Energy policy consultant Tarak Shah participated in the Sasakawa USA 2017-2018 In-Depth Alumni Research Trip to Japan. In this paper, Shah highlights current trends in the Japanese electricity market, notes areas of strength, and outlines specific changes that Japanese policy makers could implement for a safer, cleaner energy future.
A global energy revolution is underway. In electricity markets around the world, new technologies in solar, wind, and natural gas extraction are dramatically reducing costs for no or low carbon energy resources. In Japan, a transition in the way homes and businesses are powered, vehicles are fueled, and energy is generated is also occurring. These changes are being prompted in part by global trends, and in part due to the generational re-think in domestic energy policy that occurred after the 2011 Great East Japan Earthquake and meltdown at the Fukushima Daiichi Nuclear Power Plant.
But, this transition, particularly in electricity markets, is uneven, slow, and riddled with idiosyncrasies that could threaten Japan’s economic (and therefore security) future and challenge global efforts to avoid the worst impacts of climate change.
This paper highlights current trends in the Japanese electricity market, notes areas of strength, and outlines specific changes that Japanese policy makers could implement for a safer, cleaner energy future. Briefly, those changes include a more ambitious set of renewable energy policies, more realism around coal and nuclear power, steps to inject more fair competition to electricity markets, and efforts to reduce the cost of electricity.
As a result of population dynamics and increasing efficiency, electricity demand is flat and projected to remain so through 2030. In a capital-intensive market like the electricity sector, this lack of growth has the effect of slowing the transition to new energy resources. For years after the earthquake, meltdown, and the subsequent complete shutdown of nuclear power generation, electricity prices were about 20-30% higher than before the incident. These prices are stabilizing now, in part due to falling prices for natural gas imports, which are increasingly being used for power generation.
In the seven years since the Fukushima disaster, only eight nuclear reactors have restarted (as of June 2018). Even though the discussion around the restart of some of Japan’s nuclear fleet is active, it is slow. In some cases, local opposition, even after plants have been upgraded and passed government safety reviews, creates a challenging path forward to resuming electricity generation. Because of these dynamics, while government targets project that nuclear energy will produce 20-22% of Japan’s electricity generation by 2030, experts interviewed for this paper estimated a figure closer to 10%.
In the seven years since the Fukushima disaster, only eight nuclear reactors have restarted (as of June 2018).
Japan’s greenhouse gas emissions, which spiked to the highest ever levels after the earthquake, are declining. This is due to a variety of factors including a reduction in energy demand, some substitution of oil power generation for natural gas, and the rapid acceleration of renewable energy through a Feed-in Tariff (FIT) system that subsidizes their development.
However, the costs of renewable energy remain stubbornly high. For example, solar energy remains about twice as expensive in Japan as in other industrialized countries. This is even as Japan has the second highest installed solar capacity in the world. Large grid connection charges by utilities, long construction timeframes, and slightly higher module costs contribute to this disparity. This is particularly concerning because even as cost reductions have occurred in other nations’ solar industries, they have proved more elusive in Japan.
On the policy front, Japan’s energy policies are guided by its “Basic Energy Plan,” last approved by the Cabinet in 2014. Changes to the plan are being discussed now, although no changes are anticipated to the 2030 power source mix, which is a key component of the plan. Freezing the power source mix for the time being sidesteps difficult political questions, particularly around nuclear power, but will also have the effect of slowing the energy transition, even as it accelerates in other countries, including China and India.
Actions are underway to create a comprehensive energy market. In 2016, full liberalization of the retail electricity market occurred. Where Japanese residential consumers previously only had one regional choice for electricity, they now have hundreds of choices. This deregulation will take the next step in 2020 when the traditional monopoly players are legally required to split their operations and separate their power generation, transmission, and marketing units into independent entities that have to compete in the marketplace.
Electricity trading on Japan’s Electric Power Exchange (JEPX), which is a critical enabling mechanism towards a market oriented power system, has experienced huge growth since the market liberalization, regularly breaking records for the amount of power being traded on the exchange. About 10% of domestic electricity is purchased through the spot market exchange, up from about 1.5% before the liberalization. Later this year, a electricity futures market (without physical deliveries of energy) is expected, which would further increase trading on JEPX.
Finally, several new market mechanisms are being discussed, including revisions to the FIT, an auction policy to drive down renewable costs, and new efforts to promote non-solar renewables.
What is working
The Earthquake and meltdown at Fukushima Daiichi, sparked a generational re-think of energy policy in Japan by enabling a nascent movement towards electricity deregulation and renewables to mature quickly. In the past several years, this has led to new policies that have encouraged solar power and greater market competition on the grid, as described above.
Consumers now have choices in the electricity marketplace, which didn’t exist as recently as two years ago.
Consumers now have choices in the electricity marketplace, which didn’t exist as recently as two years ago. As of May 2018, over 7.7M Japanese households have switched electricity suppliers from incumbent providers to new entrants in the power market, representing nearly 15% of the market.
