Solar Energy Bubble in Japan as Gamblers and Goldman Sachs set up Huge PV Power Plants

We have been predicting a massive solar energy boom in Japan due to the generous solar feed in tariffs set by the Japanese Government in the wake of the Fukushima Nuclear accident. Note Japan generates very little electricity from renewable sources of power like wind and solar energy. However that is changing with a large number of solar power plants being developed by a number of Japanese companies. Seeing the lucrative returns and IRRs in excess of 30%,  gamblers and Goldman Sachs have started investing massive amounts to reap the early mover advantage of the Solar Bubble.

Solar Demand to Explode in Japan (the following excerpt was written by us in June)

Japan after the Fukushima disaster had set out on a plan to increase the share of renewable energy in the electricity mix which is abysmally low. Japan has very low capacity in wind and solar energy compared to the more environmentally conscious developed countries like Germany. Japan which had led the solar market in the period till 2005 abruptly stopped its support. Though that time period had led to the birth of the Japanese solar industry (which is second to the Chinese even today), the industry had faltered as domestic demand went into decline.

Sharp, Kyocera, Panasonic-Sanyo, Mitsubishi are the top solar panel producers in the world. Solar Energy in Japan has a long future dating back to 1994 when the government introduced capital subsidies to boost solar energy installations on rooftops. Till 2004, Japan was the largest solar market in the world after which it was overtaken by Germany. After 2004, the growth in the solar industry tapered off as the government reduced the subsidies for solar panels to almost zero. However the low cost Chinese solar module producers have pushed back most of the Japanese companies. The Japanese government grants generous solar subsidies and feed in tariff to boost the renewable energy production in the country which remains far off targets. This has led Japan to become the top non-European market after USA and the growth seems set to continue in the future as well. Japan has relatively low installations costs and is much nearer to grid parity. Also lack of  wind energy makes solar energy more attractive as a renewable energy choice. While large scale solar installations in Japan are almost absent, there remain large numbers of rooftop solar installations.

However with the setting of a crazily high Feed in Tariff of 52c/KwH, solar demand is set to increase exponentially in Japan. Note Japan is already one of the biggest markets globally and has a large solar manufacturing industry. This is ideal grounds for a subsidy led solar boom like what happened in Spain in 2008 and Czech in 2010 with pernicious results.  Japanese solar companies like Sharp, Solar Frontier, Mitsubishi will benefit the most.

Solar Booms always end up in Spectacular Busts

Note Solar Booms are generally followed by a Bust after a couple of years as the massive subsidies forces the Government to stop the incentives abruptly and even apply retroactive taxes . This story has been completed in a number of countries like Spain,Italy Czech and Bulgaria already and Japan is in the first phase. Sumitomo one of the largest industrial  groups has decided not take part in this bubble and is investing instead in wind energy which has lower FITs and lower returns as well.

Bulgaria the most recent Solar Bust

The Bulgarian Government is set to face numerous lawsuits from investors in solar power plants as it imposes electricity grid fees on existing solar power plants to reduce their returns. This will reduce the returns for solar investors by 20-40% and bring down the electricity rates for Europe’s poorest citizens who saw rates go up by 12%. Note Bulgaria had given a very generous solar feed in tariff which has attracted solar developers and companies in droves setting up large solar power plants. The returns were enormous for these investors as solar panel prices have crashed leading to IRR of 30-40%. This has imposed a heavy monetary burden on the Bulgarian government and electricity companies as they are forced to pay for this boom. This story is similar to what was scripted in Czech and Spain a couple of years ago. The story goes like this:

a) Government starts a solar subsidy program by giving above market rates for solar electricity

b) Solar systems prices go down making the FIT very lucrative

c) Massive solar boom ensures with solar developers setting up huge capacities in short period of time (Czech saw 1 GW of solar installed making it the 4^th largest solar market)

d) Burden becomes huge in the government leading to increasing rates for customers

e) Government clamps down and imposes taxes and fees on existing solar power plants

f) Investors cry wolf and sue the government.

Businessweek

 “With so many companies rushing in we are seeing a solar bubble forming and land prices are rising,” Kitamura said in a Sept. 7 interview. Japan’s ambitions in renewable energy look more manageable in wind energy, he said.

Projects to add more than 1,150 megawatts of solar plants have been announced this year in Japan, compared to none last year, according to BNEF. Those estimates, which exclude residential installations, mean about 110 megawatts of utility- size solar capacity may be commissioned this year, up from 10 megawatts last year, BNEF said in an Aug. 31 report.

Japan Asia Group, a Tokyo-based brokerage and an aerial surveyor that started looking at renewables three years ago, last month pledged to invest 150 billion yen to build 500 megawatts of solar power across the country by March 2015. The amount exceeds Japan Asia’s revenue over the last two years A group including International Business Machines Corp. (IBM) and Goldman Sachs won approval to build Japan’s largest solar plant of 250 megawatts in the southern city of Setouchi, which will cost as much as 86.1 billion yen, the local council said Sept. 13 on its website. That would be Goldman Sachs’s second renewables investment in Japan after it bought 5.1 percent of Eliiy Power Co. a lithium-ion battery maker, last year.

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