JAPAN: An Introduction to Projects & Energy: Domestic
Energy Industry Trends in Japan
Introduction
Japan has made international commitments to reduce greenhouse gas emissions by 46% by 2030 (compared to 2013 levels), as well as achieving carbon neutrality by 2050. While fossil fuel-centric industries have historically been the primary means of power generation, these commitments mean Japan needs to urgently increase its renewable energy capacity. Policies to support this energy transition are now being rapidly enacted. Despite long-standing concerns, nuclear power generation has also recently restarted in Japan, with this shift in policy likely to lead to operations resuming at further existing nuclear plants.
The “Basic Act on Energy Policy”, enacted in June 2002, is the foundation of Japan's energy policy. This Act establishes the core principles of "Securing of Stable Supply", "Environmental Suitability", and "Utilisation of Market Mechanics". Considering these principles, the Japanese government publishes a Strategic Energy Plan every three years, with the most recent iteration being the “Sixth Strategic Energy Plan”, published in October 2021.
The Sixth Strategic Energy Plan explicitly references the greenhouse gas emission reduction and carbon neutrality targets. Additionally, the Plan aims for renewable energy to become Japan’s primary mode of power generation. (In 2019, renewable energy held an 18% share of the energy mix, and the government’s target is for the share to be 36-38% by 2030.)
Further to these commitments, the government announced in December 2022 a "Draft Basic Policy for the Realisation of Green Transformation (GX)", which aims to achieve the dual goals of meeting Japan’s international commitments, together with creating a stable supply of more affordable energy through GX (requiring a shift from fossil fuel-centric industries towards clean energy-centric ones).
Against the backdrop of these targets, recent trends and developments in energy policy and practice are further discussed below.
FIT/FIP Schemes
In order to expand renewable energy use domestically, Japan implemented the FIT Act in July 2012 (FIT Act), which introduced a Feed in Tariff scheme (FIT Scheme). This was initially introduced as a special temporary measure, requiring electricity companies to purchase renewable energy at a fixed price. As a result of the introduction of this scheme, the share of renewable energy as a proportion of the energy mix grew from 10% in July 2012 (at its introduction) to 18% in 2019. That 18% share in 2019 consisted of 6.7% solar, 0.7% wind, 0.3% geothermal, 7.8% water, and 2.6% biomass power generation. Of these, solar power capacity increased most rapidly, while in contrast wind and biomass capacity initially remained largely unaffected. Given Japan’s location on a volcanic belt, there is significant potential for the development of geothermal power, but this potential has so far remained under-utilised due to limitations on available land and conflicts arising with existing parks and hot spring (onsen) facilities.
At its inception, the terms of the FIT Scheme were extremely generous, including guaranteeing renewable energy purchases at a price of 42 yen/kWh for 20 years for solar power generation projects. However, the guaranteed purchase price has since fallen on an annual basis. Further, the FIT Act was amended in April 2022 with amendments including the establishment of a system to provide a certain Feed in Premium (FIP) over the market price of electricity (FIP System), as an alternative to the FIT Scheme, and providing that large-scale renewable energy projects are subject to the FIP System instead of the FIT Scheme.
Utilisation of auctions under the FIT/FIP systems has also progressed, resulting in further reductions in the purchase price. For example, in the most recent electricity purchase auctions for solar power projects subject to the FIP System (held three times in 2022), the average purchase price of winning bids was 9.73 yen/kWh.
Despite these price reductions, the development of new solar power generation projects continues at pace, with biomass and onshore wind farms also seeing recent growth. There are no practical restrictions on foreign-owned companies participating in the bidding, and foreign companies and funds have been active investors in Japan in recent years.
Offshore Wind Power
As an island nation, there is high potential for offshore wind development, and it is currently Japan’s most active renewable sector. For offshore wind power projects, the government designates sea areas that are appropriate for development as "Promotion Areas" and appoints operators to develop these areas through a public tender process under the 2018 Marine Renewable Energy Facilities Act (Marine Act). The appointed operator receives a permit to occupy the Promotion Area for a maximum of 30 years, pursuant to which it may develop a project in that area.
In 2021, operators were appointed for four sea areas pursuant to the Marine Act. The standards for evaluating and appointing operators were subsequently revised, and the second round of public tenders (for four additional sea areas) commenced in December 2022. The government aims to designate Promotion Areas with a supported capacity of 1GW each year. By continuing to conduct annual public tenders, it is seeking to achieve total capacity of 10GW by 2030, and 30-45 GW total overall capacity (including floating capacity) by 2040. Consortiums formed by major Japanese trading, construction electricity and wind power companies have already participated in public tenders for offshore wind power projects, with many consortiums also including foreign companies that have acquired experience in offshore wind power generation projects in geographies such as Europe, the UK and Taiwan.
Nuclear Power
Following the incident at the TEPCO Fukushima Dai-ichi Nuclear Power Plant in March 2011, all nuclear power plants in Japan were immediately shut down, with more robust safety regulations subsequently implemented. Recently, facilities deemed to be compliant with the new regulations have re-commenced operations. According to the Agency for Natural Resources and Energy, as of January 2023 ten nuclear reactors have resumed operations, including KEPCO's Oi nuclear power plant unit No. 3 and Takahama nuclear power plant unit No. 4 (although operations at some of these reactors were subsequently suspended to carry out routine inspections). In order to achieve its target of 20-22% of the 2030 energy mix deriving from nuclear power, the government is currently promoting both the resumption of additional existing plants together with the development and construction of next-generation nuclear reactors.
Other Recent Developments
Reinforcement of the transmission network
Grid capacity has become a major problem as new renewable energy sources come online. Seeking to resolve this issue, the government has proposed a nationwide grid development master plan. It is also working to reinforce the grid across Japan, together with constructing sub-sea cable transmission lines.
New energy sources and schemes
Corporate PPAs: Recently, Corporate PPAs, where power producers conclude long-term purchase agreements with customers outside of the FIT/FIP system, are gaining popularity, especially with regard to solar power businesses.
Battery Storage: There are attempts to expand the use of grid-scale batteries (large storage batteries directly linked to the grid). The Electricity Business Act was amended in May 2022, establishing that from April 2023 grid-scale batteries (with capacity of 10MW and above) are classified as having "electricity generation". As a result, if a grid-scale battery operator requests, it is possible in principle for the battery to be directly connected to the grid. Consequently, the development of grid-scale batteries is also accelerating.
Hydrogen/Ammonia: The Sixth Strategic Energy Plan also includes a target for 1% of the 2030 energy mix to derive from energy sources utilising hydrogen and ammonia. In the related area of carbon dioxide capture and storage (CCS), the government has targeted storage of 6-12 million tons annually by 2030 and has started supporting businesses that can assist with the achievement of this target.
Conclusion
As can be seen from the developments above, Japan is progressing rapidly on both the legal and infrastructure fronts in order to meet its international commitments. New projects in offshore wind, solar, battery storage, hydrogen and other sectors are currently under development. It is expected that these trends and developments will continue to build momentum, undoubtedly generating additional business opportunities in the near future.