Published: January 26, 2026 | Updated: July 15, 2026
POLICY & REGULATION
Japan’s Long-Term Decarbonization Power Supply Auction (LTDA) pays annual capacity revenue (JPY/kW/year) rather than energy revenue (JPY/kWh) — guaranteeing recovery of fixed costs over a 20-year period. In the third auction (bid year 2025), whose results were published in May 2026, offshore wind won zero capacity. Offshore wind projects under the Marine Renewable Energy Act (FIP projects) are, as a rule, not eligible for LTDA, because the scheme is designed to prevent double recovery of fixed costs. A revision now written into the draft application guidelines for the 2026 auction — open for public comment since late June 2026 — would admit a narrow exception: only “zero-premium” projects from the earlier Rounds 2 and 3. Roughly 90% of market-derived revenue is still returned to the system, capping upside while removing the downside risk that makes project financing difficult under FIP alone.
👉 Japan’s Offshore Wind Policy & Regulatory Framework
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FIT and FIP both reward generation volume. LTDA pays a contractually fixed annual capacity revenue for 20 years, creating a cash flow stream independent of output volume. In project finance, this narrows the P50–P90 revenue gap and supports DSCR ≥ 1.35x — a threshold FIP-only projects struggle to meet at current prices.
In the third auction (results published May 2026) offshore wind won zero, and it continues on the FIT/FIP track. FIP projects under the Marine Renewable Energy Act cannot join, to prevent double recovery of fixed costs — but the draft 2026 auction guidelines (out for public comment since late June 2026) would admit only Round 2/3 “zero-premium” projects that reset their supply price to JPY 0/kWh. The ~90% return of market revenue (JEPX, ΔkW, non-fossil certificates, PPA-equivalent) is unchanged — LTDA is a fixed-cost floor, not a high-yield model.
DeepWind’s latest cost model (May 2026) shows the Murakami–Tainai project reaching its break-even point in approximately 13 years at a bid price of JPY 100,000/kW/year. If capacity payments continue for 20 years, the project comfortably exceeds the profitability threshold.
1. The Core Mechanism: Paying for Capacity, Not Output
The Long-Term Decarbonization Power Supply Auction (LTDA) was introduced to solve a structural problem in Japan’s energy transition: decarbonized power sources — offshore wind, nuclear, large-scale hydro — require enormous up-front capital, but Japan’s power market does not provide the long-term revenue visibility that project finance requires.
The core design response is to separate fixed-cost recovery from energy revenue. Under LTDA:
- Winning bidders receive an annual capacity payment (JPY/kW/year) for 20 years
- Payment is based on installed capacity (kW), not generation volume (kWh)
- This payment is designed to cover CAPEX amortization and fixed O&M costs
Government documents describe the scheme as “a mechanism that guarantees a level of capacity revenue equivalent to fixed costs.” The effect is to convert what would otherwise be a merchant revenue stream into a contracted, volume-independent cash flow — dramatically improving bankability for capital-intensive projects.
2. How LTDA Differs from FIT and FIP
FIT and FIP both reward energy output. LTDA rewards capacity availability. That distinction reshapes the entire financial structure of a project.
| Scheme | Revenue Basis | Market Exposure | Primary Objective |
|---|---|---|---|
| FIT | kWh (fixed purchase price) | None | Accelerate early renewable deployment |
| FIP | kWh + market premium | Partial (market-linked) | Integrate renewables into the wholesale market |
| LTDA | kW (capacity value) | Yes — but market upside and downside are largely neutralized | Stabilize long-term investment in decarbonized power |
Under FIT, the generator is fully insulated from wholesale prices. Under FIP, the generator sells into the market and receives a premium above a reference price — carrying price risk but able to capture upside. Under LTDA, the generator participates in the market but returns ~90% of what it earns there; in exchange, it receives a stable capacity payment that covers costs regardless of market conditions.
Japan’s offshore wind auctions shifted from FIT (Round 1) to FIP (Round 2 onward). Round 3 bids came in at effectively zero premium — meaning revenue depends almost entirely on the wholesale price generators can capture. LTDA is the mechanism intended to restore the fixed-cost coverage that zero-premium FIP cannot provide — though, as Section 4 explains, offshore wind FIP projects can currently access it only through a narrow, still-under-discussion exception.
👉 Japan’s Offshore Wind Policy Enters a New Phase
3. The 90% Revenue Return Rule — Capping Upside to Guarantee Fixed-Cost Recovery
LTDA’s most distinctive operational feature is the revenue return mechanism. Approximately 90% of all market-derived revenue must be returned to the system.
