Case Studies on Financing Renewable Energy Development Japan 22 nd Meeting of the Expert Group on New and Renewable Energy Technologies May 2004 Honolulu, Hawaii, USA Ms. Yayoi IIJIMA Chief Officer International Projects Dept. New Energy and Industrial Technology Development Organization (NEDO)

1.Principle of Japan’s Energy Policy: 3Es 2.Japan’s New and Renewable Energy Indicators 3.Cost Competitiveness of NRE 4.Creation of Initial Demand 5.New Energy Budget Trend/Origin/Allocation 6.Policy Tools for NRE Promotion 7.Support Measures/System 8.Wind Power 9.PV Power 10.NEDO’s Role in Japan’s New Energy Scheme 2 Outline

Harmony with Environment Lowering CO 2 emission Economic Efficiency Market mechanism Security of Energy Supply Alternatives to oil 3Es *The Basic Plan for Energy Supply and Demand issued in October 2003 *Revision of long-term outlook for energy supply and demand is scheduled to be finalized this summer (1) Principle of Japan’s Energy Policy: 3Es 3

(2.1) Japan’s New and Renewable Energy Indicators Supply Side FY2001 FY2010 Indicators Power generation Photovoltaic power generation 110,000 kl (452 MW) 1,180,000 kl (4,820 MW) Wind power generation127,000 kl (312 MW) 1,340,000 kl (3,000 MW) Waste power generation 1,250,000 kl (1,110 MW) 5,520,000 kl (4,170 MW) Biomass generation48,000 kl (71 MW) 340,000 kl (330 MW) Energy utilization Solar thermal utilization 820,000 kl4,390,000 kl Thermal utilization of waste 45,000 kl140,000 kl Thermal utilization of biomass -670,000 kl Unused energy (incl. snow-ice) 44,000 kl580,000 kl Black liquor and scrap wood, etc* 4,460,000 kl4,940,000 kl Total (ratio of total primary energy supply) 6,900,000 kl (1.2%) 19,100,000 kl (approx. 3%) FY2001 FY2010 Indicators Total New Energy7 million kl19 million kl Hydro Power20 million kl Geothermal1 million kl Grand Total (ratio of total primary energy supply) 28 million kl (4.6%) 40 million kl (approx. 7%) New EnergyRenewable Energy 4

Demand Side (1) Includes electric vehicles, fuel cell vehicles, hybrid vehicles, natural gas vehicles, methanol vehicles, and diesel-alternative LP gas vehicles. (2) Including those powered by fuel cells. (2.2) Japan’s New and Renewable Energy Indicators Clean Energy Vehicles (1) 115,000 vehicles3,480,000 vehicles Natural Gas Cogeneration (2) 1,190,000 kW4,640,000 kW Fuel cells 12,000 kW2,200,000 kW FY 2001 FY 2010 Indicators 5

(3) Cost Competitiveness of NRE Power generation cost of new energy (unit: yen/kWh) 147~2111~129~1118~249~147346~66 Power generation cost Small- and medium- scale Large scale Small- and medium- scale Large scale Non- residential Residential Small- and medium- scale hydro power generation Biomass power generation Waste power generation Wind power generation Photovoltaic power generation Type [Source] Report (July 2001) by the New Energy Subcommittee of the Advisory Committee on Energy and Natural Resources, and others Power generation cost by power source (unit: yen/kWh) Power generation cost Oil-firedCoal-firedLNG-firedNuclear powerType [Source] Data of the 70 th Nuclear Power Subcommittee (December 1999) of the Advisory Committee for Energy 6

Period of market creation Period of independence and expansion in the marketPeriod of market maturity Market independence Development of new products Creation of initial demand ： Market scale この時期が重要 This period is important. Synergistic effect of mass production and cost reduction Cannot be sold without support Technical development ▪ High cost ▪ Competition with existing products ▪ Construction of a total energy system ▪ A lack of social awareness (4) Creation of Initial Demand 7

(5.1) Japan’s Policy Tools for NRE Promotion Market Expansion by Synergy of These Measures RD&D Sunshine Project/New Sunshine Program - Cost Reduction - Output Stability Support for Introduction - Support for introduction by business sector - Support for residential PV systems - Support for NPOs promotional activities Support for Promotion of RE in Regional Governments - Support for Developing Regional New Energy Visions - Support for Promotion of Renewable Energy by Regional Governments Renewable Portfolio Standard System -Obligates electricity retailers to supply certain amount of electricity generated by renewables Voluntary Action by Private Sector to Purchase Renewable Energy Electricity - Renewable Certificates - Voluntary Action by Power Companies to purchase Renewable Energy Electricity 8

