What is the Long-Duration Decarbonized Power Auction (LDA)?
— A Complete Guide to the 20-Year Fixed Revenue Mechanism

Why the Government Created This System

Japan's power system faces significant challenges as renewable energy expands rapidly. Since solar and wind depend on weather conditions, battery storage systems that balance electricity supply and demand have become essential.

However, large-scale battery storage requires investments exceeding 10 billion yen for construction. For private companies to make such investments, a long-term revenue outlook is essential.

The government created the "Long-Duration Decarbonized Power Auction (LDA)" in FY2023 as part of the capacity market. Managed by OCCTO (Organization for Cross-regional Coordination of Transmission Operators), in a nutshell, it is a system where "if you build and operate a battery for 20 years, the government guarantees your construction and fixed costs."

How the LDA Works — "Defensive" and "Offensive" Two-Tier Revenue

When you win the LDA, revenue consists of two tiers. The auction uses a multi-price format (each winner's bid price becomes their contract price), which differs from the Main Auction's single-price format.

Even in the worst-case scenario (zero market profits), the fixed income from (1) ensures no losses. This stability is the greatest advantage, making project finance structuring easier and favorably influencing lending decisions by financial institutions.

The Truth Behind the "90% Refund Rule" — Actually a Three-Tier Structure

The LDA has an arrangement known as the "90% refund rule," but it is actually a three-tier structure.

Importantly, only (2) market trading profits are subject to refunds — 100% of (1) LDA fixed income stays with the operator. KPMG's analysis shows that the LDA IRR converges to approximately 3.2% "bond-like returns" from capacity payments alone, but the 20-year stable revenue makes DSCR (net CF before debt service / debt service) easier to structure, enabling financing through TK-GK schemes via SPCs (Special Purpose Companies).

Eligible Power Sources and Participation Requirements

Only new construction, replacement, and renovation projects are eligible for the LDA. In addition to batteries and pumped hydro, nuclear, hydroelectric, solar, wind, geothermal, dedicated biomass, and hydrogen/ammonia co-firing (renovation) are eligible, with LNG-fired thermal also included as a temporary measure for FY2023-2025.

Results from the 1st and 2nd Rounds — Capital Rushes into Batteries

In the 1st round, batteries won 1,092MW plus pumped hydro 577MW for a total of 1,669MW. According to KPMG's analysis, approximately 60% of winning battery companies were foreign-owned, showing international investment capital concentrating on this system.

The 2nd round saw 961MW for 3 to less than 6 hours duration and 409MW for 6+ hours. The largest awarded source was existing nuclear safety investment at 3,153MW (3 projects).

Policy Changes from the 3rd Round — Drastic Reduction in LiB Quota and 6-Hour Requirement

Since 3-4 hour LiB batteries will find it difficult to participate in the LDA, it is urgent to consider technologies capable of long-duration discharge (sodium-ion batteries, LDES, etc.).

Summary — For the LDA, "Entry = Securing the Right Site" is Everything

The LDA is an extremely attractive system that stabilizes project revenue with 20-year fixed income. However, there are hurdles: an intensely competitive 20% win rate, a minimum capacity requirement of 30MW, and the prerequisite of obtaining a grid connection review response in advance.

Securing a suitable site with low grid interconnection costs and a system to rapidly obtain grid connection review responses — this is the shortest path to winning the LDA.