Revenue streams subject to return include:
- JEPX (Japan Electric Power Exchange) spot market income
- ΔkW balancing market income
- Non-fossil value certificate revenue
- PPA revenue equivalent to market prices
The generator retains approximately 10% of market revenue. In exchange, it receives the full capacity payment designed to cover fixed costs. The trade-off is explicit: accept a ceiling on revenue upside; receive a floor on cost recovery.
LTDA creates a structural tension with corporate PPAs. Any PPA priced above the market reference is treated as “other market revenue” — approximately 90% of the premium above market is returned. High-margin PPAs therefore do not improve the generator’s economics under LTDA. The scheme is designed for cost recovery, not profit optimization.
4. Third Auction Results and Offshore Wind Eligibility — Zero Awards and the “Zero-Premium” Exception
On 13 May 2026, the Organization for Cross-regional Coordination of Transmission Operators (OCCTO) published the results of the third auction (bid year 2025). Decarbonized power sources were awarded 4.261 GW of the 5.0 GW solicited; including LNG-only thermal, nationwide awarded capacity reached 7.299 GW — 67% of the 10.856 GW bid.
| Power source (decarbonized) | Awarded capacity |
|---|---|
| Li-ion batteries / pumped hydro (excl. new-build) | 0.819 GW |
| Non-Li-ion batteries / pumped hydro (new) / LDES | 0.886 GW |
| Decarbonized thermal (hydrogen / ammonia / biomass) | 0.517 GW |
| Existing nuclear — safety upgrade investment | 0.558 GW |
| Other decarbonized (new / replacement nuclear, etc.) | 1.482 GW |
| Decarbonized total | 4.261 GW (of 5.0 GW solicited) |
LDES is Long Duration Energy Storage. In the breakdown by generation type, the “other / general hydro / solar / wind, etc.” category — which includes offshore wind — was awarded zero. Offshore wind won no capacity in this auction and continues on the FIT/FIP track (Source: OCCTO, “73rd Capacity Market Review Meeting, Document 3,” published 13 May 2026).
This outcome follows directly from the scheme’s design. FIT/FIP projects — including public tenders under the Marine Renewable Energy Act — are, as a rule, not eligible for LTDA, in order to prevent double recovery of fixed costs. The common shorthand that “offshore wind is eligible for Rounds 2 and 3” is therefore inaccurate: under current rules, offshore wind FIP projects are excluded.
Allowing Only “Zero-Premium” Projects — Now in the Draft 2026 Guidelines
This treatment has now been written into the draft application guidelines for the 2026 (fourth) auction. Following discussion at the 39th Offshore Wind Promotion Working Group (19 November 2025) and the system-review working group (12 December 2025), and a policy statement by METI’s Agency for Natural Resources and Energy and MLIT’s Ports and Harbours Bureau on 13 February 2026, the “Draft 2026 LTDA Application Guidelines” published on 30 June 2026 explicitly add only “zero-premium” projects among the earlier Round 2 and 3 tenders to the auction’s eligible sources. The draft is currently out for public comment.
A zero-premium project is one that has changed the supply price in its public occupation plan to JPY 0/kWh, eliminating any possibility of a premium. The condition for participation is that the project forgo the FIP subsidy equivalent to balancing costs. Under that condition, officials assess that no double recovery of fixed costs arises.
What is easy to miss is that the supply prices of the Round 2 and 3 awarded projects are already low — around JPY 3/kWh (only the Saikai–Eshima site in Nagasaki is higher, at JPY 22.18/kWh). Because resetting the supply price to JPY 0/kWh gives up very little, the value of gaining a 20-year capacity-revenue offtake option becomes correspondingly large.
This is still a draft out for public comment, not a finalized rule. It applies only to zero-premium projects among the already-selected Round 2 and Round 3 tenders; the treatment of future auctions is to be discussed separately. LTDA should therefore be read not as a permanent support scheme for offshore wind, but as a limited backstop to help already-committed Round 2 and 3 projects reach completion.
Other Related Changes in the Draft 2026 Guidelines
The draft 2026 guidelines include two further changes relevant to offshore wind. First, the applicable period is capped: the current “20 years or more” becomes “20 to 40 years” (to keep the capital-cost share from becoming excessive). Sources whose price-cap parameters are being raised — general hydro, new-build pumped storage, LDES, nuclear, and LNG-only thermal — have this cap shortened to 30 years, but offshore wind is not subject to that shortening.
