Recharging Japan’s energy policy

Photo: Flickr/Harald Johnsen

Australia & Japan in the Region

Volume 6, No 5, May 2018

Under the Paris Agreement on climate change the Japanese government committed the country to a reduction in greenhouse gas (GHG) emissions of 25.4 per cent by 2030 compared to 2005. In 2015 Japan’s GHG emissions were 5 per cent lower than 2005. But emissions remain 4 per cent higher than in 1990.

Is Japanese energy policy running hard to stand still?

Like many countries, Japan is moving too slowly to cut its GHG emissions. Fuel combustion for power and heat generation represents about one-third of the country’s total GHG emissions and coal-fired power is a little under half of this amount. Japan is in the final stages of reviewing its mid-term targets for energy and reports suggest the 2030 targets for the power sector will not be substantially revised.

The increase in the wage costs of large firms can be partly offset by a reduction in corporate tax. But this tax incentive would likely only be applied to large firms: 70 per cent of Japanese firms, most of which are small- and medium-sized, run at a loss and do not pay any corporate tax.

Yet while overall emissions remain stubbornly high, new policies have the potential to positively affect the country’s long-term emissions trajectory if done right. Two trends are noteworthy.

First, the government is tweaking the financial incentives to invest in renewable energy. Japan introduced a Feed-In-Tariff (FIT) in 2012 that guarantees a return to investors in renewable energy. The FIT has drawn large amounts of renewables capacity into the power sector.

The vast bulk of this investment has flowed into solar photovoltaics. Prices for larger solar photovoltaic systems fell almost 30 per cent between 2012 and 2017. Japan has now switched towards using auctions for larger facilities to push further cost reductions while making the incentive structure more fiscally sustainable.

Beginning last year the government also revisited incentives for other forms of renewable energy. Wind power has seen tremendous growth in China, the United States and elsewhere, yet it remains a small part of total generation in Japan’s power sector and development costs are high.

Japan’s largest source of low-carbon electricity remains nuclear power

Recognising this, the government is pushing to make wind power more competitive. It cut the financial incentives for smaller wind-power developers from US$0.46 to US$0.18 per kilowatt, on the basis that there are no prospects for small-scale wind-power producers to become independent from subsidies.

This cut follows the implementation of a multi-year rate for large onshore wind-power producers in 2017 and the creation of a separate FIT incentive for offshore wind power in 2015. New legal revisions — including legislation currently before parliament that would establish rules for developing offshore wind projects outside Japan’s ports and harbours — are designed to give certainty to developers.

There remains a long way to go, but these changes can help to rebalance Japan’s renewable energy development, make subsidies more fiscally sustainable and promote cost reductions that prepare renewable energy to compete with fossil fuel generation on a non-subsidised basis.

A second basket of policy changes focus on revisions to the terms of competition governing Japan’s power sector. The government embarked on a three-stage reform process following the 2011 Fukushima nuclear disaster. In 2015 a new regulatory body — the Organization for Cross-regional Coordination of Transmission Operators (OCCTO) — was created to plan for investments designed to enhance grid stability. OCCTO has also developed a system for cost-sharing among power producers wanting to connect to the electricity grid. While there are important teething problems to overcome, in principle the initiative should reduce the costs to individual developers.

Full retail choice was introduced in 2016 and has already led to more than 7 million households switching their electricity provider away from the incumbent utilities. One potential benefit of this is the increased ability of customers to take advantage of lower carbon offerings, providing a demand-led incentive for renewable energy development. There is some evidence that this is one effect of the introduction of competition to the power sector in the United States, and Tokyo Electric recently started a retail venture dedicated to selling renewable power to households.

The big question is what roles renewable energy and fossil fuels will play in making up any nuclear shortfall

The final — and potentially most far-reaching — reform will see the responsibility for operating the transmission grid removed from the incumbent power utilities, beginning around 2020.

Japan’s largest source of low-carbon electricity remains nuclear power. The current mid-range target projects that nuclear power will constitute 20–22 per cent of Japan’s generated electricity by 2030.

But the prospects of achieving this target remain uncertain in the face of local opposition to nuclear restarts and the costs of meeting more stringent safety standards. Bloomberg New Energy Finance has estimated — in a less enthusiastic assessment — that nuclear power will make up just 10 per cent of Japan’s generated power in 2030, even under an optimistic scenario.

The big question is what roles renewable energy and fossil fuels will play in making up any nuclear shortfall.

That debate has already begun, with the recent disagreement over a proposed 600 megawatt increase in the planned capacity expansion of a new coal unit at the Misumi plant in Shimane Prefecture. The disagreement pits the Ministry of Economy, Trade and Industry, which is responsible for system stability and broader aspects of energy policy, against the Ministry of Environment (MOE), which focusses on Japan’s international climate commitments and also administers the country’s environmental impact assessment process.

Putting a price on carbon (as was recently proposed by an MOE advisory committee) represents one approach to getting the incentives right. But even in its absence, continuing to lower the costs for renewable energy and improve the investment environment will give renewables the best opportunity to play a big role in supporting Japan’s decarbonisation efforts.

Llewelyn Hughes is an Associate Professor at the Crawford School of Public Policy, The Australian National University and a Visiting Professor at the Energy Transition Hub in the School of Earth Sciences, The University of Melbourne.

Updated:  23 June 2017/Responsible Officer:  Crawford Engagement/Page Contact:  CAP Web Services Team