Legal aspect (5.2) Recent Policy Strengthening to Expand NRE Introduction Jan. 2002Added two new energy sources: “biomass” and “snow ice,” to the new energy sources stipulated in the Law concerning Promotion of the Use of New Energy (in fiscal 2002, the Government began supporting projects to introduce these energies). May 2002Establishment of the “Special Measures Law concerning the Use of New Energy, etc., by Electric Retailers”. This Law made it obligatory, starting in April 2003, for electricity retailers to increase their ratio of power generated by new energy sources, such as photovoltaic power, wind power, and biomass.) Support for technological development and experimental testing, and appropriate collaboration in support for individual projects Biomass measures related to agriculture, forestry, and fisheries New energy measures Ministry of Economy, Trade and Industry Waste measures Ministry of the Environment Measures related to construction waste material and sewage sludge Ministry of Land, Infrastructure and Transportation Ministry of Agriculture, Forestry and Fisheries Collaboration among ministries The entire Government positioned new energy introduction targets in the Global Warming Measures Promotion Outline decided in March Especially in the biomass field, systematic collaboration among ministries is important. Collaboration among ministries 9

※ 1 US$ ＝ \106 (6.1) New and Renewable Energy Budget Trend 10

Special A/C for Petroleum and Sophisticated Structure of Energy Supply/Demand (Petro: \2,040/kl; LPG: \800/t; LNG: \849/t; Coal: \230/t; etc.) Petroleum-related Measures Energy Conservation NatGas Utilization Promotion Environmentally Friendly Utilization of Coal New Energy Utilization Special A/C for Electric Power Development Acceleration Measures (Electricity sales: \0.425/kWh) Regional Power Source Development Nuclear Energy Utilization Promotion Hydro/Thermal Energy Utilization Etc. \63.5B \87.6B (6.2) Overview of NRE Budget Origin (FY 2004) 11

(6.3) NRE Budget Allocation Budget for FY2004: about \42.4 billion ≒ US$400 million Fundamental investigation Development for practical application Budget for FY2004: about \26.5 billion ≒ US$250 million Field tests Demonstrative research Budget for FY2004: about \92.4 billion ≒ US$872 million Creation of initial demand for inducing market independency Creation of environment hospitable to introducing leading-edge new energy systems Financial support (tax system, fiscal investment and loans) The Green Purchase Law Enlightenment and public information activities Renewable Portfolio Standard ※ 1 US$ ＝ \106 Ⅰ． Technological Development Ⅱ． Demonstrative Testing Ⅲ. Introduction Promotion (full utilization of market mechanism) 12

１． Subsidy Program for Residential PV Systems (7.1) New and Renewable Energy Introduction Support Measures ２． Project for Promoting the Local Introduction of New Energies ３． Project for Supporting New Energy Enterprises ４． Project for Promoting the Local Deployment of New Energies ５． Project for Promotion of Non-Profit Activities on New Energy and Energy Conservation ６． Project for Supporting Regional Activities for Prevention of Global Warming ７． Project for Establishing New Energy Visions at the Local Level By offering opportunities to create initial demand, these measures aim to improve the cost effectiveness of new and renewable energy, with costs expected to be reduced in the future through economies of scale. 13

(7.2) Support System to Expand New and Renewable Energy Use Study on project introduction and project implementation Introduction planning Study on financial source Project method Experimental testing, etc. Coordination with related agencies, establishment of implementation plan, designing, Installation construction Judgment on project implementation Establishment of regional new energy plans Comprehension and analysis of regional characteristics Establishment of individual project plans, etc. Start of service of new energy General introduction flow Projects, such as establishment of regional new energy visions (for local public bodies) FY2003 budget: 1,320 million yen FY2003 budget: 1,320 million yen → FY2004 budget: 1,180 million yen Field Test Project (for enterprises and local public bodies) FY2003 budget: 6,900 million yen → FY2004 budget: 8,290 million yen （ＮＥＤＯ） Regional New Energy Introduction Promotion Project (for local public bodies) FY2003 budget: 12,710 million yen → FY2004 budget: 11,030 million yen Support Main support systems Support New Energy Enterprise Support Project (for enterprises) FY2003 budget: 38,820 million yen → FY2004 budget: 48,260 million yen Support 14

