Current Status and Key Issues Facing the Japanese Renewable Energy and Project Finance Markets

Part 1: Introduction: A lot going on in Japan!

Japan’s renewable energy sector continues to undergo rapid change. The country’s energy transition has been developing for over a decade, but the environment facing sponsors, developers and lenders today appears markedly different from that of the first generation of projects which developed under Japan’s feed-in tariff (FIT) regime.

We have seen changes in government policy coinciding with significant shifts in the wider economic and geopolitical environment. This has required market participants and entrance to take a fresh look at the assumptions underpinning their projects, including project costs, revenues, financing and risk allocation.

One key point to note at the outset is that Japanese Government policy has changed and continued to evolve over the past ten years. The Sixth Strategic Energy Plan, which was enacted in 2021, included targets for around 35% of electricity generation by 2030 to be from renewables. This target has, however, already been updated in the Seventh Strategic Energy Plan, approved in February 2025, with the Government now targeting renewable energy to supply approximately 40%-50% of electricity generation by an updated target of 2040.

These ambitious targets are now sitting within a complex policy framework. Japan is trying to do multiple things at the same time, including:

• accelerate the rate of decarbonization;
• improve energy security;
• maintain affordable and reliable electricity supply for the country;
• continue development of domestic supply chains and industrial capacity; and
• mobilise private investment to support the energy transition.

These are occurring simultaneously with the country’s transition from FIT to feed-in premiums (FIP), the continuing development of offshore wind, and the rapid growth of corporate PPAs and battery storage.

For those involved in project finance, these are significant developments. Higher construction and financing costs have placed increased pressure on project economics. At the same time, the predictable revenue structures which supported early stage renewable energy projects now look outdated and there is a move to structures which seek to balance a more complex allocation of market and regulatory risk.

To try and illustrate these points, this article delves into two key areas. The first outlines the current state of renewable energy projects in Japan, with a particular focus on the offshore wind sector. The second part takes a look at the increasing role of long-term revenue support in the financing of Japan’s energy transition. This also takes a dive into ammonia co-firing projects as a way to explain how new revenue models for energy financing are emerging.

Part 2: The Current State of Renewable Energy Projects in Japan

Japan is a country with few natural resources, and it has long been recognized that there is a need to develop renewable energy projects. The Japanese Government is making strong efforts to achieve a 40%–50% share of its power mix as renewable energy under the “FY2040 Energy Mix”.

Renewable energy sectors including offshore wind farms were among the 17 strategic fields announced by the current Takaichi administration on 21 July 2026 to attract cumulative investment of 370 trillion yen by 2040 through public-private partnerships.

In this section, we will introduce the current status of Japan’s offshore wind farm sector as a representative example of renewable energy projects, which are attracting significant interest from overseas companies.

1. Overview

Mitsubishi Corporation’s withdrawal from three Round 1 offshore wind projects in August 2025, attracted considerable public attention, and many people remain under the impression that Japan’s offshore wind market has come to a standstill. However, as mentioned above, offshore wind farm projects in Japan were in fact selected as one of the 17 strategic fields and continue to make progress.

1. Explanation of the Legislative Scheme

The sea areas that are eligible for offshore wind farm projects are divided into two categories: “Port Areas” and “General Sea Areas”. These two areas are governed by different authorities and legislation as follows:

• Port Areas: These are managed by port authorities in accordance with the Ports Act. Port authorities are primarily local authorities.
• General Sea Areas: On the other hand, the lack of (1) uniform rules regarding the occupation of General Sea Areas; and (2) a framework for coordination with prior users, previously hindered the introduction of offshore wind farms in such General Sea Areas. In April 2019, the Marine Renewable Energy Act1 (the “Act”) came into force to promote offshore wind farm projects in General Sea Areas.

Under this Act, areas within General Sea Areas are designated as a “Promotion Area” for the implementation of offshore wind farm projects, confirming that the area meets applicable requirements including suitable natural conditions, no hindrance to prior uses such as fisheries and shipping, and that an appropriate grid connection has been secured from MLIT.2 Operators may then obtain a licence to occupy the area for up to 30 years. The public tender process for operator selection is conducted by METI3 and MLIT. This public tender is known as a “Round”; currently, Rounds 1 to 3 have been completed (with Round 1 intended to be re-tendered following Mitsubishi Corporation’s withdrawal) and Round 4 is currently underway.

