Japan: Lighting the way for the energy transition with a ground-breaking solar project

Japan has set an ambitious goal of generating 36-38% of its electricity from renewables by 2030, on the way to reaching net zero emissions by 2050¹.  As the transition accelerates, one ground-breaking solar project is showing how demand from major energy consumers is playing an important part in ramping up the supply of clean power. 

In October 2023, Fukuoka-headquartered Shizen Energy unveiled a 20-year virtual power purchase agreement (VPPA) with US technology giant Microsoft to provide renewable energy from a solar farm under construction in Japan.  It is the first time Microsoft, which operates data centres in Japan and aims to source 100% of its energy from renewables by 2025², has signed a long-term supply deal for renewable energy in the country³. 

A landmark project on several fronts

The deal with Microsoft was instrumental in allowing Shizen to reach financial close of the Inuyama project, a 25-megawatt AC/31 megawatt DC solar power plant in Aichi Prefecture, north of Nagoya, which is an automotive, aircraft, machine and electrical component manufacturing hub. Furthermore, Toshiba Energy Systems & Solutions will provide the balancing and market trading operations necessary to connect the power from the Inuyama plant to the grid.

Societe Generale acted as sole mandated lead arranger, hedging bank and letter of credit issuer for the deal. The JPY10.9 billion (USD73 million) non-recourse financing funds the development and construction of what is a landmark project on several fronts:  

•    For Shizen Energy Group – a developer, owner, construction contractor and operator of renewable energy – it is also the first project in Japan financed by an international lender.

•    This is the first time that non-recourse project finance has been used for the combination of a VPPA for the sale of non-fossil fuel certificates (NFCs) with long-term contracted energy sales, including balancing. 

•    The new project’s size, which is the largest single-asset solar power plant under a corporate PPA to reach financial close, will help Japan make progress towards its renewable energy targets. 

•    The project is also the first to reach financial close since the Japanese government reformed the energy market in April 2022, underlining Societe Generale’s ability to navigate changing market dynamics. 

“We look forward to enabling more projects with a similar structure as we increasingly focus on PPA projects to support our customers to decarbonise in Japan, Asia and the Americas.  The transaction may act as an example for deals across the globe for Shizen Energy, which has a portfolio containing projects across Southeast Asia and Brazil as well as Japan,” says Oliver Senter, Executive Officer for Investment & Strategy at Shizen Energy. 

“We are proud to introduce this model to the Japanese market with a first-of-a-kind financing for Shizen Energy. We can expect long-term contracts with corporate clients to become an important aspect of future projects, and this structure can serve as a template for renewable energy developers looking to access long-term project financing,” said Cedric Chatel, Managing Director, Energy+ Group at Societe Generale.

Societe Generale entered the Japanese renewables market in 2020 with financing for Marubeni Corporation’s 140 MW Akita offshore wind project.  It has since worked on other innovative projects in Japan, including Canadian Solar’s JPY24.5 billion (EUR185 million) financing in 2021 for the 100 MW Azuma Kofuji Solar power project, for which Shizen Energy's subsidiary JUWI Shizen Energy Inc. was the EPC contractor.  

The deal also extends Societe Generale’s track record in Japanese renewable energy projects and establishes a framework for future financings involving corporate power purchasers.
 

^{* -    A power purchase agreement (PPA) is a contract between two parties where one party (usually a renewable energy project developer) sells both electricity and renewable energy certificates (RECs) to another party (the buyer, sometimes called the offtaker). PPAs are a good mechanism for companies to make a long-term commitment to purchasing renewable energy.
-    A Virtual PPA (VPPA) is a specific type of a PPA contract, used to procure long-term renewable energy. Unlike a physical PPA, with a VPPA the buyer does not receive, nor take legal title to the energy. The buyer continues to receive physical power from its utility or retail provider, allowing the buyer to utilize a VPPA in a different region than where it uses electricity.
Source: https://3degreesinc.com/}

<sup>1. asia.nikkei.com/Business/Energy/Japan-aims-for-nearly-40-renewable-energy-by-fiscal-2030
2. news.microsoft.com/europe/features/as-the-world-goes-digital-datacenters-that-make-the-cloud-work-look-to-renewable-energy-sources/
3. www.shizenenergy.net/en/2023/10/13/seg_vppa_microsoft/</sup>