If electricity market reforms continue as they are currently scheduled and the power monopolies are fully dismantled in 2020, more competition, lower prices, and better energy outcomes will ensue.
These changes have also created new possibilities for innovators—and the seedlings of a start-up ecosystem in Japan. For example, a Tokyo-based company is using JEPX and solar blockchain technology to give neighbors the ability to buy renewable power from one another.
In addition, in March 2018, the Cabinet approved new procedures to allow developers to competitively bid on offshore wind zones in Japan’s territorial waters. The legislation, which still has to be approved by the Diet, would streamline the current process. This is necessary because current rules are unclear enough that no offshore wind has been developed in Japan, even as the potential is large.
What could be improved
Even as Japan’s energy future is beginning to improve following the Fukushima disaster, factors within Japan’s control are creating an uneven, slow, and idiosyncratic transition to lower carbon, lower cost energy resources.
Realism and Ambition
Given the direct relationship between the government policy and the Japanese power mix, Japanese decision makers must be simultaneously realistic and ambitious about the future. Japan’s 2030 renewable energy target is 22-24%, with wind and solar making up less than 9% of the total energy mix. When compared with other economies, this target, which was last revised in 2014, is not ambitious. Many large economies, including Germany, the United Kingdom, and the United States already exceed Japan’s 2030 wind and solar targets. The world is in a period of dramatic transformation in the power sector—with prices for renewables continuing to decline rapidly. Japan’s government should review their 2030 targets and increase its ambition for renewables.
At the same time, more realism needs to be incorporated in Japan’s energy policies. Over 40 new coal power projects remain in planning throughout Japan, making this the largest planned investment in coal power in the developed world. While industry will note that they plan to deploy efficient, lower emissions coal technology, nearly half of the planned coal projects will use conventional, highly polluting designs. If these plants are built, Japan will also face difficulty meeting its pledges to the world under the Paris Agreement to limit climate-changing pollution.
The outcome of debate over the management of the nuclear power fleet is central to Japan’s energy future.
Less than ten years ago, the Basic Energy Plan called to slash the share of coal in Japan’s power mix to 10% by 2030. In 2014, that percentage was increased. The revision to the plan being considered this year keeps that percentage at 26%. This would be a step in the wrong direction and strong leadership is needed from the government to chart a different path. Japan’s Ministry of Foreign Affairs recognizes this, and in a February 2018 report, wrote “If Japan continues to pursue its policy incompatible with the global decarbonizing efforts, Japan may be left behind not only in energy and environment sector, but also may hinder its industrial competitiveness in the global market, which now pays serious attention to carbon risks.” Investors around the world are becoming much more sensitive to the carbon risk from coal power, and trade-dependent Japanese companies must demand change as well.
In addition, the outcome of debate over the management of the nuclear power fleet is central to Japan’s energy future. The current stalemate has the effect of freezing decision-making in other aspects of energy policy—including the power source mix in the Basic Energy Plan, artificially creating capacity constraints on the grid, and slowing progress on Japan’s international climate commitments. For example, transmission capacity is being reserved for nuclear power plants that may or may not be restarted. Because it is reserved, this unused capacity is not available for new generation, including renewable energy. A policy process that has taken years, and will take years more only harm’s Japan’s future. One way or the other, a decision is needed on the status of nuclear power in Japan. That decision should take nuclear energy’s contribution to climate goals in to account while being discerning about the future operating costs of nuclear and begin to incorporate the future costs of decommissioning nuclear power plants into current electric rates.
Fair Competition and Reliability
Policy makers must view fair competition and reliability as co-equal goals. Current policies favor incumbent forms of energy (coal, gas, and nuclear) while overstating the reliability challenges associated with variable renewable energy. Specifically, current grid access rules, transmission connection charges, the potential for unlimited curtailments of renewable energy, and foreign investment barriers are depressing the Japanese clean energy market. For example, renewable energy developers must pay increasingly large charges to electric utilities in order to connect renewable projects to the grid. One industry player noted that these charges have increased 10 times in the past five years and now can make up as much as 10% of overall project cost.
In addition, the Revised FIT Act permits electric utilities, acting as grid operators in their service territories, to allow unlimited uncompensated curtailment of renewable energy in areas that the government and utilities have deemed unable to balance supply and demand. This rule dramatically increases project risk and financing costs in these areas, even as high quality renewable resources may be available. It also perversely incentivizes utilities to artificially set low limits on the amount of renewable energy they say they can absorb, because they can refuse energy supplies over that amount with no consequence. In other countries, compensation rules spur grid operators to minimize renewable curtailment. Open access rules, priority dispatch, and wholesale markets are other tools that regulators in these countries have used to address these disparities.
Even as solar power has grown dramatically in Japan over the past five years, wind energy has not.
