Japan Long-Term Decarbonization Power Auction: System Design, CfD Settlement, and Auction Results

1. Background: Why Was the LTDA Introduced?

Japan's capacity market (main auction) ensures short-term supply reliability, but its annual cadence and price volatility cannot provide sufficient investment certainty for long-lead, capital-intensive power sources such as nuclear, offshore wind, and BESS. The 2022 eastern Japan power supply crunch — partly attributed to accelerating retirements of aging thermal plants — prompted the government to launch the Long-Term Decarbonization Power Source Auction (LTDA) in FY2023.

2. System Design: Eligibility and Auction Format

The LTDA is administered by OCCTO and uses a pay-as-bid (multi-price) auction format — each winner receives the price they bid, unlike the uniform clearing price of the main capacity auction. Eligible resources fall into three broad categories:

Category	Power Source Type	Key Requirements
Decarbonized Power Sources (Round 1: 4 GW target, Round 2: 5 GW)	Solar PV (new/replacement)	Cannot simultaneously receive FIT/FIP support
	Onshore/Offshore Wind (new/replacement)	Cannot simultaneously receive FIT/FIP support
	BESS / Pumped Hydro (new/replacement)	Round 2: split into 3–6 hour and 6+ hour discharge categories
	Geothermal (new/replacement)	Minimum capacity 10 MW
	Hydro – Regulated (new/replacement)	Minimum capacity 10 MW
	Nuclear (new/replacement)	Must pass safety review
	Biomass – Dedicated (new/replacement)	Full dedicated fuel by FY2050
Existing Thermal Retrofit (Round 1 cap: 1 GW)	Hydrogen/Ammonia co-firing retrofit	Must submit decarbonization roadmap
	CCS retrofit	Must achieve annual minimum CO₂ storage rate
LNG New-Build (Time-Limited Category)	LNG-fired (new/replacement)	Round 1: 6 GW over 3 years; decarbonization roadmap required
	Existing Nuclear Safety Investment	Added in Round 2; cap 1.5 GW

3. CfD Settlement Mechanism

The core financial design of the LTDA is a Contracts for Difference (CfD) capacity assurance scheme, ensuring winners can recover fixed costs over 20 years while preventing windfall profits.

3.1 Capacity Assurance Contract Payments

After winning, OCCTO signs a capacity assurance contract with the operator. Each fiscal year, OCCTO pays the capacity provider monthly:

Capacity Assurance Payment = Contract Unit Price (¥/kW/year) × Contract Capacity (kW)

This revenue represents the fixed-cost-level capacity income — paid regardless of market electricity prices, ensuring investment recovery certainty.

3.2 Market Revenue Clawback (Three-Tier Structure)

Once operational, the contracted power source must return approximately 90% of market revenues (revenue from JEPX spot, balancing market, non-fossil value market, minus variable costs) to OCCTO under a three-tier structure:

Clawback Zone	Clawback Rate	Description
Zone (A): Market revenue ≤ capital cost equivalent	95%	Ensures operator retains minimum capital cost return
Zone (C): Capital cost < Market revenue ≤ Main auction price × contract capacity	90%	Standard clawback zone
Zone (B): Market revenue > Main auction price × contract capacity	85%	Reduced clawback on excess revenue to incentivize efficient operation

4. Historical Auction Results

4.1 Round 1 (FY2023 Bidding Year, Results Announced: April 2024)

Category	Target Capacity	Awarded Capacity	Total Contract Value (annual avg.)
Decarbonized Power Sources	4.0 GW	4.01 GW	¥233.6 bn/year
└ BESS / Pumped Hydro	Cap 1.0 GW	1.67 GW	(included above)
└ Existing Thermal Retrofit	Cap 1.0 GW	0.83 GW	(included above)
LNG New-Build	6.0 GW (3-year total)	5.76 GW	¥176.6 bn/year
National Total	—	9.77 GW	¥410.2 bn/year

Round 1 saw total national bids of 13.56 GW with a 72% award rate. By technology: pumped hydro award rate 69% (0.84 GW bid), BESS award rate only 24% (4.56 GW bid, highly competitive), LNG new-build 100% award rate. New-build/replacement accounted for 91% of awarded capacity.