1. Legal issues

2. Lack of Standard Model Forms

As these are domestic Japanese projects, Japanese law is generally selected as the governing law for relevant contracts. However, Japan only has traditional templates relating to construction, and the gap between these contracts and those required for complex offshore wind projects is too great for these templates to be effectively used. Furthermore, Japan’s offshore wind sector has a lot to learn from Europe, and European companies are invariably involved on either the business operator side or the contractor side. This means that negotiations are almost always based or premised on European templates.

Although many people are waiting for the completion of the development of the FIDIC for offshore wind farm book, the FIDIC Offshore Wind Subcommittee is currently still working on drafting templates and only contracting principles such as those of the IMCA4) exist in Europe. We have frequently seen a situation where European companies have developed their own proprietary templates based on the FIDIC Yellow Book and, because there is no consistent trend across such drafts by different companies mean contract negotiations are often fraught with confusion.

1. Confusion over Project Structures

Although contracts are frequently referred to as “EPC” Contracts, in reality, the project scheme involves splitting the work into separate contract packages for each scope (such as foundations, inter-array cables and ports logistics). A result of splitting the contract into separate lots is that it can lead to significant interface issues, which presents bankability challenges for lenders who prefer a “single point of responsibility” when assessing bankability.

iii. Risk of Termination for the Employer’s convenience

Following Mitsubishi Corporation’s withdrawal from Round 1 of the offshore wind auction on the grounds of project profitability, the Japanese market has since seen a trend—particularly in projects led by trading companies—towards prioritising profitability and establishing mechanisms that allow for mid-project withdrawal. This approach is casting a shadow over the smooth progress of projects. It also appears that many business operators in Japan are re-assessing their business prospects with one eye on Japan’s Long-Term Decarbonized Power Source Auction Scheme (LTDA Scheme), which began in the 2023 financial year and offers the prospect of government support for certain projects. The LTDA Scheme is a scheme under which the selected bidders are guaranteed payment at a fixed cost level for a period of, in principle, 20 years, thereby providing long-term revenue certainty, which is required if sponsors have any chance of recouping the massive initial investment.

Part 3: Financing Japan’s Energy Transition: The Increasing Role of Long-Term Revenue Support Mechanisms

1. Energy Transition and Evolving Project Finance Challenges

Japan’s project finance market has traditionally focused on lending to infrastructure assets which are supported by stable and predictable cash flows. As such that has historically included conventional power generation, transportation infrastructure and renewable energy projects operating under the FIT regime. As Japan progresses toward its 2050 carbon neutrality objective, however, project finance investment is increasingly being targeted towards projects involving emerging technologies such as offshore wind, hydrogen, ammonia co-firing and carbon capture and storage (CCS).

Unlike traditional infrastructure projects, many of these technologies require substantial upfront capital expenditure, notwithstanding that they still face technological, commercial and regulatory uncertainties. As a result, the ability to be able to demonstrate predictable long-term revenues has become one of the most important considerations for project sponsors, investors and lenders. The transition from the FIT regime to the FIP regime in Japan for most types of energy projects has reinforced this trend by increasing project exposure to electricity market prices and placing greater emphasis on long-term revenue modelling and bankability analysis.

1. Long-Term Decarbonized Power Source Auctions

Against this background, the introduction by METI in 2023 of the LTDA Scheme (referred to above) represents one of the most significant recent developments in Japan’s energy and project finance landscape. The LTDA Scheme is intended to support investment in decarbonised power generation by improving long-term revenue visibility and enabling successful projects to recover approved costs over an extended period of time.

From a project finance perspective, the significance of the LTDA Scheme lies in its potential to reduce revenue uncertainty. Revenue predictability has of course always been a fundamental requirement for non-recourse financing, and the LTDA Scheme has been designed to address concerns that market-based electricity revenues alone may not be sufficient to support large-scale investment in emerging decarbonisation technologies. Consequently, the scheme is increasingly viewed as an important bridge between public policy objectives and private-sector financing requirements.

