CfD scheme

Japan’s Low Carbon Standard

In order to be eligible for support under the Hydrogen Act’s CfD Scheme, hydrogen (and its derivatives e.g. ammonia, e-methane and e-fuel) (Low Carbon Fuels) must meet a specified maximum carbon intensity that differs depending on the type of fuel. The low carbon standard (set out below), established by the Ministry of Economy, Trade and Industry (METI), reflects a 70 percent reduction in CO₂ emissions as compared to a fossil fuel comparator (an approach consistent with the European requirements for low carbon fuel, save that in the case of hydrogen and ammonia it is measured at the point of production, rather than the point of consumption).

By focusing on CO₂ content rather than the method of production, the Japanese low carbon hydrogen standard creates flexibility for Japan’s Low Carbon Fuel demand to be met by carbon capture and storage (CCS)-enabled (i.e. ‘blue’ hydrogen) or electrolytically produced (i.e. ‘green’ hydrogen) products. This makes sense given Japan’s proximity to the US and Canadian production markets, in which significant volumes of blue hydrogen are forecast to be produced at competitive prices. It also contrasts with the European position, where green hydrogen is prioritised through the quotas established by the Renewable Energy Directive.

Addressing the Price Gap

The cost of producing low carbon hydrogen is widely recognised as being higher than producing traditional ‘grey’ hydrogen from fossil fuels, such as natural gas. The CfD Scheme will tackle this price gap between low carbon hydrogen and conventional fuel by providing subsidies to eligible suppliers of Low Carbon Fuels through a contracts for difference for a term of up to 15 years. This subsidy will be provided by The Japan Organization for Metals and Energy Security (JOGMEC), which will administer the CfD Scheme. 

In structuring the subsidy arrangements as a CfD, the government has referred to the UK’s approach to delivering subsidies for hydrogen production. The contracts for difference mechanism has proved to be very effective in the UK’s offshore wind sector and has been redeployed as a means of injecting operational support to hydrogen projects in the UK. 

The total budget which the government intends to allocate to the CfD Scheme is JPY 3 trillion (c. US$19 billion) over the scheme’s 15-year term. This represents a significant financial commitment, which the government hopes will create a more level playing field for Low Carbon Fuels, thereby stimulating growth of industrial-scale demand for Low Carbon Fuels within Japan. 

CfD Scheme Applications and Eligibility

Applications under the CfD Scheme were to be submitted by March 31, 2025 and the selection results are still awaited.

The CfD Scheme is open to suppliers of Low Carbon Fuels that have either been produced domestically, or which are imported into Japan, provided that their business plans are approved by the government. 

The Hydrogen Act stipulates that, in order to obtain government approval, a project must, among other things, satisfy the following requirements:

• meet the eligibility criteria set out in the basic policy published by the government on October 23, 2024 (the Basic Policy) and the standard published by the government on 23 October 2024 (the Standard); 
• have an economically viable and reasonable business plan that has been jointly created by the supplier and offtaker(s) of Low Carbon Fuels;
• contribute to increasing the international competitiveness of Japanese industries associated with the supply and use of Low Carbon Fuels;
• be expected to start supplying Low Carbon Fuels by FY2030 and to continue supplying Low Carbon Fuels for at least 10 years after the cessation of the 15-year subsidy programme; and
• lead to the development by offtakers of new businesses using Low Carbon Fuels, with a particular focus on “hard-to-abate” industries such as steel and chemicals and/or develop innovative methods for improving the environmental impact of the use of raw materials and fuel, (the Hydrogen Act Requirements).

The Basic Policy and the Standard include, among others, the following eligibility criteria:

• the “S+3E” Policy Criteria (being “Safety, Energy Security, Environmental Capability and Economic Efficiency”) – this requires the project to: hold all relevant permits and licences under all applicable safety related laws and regulations; contribute to the security of supply by delivering at least 1,000 tonnes (hydrogen equivalent) of Low Carbon Fuels per year; lower the carbon intensity and reduce the cost of supply to a level that will allow for self-sufficiency after the support ends; 
• the GX policy criteria – the project must strengthen industrial competitiveness and contribute to economic growth. This will involve an assessment of whether the project promotes the energy transition in hard-to-abate industries and reduces emissions; and
• criteria relating to project completion – this includes consideration of: the credibility of the business plan, including whether offtake has been secured; and risk sharing between the government and the project, such as whether the project is susceptible to geopolitical risks.

