Issues with Calculation of Avoided Costs Under Feed-in Tariffs in Japan

Abstract

Avoided costs of renewable energies have been used for calculating additional costs to purchase electricity from renewables under feed-in tariffs (FiT) in Japan. Historically, the concept of avoided costs had been the basis of tariffs for purchasing electricity from decentralized power plants in areas without wholesale electricity markets in the United States (U.S.). This article reviews the concepts and calculation methodologies of avoided costs of renewable energies in the U.S., with a particular focus on avoided energy costs. Based on this review, the total amount of avoided costs of renewable energies under FiT in Japan is calculated and compared with the amount calculated based on METI’s methodologies. This paper concludes that, in the latter estimate, the amount of avoided costs must have been undervalued, and as a result, an excessive FiT surcharge imposed.