Second, wind is subject to a new decommissioning-cost reserve requirement. This applies the FIT/FIP framework and explicitly excludes public tenders under the Marine Renewable Energy Act — i.e., promotion-zone offshore wind. Offshore wind projects selected in the promotion zones are therefore not caught by this reserve requirement.
5. Price Cap vs. Actual Bid Level
LTDA sets a price cap for each power source. The offshore wind cap indicated at the third auction was:
- Price cap: JPY 180,655–200,000/kW/year (as set for the third auction)
As noted above, offshore wind won zero in the third auction, so this cap was never tested by an actual clearing price. The ceiling is a regulatory maximum, not an expected clearing price. DeepWind’s analysis indicates that, were an offshore wind project to go zero-premium and enter LTDA, the capacity revenue it would need to recover fixed costs is approximately JPY 100,000–120,000/kW/year — roughly 50–60% of the third-auction cap.
The wide gap between cap and practical need reflects a deliberate buffer against cost uncertainty. In competitive auctions, clearing prices should converge toward the economic break-even level — not the regulatory ceiling.
The Fourth Auction Raises the Cap by 3.5x
That cap has now been set. On 14 July 2026, a national review body indicated the offshore wind price cap for the fourth auction (bid year 2026, bidding in January 2027). Press reports put it at JPY 345,220–701,172/kW/year, set separately for each of the nine regions from Hokkaido to Kyushu. Nikkei describes the increase as 3.5x; Denki Shimbun reports it as “up to roughly 4x” (both 14 July 2026). The two figures are not in conflict — the third-auction cap ranged from JPY 180,655 to JPY 200,000 by region, so the multiple depends on which end of that range is used as the base.
The size of the increase stands out against other technologies. The draft guidelines for the fourth auction raised the price-cap parameters for general hydro, new-build pumped storage, LDES, and nuclear from 1.5x to 2x. Offshore wind received more than double that adjustment.
It is worth pausing here. DeepWind’s estimate of the capacity revenue needed to cover fixed costs is JPY 100,000–120,000/kW/year. The third-auction cap of JPY 180,655–200,000/kW/year already sat at roughly twice that level — and offshore wind still won nothing. The reason offshore wind stayed out of the third auction was therefore not that the cap was too low. The cap was, in all likelihood, never the binding constraint.
The new ceiling sits at roughly three to seven times DeepWind’s estimated requirement. Raising it widens the range within which a project may bid. But a ceiling is a maximum allowable bid, not a payment: awards are set by competition, so bidding at the ceiling is rarely a viable strategy. Whether offshore wind bids into the fourth auction will depend less on the height of the cap than on how far cost inflation in equipment and construction can be absorbed.
Note that the fourth-auction cap above is drawn from press reporting. The review body’s own materials could not be verified at the time of writing, so the regional breakdown and the detail of the eligibility conditions should be confirmed against the primary document once it is available.
6. Capacity Factor Requirements Are Being Formalized
The latest government documents explicitly require:
“Generators must achieve annual capacity factors appropriate for each power source.”
For offshore wind, specific thresholds remain under discussion. However, the direction of travel is clear: capacity factor performance will become a formal condition for receiving capacity payments.
For project finance, this introduces a compliance risk layer. Capacity factors for offshore wind depend on site wind resources and turbine availability — both subject to P90 modeling uncertainty. Lenders assessing LTDA-eligible projects will need to stress-test capacity factor scenarios to confirm that the 90th percentile performance band still meets the eligibility threshold.
7. Profitability in Practice: The Murakami–Tainai (690 MW) Case Study
DeepWind uses the Murakami–Tainai offshore wind project (Niigata Prefecture) as a reference case for LTDA profitability analysis. The project — led by Mitsui & Co. and Osaka Gas — is a Round 2 fixed-bottom project selected at a supply price of JPY 3/kWh, making it one of the very projects that could realistically consider the “go zero-premium and enter LTDA” route described above.
Updated Configuration (January 2026 Revision)
In January 2026, the project consortium announced a turbine revision: the original 18 MW GE Vernova turbines (discontinued) would be replaced by 46 units of 15 MW turbines. DeepWind’s cost model (May 2026) reflects this configuration:
- CAPEX: approximately JPY 640 billion (estimated)
- OPEX: approximately JPY 19 billion per year (estimated)
- Capacity: 690 MW
- Operating period: 30 years (assumed)
Scenario: Bid at JPY 100,000/kW/year
- Capacity revenue: approximately JPY 69 billion per year
- Market revenue: ~90% returned → approximately 10% retained (excluded from base calculation)
The case study shows that, at a bid price of JPY 100,000/kW/year, cumulative capacity revenue covers cumulative fixed costs at approximately year 13. If capacity payments continue for 20 years, the project substantially exceeds the breakeven threshold. This confirms that LTDA capacity revenue — not merchant FIP income — is what makes Round 2 project finance viable at current cost levels.