How will the CfD mechanism work?

Rather than paying importers a tax credit per volume of Low Carbon Fuels produced, the government has opted to compensate suppliers for the price gap between conventional fuels and Low Carbon Fuels. Suppliers that benefit from support under the CfD Scheme will receive a top-up payment according to the amount by which the cost of Low Carbon Fuels production (the Standard Price) exceeds a reference price representing the cost of conventional fuels landed in Japan (the Reference Price).

Figure 1 provides a simplified diagram of the CfD Scheme based on that published by METI in June 2024.

Figure 1: Simplified CfD Mechanism

Establishing the Standard Price

The Standard Price may be a fixed or variable amount and is determined based on a formula proposed by the supplier and approved by the government and JOGMEC. It aims to reflect the price at which the project is able to recover its cost of production, importation and supply of Low Carbon Fuels and make a reasonable profit.  Subject to a pre-agreed cap, the formula may: 

• include a contingency amount equal to 10 percent of anticipated construction costs as a buffer for cost overrun that cannot be quantified at the evaluation stage, however this amount must be refunded or deducted from the Standard Price calculation if such costs are not incurred; and
• reflect fluctuations in foreign exchange rates, inflation and/or raw material costs.

The Standard Price formula is not permitted to include cost overruns due to events or circumstances that are (or should have been) within the control of the supplier.

Once approved, the supplier is not entitled to any adjustments to the Standard Price formula for the 15- year term of the CfD Scheme. It should however be noted that METI announced in its Q&A that (although on an exceptional basis) the Standard Price may be adjusted downwards at the request of the government if there is a reduction in market prices for Low Carbon Fuels (e.g. as a result of the introduction of innovative technology that is expected to reduce production costs). This is unusual when compared to similar support schemes in other major hydrogen consuming markets as it is widely anticipated that technology enhancements over time will reduce the cost of Low Carbon Fuels. Reducing support for first mover projects that bear a higher production cost may therefore create bankability issues for such projects reliant on the CfD Scheme. 

Determining the Reference Price

The Reference Price is intended to represent the landed cost of conventional fuels in Japan and will be set based on a publicly available index. The index is intended to reflect the prevailing cost of conventional fuels based on empirical data. 

In some cases, an ‘environmental value’ will be added on top of the figure determined according to the index when setting the Reference Price and the government envisages that the Reference Price will increase over time due to the influence of carbon pricing on conventional fuels. This will decrease the amount of support provided under the CfD Scheme, thereby creating a path to a self-sustaining Low Carbon Fuel industry in Japan.

Clusters Support Scheme

Developing Industrial Clusters

The Clusters Support Scheme focuses on the development of industrial clusters for the use of Low Carbon Fuels. This furthers METI’s vision of stimulating the Low Carbon Fuel economy by aggregating industrial demand in designated locations around Japan. This approach is consistent with the evolution of government support for hydrogen demand in North America and the UK, with clusters of hard-to-abate industries being identified and hydrogen infrastructure being developed through a concentration of grant funding.

The government is expected to select eight to ten industrial clusters over the next decade, focusing, in particular, on three large-scale clusters in the metropolitan areas and a further five medium-sized clusters in regional locations throughout Japan. METI envisages that industrial clusters will contain a concentration of one or more of the following:

• large-scale power generation, such as existing gas/coal-fired power stations, where hydrogen/ammonia power generation can be deployed as a replacement fuel;
• heavy industrial processes such as refineries, still production facilities and petrochemical facilities, where low carbon hydrogen could be used to displace grey hydrogen in existing industrial processes; and
• renewable energy production facilities that can be used to produce hydrogen/ammonia domestically, reducing the logistic and transportation costs of meeting the demand for Low Carbon Fuels.

