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Project finance refers to senior loans extended by financial institutions to large-scale projects and natural resource development on a limited recourse basis, with repayment sourced from the cash flow of the project.

In a typical structure, the sponsors establish a special purpose company (SPC) that borrows from or issues bonds to lenders and receives equity contributions and subordinated loans from the sponsors.

Senior lending is termed project finance and bond investment “project bonds”, while subordinated (mezzanine) lending and equity investment through shares are often referred to as “infrastructure debt” and “infrastructure equity”, respectively.

According to the 2024 global project finance mandated lead arranger (MLA) league table, all three Japanese megabanks – MUFG, SMBC and Mizuho – ranked among the top 10 in Project Finance International’s Global MLA Rankings 2024.

Structuring bankable limited-recourse project finance

The defining characteristic of project finance is that repayment is sourced, in principle, solely from revenue (cash flow) of the specific project financed. Whereas sponsors capture the project’s upside through dividends, lenders receive only fixed interest income apart from arrangement fees.

For senior lenders, the sole source of repayment is cash flow of the borrower (the SPC), while their risk tolerance is limited. Because any risk retained by the borrower is ultimately borne by the senior lenders and sponsors, it is indispensable to transfer project risks to the SPC’s contractual counterparties, or to eliminate or mitigate them within the project structure. Structuring the transaction to make it “bankable” is the most salient feature of project finance.

Japan’s shift from FIT, FIP

Japan’s renewable energy market is undergoing a transition from a government-supported feed-in tariff (FIT) regime to a market-based framework centred on the feed-in premium (FIP) scheme and corporate power purchase agreements (PPAs).

Introduced in 2012, the FIT scheme drove Japan’s renewable energy market
by requiring utilities to purchase all electricity generated from eligible renewable energy sources at fixed prices for fixed periods, substantially eliminating price and offtake risk. That model is now being phased out.

In January 2026, the Ministry of Economy, Trade and Industry (METI) announced that, from FY2027, ground-mounted commercial solar projects will no longer qualify for FIT or FIP support. Existing FIT projects may, however, continue to convert to the FIP scheme (FIP conversion).

Japan’s policy focus is shifting toward rooftop solar, perovskite solar cells, and the integration of renewable generation into competitive electricity markets through corporate PPAs combined with the FIP scheme.

Unlike FIT, FIP does not guarantee a fixed electricity price. Instead, generators sell electricity through the Japan Electric Power Exchange (JEPX) or bilateral contracts and receive a government premium in addition to market revenues.

FIP offers several important commercial advantages. Developers can optimise revenue by combining projects with battery storage and selling electricity during higher-priced market hours, and benefit from government subsidy programmes. From the current fiscal year onwards, they are expected to face less curtailment than FIT projects under the METI’s proposed dispatch rules.

Because bilateral sales are permitted under FIP, corporate PPAs have become one of the principal commercial structures for FIP projects.

Corporate and virtual PPAs

Corporate PPAs are long-term power purchase agreements under which renewable energy generators supply electricity to corporate or public sector offtakers, rather than traditional utilities. While corporate PPAs have become well established globally, Japan has only recently developed a clear legal framework for virtual PPAs, which are structured as contracts for difference (CfDs).

In 2022, the METI confirmed that qualifying virtual PPAs fall outside the scope of the Commodity Derivatives Act. In 2025, the Accounting Standards Board of Japan (ASBJ) further clarified that qualifying virtual PPAs generally do not require derivative accounting by corporate or public-sector offtakers.

These regulatory and accounting developments have significantly improved legal certainty and are accelerating market adoption. Publicly announced corporate PPAs in Japan increased from 30 transactions (including six virtual PPAs) in 2022 to 148 transactions (including 33 virtual PPAs) in 2025.

Bankability

From a project finance perspective, corporate PPAs combined with the FIP scheme are becoming increasingly bankable in Japan, while fully merchant corporate PPA projects without FIP support remain relatively limited.

