Japan Renewables Alert 60: Corporate PPAs (No. 3) | Orrick, Herrington & Sutcliffe LLP


today’s topic

Corporate PPAs (No. 3) – Application of the Commodity Derivatives Transactions Act to virtual PPAs

On November 11, 2022, it was announced on the website of the Cabinet Office of Japan that the Commodity Market Development Office (Office of Information and Trade Policy, Trade and Services Group, Market Development Office of Basic Products) of the Ministry of Economy, Commerce and Industry (METI) has expressed his position that the Commodity Derivatives Transactions Law (the CDTA) does not apply to difference settlement in virtual PPPs as long as certain conditions are met (watch here; specifically, No. 7; only in Japanese). The stance announcement was made in response to our request that we submitted through the Cabinet Office to the Commodity Market Development Office, which oversees electricity futures trading. Now that an official position from the Commodity Market Development Office regarding a major hurdle to a virtual PPA scheme has been released, there is potential to further speed up the completion of virtual PPA transactions in Japan.

1. Settlement of CfD in virtual PPAs

A virtual PPA generally refers to a transaction between a renewable energy power producer and a corporate customer in which renewable energy certificates are traded without any actual energy transaction. In the context of Japan, it usually refers to a transaction in which a consumer purchases a non-fossil certificate unfit for consumption (nfc) from a renewable energy producer with a renewable designation equal to the amount of electricity generated at a specified renewable energy power plant.

In Japan, since only registered electricity retailers (or specific authorized and registered transmission and distribution companies) can in principle sell electricity to consumers over the grid, renewable energy producers without such registration cannot trade electricity without going through an electricity retailer. On the other hand, direct non-FIT NFC transactions (with renewable designation) from renewable energy producers to corporate customers are possible from April 2022 for non-FIT renewable energy sources that meet certain requirements. Reforms to allow such direct transactions were made to address the high level of consumer interest in virtual PPAs, which allow the exclusive acquisition of renewable energy certificates from specific renewable energy plants without having to switch existing electricity retailers. The monitoring procedures have been extended to cover these types of direct transactions, as announced in October 2022 (watch here and here for related materials on the website of BIPROGY Inc., which was commissioned by METI and JEPX for NFC verification and tracking services).

In virtual PPAs carried out in the United States and other countries, the use of contracts for difference is common

(CFDs) based on electricity market prices. Specifically, the difference between the market price of electricity (in Japan, the price per kWh in the JEPX daily price of the area in which the power plant is located) and the pre-agreed contract price for

kWh is multiplied by the amount of electricity generated during the corresponding time period (30 minute time period), then added by a month, for example, to calculate the liquidation value. During the time period when the market price is lower than the contract price, the consumer pays the difference to the power producer, and during the hours when the market price is higher than the contract price, the power producer pay the consumer.

2. Previous Interpretations and Orrick Consultation

With regard to CfD settlements based on electricity market prices, it had been suggested that, in principle, the permission of the Minister of Economy, Trade and Industry might be required in accordance with the CDTA. Electricity constitutes a “commodity” under the Commodity Derivatives Transactions Law (CDTA) (art. 2, para. 1, subsection (5)), and CfD settlements referring to the prices of the electricity market could constitute an “OTC commodity derivatives transaction” under the CDTA (art. 2, para. 14, subsection (2)). Carrying out OTC commodity derivative transactions as a business, in principle, constitutes a “commodity futures transaction” (CDTA, art. 2, para. 22, item (5)) and therefore requires the permission of the Minister of Economy, Commerce and Industry (Article 190, Paragraph 1).

We mentioned such potential risks for certain developers when discussing the possibility of virtual PPAs in Japan in 2019, and we made inquiries to the Commodity Market Development Office around November and December 2020 and later until the beginning of this year, but the response The continuation was that the CfD arrangements would constitute an OTC commodity derivatives transaction. Commodity futures trading permits are generally obtained by banks and brokerage firms that specialize in financial services (watch here for a list of allowed commodity futures trade operators), and renewable energy producers and operators wanting to run virtual PPAs have faced considerable hurdles in obtaining them. Similarly, OTC commodity derivative transactions that meet certain requirements are not considered commodity futures transactions even when conducted as a trade, for example if the counterparty is a joint stock company (KK) with a capital of at least 1 billion yen, are very pronounced and present a significant obstacle to the structuring of virtual PPA transactions in practice (CDTA, art. 2, paras. 22 and 15; Application Rule for CDTA, art. 1; note that the conduct of exceptional OTC commodity derivatives transactions as a business requires the filing of a notice as a “specified OTC commodity derivatives transaction business” under the CDTA section 349(1).

Therefore, we have compiled and submitted a request to the Cabinet Office for review by its Working Group for the Review of Renewable Energy Related Regulations (再生可能エネルギー等に関する規制等の総点検タスクフスー). is tasked with working on regulatory reform in areas related to renewable energy, and our application will be forwarded to the Commodity Market Development Office through the Cabinet Office. After meeting with us, the Commodity Market Development Office submitted to the Cabinet Office a written statement of its position on the applicability of the CDTA to CfD deals under a virtual PPA scheme, which was published on the Cabinet Office website on November 11, 2022 (see article no. 7 in the link above).

3. Interpretation by the Commodity Market Development Office

The Commodity Market Development Office announced that, “generally speaking, the CDTA does not apply to CfD settlements if at least the following elements can be confirmed in the relevant contract and such contract as a whole can be considered a purchase and sale of certified renewable energy, etc.” where the “following elements” are (1) “that the negotiated environmental attributes are real (not self-described green points, etc.)” and (2) “that the transfer of rights to environmental attributes from the energy producer to the consumer can be confirm.”

“Real” in item (1) refers to environmental attributes that are widely recognized for trade and, in response to our inquiry, the Commodity Market Development Office stated that non-FIT NFCs under the current system meet with that requirement. Transactions involving “self-described eco-points” that are not widely recognized are excluded because they leave room for the interpretation of such transactions as electricity derivative transactions under the guise of buying and selling environmental attributes.

“Transfer of rights” under item (2) refers to making it clear that the contemplated transaction will be a sale through the delivery of renewable energy certificates that represent environmental attributes from the seller to the buyer. For example, a transfer of rights may not be recognized if renewable energy certificates are treated as if they have been transferred to the consumer but in fact remain with the power producer.

Since the reason for the above interpretation is that the transaction as a whole can be understood as a purchase and sale of environmental attributes, and not as an electricity derivatives transaction, the transaction could, again, be seen as an electricity derivatives transaction under the appearance of selling and buying environmental attributes if the contract price per kWh is set at 1,000 yen or some other price level that deviates significantly from market trends.

4. Future prospects

Non-FIT corporate PPAs are expected to become one of the leading revolving transaction schemes in Japan. As we have been involved in multiple corporate PPAs in Japan so far, we believe this trend will further accelerate with the publication of the authority’s interpretation of the CDTA.

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