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Development Activities

Solar project development is challenging and complex. There are many parties involved: landowners or building owners, the Ministry of Economy, Trade, and Industry (METI), Utilities, EPC’s (solar equipment installers), equity investors and lenders. For ground mount projects, additional permitting with the municipal, prefectural and sometimes national government is necessary. The requirements of each must be satisfied in order to execute a successful project.

Land Acquisition and Rooftop Leasing: Finding a Place in the Sun	Power Purchase Agreement Application Process	EPC and O&M Selection	Debt Financing

• Development of ground mount solar projects is more complex than rooftop solar. Often there are many landowners whose parcels must be assembled and acquired. There are frequently several brokers each trying to earn a commission, thus driving up land prices. Furthermore, neighbors need to agree on land boundaries and, in many cases, consent to the solar plants’ construction.
• Most ground mount projects require land development permits which can take many months to complete. Forestry land development process is quite complex and requires creation of rain water drainage ponds. Forestry development approval typically takes 6 months.
• Agriculture land development is also complicated and requires several months to complete. Some types of agricultural and forestry land cannot be developed.
• Rooftop solar is easier to develop because there are no land development permits required nor neighbors to appease. Besides signing a rooftop lease agreement with the building owner for 20 years, rooftop projects only need to get METI approval and a power purchase agreement signed with a major utility. However, lender financing for rooftop projects is more difficult than ground mount projects. Lenders worry about the remote possibility of the building owner selling to a new owner who does not respect the existing rooftop lease. Unlike land lease contracts, roof leases usually do not allow the lessee to be registered on the title.

• The goal is to sign a power purchase agreement (PPA) for 20 years with one of Japan’s ten major utilities. Permitting milestones and deadlines must be met or there is risk of losing the feed-in tariff. METI and Utility PPA requirements must be satisfied.
• METI: The Ministry of Economy, Trade and Industry is the governing body overseeing the utilities. METI sets and updates the rules pertaining to the power purchase agreement process. METI requires solar project developers to apply for equipment accreditation. In this application, developers must submit:
  

  1. Panel layout

  2. Single Line Diagram

  3. Panel and power conditioner (inverter) specifications

  5. Maintenance Organization Chart

  6. Plant location data

• Note: There are ten major utilities in Japan organized by geography, all under the supervision of METI.
1. Preliminary Application: This is a simple application which gives an indication regarding current grid connection capacity to a specific location and distance to the grid connection point.
2. Grid Study Application: Following a positive preliminary application result, PPA applicants, submit a detailed grid study application with most of the same items required for the METI Equipment Accreditation, and pay a 200,000 JPY fee to have the application reviewed. Three months later, the Utility issues an answer which describes in greater detail how the plant will be connected to the grid, timing to connect, and at what cost. Typically, the grid connection cost is shared between the utility and the developer.
3. Power Purchase Agreement Application: After receiving a positive grid study application answer from the utility, developers can apply for a PPA application. This is a rather simple application and is submitted along with a “self-usage electricity” application. Solar plants typically buy a small amount of power from the utility to sustain their operations, and then all of the power generated by the solar plant is sold to the grid.
   Once the PPA application has been accepted (stamped with date), and the METI Equipment Accreditation has been obtained, the feed-in tariff rate and capacity has been secured. This is the most significant milestone in the development process.
4. Grid Connection Construction Contract: As the target grid connection date approaches, the utility will finalize the grid connection design in cooperation with developer’s EPC. Then a grid connection construction contract will be concluded between the developer and the utility. The utility will issue an invoice payable within 30 days which is usually a month or two within grid connection timing. If the developer fails to make timely payment, the feed-in tariff provisionally obtained will be lost. Once the grid connection invoice is paid, the PPA goes into effect.

• EPC stands for Engineering, Procurement and Construction. EPC’s are the companies contracted to build out the solar plant. They need to work cooperatively with the building’s general contractor and the utility. The solar installation is done in the last few months of the building’s construction and never after as the solar installation should not interfere with the tenants’ business operation. Since the general contractor has already been using scaffolding for the building’s construction, the EPC can also use the same scaffolding thus optimizing costs.
• EPC’s should have a comprehensive solar plant installation track record. They should also be bankable. Lenders’ pre-approval of candidate EPC’s during the EPC selection process should be sought. First tier EPC’s are typically bankable but more expensive than second tier EPC’s which are not always bankable.
• In the past several years, panel prices have dropped dramatically. They have dropped in Japan, as well, but not as far as the global market. Panel makers try to maintain a “Japan Premium” by having Japan versions of its panels which are identical to its other panels, but whose warranties are tied to this Japan version. Lenders will only provide financing for panels with warranties.
• Because of this Japan price “stickiness” it is necessary to push aggressively with the EPC’s to reduce costs to make them as closely in line with global standards as possible. It is advised to monitor “PV Insights” home page (wap.pvinsights.com) for the latest solar panel spot market prices.
• O&M stands for Operations and Maintenance. O&M providers provide solar plant monitoring and maintenance services. They monitor plant performance and safety, and make repairs as necessary. Periodic parts replacement is required especially for major equipment such as power conditioners and transformers.
• Many but not all EPC’s have their own O&M divisions. Like EPC’s, not all O&M providers are bankable and consultation with lenders is advised.

• Banks provide project finance for ground mount projects but not for rooftops.
• For rooftop solar debt financing it is best to approach leasing companies, preferably affiliated with a developer’s main bank. Lease companies can take more risk than banks, and the lease right imperfection inherent in rooftop projects wherein the solar equipment owner is different than the building owner is too much for Japanese banks. The fear in the banks’ mind is that if the building is sold, the new owner may not respect the solar operator’s roof lease rights according to the lease agreement.
• The optimal situation is when the building’s lender introduces its affiliated lease company, usually a subsidiary. The lease company in this situation worries less about its imperfect lease right because of the alignment of interests with the parent bank.
• Debt finance due diligence is rigorous. From start to finish the loan application process takes about 2-3 months and underwriters will require borrowers to submit 40-50 documents.
• Borrowers can expect interest rates 4-4.5% for pre-construction, non-recourse rooftop solar financing, 15-17 year terms, and 75-100% financing depending on the project. Ground mount projects can be financed at around 2% interest.