Omaezaki-kou biomass, Japan

As Japan winds down its generous solar feed-in tariff (FiT) scheme, the country’s renewables developers have turned to biomass, which still enjoys a relatively high FiT. Renova took full advantage of Japan’s 20-year FiT to structure an aggressively leveraged transaction for its 75MW Omaezaki-kou biomass power plant in central Japan.

Renova started development in early 2016 on the 74.95MW Omaezaki-kou biomass power plant, which will be located in Omaezaki city’s commercial port zone. Omaezaki city in Shizuoka prefecture is located 160km east of Nagoya, Japan’s third largest city, and 220km west of Tokyo.

The developer plans to start design work this month (November 2019), start construction in April 2021 and commence operations in July 2023.

The total cost, including pre-construction development costs, of the project is around ¥50 billion ($459 million).

Renova owns 38% of the equity in the Omaezakikou biomass power plant.

The three other partners are:

  • Chubu Electric Power – 34%
  • Mitsubishi Electric Credit Corp – 18%
  • Suzuyo Shoji – 10%

Renova holds an option to acquire Mitsubishi Electric Credit Corp’s 18% stake at a future date, on or after completion of construction.

The project's approved FiT is ¥24 per kWh, the applicable FiT to the year ending March 2018. Under Japan’s FiT scheme, which is being phased out, the date of the central government’s FiT application approval, rather than the date of start of operations, determines the 20-year tariff for a renewables project.

Renova is set to sign a 20-year power purchase agreement (PPA) at the government-set FiT price with local legacy utility Chubu Electric Power, which is also a 34% shareholder in the Omaezakikou biomass power plant. The 20-year PPA will apply from the date when the plant starts operating in July 2023.

Renova made the final investment decision on the Omaezakikou biomass power plant on 19 November (2019). Financial close also occurred on the same day.

On 28 November it emerged that a Japanese joint venture between Toyo Engineering Corporation and Nippon Steel Engineering Co. had won a full turnkey EPC contract from the project company Omaezakikou Biomass Energy G.K.

The JV then placed an order with Siemens K.K. for a 74,950kW power output steam turbine for the project and related products, on or around 19 December.

Financing

The certainty of having a 20-year PPA with a legacy power utility such as Chubu Electric Power allowed Renova to leverage the project at an aggressive debt-to-equity ratio of around 90:10.

Chubu Electric Power has strong credit ratings of ‘A3’ from Moody’s, and AA and A+ by Japanese rating agencies Japan Credit Rating Agency (JCR) and Rating and Investment Information Inc. (R&I), respectively.

The roughly ¥45 billion debt financing package includes a mechanism to build up the project special purpose vehicle’s cash reserves to around ¥2.5 billion to hedge against potential unforeseen accidents and problems.

The financing package also includes fixed currency swaps to hedge against fluctuations in the price of the biomass plant's fuel sources - palm kernel shells (PKS) and wood pellets. These feedstocks will be imported from Canada and the US. Around 70-80% of the PKS and wood pellet supplies will be delivered under long term contracts and the remainder sourced on the spot markets. 

Including the fixed currency swaps, the debt package priced at around 200bp over 3 month Tokyo Libor (Tibor).

The package has two components:

  • 19-year ¥40 billion non-recourse senior loan
  • ¥5 billion mezzanine debt

Shinsei Bank and Sumitomo Mitsui Trust Bank (SMTB) are the lead managers on the 19-year term loan.

Mitsubishi UFJ Lease & Finance is the mezzanine lender.

Renova did not retain any outside advisers, financial or legal, for the transaction.

So long, generous FiT

The Japanese government first introduced its FiT scheme in 2012. The scheme required Japan’s 10 legacy regional electricity utilities to guarantee grid connection and sign 20-year PPAs at the applicable FiT rates. 

The Ministry of Economy, Trade and Industry (METI) set its first biomass FiT at ¥34 per kWh.

In the face of increasing public opposition to the government-subsidised FiT, METI has been reducing the price of renewable FiTs nearly every year. 

As of November (2019), the last applicable biomass FiT is ¥24 per kWh, for projects approved in the year ending March 2018. METI has signalled that going forward, it will hold reverse auctions for biomass capacity, a switch made in 2017 for solar power.

Japan’s high FiT rates did produce METI’s intended effect and sparked somewhat of a boom in biomass development.

To date, as of November (2019), IJGobal data shows Japan has 32 biomass projects with a total deal value of $5.5 billion. Of those, 13 have reached financial close and 18 are in the financing stage.

The last Japanese biomass project to reach financial close according to IJGlobal data was Osaka Gas and Kyuden Mirai Energy’s Hirohata plant in Hyogo, in western Japan. The ¥34 billion transaction reached financial close on 12 April (2019).

What’s next for biomass in Japan

Whether the transition to a reverse auction system will dampen developers’ appetite for biomass power plants, as it has for solar, remains to be seen.

At Japan’s last solar auction held in September (2019), the procurement agency Green Investment Promotion Organization awarded just under 200MW of capacity, a third less than the 300MW offered for bidding. The lowest tariff was ¥10.50 per kWh, compared to the tariff ceiling of ¥14 per kWh.

Before in 2019 the Japanese government abolished its FiT for utility-scale solar, the last effective solar FiT in the country was ¥18 per kWh in 2018. At the end of 2018, Japan had installed 56GW of solar capacity – making it the world’s third largest solar market that year behind China and the US, according to Japan’s Renewable Energy Institute.

However, biomass may have a brighter outlook than utility-scale solar in Japan. Crucially, a biomass power plant requires less flat-land mass for development.

Renova for its part is continuing to look at developing further biomass projects that have already been approved for the ¥24 per kWh FiT, an official told IJGlobal. “We have one more project in the pipeline and we are looking to rescue projects that have already been approved for the 2018 FiT”, he said.

Already this year, Renova has led a consortium that reached financial close on another 75MW biomass project in Japan in February: Tokushima-Tsuda Biomass. Its 20.5MW Akita Biomass power plant became operational in 2016, while the 75MW Kanda Biomass power project is in construction.

The renewables developer is still studying ways to bring development costs down ahead of the eventual introduction of the auction system, he added.

Meanwhile Fitch Solutions Macro Research (FSMR) has said it forecasts increased focus on the Japanese biomass sector, which is presenting wood pellet feedstock companies with opportunity for continued growth and diversification amid slowing growth in mature European biomass markets.

In an industry trend analysis published on 26 November (2019), FSMR said: "We anticipate Japan and South Korea will be the primary countries in focus as favorable government policies will encourage growth within the countries’ wood-fueled biomass power sectors and boost wood pellet demand. We expect particularly strong biomass capacity growth in Japan from 4,988MW in 2019 to 6,958MW in 2028, resulting from a large project pipeline due to attractive feed-in tariffs and subsidies for the sector."

The world's largest exporter of wood pellets, US-based Enviva has revealed this month (November 2019) that Japanese buyers account for a growing portion of its long-term sales contracts, with the portion due to be 30% in 2023 rising to more than 45% by 2025. Major Canadian exporters of wood pellets already tapping demand in the Asian market include Pinnacle Renewable Energy and Pacific BioEnergy.

Asset SnapshotOmaezakikou Biomass Power Plant (74.95MW)

Est. Value:
JPY 50,000.00m (USD 458.95m)
Full Details

Transaction SnapshotOmaezakikou Biomass Power Plant (74.95MW)

Financial Close:
19/11/2019
Value:
$460.32m USD
Equity:
$46.03m
Debt:
$414.29m
Debt/Equity Ratio:
90:10
Full Details