It has been almost a decade since the Fukushima nuclear accident which resulted in significant disruption to Japan’s energy supply and the country has been making significant efforts to diversify its energy mix. It has been gradually expanding its renewable energy capacity and improving its energy efficiency in order to lower its carbon emissions as well as reduce the dependence on imported fuels. However, the country’s energy supply still remains highly carbon intensive and Japan will need to redouble its efforts to achieve its goal of reaching carbon neutrality by 2050.
In its recent report “Japan 2021: Energy Policy Review”, the International Energy Agency (IEA) provides energy policy recommendations to help Japan smoothly manage the transformation of its energy sector. This is the executive summary of the report.
In October 2020, the new Prime Minister of Japan declared that by 2050 Japan will aim to reduce greenhouse gas emissions to net-zero and to realise a carbon-neutral, decarbonised society. This declaration is a defining moment for Japan’s future energy and climate policies, and the government is developing additional policies and measures to achieve this target. In November 2020, a bipartisan group of lawmakers declared a climate emergency in a symbolic vote to support the earlier announcement by the Prime Minster. This IEA in-depth review comes timely, as it makes numerous recommendations that can be helpful in developing policies and measures to support achieving the new goal.
Over the last decade, Japan made substantial progress in implementing its vision of an efficient, resilient and sustainable energy system. The gradual restart of nuclear power generation, expansion of renewable energy and energy efficiency gains have reduced the need for imported fossil fuels, and contributed to a continuous decline in greenhouse gas (GHG) emissions. These reached a historic peak in 2013, as fossil fuels filled the gap caused by the temporary shutdown of all nuclear power plants after the Fukushima accident. In 2018, GHG emissions had decreased by 12% compared to 2013, back to same level they had in 2009.
Despite all efforts, Japan remains heavily reliant on imported fossil fuels. In 2019, fossil fuels accounted for 88% of total primary energy supply (TPES), the sixth highest share among IEA countries. Japan’s carbon intensity of energy supply increased rapidly after 2011 and is only gradually reducing since; the carbon intensity of power generation is among the highest in IEA member countries.
Achieving the aim of carbon-neutrality by 2050 will require Japan to substantially accelerate the deployment of low-carbon technologies, address regulatory and institutional barriers, and further enhance competition in its energy markets. It will also be important to develop different decarbonisation scenarios, to prepare for the possibility that certain low-carbon technologies, such as nuclear, do not expand as quickly as hoped.
Japan’s vision of a decarbonised society
Japan presented its new “Green Growth Strategy in line with Carbon Neutrality in 2050” in December 2020. The strategy is specifically designated as an industrial policy and promotes the creation of a virtuous cycle of economic growth and environmental protection, together with the business community. The strategy builds on the speech of the Prime Minister that recognised that pro-active climate policy will transform not only industrial structures but also the economy and the society and will lead to dynamic economic growth. The Prime Minister also specifically pointed to benefits of regulatory reforms and digitalisation to advance the green transformation and to ensure green investments.
The Green Growth Strategy identifies 14 sectors with high growth potential towards the 2050 ambition. The government counts on an ambitious expansion of renewables, a recovery of nuclear power and on the deployment of new technologies, including low-carbon hydrogen, safer advanced nuclear reactors and carbon recycling to decarbonise the electricity sector. As a reference for discussion, the strategy sees renewables accounting for between 50% – 60% of electricity demand in 2050 with the reminder supplied by nuclear and thermal plants with carbon capture utilisation and storage (CCUS) (30-40%) and 10% of hydrogen and ammonia generation.
Japan launched an ambitious long‑term innovation strategy in early 2020, with innovation paths and cost targets for technologies that are considered necessary to achieve the 2050 vision. The strategy is driven by a strong sense of urgency, recognising that innovation needs to be accelerated.
Hydrogen is expected to play a central role in Japan’s clean energy transition. Japan was among the first countries to launch a national hydrogen strategy, which aims to make hydrogen cost-competitive with natural gas. By 2030, Japan aims to have 800,000 fuel cell vehicles, more than 5 million residential fuel cells and to establish an international hydrogen supply chain. It is also experimenting with large-scale power generation based on hydrogen. All this will provide valuable lessons to the international energy community. Japan is well positioned to push for an internationally shared vision on making hydrogen a truly clean energy source.
CCUS is another focus area, due to Japan’s large reliance on fossil fuels. Requiring new gas- and coal-fired power plants to be constructed “capture ready”, so that CCUS can be more easily deployed later on, can help avoid that new plants become stranded assets. Due to limited storage sites, Japan has a strong focus on carbon recycling. However, given the uncertainty about the technology’s true mitigation potential, the promotion of low-carbon technologies should remain a focus, so as to reduce Japan’s dependence on carbon‑intensive assets. The IEA welcomes the recent announcement to phase out inefficient coal-fired plants by 2030. A pledge that was underlined in the Prime Minister’s speech when he talked about drastically changing Japan’s policies regarding coal- fired power generation.
