Photo credit: Charly Triballeau / AFP via Getty Images
When Japanese regulators implemented major changes to the nation’s power markets last year, energy trading firm Trailstone saw an opportunity to make its debut in Asia.
Japan, which has no cross-border interconnections, operated under a fixed rate “feed-in tariff” structure for renewables projects until April 2023, when new rules aimed at managing intermittency came into effect. Those new rules ushered in systems akin to those in place in much of Europe, shifting intermittency costs and supply risks onto developers.
In 2023, renewables accounted for just over 20% of Japan’s total electricity generation. But by some estimates, that number could reach 90% by 2035, thanks in part to the declining cost of wind and solar. Moving from fixed rates for renewable power to a feed-in premium is one way to take advantage of that potential growth, by allowing the country to be flexible to changing market conditions and driving down end user costs.
According to Trailstone’s head of Japanese operations Takuya Kamisago, that shift represents an opportunity for companies offering trading and asset solutions. As one of the first Asian markets to move away from a fixed rate structure, Japan is suddenly looking attractive to those with experience in other, similarly-structured markets.
Japanese developers and aggregators, who have never sold power in an exchange market, now find themselves in need of help. As they grapple with whether or not to develop forecasting and surplus management tools in-house, Trailstone is hoping its artificial intelligence-powered risk management offerings that have served it well in markets like Germany will catch on.
But as global markets evolve to meet the energy transition — at times sending a country’s seasoned developers back to novice status — Kamisago cautioned against the assumption that the business models Trailstone had honed in Europe can be copied and pasted to new markets like Japan’s.
“There’s no question that the market is shifting towards the way of European markets,” Kamisago said. “But we can’t apply the same way of doing business in Europe to Japan because the market is still immature.”
Feed-in tariff structures — under which asset owners sign long-term contracts guaranteeing a set price for their power based on the cost of generation — have for decades been popular policy levers for stimulating renewable energy’s growth. With that structure in place in many countries around the world, solar and wind deployment boomed.
However, that structure also pushed the cost of intermittency to the consumer. So as the price of renewable energy dropped, countries began phasing out their feed-in tariffs. In Germany, for example, a longstanding feed-in tariff structure transitioned to an auction system in 2016 for renewable projects over a certain size.
At present, Trailstone has developed a business model for both of its customer segments in Japan: renewables developers and renewable energy aggregators.
Prior to this year, Kamisago explained, Japanese power developers weren’t able to sell renewable electricity certificates directly to end users as offsets. Now, they can sell certificates directly to the Amazons or Googles of the world, but they still need to sell the power they generate into the market and manage intermittency, he added, including by submitting day ahead predictions to transmission system operators.
In a pivot away from the models it developed in Europe, Trailstone is focusing on virtual power purchase agreements with Japanese developers. Kamisago said this allows the company to take on the risks of variability and intermittency that Japanese developers didn’t have under the old system, and are still loath to manage. These offersome of the stability from a fixed rate structure, he added, but it’s still essentially a new business model for Japan. Trailstone has yet to announce any finalized VPPA deals with Japanese developers.
On the other side of Trailstone’s business are aggregators, who likewise are faced with balancing intermittency and providing forecasts, and are looking to minimize risk. For aggregators, Trailstone is offering balancing services: generating supply forecasts, scheduling with the TSO, and taking on the risk of imbalances for a fee.
“It’s more like risk management for aggregators,” Kamisago said.
Trailstone has already inked its first deal with a Japanese aggregator. In September it announced an agreement to manage solar assets for Marubeni Power Retail Corporation, a subsidiary of Marubeni Corp.
Kamisago said getting that first partnership to close took around a year, and that Trailstone leveraged existing relationships to get it off the ground.
“The business model is new,” said Kamisago. “It moves very slowly; [Japanese aggregators] want to try new things, but it's unknown, so it really took time.” As Marubeni becomes more comfortable with the model, the companies will look to scale beyond what is currently a “small trial deal,” he added.
And some of the biggest asset management opportunities — large renewables projects — won’t come online at all until 2025 or 2026. That gives developers and aggregators alike a bit of time to get used to the new reality.
Despite the hurdles, entering the new market in its infancy is a key part of Trailstone’s expansion plan. The “moving parts” of this stage mean uncertainty, Kamisago said, but also offer opportunity.
Companies understand the direction the industry must head, but many are still deciding whether to develop new capabilities in-house, or to outsource to a third party like Trailstone. In most cases, company strategies are still in shades of gray, he added.
“It’s not really black and white at this moment, because the market is just launching,” he said. “People see that business chance, but at the same time, it’s a risk.”