JAPAN: An Introduction to Projects & Energy: Domestic
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), and to achieve carbon neutrality by 2050. While fossil fuel-centric industries have historically been the primary means of power generation, these commitments mean that 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” was enacted in June 2002 and is the foundation of Japan's energy policy. It establishes the core principles of the “Securing of Stable Supply”, “Environmental Suitability” and the “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 Plan explicitly references the greenhouse gas emission reduction and carbon neutrality targets, in addition to aiming 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).
Having formulated a “Green Growth Strategy Through Achieving Carbon Neutrality in 2050” in June 2021 and established a JPY2 trillion “Green Innovation Fund”, the government is providing support, from R&D through to demonstration and social implementation.
Further to these commitments, in December 2022 the government announced a “Draft Basic Policy for the Realisation of Green Transformation (GX)”, which aims to achieve the dual goals of meeting Japan’s international commitments and 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, 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 JPY42/kWh for 20 years for solar power generation projects. However, the guaranteed purchase price has since fallen on an annual basis. Furthermore, the FIT Act was amended in April 2022 to include 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.
The 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 JPY9.73/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.
Following increasing concerns involving local residents, together with issues related to natural disasters, scenery and the living environment, the Ministry of Economy, Trade and Industry (METI) plans to require advanced notification to residents of areas surrounding power facilities. In particular, briefing sessions for residents will be mandatory for medium and high capacity facilities (50kW or higher) (excluding rooftop installations).
For lower capacity power generation (excluding residential solar equipment and rooftop installations), the requirements are as follows:
• the same briefing as for medium and high capacity facilities should be held for residents inside the surrounding area/environment that is highly likely to be affected; and
• outside such area, residents must be informed in advance by means other than a briefing session.
As part of the measures to enhance laws and regulation, three permissions will need to be obtained in advance when applying for FIT/FIP certification:
• forest land development permission under the Forest Act;
• permission under the Embankment Regulation Act; and
• permission under three erosion control laws (the current position is that compliance with laws and regulations in relation to power generation business is required at the time of application, while obtaining permissions is not).
Local governments can be prone to establishing regulations and harmonisation ordinances, which can include designating restricted and/or prohibited areas. Care should be taken as such regulations may be tightened at a national or local government levels.
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 pursuant to which it can occupy the Promotion Area for up to 30 years and develop a project in that area.
In 2021, operators were appointed for four sea areas pursuant to the Marine Act through the first public tender round. Prior to the second public tender round (for four additional sea areas), the evaluation and appointment standards were revised, with the second round running from December 2022 to 30 June 2023. Selection results are scheduled to be publicly announced in March 2024 following participant screening and the evaluation of the submitted exclusive occupancy and use plans.
The government aims to designate Promotion Areas with a supported capacity of 1 GW each year. By continuing to conduct annual public tenders, it is seeking to achieve total capacity of 10 GW 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.
For the third tender round, the government announced in September 2023 that it intends to designate two new Promotion Areas: Japan Sea (south) off Aomori Prefecture and the sea off Yusamachi, Yamagata Prefecture, with the tender round expected to commence within this fiscal year. In addition, the government announced plans to implement legal reforms to shorten the offshore wind environmental impact assessment (EIA) process, with the government conducting part of the process prior to operator selection (currently, the EIA process is entirely the operator’s responsibility).
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 recommenced 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 operation of additional existing plants and the development and construction of next-generation nuclear reactors.
Hydrogen/Ammonia
Under the aforementioned Sixth Strategic Energy Plan, the target share of hydrogen/ammonia in the 2030 power mix is 1%. To achieve this target, the government revised its Basic Hydrogen Strategy in June 2023. As well as hydrogen, the New Strategy covers ammonia and carbon recycling products (such as synthetic methane and fuels). The Strategy introduces new targets, which include:
• attracting investment of JPY15 trillion in the next 15 years from public and private sources in order to build a hydrogen supply chain;
• expanding the volume supply of hydrogen to 12 million tons by 2040 (six times the current level); and
• lowering the price of hydrogen to JPY30/Nm³ by 2030 (around a third of the current price), and to JPY20/Nm³ by 2050.
CCS
The government is promoting Carbon dioxide Capture and Storage (CCS) to achieve carbon neutrality. In March 2023, METI officially announced the “CCS Long-Term Roadmap Study Group – Final Summary” to promote CCS projects over the medium to long term, together with recommending actions that should be taken for the full-scale implementation of CCS projects. This Final Summary sets targets to improve the commercialisation of CCS and commence full-scale CCS operations from 2030, with the aim of enabling the annual storage of approximately 120 to 240 million tons of CO2 by 2050. In June 2023, the government agency supporting energy and resource development selected seven domestic and overseas projects as “Advanced CCS Projects” (that are expected to scale up and reduce costs) to receive commercialisation support.
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, where power producers conclude long-term purchase agreements with customers outside of the FIT/FIP system, have been gaining popularity of late, especially with regard to solar power businesses.
There have been 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 10 MW and above) are classified as having “electricity generation”. As a result, if a grid-scale battery operator requests the battery to be directly connected to the grid, this is possible in principle. Consequently, the development of grid-scale batteries is also accelerating.
To achieve Carbon Neutrality by 2050, a “Green Innovation Fund” of approximately JPY2 trillion has been launched. Projects to be developed via this fund include a cost reduction in offshore wind power generation; next-generation solar power generation; and a large-scale hydrogen supply chain.
The GX Promotion Act was enacted in May 2023 to promote investments to realise GX. Plans under the Act include the issuance of GX Economic Transition Bonds of JPY20 trillion over ten years from 2023. The proceeds will be applied to technological development and capital expenditure for decarbonisation.
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.