1. Focus on Ammonia Co-Firing Projects and Emerging Revenue Models

Ammonia co-firing projects provide a useful illustration of the challenges facing energy-transition financing in Japan. The Japanese Government has promoted the development of ammonia co-firing generation plants as a means of reducing carbon emissions from existing thermal power plants, while also maintaining energy security and electricity system stability. By utilising existing generation facilities, ammonia co-firing are seen as a practical pathway toward decarbonisation without requiring the complete replacement of existing infrastructure.

That being said, the economics of financing ammonia co-firing projects differ significantly from those of conventional renewable energy projects. Project revenues are typically linked to electricity market prices, while operating costs are heavily influenced by the procurement, transportation and storage of ammonia, the majority of which is expected to be imported from outside of Japan. These characteristics create additional challenges for lenders seeking to assess the long-term viability of such projects.

It is expected that the LTDA Scheme will therefore play an important role in addressing these challenges. Long-term revenue support may facilitate the financing, not only for carrying out modifications to existing generation facilities, but also to finance associated infrastructure such as ammonia receiving terminals, storage facilities and supply-chain assets. In this respect, ammonia co-firing projects demonstrate the growing importance of integrated infrastructure financing across the broader energy value chain.

1. Legal and Contractual Implications

As energy-transition projects move from primarily being at demonstration phase to commercial deployment and operation, legal and contractual considerations are becoming increasingly important to project bankability. Unlike traditional power projects, a number of the emerging technologies referred to above rely on complex combinations of regulatory support, technological performance and long-term supply-chain arrangements.

Key issues that will need to be addressed between sponsors, contractors, fuel suppliers, offtakers and lenders include:

• the allocation of change in law risk;
• technology-performance risk;
• fuel-supply risk; and
• environmental compliance obligations.

In addition, the long-term nature of these projects requires that parties pay careful attention to termination arrangements, compensation mechanisms and contractual protections against material regulatory changes.

Many projects also involve cross-border fuel supply chains and participation by international investors and financial institutions. As a result, transaction structures for domestic Japanese projects are increasingly influenced by international project finance standards and market practices. We expect this trend to continue as Japan seeks to attract global capital to support its decarbonisation objectives.

1. Outlook

The Japanese project finance market is evolving from a traditional infrastructure financing market into a mechanism for funding energy-transition infrastructure. The emergence of projects involving offshore wind, hydrogen, ammonia and CCS highlights the growing importance of revenue structures that can accommodate and mitigate technological and regulatory uncertainty.

The LTDA Scheme reflects an acknowledgement that long-term revenue visibility remains a prerequisite for attracting private investment into strategic decarbonisation projects. As these sectors continue to develop, the creation of bankable revenue frameworks and effective contractual risk-allocation mechanisms will be critical to sustaining investment and supporting Japan’s long-term energy transition.

Introduction to Atsumi & Sakai and our Renewable Energy and Project Finance Practice

Atsumi & Sakai is a multi-award-winning, independent Tokyo law firm with a significant domestic presence. Building on our reputation as one of Japan’s leading finance and capital markets practices, we are now among the largest independent full-service law firms in Japan. In addition to our Tokyo main office we have an office in London and an affiliate office in New York. We now have over 100 partners (including over 12 foreign partners) and a total of around 275 attorneys.

Atsumi & Sakai has Tokyo’s leading renewable energy practice, with a team of 15 Partners and Of Counsel (including foreign Partners and lawyers with strong relevant experience from their time working at leading international law firms) who work extensively on solar projects (including PPA and VPPA documentation), BESS and other battery storage projects, wind (both offshore and onshore), hydrogen and ammonia, biomass, hydro and other renewables projects. We act for Japanese and foreign sponsors, funds, lenders, purchasers and sellers.

The firm has been independently recognised for the quality of its project finance, energy, shipping and infrastructure practices.

For more information please go to: https://www.aplawjapan.com/en/services