the first time. The 2 nd and 3 rd times are set by verifying the results of the 1 st time. · Procurement price etc. of the winning bidder: Bid price is adopted as procurement price in 1 st ~ 3 rd times (Pay as bid method). Procurement period is 20 years. ＜Image Price (JPY/k. Wh) of bidding＞ Maximum price 落 札 落 札 1 st 2 nd 3 rd 落 札 Bidding / winning bid price P 4 P 3 P 2 P 1 4 th Bid amount 5 th Capacity(k. W) Wanted capacity 19

Accelerating Environmental Impact Assessment l Environmental Impact Assessment (EIA) typically takes between 3 and 4 years, so it takes a long until the project scale and site are determined. This is a concern for the development of the business. l Results of demonstration projects (from time of Letter of Consideration to Minister’s recommendation) • Typical process: 36. 8 months • Accelerated process: 22. 4 months (for those completed by 2015) Capacity of Wind Projects under EIA Power Co. Capacity （MW） Hokkaido 2, 200 Kansai 80 Tohoku 5, 330 Chugoku 100 Tokyo 80 Shikoku 190 Hokuriku 20 Kyushu 240 Chubu 140 Total 8, 350 20

1 st Step: Establishment of OCCTO l In order to facilitate power interchange between regions, the Organization for Crossregional Coordination of Transmission Operators (OCCTO) was established in April 2015. OCCTO Direction Electricity Surplus Electricity Deficit OCCTO’s main functions include: - prescribing utilities to increase power generation and interchange when needed. - reviewing utilities’ power supply and demand plans. - constructing transmission lines between regions in response to an increase in demand. 21

2 nd Step: Full Retail Competition l The residential sector was opened up to competition on April 1 st this year. l In the meantime, consumers can stay with the regulated tariffs at least until 2020 if they wish. After April 2016 Power Generation Transmission/ Distribution Retail - Power generators have to be registered. - Regional monopoly. - Network tariff is regulated. - Responsible for maintaining frequency & providing last resort service. - Full competition. - Regulated tariff will remain at least until 2020. - Retailers have to be registered. 22

3 rd Step: Unbundle Transmission/Distribution Sector l In order to enhance neutrality and transparency, transmission/ distribution sector has to be unbundled from other sectors in 2020. l Either a holding company or an affiliated company format will be chosen. Holding Company Format Holding Company Generation Company Transmission/ Distribution Company Competitive Affiliated Company Format Generation Company Competitive Retail Company Competitive Transmission/ Distribution Company Competitive Regulated 23