Under LTDA, capacity revenue is treated in project finance as a contractual, volume-independent cash flow. To access it, a Round 2 or 3 project must go “zero-premium” — resetting its supply price to JPY 0/kWh and forgoing the FIP subsidy equivalent to balancing costs. Since the original supply price is already low (around JPY 3/kWh), the amount given up is small, and in exchange a 20-year fixed revenue absorbs most P90 downside. For a 690 MW project at JPY 100k/kW/year, the roughly JPY 69 billion annual capacity revenue provides a floor that narrows the P50–P90 spread and supports DSCR ≥ 1.35x under current lender risk appetite in Japan.
8. What LTDA Means for Developers and Offtakers
Developer Perspective
| Dimension | Benefit | Constraint |
|---|---|---|
| Revenue certainty | Capacity payments guarantee fixed-cost recovery for 20 years | ~90% of market upside is returned to the system |
| Financing | Improved bankability — easier to meet DSCR thresholds | Capacity factor compliance risk if performance falls short |
| PPA strategy | Low default risk makes generator an attractive PPA counterparty | High-margin PPAs do not improve developer economics |
Offtaker Perspective
For offtakers seeking long-term corporate PPAs, LTDA-supported generators offer a specific advantage: the generator’s fixed-cost burden is already covered by capacity revenue, meaning default risk is structurally lower. The PPA is an overlay on an already-stable revenue base — not a lifeline for a financially stressed project.
The constraint for offtakers is that the generator has limited room to offer favorable PPA pricing. With most market-equivalent revenue returned under LTDA, the economics of above-market PPA terms are largely nullified on the generator side.
👉 What Is a Corporate PPA? Japan Market Guide
9. LTDA and Corporate PPAs — A Structural Tension
LTDA and corporate PPAs operate at partial cross-purposes. Under LTDA, any PPA priced above the market reference is treated as “other market revenue” — with approximately 90% returned to the government. The implication: a developer cannot meaningfully improve economics by negotiating a high-margin PPA on top of LTDA capacity revenue.
This does not eliminate the value of PPAs for LTDA-eligible projects. Rather, it changes the nature of the relationship:
- PPAs on LTDA projects are stability arrangements, not yield-enhancement tools
- The offtaker gains a counterparty with very low default risk
- The developer gains a stable demand relationship without dependence on spot market liquidity
The structural tension becomes relevant if an offtaker expects a high-yield, below-market PPA price in exchange for long-term commitment. That incentive structure does not function when 90% of the revenue gap between PPA price and market reference is returned to the system.
Japan’s 2050 grid expansion plans add another layer of context: LTDA-supported large-scale offshore wind is expected to contribute to system stability, and the long-term grid build-out creates a supportive environment for the 20-year project timelines LTDA is designed to cover.
👉 Japan’s 2050 Grid Master Plan Review: Offshore Wind Scenarios
LTDA is a financial architecture tool, not a subsidy — and whether the narrow “zero-premium” door is actually used is the real test for Japan’s offshore wind bankability.
The government’s goal is not to fund offshore wind directly. It is to change the risk profile of the revenue stream well enough that lenders can model it. Capacity revenue that is contractually fixed for 20 years converts what would otherwise be a merchant project into something closer to a contracted project. For Round 2 and 3 projects that bid at near-zero FIP premiums, LTDA capacity revenue may be the difference between a DSCR above 1.35x and one that falls below the bankable threshold.
The harder question is how far this limited path goes. Offshore wind FIP projects under the Marine Renewable Energy Act are, as a rule, outside LTDA; what is opening is an exception confined to Round 2 and 3 projects that reset their supply price to JPY 0/kWh. Whether future tenders can clear commercially viable prices on FIP alone — without any capacity floor — depends on how much Japan’s offshore wind cost curve moves before the next auction opens, and remains unresolved. The point at which offshore wind bankability can stand on the market alone still lies ahead.
Related DeepWind Articles
- Japan’s Offshore Wind Policy & Regulatory Framework — Auction, Zones, and Legal Basis
- Japan’s Offshore Wind Policy Enters a New Phase
- What Is a Corporate PPA? Japan Market Guide
- Japan’s Offshore Wind Operational Guideline Revision (June 2026)
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