Japan's renewable energy market is at a crossroads.

Japanese installed wind power capacity actually dropped from March 2008 through the same month this year, after an underwhelming increase in 2007.

New regulations are partly to blame, since the government now requires wind turbines to meet the same safety standards as tall buildings — despite wholly different surroundings.

Overall, the world's #2 economy ranks a woeful #20 in the latest Ernst & Young Renewable Energy Attractiveness Index. For wind power specifically, it's even lower down the ladder, despite being the world's fourth-heaviest greenhouse gas (GHG) emitter and home of the Kyoto Protocol.

But in solar power, Japan ranks third in the world for installed capacity, behind only Germany and Spain. . .

And those countries adopted Japan's feed-in tariff model for stimulating their own homegrown solar sectors!

Now, with silicon prices cratering and government support for the sector increasing, we're seeing Japan become a magnet for foreign solar power investment.

Taiwan's AUO Makes a Big Bet on Japanese Solar

The government's pumping $9 billion worth of stimulus into the market, pushing demand for solar panels in Japan up for the first time since 2006.

Prime Minister Taro Aso said on June 9 that solar power and electric cars will play a key role in lifting Japan out of the economic muck and into robust growth. The PM foresees a cleantech industry worth 50 trillion yen (about $510 billion) by 2020.

He wants solar power generators installed at roughly 37,000 public schools in the next three years, a move which would keep PV production lines humming along steadily through 2012 and beyond. The total increase would boost Japanese solar production twentyfold by 2020.

Yet, Aso knows that such a rich future for Japanese solar won't be fueled solely by domestic money. . .

Taiwanese technology company AU Optronics (NYSE:AUO), a maker of LCD flat-screen televisions, just announced it would take a 51% stake in M. Setek, a Japanese solar material supplier that's been around since 1978. That move is both opportunistic and optimistic, given today's silicon market conditions.

Raw material providers like M. Setek are hurting from silicon prices that have dropped sharply in the past year, from nearly $1.50 per pound to just above 50 cents today. Though current levels are closer to the 5-year baseline, the boom-bust cycle we've seen in the global economy and energy investment over the past two years has had a severely destabilizing effect on upstream firms.

In the current environment, other Asian solar material providers are issuing shares — China's ReneSola (NYSE:SOL) is selling $100 million of new stock — and tapping fresh lines of credit.

But M. Setek found a buyer in AU Optronics, and investors like it. AUO shares have gained since the $125 million private-placement deal was announced.

And AUO isn't alone — other internationally listed companies are also pouncing on Japan's stimulus-fed solar consumer surge and could expect a market premium for their efforts.

Canadian Solar to Sell Chinese-made Cells in Japan

Canadian Solar (NASDAQ:CSIQ) announced just this week that it will target 12,000 kilowatts of yearly solar cell sales in Japan from its Chinese production base.

With the government paying up to $785 per kilowatt for rooftop photovoltaic (PV) installations as part of its $9 billion rooftop solar stimulus package, CSIQ is smart to turn towards the Land of the Rising Sun.

As Nick Hodge has pointed out in recent reports from Wall Street's Renewable Energy Finance Forum, clean energy financing flows are shifting fast and furious these days.

Low silicon prices, though they hurt producers' balance sheets, are enabling governments to get more bang for their stimulus bucks (or yen), which in turn will boost sales at vertically-integrated solar power companies.

Regards,

Sam Hopkins

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