4.2 Area Breakdown – Round 1

Area	Bids (GW)	Awards (GW)	Award Rate
Hokkaido	0.08	0.04	49%
Tohoku	1.04	0.72	70%
Tokyo	3.76	3.25	86%
Chubu	1.88	1.56	83%
Kansai	2.23	1.89	85%
Chugoku	1.21	0.78	65%
Shikoku	0.06	0.00	0%
National	13.56	9.77	72%

4.3 Round 2 (FY2024 Bidding Year, Results Announced: April 2025)

Category	Target Capacity	Awarded Capacity	Total Contract Value (annual avg.)
Decarbonized Power Sources	5.0 GW	5.03 GW	¥346.4 bn/year
└ BESS/Pumped Hydro (3–6 hr discharge)	—	0.96 GW	(included above)
└ BESS/Pumped Hydro (6+ hr discharge)	—	0.77 GW	(included above)
└ Existing Thermal Retrofit	—	0.10 GW	(included above)
└ Existing Nuclear Safety Investment	Cap 1.5 GW	3.15 GW	(included above)
└ Conventional Hydro (regulated)	—	0.05 GW	(included above)
LNG New-Build	2.24 GW	1.32 GW	¥45.6 bn/year
National Total	—	6.35 GW	¥392.0 bn/year

Round 2 saw total national bids of 13.62 GW with only a 47% award rate (more competitive than Round 1). The headline result was the first inclusion of existing nuclear safety investment, with 3.15 GW awarded (4.35 GW bid, 73% award rate), reflecting Japan's nuclear restart policy. BESS bids surged to 6.96 GW (+53% vs. Round 1) but the award rate fell to 20%.

4.4 Round Comparison

Metric	Round 1 (FY2023)	Round 2 (FY2024)
Decarbonized source target	4.0 GW	5.0 GW (+25%)
Total national awards	9.77 GW (72% rate)	6.35 GW (47% rate)
Decarbonized source contract value	¥233.6 bn/year	¥346.4 bn/year (+48%)
LNG new-build awards	5.76 GW	1.32 GW (sharply reduced)
BESS bids	4.56 GW	6.96 GW (+53%)
BESS award rate	24%	20% (more competitive)
New source category	—	Existing nuclear safety investment (3.15 GW)
BESS discharge duration split	Not differentiated	3–6 hr / 6+ hr categories

5. Capacity Levy Impact on Retail Suppliers

The LTDA capacity levy is calculated alongside the main auction levy, allocated to each area by H3 demand ratio, then distributed among retailers by their market share. Based on Round 2 results, the estimated FY2028 national LTDA capacity levy is approximately ¥69.3 billion/year (grid operators ¥5.4 bn + retailers ¥63.9 bn), on top of the main auction levy. As subsequent rounds add more contracted capacity, the LTDA share of total capacity levies is projected to rise significantly through the 2030s.

6. Strategic Implications for BESS and Renewable Investors

The LTDA provides critical revenue certainty for BESS investors. A 20-year fixed capacity assurance contract significantly de-risks financing, making project finance more accessible. However, since ~90% of market revenues must be returned, BESS business models must be built around the capacity assurance payment as the primary revenue stream, not market arbitrage.

7. Controversies and Reform Outlook

The LTDA has faced criticism on several fronts. First, the inclusion of LNG new-build is seen as greenwashing — while decarbonization roadmaps are required, most plans do not achieve full decarbonization until the 2040s. Second, BESS award rates of 20–24% mean most storage investment plans cannot secure long-term revenue certainty, potentially slowing Japan's storage deployment. Third, the inclusion of existing nuclear safety investment has been controversial, with critics arguing it uses consumer funds to subsidize nuclear life extension rather than driving genuinely new low-carbon investment.

"The Long-Term Decarbonization Power Auction is a pivotal policy tool in Japan's power sector decarbonization, but its effectiveness ultimately depends on the competitive dynamics of each technology category and the rigor with which decarbonization roadmaps are enforced."