Until now, Japan mainly relies on regulatory measures and voluntary agreements to reach its climate goals. Stronger reliance on market-based instruments could be one policy option for Japan to reduce emission costs-effectively, foster innovation for CCUS and other low-carbon technologies, and further increase Japan’s high level of energy efficiency. Japan imposes lower prices on CO2 emissions from energy use than many other IEA member countries and the IEA sees scope for Japan to make better use of price signals to enhance low carbon technologies to reduce CO2 emissions by steering behaviour, both of end consumers and of the industrial sector, and to re-direct industrial investments to innovative technologies. However, such price signals would need to be designed carefully, so as to limit negative impacts on end user electricity prices, which are already high in Japan. The Green Growth Strategy of December 2020 calls for a discussion about a carbon border adjustment mechanism to ensure a level playing field for Japanese companies vis-a-vis their foreign competitors. The strategy seems to be alluding to introduce more robust economic mechanisms by calling for regulatory reform, including market-based tools that could include credit trading, carbon tax and carbon border adjustments. This marks a major development in Japan’s climate policy and a reversal of its earlier position regarding carbon pricing.
Main energy goals to 2030
Reaching carbon neutrality by 2050 requires steep emission reductions as early as possible and latest from 2030 onwards, and the quick implementation of a wide set of policies and measures. The Green Growth Strategy will have implications for the next Strategic Energy Plan that is currently under discussion, and which may include a revised 2030 energy mix.
Japan’s energy policy is guided by the principles of energy security, economic efficiency, environmental sustainability and safety (the “three E plus S”). The 5th Strategic Energy Plan, adopted in 2018, aims to achieve a more diversified energy mix by 2030, with larger shares for renewable energy and restart of nuclear power. It also aims to enhance the efficiency of fossil fuel use and to reduce energy demand.
In the 5th SEP, the share of renewable energy in TPES is expected to reach 13% in 2030, up from 8% in 2019. Renewable power generation is expected to reach 24% in 2030, up from 19% in 2019. Japan has seen rapid expansion of solar photovoltaic in recent years, driven by generous feed-in-tariffs. More efforts are needed to develop other renewable technologies, including wind and geothermal, for which Japan’s energy potential is large. In the power sector, the main challenge is to address grid constraints, including through better connectivity between Japan’s regional grids. Regulatory reform can help improve electricity system operation, thereby allowing for integration of larger shares of variable renewable energy. Expansion of renewables in the heat and transport sectors remains slow due to limited policy support.
Nuclear energy is expected to increase to at least 11% of TPES by 2030, up from 4% in 2019. Prior to 2011, nuclear energy accounted for some 15% of TPES. This 2030 target is achievable if the number of operational reactors increases from 9 to at least 30. That will require concerted efforts by the electricity utilities, government and regulators to satisfy enhanced safety standards, as well as extensive work with local communities to regain social acceptance.
While fossil fuel use is expected to decline, it remains high, at 76% of TPES and more than half of power generation in 2030. The envisioned energy mix for 2030 is coherent with the goal to reduce GHG emissions by 26% by 2030 compared to 2013 levels, and assumes that nuclear energy restarts as planned. However, in light of the newly announced ambition to become carbon-neutral by 2050, there is a need to raise the zero-emission power source ratio already by 2030. The upcoming revision of the SEP in 2021 is a logical starting point for this. The government should develop scenarios how to close an eventual gap in electricity generation if restarts of nuclear plants are delayed. Uncertainty regarding these dimensions risks supressing the necessary investments in energy infrastructure.
Japan is among the most energy‑efficient economies in the world and aims to improve efficiency even further to curtail future energy demand growth. The challenge will be to identify where savings potential is largest, and how this potential can be realised cost-effectively. It will also be important to monitor progress, in particular in areas where efficiency goals are aspirational or voluntary.
Electricity and gas market reform
The 2011 accident prompted the government to accelerate reform of the electricity market. In parallel, it also advanced reforms in its domestic gas market. The reforms followed the same three objectives: to enhance security of supply, to increase competition, and to reduce end-user prices.