Cluster Selection Process

The process of selecting the industrial clusters is expected to involve a three-stage process comprising the following steps: 

• Stage 1 - Feasibility Study Phase – where METI (via the Consortium for Resilient Omni-energy Supply System (CROS)) is expected to initiate a public tender process for cluster selection, as a result of which it expects around 15 feasibility studies to be chosen for implementation;
• Stage 2 - Front-End Engineering and Design (FEED) Phase; and
• Stage 3 - Construction / Engineering (or Infrastructure Development) Phase.

The 15 initial clusters going through the feasibility study phase will gradually be shortlisted to the eight to ten clusters desired by METI, as Stage 2 and Stage 3 progress. As the Clusters Support Scheme is designed to support the industrial clusters which start supplying Low Carbon Fuels by FY2030,  all Stages under the Clusters Support Scheme will be completed by FY2030.

Eligibility Criteria

The Hydrogen Act (which leaves the details specifically applied to each scheme to the Basic Policy, the Standard and/or subordinate regulations) does not differentiate between the requirements to be met for participation in the Clusters Support Scheme and in the CfD Scheme. Therefore, the Hydrogen Act Requirements described above will apply equally to the Clusters Support Scheme.

The Basic Policy sets out detailed eligibility and evaluation criteria specific to the Clusters Support Scheme which would, among others, include criteria for:

• individual companies forming the clusters – such as whether companies have an innovative and/or competitive advantage in relation to decarbonisation technology;
• the project site as a whole – such as whether the site is capable of hosting industry capable of using a minimum of 10,000 tons of Low Carbon Fuels per year and whether the site will contribute to the local economy;
• medium-to-long term development potential – such as whether the business plan for the project has a medium-to-long term outlook that can incorporate emerging usage needs in the surrounding area and new technologies including carbon recycling and carbon capture, utilisation and storage; and
• feasibility – such as whether the project has a clear vision for cluster formation and is led by one or more companies having a strong leadership and commitment to promote cluster formation, with an appropriate project structure to achieve this.

At each stage of the cluster selection process, applicants are expected to solicit and take account of input from various stakeholders connected to the development of the clusters, including Low Carbon Fuels suppliers, large-scale consumers, financiers, local government, technology providers, transport and storage providers and regional stakeholders (such as universities and local residents in the relevant area). This ought to assist in the deliverability of clusters.

Level of Subsidy for Selected Clusters

According to the CROS’s application guidelines, a budget of JPY1,438 million (c.US$9.1 million) is already secured to fund approximately 15 feasibility studies selected by public tender.  JOGMEC will therefore make available JPY 100 million to JPY 200 million (US$635,000 – 1,270,000) for each feasibility study (subject to a cap of JPY 200 million). 

The first public tender process for Stage 1 has already been completed and CROS announced the selection of ten feasibility studies on May 31, 2024.  Applications under the additional public tender round in Stage 1 were submitted by December 27, 2024, but the selection announcement has yet to be published.

The public tender processes for both Stage 2 and 3 were made together and the submission deadline for applications was June 30, 2025. The selection results have not yet been published.

At this stage, the level of subsidy to be made available to support Stages 2 and 3 of the cluster selection process and the timing of the legislative programme to establish the budget are not yet known, but it appears that the budget for each year will be determined during that specific year. The budget for Clusters Support Scheme for FY2025 is JPY 5,700 million. 

No Double-dipping of Japanese Subsidy Schemes

Both the CfD Scheme and the Clusters Support Scheme preclude the compounding of subsidies under those schemes with other Japanese government subsidies, such as NEDO or the Green Innovation Fund. However, the Hydrogen Act does not prevent Low Carbon Fuels suppliers or cluster developers from receiving subsidy or support from foreign governments, therefore allowing Japanese producers and supply chain participants to take the benefit of production subsidies available outside of Japan.

Current status

The submission deadlines to the Japanese government authorities of proposals for the CfD Scheme and for Stages 2 and 3 of the Clusters Support Scheme were March 31, 2025 and June 30, 2025 respectively, and the market is still waiting to hear the results which are expected before the end of the year.