Case Study: Discount Rate for Solar Power Station Valuation in Japan

Current Status of Solar Power Stations in Japan

The Great East Japan Earthquake in 2011 caused the Fukushima nuclear power plant accident. That led to a nationwide shutdown of nuclear power plants, drawing attention to environmentally friendly renewable energies. At that time, the high cost of renewable energy (especially solar power generation) was a hurdle to its widespread use. Still, the Feed-in Tariff (FIT) scheme for renewable energy, which went into effect in July 2021, has increased the desire to locate solar power plants. While the purchase price was gradually reduced from the beginning, the lower cost of power generation due to falling prices of solar panels and other factors ensured the investment profitability of solar power generation facilities to some extent, making them more attractive as investment properties.

In addition, renewable energy power generation facilities are attracting even more attention as one way to achieve a decarbonized society, which is progressing globally. In Japan, in October 2020, the Japanese government declared its goal of achieving carbon neutrality, which means zero overall greenhouse gas emissions by 2050. In this trend, the number of renewable energy power facilities is expected to increase in the future.

Discount Rate for Solar Power Station Valuation

Economic Characteristics of Solar Power Projects

The following economic characteristics of solar power generation projects are noted.


  • FIT, which started in July 2012, sets a certain purchase price and purchase period by electric providers and is expected to provide a stable return on investment with little impact from the economic climate.
  • Since solar power generation is a system with few moving parts, it is less prone to breakdowns, and equipment maintenance costs are lower than other assets.
  • The risk of accidents is low; even if an accident were to occur, it is not expected to cause serious damage compared to other assets, while there is a risk of electric shock.
  • As solar power is used as an energy source, investment can be made in any area.
  • The system can be installed in both urban and suburban areas, making it possible to use idle land throughout Japan effectively.
  • Since power generation does not emit carbon dioxide, it is an environmentally friendly energy source, and the investment value is unlikely to be damaged if environmental regulations are tightened.
  • It contributes to improving energy self-sufficiency since it is a purely domestic renewable energy source that does not deplete resources.


  • The performance, deterioration, damage, and maintenance status of the equipment directly lead to a decrease in profitability.
  • There is a risk that the expected amount of power generation cannot be obtained due to the influence of weather, natural disasters, volcanic ash, yellow sand, etc.
  • There is a risk of not being able to generate the expected amount of power due to shadows cast by neighboring buildings, forests, etc.
  • There is a risk that the power supply contract will be terminated due to the power company’s bankruptcy.
  • Risk of theft due to outdoor installation.
  • There is a risk of loss of long-term quality assurance due to the manufacturer’s bankruptcy.
  • There is a risk of changes in the feed-in tariff system, such as power company output curtailment or contract changes.
  • There is a risk of a relative decline in the market value of equipment due to technological innovation.
  • There is a risk of a relative decline (or increase) in profitability in the event of rapid inflation (or deflation) due to the constant procurement price by electric utilities.

Discount Rate for Solar Power Station Valuation

In the valuation of solar power stations, DCF (Discounted Cash Flow) method, which estimates future cash flows based on electricity sales income and discounts such cash flows to present value, is the primary method utilized. For the discount rate, which is a key factor in determining the value, VRG Japan conducts periodic surveys of investors in renewable energy power generation facilities.

The specifications of the survey are as follows:

  • Purpose of the survey: To contribute to appropriate valuation and investment activities by compiling and analyzing data on yields and business sentiment assumed by market participants and providing feedback to respondents.
  • Respondents: Market participants include investors, asset managers, and renders.
  • Survey method: Email surveys.
  • Survey period: April – May in each year.
  • Assumed solar power station conditions:
    • Facility condition: After the start of the operation,
    • Facility capacity: Less than 2MW (High-voltage),
    • Panel manufacture: Leading manufacturer in China,
    • Land rights: Superficies,
    • Operator: Excellent,
    • Facility maintenance: Good,
    • Probability of exceeding expected generation: P50,
    • Output control risk: Factored into cash flow (not included in discount rate),
    • Running cost: Standard,
    • Distance from prefectural capitals: Approximately one hour by car,
    • Natural environment: Standard for each area,
    • Road access: Good,
    • Land shape: Flat and well-shaped

As shown above, discount rates are in a down trend, reflecting an active market supported by the strong demand for acquisition and increased liquidity. The spread by area is less than the other assets such as office buildings and residences because the solar power in each area is not so different from its economic condition.

Outlook for the Solar Power Business

FIT was intended to increase the number of renewable energy power generation businesses and expand the deployment of renewable energy. However, since the purchase price of renewable energy by electric power companies deviates from the market price, we are now at the stage of convergence of the price at which renewable energy is sold into the market price. Feed-in Premium (FIP) was introduced in April 2022 to encourage power generation that is linked to electricity market prices.

In addition, many issues must be addressed, such as improving the power grid to channel large amounts of renewable energy, developing high-performance storage batteries, and improving industrial waste disposal and recycling associated with the disposal of solar panels.