Supporting the Dissemination of Japanese New Energy/Energy Efficiency Equipment and Technologies Examination Stage by Developing Economies’ Gov’t (Support for Master Plan Preparation, Model Projects, etc.) Implementation Stage by Developing Economies’ Gov’t (Supported by JBIC’s Untied Loans/ODA) Private Sector Activity Stage (Supported by JBIC’s Export Loans, Overseas Investment Loans, F/S Preparation) JBIC METI, NEDO, JICA (7.3) Japan Bank for International Cooperation (JBIC) 15

Export Loans ⇒ Support for the Export of New Energy/Energy Efficiency Equipment and Technologies (e.g. Wind Power Plant, Solar Power Plant, etc.) to Developing Economies (Support for Private Sector Business) Overseas Investment Loans ⇒ Support for the Overseas Investment by Japanese Private Companies of New Energy/Energy Efficiency Projects in Developing Economies (incl. CDM/JI, ESCO) (Support for Private Sector Business) Untied Loans / ODA ⇒ Support for the Introduction of New Energy/Energy Efficiency Projects by Developing Economies’ Government or Public Corporation (Support for Public Sector) (7.4) JBIC-Financial Support 16

Mexico- Geothermal Power Generation Project (BOT, 25MW×4)(Export Loan, 2000) Philippines- Geothermal Power Generation Project by Philippine National Oil Company (Untied Loan & Guarantee, 1994/1999) Purchase of Solar Power Battery Maker by Japanese Firms (Overseas Investment Loan, 1994) (7.5) JBIC Support—Three Examples 17

Fiscal Year Source: NEDO research data (8.1) Wind Power Generation Capacity in Japan End of FY MW, 738 Turbines (Preliminary) Introduction Volume [MW] Number of Turbines 18

Note 1: US and European data are from AWEA and EWEA Note 2: The data of Japan is from NEDO (preliminary value) (8.2) International Comparisons—Installed Wind Capacity (MW) 19

YearSubsidy Installed Capacity (Cumulative MW) /3 of installation cost (Max: \340,000/kW) /3 of installation cost (Max: \340,000/kW) /3 of installation cost (Max: \340,000/kW) Max: \270,000/kW* \120,000/kW \100,000/kW421.4 * The incentive was reduced to 180,000 yen/kW for the second half according to subscriber interest and the price of PV systems. There was a need to reduce it to 150,000 yen/kW during the second half. (9.1) Residential PV System Subsidy Scheme 20

(9.2) PV Power Generation Capacity in Japan 21

Source: IEA/PVPS (end of 2002) (9.3) International Comparisons—Installed PV Capacity (MW) 22

Support for experiment- al testing and introduction Research and development / technological development Development of revolutionary next-generation technology Establishment of infrastructure in the software aspect (systems) International cooperation Integrated linkage-type experimental testing ２００２ ２００５ ２０１０ Private companies’ efforts Development of advanced solar battery technology Development of diffusion promotion-type technology Research and development, and investigation, on common basic technology (Research and development on common basic technology to meet new needs) (Medium- and long-term technological development) Electric companies Makers, etc. Review of related systems and regulations (construction of certification systems, etc.) Special Measures Law on Use of New Energy, etc., by Electric Enterprises (from 2003) International joint experimental development on photovoltaic power generation systems, etc. Market expansion through surplus electricity purchase scheme Support by a green power system Economic target Measures toward introduction and diffusion Implementation of technological development for further cost reduction and efficiency improvement Establishment of essential technology ２０ ３０ Diffusion stage Stage of experimental testing and introduction Power generation cost 30 yen/kW 25 yen/kW 10 ～ 15 yen/kW 5 ～ 10 yen/kW (introduction level) Module cost 140 yen/W → 100 yen /W → 75 yen /W → 50 yen /W → 30 yen /W (technological level) Residential system sales price 370,000 yen/kW 300,000 yen/kW 200,000 yen/kW 120,000 yen/kW Project to aid promotion of regional new energy introduction 2010 introduction target: photovoltaic power generation 4.82 million kW Project to establish a foundation for introducing residential photovoltaic power generation Photovoltaic power generation field test project ２０ Establishment of essential technology Maintenance of international superiority by using results of technological development and improving productivity (9.4) Scenario on Introduction/Expansion of PV Power Generation 23

(10) NEDO’s Role in Japan’s New Energy Scheme 24

Thank You!! The End