In the electricity market, key steps included the full liberalisation of the retail market in 2016 and the legal unbundling of ten vertically integrated electricity companies in April 2020. Competition in the electricity retail market is increasing, although the incumbents’ retail businesses still account for some 85% of total retail sales. Liquidity in the wholesale market is also increasing, with some 30% of electricity now being traded at the Japanese Electric Power Exchange. New markets (including a balancing, baseload, capacity and non-fossil certificate market) have been established to address market barriers and further foster competition. It will be important to monitor the interaction of these new markets and their effect on wholesale power trade. It may also be worthwhile to consider making wholesale trading mandatory to remove the incumbents’ advantage of internalised wholesale trading.
The IEA welcomes the electricity bill passed in June 2020, which initiated a new phase of market reform. The bill introduced changes to transmission charges to spur investments in the transmission and distributed network. It also strengthened the role of the Organization for Cross-regional Coordination of Transmission Operators (OCCTO), which was established in 2015 with the task to balance electricity supply and demand on a nationwide level and to improve power exchanges across Japan’s regional grids. A well-integrated national grid will both facilitate the integration of variable renewable electricity and enhance energy security. Advancing regulatory reform to improve the operational efficiency of the electricity system will also be important. Japan has ambitious goals to promote distributed energy sources, connect mobility infrastructure to the power grid, and to use digital technologies for efficient electricity demand management and demand response.
In the natural gas market, the retail sector was fully liberalised in 2017 and the vertically integrated gas companies will need to unbundle their businesses by April 2022. Competition in the gas market remains modest and there are three regions that have seen no new retail entrant to date. Non-discriminatory open access to gas infrastructure and better interconnectivity of the regional gas networks will be paramount to foster competition. The introduction of third-party-access to liquefied natural gas (LNG) terminals in 2017 is an important step in the right direction, although only one competitor was granted access to date.
Security of gas supply is a particular concern, as demonstrated by the shortages in gas supply for the power sector in January 2021, resulting in purchases of spot cargos at record high prices – even higher than after the Fukushima accident in 2011. Electricity market prices jumped by a factor of 10 as the electricity reserve ratio declined to close to 3%. The gas shortage came as a surprise to many market participants, as there is little transparency on gas stocks in the country. Also there is no obligation for electricity companies to store LNG ahead of winter to overcome cold weather periods. The gas shortage in this winter highlights the importance of ensuring electricity security in Japan where the grid is isolated and the country relies on imports of LNG. This calls for a holistic approach beyond gas supply and storage, and to also consider other energy sources and market frameworks to mitigate the effects of gas shortages on the electricity and gas markets including their better integration. The Japanese government is discussing how to improve electricity security while aiming for the carbon neutrality target.
Enhancing competition by early and complete implementation of the electricity and gas market reforms is needed for Japan to reach its goals of increasing security of supply and reducing costs for end users. To facilitate this early and complete implementation, Japan may wish to consider making the Electricity and Gas Market Surveillance Commission a more independent regulator with its own executive and enforcement powers.
Strengthening the resilience of the energy sector
As an island country with limited natural resource endowments and no international gas pipelines and electricity connections, Japan faces fundamental energy security challenges. Dependency of imported fossil fuels sparked to 94% of energy supply in 2014, but the restart of nuclear, expansion of renewables and lower energy demand helped reduce this share to 88% in 2019.
Japan has successfully diversified its import sources for liquefied natural gas (LNG), while oil imports remain heavily concentrated in a small number of Middle Eastern suppliers. At the same time, Japan has one of the largest oil stockholdings globally, which acts as insurance against geopolitical risks and large global shocks. Japan continues to play an important role in international energy markets by bringing together energy producers and consumers to ensure stable supply at reasonable prices. Japan’s efforts to promote a more liquid and transparent global LNG market are particularly commendable.
Traditionally, Japan has a very high level of electricity security by international comparison. However, in recent years a series of natural disasters caused long and large-scale blackouts that highlighted the vulnerabilities of the current system. The challenge to maintain electricity security of supply will become even larger as the share of variable renewable energy sources in the power mix increases. Japan’s electricity network is fragmented into many regional areas with limited interconnections, which makes it difficult to efficiently balance supply and demand across the country. The legislative changes of June 2020 enhance the disaster response preparedness of electric utilities with important roles for distributed power systems, and the IEA encourages Japan to also swiftly move forward with the planned strengthening of interconnections.
The government of Japan should:
- Map out energy scenarios, including road maps, for achieving the 2050 decarbonisation aim that take into account various futures for the development of energy sources.
- Establish price signals to encourage investments across the economy in efficient and low-carbon technologies.
- Encourage investments in the electricity network and improve electricity system operations to facilitate the cost-effective integration of larger shares of variable renewable electricity sources, achieve a diverse mix of low‑carbon electricity generation sources and enhance security of supply.
- Advance the electricity and gas market reform and consider making the Electricity and Gas Market Surveillance Commission a more independent regulator.
This article was sourced from IEA and can be accessed here