Even as solar power has grown dramatically in Japan over the past five years, wind energy has not. For example, in no year after the Fukushima disaster have wind power installations been higher than before the meltdown. That is the case even with subsidies and rapidly decreasing prices. This situation exists because government policy barriers are driving up costs for wind energy unfairly. Specifically, a long and complex land use planning and environmental assessment processes for onshore and offshore wind power development, which is said to take three-four years on average, raises project development costs unnecessarily. In addition, all wind power projects over 10MW are required to go through this process. Coal, oil, and gas projects, which have a much larger impact on the environment, are required to go through this assessment project only if they are 150MW or larger. This disparity should be addressed.
Japan is considering several new market rule makings for the grid. These include an electricity futures market, a baseload power market, transmission interconnection rules that will require an implicit auction, a capacity market, a zero emission credit trading market, and real-time market. These reforms are a step in the right direction. However, unless they are coordinated, they may have unintended consequences. An economy wide price on carbon (similar to China’s carbon trading market) could be a less complex, more elegant way to send the right market signals.
Reduce the Cost of Energy
Finally, policy makers must determine new ways to reduce the cost of electricity, particularly renewable energy. The lack of a true national grid also drives up costs. Instead, two separate grids operating on different frequencies, with very little connectivity, creating challenges transmitting excess power from one grid to another in ordinary situations, and making it almost impossible to share electricity if one half of the grid suffers a supply problem (like those after the Fukushima disaster). Such a grid was contemplated after the Fukushima disaster, but very little has been done to realize this change.
Japan is a world leading technology innovator. Several of the current solar cell efficiency records are held by Japanese companies and institutions. In 1990, Sony developed today’s most widely commercialized energy storage chemistry, lithium-ion batteries. Other major Japanese industrial companies, notably Panasonic, continue to lead today’s home and grid scale energy storage market. Energy storage is getting ready to usher in the next revolution in electricity, further reducing the costs and variability of renewable energy, and Japan has an opportunity to be at the forefront, if the right policy steps to encourage a domestic industry are taken.
A revolution is occurring in the global electricity market – including in Japan. As Japan’s policy makers determine how to sustain that change, they should remember that being ambitious does not necessarily mean subsidies, but rather that committing to a low carbon grid means changing electricity market rules that currently favor incumbents and working out how to manage stranded assets. This is the thorny part of the political transition, but nothing less than Japan’s economic future depends on working through these challenges.
In early 2017, I had the privilege of joining the Sasakawa USA Emerging Experts Delegation (SEED) to Japan to explore energy security and the U.S.–Japan bilateral relationship. A year later, Sasakawa USA asked me to return and research the changing internal electricity market and the future for low carbon technology in Japan, as a part of the Sasakawa USA In-Depth Alumni Research Trip.
The research for this paper is based on a series of nearly 20 interviews both in Washington D.C. and in Tokyo. These included meetings with experts and officials in government (Embassy of Japan in Washington D.C., Ministry of Economy, Trade, and Industry, Ministry of Foreign Affairs, and the New Energy and Industrial Technology Development Organization), in industry (Renova, Minden, TEPCO, and the Federation of Electric Power Companies – Japan), in the non-governmental organization sector (the Renewable Energy Institute, the Institute for Global Environmental Studies, and Friends of the Earth-Japan), reporters (Nikkei and Bloomberg) and individual experts (Nobuo Tanaka, Chair, Sasakawa Peace Foundation and former Executive Director of the International Energy Agency, Ken Haig of Hokkaido University, and Robby Feldman of Tokyo University of Science). In addition to the support of Sasakawa USA, I am extremely grateful for the time and frank conversation provided by each of the interviewees for this project, without whom, this would not have been possible.
Due to the fact that conclusions described above reflect the synthesis of responses from numerous sources, and out of respect for the confidential nature of the interviews, the names and/or affiliations of sources are not identified in this paper.
About the Author
Tarak Shah is an energy policy consultant who has worked at the highest levels of the United States government designing and implementing policies that have contributed to the clean energy revolution, fostered profound advancements in renewables and energy efficiency, and formed core portions of U.S. global climate commitments.
Most recently, Shah served as the Chief of Staff and Senior Advisor to the Under Secretary for Science and Energy at the U.S. Department of Energy (DOE). As a member of the Senior Executive Service appointed by President Barack Obama, Shah supervised the office responsible for oversight and management of the world’s largest investments in early-stage, high-potential energy innovation and physical sciences. This included management of 13 national laboratories, 7 science and clean energy programs and an annual $10 billion science and clean energy budget. In direct consultation with the Secretary of Energy, the White House, industry, and NGOs, Shah provided strategic direction for DOE’s energy innovation budget. More broadly, Shah aligned DOE’s science and energy policy to President Obama’s climate and energy agenda.
Shah holds both a Master of Business Administration and Master of Industrial and Labor Relations from Cornell’s Johnson School of Graduate Management and bachelor’s degrees in Political Science and Urban Planning from the University of Illinois, Urbana Champaign.