Why "Full Merchant" is Now an Option
The LDA explained in Column 01 is a stable revenue model providing 20 years of fixed income. However, the LDA has three structural constraints.
- 20% award rate: In the 2nd LDA, batteries had bids of 6,956MW vs. awards of 1,370MW (20% rate) -- intense competition
- Long-duration types increasingly favored: From the 2nd LDA, two categories were created: "3 to under 6 hours" and "6+ hours." Bidding is possible with 3+ hours, but discussion is progressing toward institutional advantages for long-duration from Round 3 onward
- Approximately 90% of revenue refunded to the state: Most market revenue is deducted as LDA refunds, with only about 10% retained
- 30MW minimum: Minimum bid capacity from Round 2 onward is 30MW. 2MW-class high-voltage projects cannot participate
Given these constraints, the full merchant strategy becomes the only option when "you couldn't win the LDA," "the project is under 30MW," or "you want to keep 100% of market revenue." In practice, more operators are choosing "not to target the LDA from the start."
Full Merchant Revenue Structure
Full merchant revenue combines three markets: JEPX (wholesale power market), balancing market, and capacity market. Unlike the LDA, 100% of market revenue is retained by the operator.
| Revenue Source | LDA Type | Full Merchant Type |
|---|---|---|
| Capacity Revenue | LDA capacity payment (20-year fixed) | Main auction (4-year forward, single-year contract) |
| JEPX Arbitrage | Approx. 90% deducted as LDA refunds | 100% retained as own revenue |
| Balancing Market | Same (subject to refund) | 100% retained as own revenue |
| Estimated IRR | Approx. 3-5% (stable type) | 8-12%+ potential |
| Risk | Low (fixed income) | Bears all market price fluctuation |
| Project Finance | Easier to structure | Difficult due to uncertain CF forecasts |
50MW Full Merchant Revenue Model
[Revenue]
JEPX arbitrage: 800 million - 1.5 billion yen(depends on JEPX price spread and charge/discharge cycles)
Balancing market: 300-800 million yen(15 yen/delta-kW/30min base. Depends on primary through tertiary-2 clearing)
Capacity market: approx. 700 million yen(Tohoku area clearing price 14,812 yen/kW x 50MW)
Total revenue: 1.8-3.0 billion yen
[Expenditure]
O&M, insurance, management costs: -300-500 million yen
Aggregator fees (10-15% of revenue): -200-400 million yen
Wheeling charges, RE surcharge, etc.: -200-300 million yen
Annual operating profit: 900 million - 1.8 billion yen
* Balancing market assumes 15 yen/delta-kW/30min price cap from March 2026. If gradual reductions to 10 yen and 7.21 yen are implemented, may fall below lower range.
Full Merchant Decision Points
Advantages
100% of market revenue is retained. Not bound by LDA long-duration requirements, making 3-4 hour systems viable. Can participate in the capacity market main auction (FY2028 auction award rate 96.6%). Potential to target IRR over 10%.
Risks
Without 20-year fixed income, all market price fluctuation risk is borne. Balancing market price caps trending downward (19.51 to 15 yen, with 10 and 7.21 yen also under discussion). Project finance structuring is difficult, so self-funding or corporate finance is the main approach. Advanced market trading expertise (or aggregator contracts) is essential.
The balancing market is a high-revenue source for batteries, but gradual price cap reductions are underway.
- From March 2026: 19.51 yen/delta-kW/30min reduced to 15 yen(implemented)
- Future discussion: 10 yen and 7.21 yen also under consideration
The reduction to 15 yen was moderated from the original 7.21 yen proposal due to industry concerns about investment uncertainty. Since a single policy step change completely transforms IRR, sensitivity analysis across multiple scenarios is essential for financial planning.
2MW Full Merchant
2MW/8MWh-class high-voltage projects cannot meet the LDA minimum bid capacity (30MW), so they are 100% full merchant type. While small in scale, the initial investment is also small and subsidies (approx. 1/3 of equipment costs) are easier to use, making them increasingly popular as first projects for new entrants.
JEPX arbitrage: 30-50 million yen
Balancing market: 10-20 million yen (15 yen price cap base)
Capacity market (Tokyo area 14,812 yen/kW): approx. 29.6 million yen
Total revenue: 70-100 million yen
Total expenditure: -15-25 million yen
Annual operating profit: 45-75 million yen
Which Should You Choose?
| Decision Criteria | LDA Type is Suitable | Full Merchant Type is Suitable |
|---|---|---|
| Risk Tolerance | Prioritize low-risk, stable returns | Can bear market risk |
| Financing | Want to use project finance | Self-funding or corporate finance possible |
| Market Operations Capability | No trading capability | Advanced operations via own team or aggregator |
| Project Scale | 30MW+ (LDA minimum bid) | Any scale (2MW to 50MW+) |
| Target IRR | 3-5% is sufficient | Targeting over 8% |
The important point is that both LDA and full merchant types can be options for the same project. For projects over 30MW, a "two-stage" strategy of first bidding in the LDA and switching to full merchant if unsuccessful is also effective. Projects with lower connection costs are more likely to succeed under either strategy.
LDA vs Merchant — Which is Optimal for Your Company?
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