Lenders typically focus on three issues:

1. 1. The long-term creditworthiness of the corporate offtaker;
   2. The availability of government support or other credit enhancement mechanisms; and
   3. Whether the PPA includes robust termination payment provisions that adequately protect outstanding project debt.

As Japan completes its transition from FIT to a market-based renewable energy framework, corporate PPAs, particularly when combined with the FIP scheme, are expected to become the dominant structure for financing new renewable energy projects.

Back-to-back risk allocation in PPAs

1. Basic principles. The cardinal principle of risk allocation – the power purchase agreement (PPA), EPC contract, O&M agreement, insurance contracts, and fuel supply and land-use right agreements – is that each risk should be borne by the party best able to control it efficiently.

The fundamental concept is the “back-to-back” arrangement: structuring the interrelationship among the agreements so that a risk arising at the borrower level is passed through to another contracting party, leaving the borrower with no residual risk.

2. The PPA. The key issue is for how long, at what price and in what volume the producer can sell its output: price and volume risk must be minimised and the electricity sold on take-or-pay terms. Under FIT, the utility was obliged to purchase the entire output at a fixed price during the procurement period.

In non-FIT/non-FIP projects, including corporate PPAs, it must be confirmed that sufficient volume is guaranteed at a fixed price throughout the project period. “Take or pay” means that, as long as the producer is in a position to supply, the offtaker must pay the capacity charge, whether it takes delivery or not.

The offtaker’s creditworthiness is also critical. Where the offtaker alone lacks sufficient credit standing, credit enhancement such as a parent company or third-party guarantee may be required.

3. The EPC contract. Key points of the EPC contract are:
   1. 1. 1. Award of the works on a lump-sum basis to a single contractor or construction joint venture;
         2. Coverage, as a single package, of all works necessary up to completion and the commercial operation date with “full turn-key” facilities delivered ready for operation;
         3. Fixed price, placing the risk of increases in construction, materials and labour costs on the contractor and avoiding cost overruns; and
         4. An expressly stipulated completion deadline, preventing time overruns.

Point (i) is the principle of single point responsibility. In wind projects, the turbine supplier and works contractor are ordinarily separate: the supplier supplies and installs the turbines, while the works contractor performs the balance of plant, including foundation works.

Where the works are divided among multiple contractors, disputes may later arise over responsibility. It is therefore desirable to conclude a construction management agreement with a party responsible for the works as a whole, and overall co-ordination.

On taking over, liability for non-conformity and performance guarantees are also important. The former covers defects in the construction work or equipment. Performance guarantees go further, covering more broadly any failure to achieve intended performance.

In wind projects, a serial defect clause may be included for multiple turbines of the same model and lot. Guaranteed values such as power curve or availability guarantees may also be stipulated, with compensation for lost profits by reference to any shortfall.

4. Finance-related agreements. The finance documents comprise the senior loan agreement, security documents, interest rate swap agreements, the sponsor support agreement and direct agreements. The senior facility typically takes the form of a syndicated loan among a group of banks, documented by a loan agreement. Provisions include financial covenants and events of default designed to enable step-in. The financial covenants prescribe a debt service coverage ratio and a debt-to-equity ratio.
5. Security agreements. Senior lenders generally take security over all project assets, rights and contractual positions (the “all-asset security” principle). This is because continued operation is essential to loan recovery, and because security over contractual positions is needed to enable step-in.

The enterprise value security interest introduced under the new Act on the Promotion of Business-Focused Finance, effective since 25 May 2026, permits the entirety of a company’s assets to be taken as the subject of a single security interest, making it congenial to the all-asset security principle.

Caution is nonetheless warranted; although a disposition of important assets without the consent of the holder of the security interest is void, this cannot be asserted against third parties acting in good faith without gross negligence – and enforcement requires court proceedings, entailing time and cost.

Chuo Sogo LPC
Hibiya Kokusai Building18th Floor, 2-2-3 Uchisaiwaicho,
Chiyoda-ku, Tokyo, 100-0011, Japan
Tel: +81 3 3539 1877
Fax: +81 3 3539 1878