Taxation in Japan Jeopardises its Solar Sector

Taxation in Japan on the renewable energy sector is a cause for concern and can jeopardise its efforts to resolve Japan’s environmental issues.

In 2022, in Mimasaka, a small town in western Japan, a solar power project developer encountered headwinds that almost stopped the project in its tracks. Mimasaka’s municipal government aimed to impose the country’s first solar tax and construction restrictions, which would affect the 258 MW Sakuto Mega Solar Power Plant.

The plan eventually failed after considerable pushback, but fresh attempts to increase the financial burden on renewable projects in Japan are still gaining momentum.

Keen for Control

A growing list of Japanese municipal governments are keen to introduce their local taxes on solar and wind developers, threatening to stop these projects or at least put them at a regulatory and financial disadvantage. By the end of last year, around 203 municipalities were enacting renewable energy project tax schemes.

However, the reason for this problem may be more complicated than it initially appears.

Difficult Terrain

Experts at Japan NRG’s “Renewables Tax in Japan: Back with a Vengeance” webinar on September 14 said that these municipalities, many in rural and mountainous areas where land suitable for solar development is scarce, mostly try to avoid deforestation. Moreover, residents in these areas are increasingly worried about mudslides due to deforestation.

However, adding to the fray – and perhaps not unsurprisingly – local authorities are also keen on earning additional revenue for local government coffers, they said.

Miyagi Prefecture’s Dilemma

Miyagi Prefecture in northeastern Japan is now undergoing its solar tax problem. The Miyagi prefectural government has proposed taxing businesses cutting down trees that make room for solar, wind, biomass and other power generation facilities.

“We’ve worked out a way to increase the economic burden on business operators to induce them to source suitable sites other than forests,” said Miyagi Governor Yoshihiro Murai.

Miyagi Prefecture is located on Japan’s eastern Pacific coast, and 24% of its total land area is designated as natural parks.

Pending More Approvals

On July 4, the Miyagi Prefecture’s government passed another ordinance, the “Renewable Energy Community Coexistence Promotion Tax Ordinance”, according to Yuko Inui, partner and member of the Energy and Infrastructure Group at Orrick Herrington & Sutcliffe LLP/ Orrick Tokyo Law Offices.

The government aims to introduce the tax by April 2024. Still, Inui told Energy Tracker Asia that the prefecture needs consent from the minister for Internal Affairs and Communications (MIC) to do so.

“In order for the MIC Minister to grant this consent, he is to hear the opinion of the Local Finance Council in advance,” she added.

The Local Finance Council is part of the MIC Ministry, a central ministry whose duty is to deliberate on prescribed matters and to make necessary recommendations to the MIC minister. No special consultation with residents is required.

The ordinance will apply to any project that is 15,000 square m in size or larger. However, it doesn’t cover offshore wind power development.

If the new tax is levied, businesses will not be viable, Inui explained. “So we believe that businesses can either plan their projects in non-forest areas to avoid being taxed or if, in forest areas, they should proceed under a regional consensus to receive a tax exemption, which will not affect the price of electricity they sell.”

Taxing Energy Use

The ordinance is designed to impose tax in proportion to the power output of renewable energy generation facilities. The amount of tax to be imposed will be USD 4.18 per kW for solar power, USD 16.64 per kW for wind power, and USD 7.07 per kW for biomass, including for non-feed-in-tarriff (FIT) projects, according to the Japan NGR webinar panellists.

For FIT-approved solar and wind power, depending on the applicable FIT price, a maximum of USD 27.91 per kW for solar power and USD 32.60 per kW for wind power will be imposed.

This represents around 20% of a solar project’s operating income. The tax system does have a so-called grandfather clause, meaning that projects that have already started construction by the effective date are exempt from taxation.

However, the ordinance is scheduled to be reviewed within five years, and the prefecture hasn’t ruled out the possibility of taxing existing facilities.

Although the tax scheme does not impact offshore wind power projects, projects’ respective sub-power stations, power lines and infrastructure could be impacted if they compromise more than 15,000 square m of forested land.

Tax System in Japan Gains Momentum

The number of renewable energy projects that have problems with concerned residents is increasing nationwide, while ordinances that attempt to curb the construction of renewable projects in certain vulnerable areas by establishing regulated zones are steadily increasing, Inui said.

However, she added that she believes the tax ordinance doesn’t mean that Miyagi Prefecture is opposed to renewable energy per se but says that the government has shown a willingness to promote it by raising the target for its introduction.

“Even if some other local governments try to introduce a similar tax system in the future, it doesn’t mean that they are turning their backs on renewable energy, but rather they think it is essential to involve local residents and gain their understanding to introduce renewable energy more safely and stably,” she said.

False Solutions

Japan’s grappling with local tax ordinances levied on new solar projects comes as the country is still struggling to come to terms with its over-weighted fossil fuel usage relative to its population of only 123 million people. It’s the world’s largest liquefied natural gas (LNG) importer, ahead of even China, and its fifth-largest crude oil consumer.

Japan is also the world’s fifth-largest carbon emitter. As the country continues to rebound from COVID-19 economic contraction, its greenhouse gas (GHG) emissions have also increased. GHG emissions in the country rose 2% through March 2022, the first increase in eight years.

Part of the government’s solution includes solar and wind power development. Still, growing criticism has been levied against government planners for what many consider “false solutions” to help reign in the country’s emissions from fossil fuels usage.

Some of these solutions include investing in blue hydrogen that uses carbon capture storage and utilisation (CCSU), ammonia co-firing for coal power plants, the continued use of liquefied natural gas (LNG) for its power sector and utilising CCSU technology to control harmful emissions. As such, more taxation in Japan on its renewables sector, in light of its need to quickly decrease its carbon emissions from the power sector, is cause for concern.