Making Japan’s first BESS project a reality

As electricity generation systems around the world adopt renewable technologies, they face the challenge of how to maintain the reliability of supply when natural sources such as wind and sunlight are variable.

One solution is to establish a capacity market – through which power generation companies commit to be available to supply a certain amount of power when needed.

Japan has had a capacity market since 2020¹, which includes the single-year capacity auction and the Long-Term Decarbonized Power Source Auction (LTDA). The fifth auction will take place in October 2025, for the supply of power in 2029. But the capacity auction mechanism covers one-year periods only. 

To address longer-term supply needs, Japan instituted the Long-Term Decarbonized Power Source Auction (LTDA) in 2023 as a way to encourage a longer-term vision of low-carbon power investment.

Companies that submit successful bids within the LTDA benefit from payments for 20 years based on a fixed, indexed tariff, giving them the confidence and certainty to make long-term investments in infrastructure.

Hexa wins first BESS project under Japan’s LTDA

One successful bidder in the 2023 LTDA was Hexa Energy Services, a renewable energy platform that is owned by global infrastructure fund I Squared Capital. Hexa Energy Services was awarded 445MW of capacity through the LTDA – about one third of the total capacity awarded in the auction. The award comprises 11 BESS projects in six regions of Japan.

The first project to deliver the capacity is a 30MW/130MWh battery energy storage system (BESS) and adjacent small-scale solar asset in Tagawa, Kyushu, in Southern Japan. It is expected to be operational in 2026.

The BESS cashflows are supported by the long-term payments granted through the LTDA, and the project is among the firsts of its kind to reach financial close in Japan. Hexa Energy Services is now planning additional projects to meet the total capacity that it was awarded.

“The implementation of the LTDA is a landmark development for Japan, and is critical for long-term clean energy provision,” said Yuko Watanabe Shah, Chairman of Hexa Energy Services. “We are delighted to have been able to achieve one of the first financial closes of a battery energy storage system in Japan.”

Enabling innovation through tailored financing

Societe Generale was selected by Hexa Energy Services as Mandated Lead Arranger and Hedge Provider for the financing of the Tagawa BESS project. 

The bank used its expertise to design a tailored financing package that reflected the innovative revenue structure for the project. The Tagawa BESS project receives the LTDA capacity payment revenues, but it can also sell to the market, generating additional revenues. Projects that benefit from LTDA payments must refund 90% of any additional market revenues that they earn.

“Societe Generale is delighted to have supported the Tagawa BESS project and helped to achieve this significant step for the Japanese energy market,” said Stephen Krust, Co-head of Battery Mining & Industries and Energy Plus Group for Asia Pacific at Societe Generale. “We are the first non-Japanese bank to have reached financial close on a stand-alone BESS project in Japan, and this marks an important extension of Societe Generale’s capabilities in the country. We also advise and lend to many other projects in Japan, including onshore and offshore wind, and solar.”

_{1.   shulman-advisory.com/understanding-japans-capacity-market-and-the-ltda-framework/}