Japan Banks Follow Goldman to $19 Billion Solar Market
Japan’s biggest banks are following Goldman Sachs Group Inc. (GS) into domestic solar-power projects, anticipating an eightfold increase for investments in the industry.
Mitsubishi UFJ Financial Group Inc. (8306), Mizuho Financial Group Inc. (8411) and Sumitomo Mitsui Financial Group Inc. (8316) expect the market to be worth as much as 1.8 trillion yen ($19 billion) over the next three years. That’s more than eight times the roughly 223 billion yen of investment into Japanese solar installations in 2012, according to data compiled by Bloomberg.
The subsidy program Japan’s government started in July is forecast to turn it into the world’s third-largest market for solar power in 2013 behind China and either the U.S. or Italy, according to Bloomberg New Energy Finance. The incentive pays about triple the amounts Germany extends for its solar industries and already has lured solar backers from Goldman Sachs to International Business Machines Corp. (IBM)
“A lending pipeline of this size is rare,” said Koji Shiroishi, senior vice president at the structured finance division of the corporate lending unit at Mizuho, Japan’s second-biggest lender by assets. It’s evaluating solar projects worth 600 billion yen.
Solar developers typically borrow to finance at least 70 percent of project costs, suggesting loans to the industry may top 1.2 trillion yen over three years, according to calculations made with data from New Energy Finance. The London-based research group counted $2.8 billion in solar projects in Japan in 2012, the first year subsidies were offered. Few projects were completed the two previous years.
The pace of expansion forecast for the solar companies contrasts with declining support for other industries from the banks. Lending to manufacturers for plant investments has fallen 30 percent from the fiscal year ended in March 2009 to 1.98 trillion yen in the year through March 2012, the latest annual data available from the Bank of Japan show.
The banks are competing for control of the market. Mizuho forecasts construction costs of solar power plants may total 1.8 trillion yen in Japan in the next three years. Bank of Tokyo-Mitsubishi UFJ Ltd. estimates the market may be worth 1.35 trillion yen and wants the “biggest share” of the business, according to Tetsuo Nishikawa, an official in charge of structured finance for the lending division. Sumitomo Mitsui says it wants more than a third of the market.
Those opportunities in solar may not last. Energy policies set by the Democratic Party of Japan may be overturned or diluted under Shinzo Abe’s Liberal Democratic Party, which reclaimed power in the December national election. And governments across Europe that subsidized solar now are paring support for the industry after a plunge in the cost of panels.
Toshimitsu Motegi, who became trade minister on Dec. 26, said on Jan. 22 that subsidies known as feed-in tariffs will continue to “boost new investment.” Still, he added the incentive for solar energy for the year starting April 1 may be reduced to 35 yen to 39 yen a kilowatt-hour, from the current rate of 42 yen per kilowatt-hour for 20 years.
Japan’s method of subsidy for the industry is similar to the program Germany, Spain and Britain implemented, offering an above-market rate for solar power. That support typically is ratcheted back as installations surge.
“There are quite a few new power producers jumping into the market with little experience and know-how,” said Keisuke Takegahara, head of the state-run Development Bank of Japan’s environment division. “It’s the sponsors who will be saddled with risks.”
Japanese industry and government officials say they understand the need to rein in demand to avoid the boom-and-bust cycles seen in Europe.
While feed-in tariffs in Germany helped the country become the world’s largest solar market, surcharges that consumers pay for renewable energy are surging to a record and increasing the cost of power. A year ago, Spain suspended new subsidies for renewable energy to keep a lid on electricity costs.
“I am concerned that the combination of generous feed-in tariff and available debt will lead to a boom-bust cycle, with annual build in 2013 or 2014 vastly exceeding government expectations,” said Jenny Chase, an industry analyst with BNEF. “This would lead to the removal or capping of incentives, as has happened in Spain, the Czech Republic and Bulgaria.”
The impact of Japan’s subsidy was immediate. Domestic shipments of solar cells and modules soared to 627 megawatts in the quarter from July to September, 80 percent more than the same period in 2011, the Japan Photovoltaic Energy Association said. It was the biggest volume since the group began collecting data in 1981.
Goldman Sachs Japan Co. and IBM Japan Ltd. were among a group of companies that won approval in September to build the largest solar plant in western Japan. It will have 250 megawatts of capacity.
Softbank Corp. (9984), a mobile phone carrier led by billionaire Masayoshi Son, started operations at four solar stations and plans a total 211 megawatts in capacity across Japan including the four, according to Naoki Nakayama, a company spokesman.
“The solar market expanded because of the tariff of 42 yen” a kilowatt-hour, Mizuho’s Shiroishi said. Before it was announced, his bank was doing simulations with rates as low as 33 yen per kilowatt hour, Shiroishi said. Mizuho also set up a 5-billion-yen solar fund in January to take stakes in projects in addition to providing loans.
Sumitomo Mitsui, Japan’s third-largest lender, boosted its staff working on solar to about 110 from only a few in previous years in anticipation of greater lending volumes.
“We are aiming to provide loans for more than one-third of projects available,” said Teiko Kudo, head of Sumitomo Mitsui’s growth-industry cluster department.
Solar is a welcome boost for the banks, whose lending at home declined in the past three years due to the nation’s economic slump and the reluctance of borrowers to take on more debt. It’s part of a recovery that started in December for city institutions.
City bank lending outstanding rose in December for the first time since October 2009, increasing by 0.3 percent to 197.2 trillion yen, according to central bank data. City banks include lending units of the megabanks, Shinsei Bank Ltd. (8303) and Aozora Bank Ltd. (8304)
Shares of Mitsubishi UFJ jumped 50 percent in the past three months, while Sumitomo Mitsui and Mizuho advanced 56 percent and 69 percent, respectively, outpacing a 27 percent rise in the benchmark Nikkei 225 Stock Average.
The lending binge doesn’t guarantee a boost for Sharp Corp. (6753), the Japanese electronics maker that pioneered the development of solar technology in 1959 and is the oldest producer of panels globally.
Chinese supplier Suntech Power Holdings Co. (STP) is undercutting Japanese rivals including Sharp, which has two years of losses from its solar business in the period through Dec. 31.
Imported solar cells and modules accounted for 32.3 percent of volumes sold in Japan in the July-September quarter, data by the industry association show. The ratio was 21.5 percent in the year ended in March 2012. Bank executives say Japan’s solar boom may last three years, based on the outlook for subsidies.
“Though solar may be temporary, it is a significantly large market so our bank is giving it a priority,” Mizuho’s Shiroishi said.
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