Japan’s Ongoing Energy Revolution


GR Japan’s Tatsuo Fukuda says the government remains committed to wide-reaching energy reform

Rapid reform of Japan’s energy sector continues apace. While energy policy-making is still working through issues raised by the Fukushima nuclear accident of March 2011, the main impetus for change is now a long-term program of structural reforms, with important implications for purchasing and investment decisions in natural gas, coal and uranium markets.

Despite misgivings about Abe’s continued support for nuclear power, Japanese voters have shown again that this is not the issue that decides national elections. Even so, Abe cannot have everything his own way when it comes to nuclear. The restarting of nuclear reactors remains the most divisive of issues and the Nuclear Regulatory Authority, local governments and now the court system have become important players in Japan’s power landscape.

The election of Satoshi Mitazono as governor of Kagoshima on the same day as the House of Councillors election is a case in point, bringing into relief the challenges facing the national government and utilities. Mitazono is seeking to suspend operation of Units 1 and 2 at Sendai Power Station in neighboring Saga prefecture – the only two nuclear reactors operating in Japan – to carry out additional safety checks following major earthquakes in April in Kumamoto.

While advocating restarts of their nuclear reactors, Japan’s power utilities are nonetheless moving ahead with plans to replace nuclear capacity with natural gas and coal, collectively announcing almost 10,000 Megawatts of natural gas and coal-fired power since 2012. Given Japan’s continued need for massive imports of fuel, the government is taking a number of measures to improve its bargaining position in LNG markets.

Japan’s Fair Trade Commission continues its investigation into the competition implications of “destination clauses” in LNG contracts, which restrict the resale of LNG cargoes. This reflects the rising use of gas in the power sector and expectations of an increase in inter-regional trade in natural gas. Meanwhile, the Ministry of Economy, Trade and Industry (METI) has reconfirmed its determination to develop a physical trading hub for LNG in Japan.

The government is pushing ahead with changes in renewable energy policy, too. Legislation passed on 25 May requires companies registered under Japan’s feed-in-tariff (FIT) system to complete an interconnection agreement with their off-taker by 1 April 2017 or lose their FIT certification. The government is also moving to limit the amount of time companies can take between receiving FIT certification and commencing operations, and there is a drive under way to replace fixed feed-in tariffs for mega-solar projects with a system of reverse auctions. If implemented, these changes could dramatically shift the costs and benefits of investing in renewable energy in Japan. The policy changes around feed-in tariffs are commercially significant and demand close attention.

Demand side developments

The government is also making major changes on the demand side, including support for Home Energy Management Systems and a new strategy for next-generation vehicles. The government is also looking to introduce negawatt trading and to create demand response measures incentivizing households to cut down on consumption at peak hours.

As if this were not enough to keep it busy, the government is also pursuing an ambitious program of energy market reform. Full retail competition was introduced to the power sector on 1 April 2016, with over 300 companies registering for the right to sell power alongside the ten incumbents. From zero, customer churn is heading for two percent of the total market this year.

One of the persistent weaknesses of Japan’s power market reform has been the thin volumes in the wholesale electricity market. In response, METI is considering forcing power sales into the Japan Electric Power Exchange, to increase liquidity and ease access to power for new market entrants at the retail level.

Japan’s energy policy agenda is broad and bold, reaching across different fuels and market design issues. Successful implementation of these measures will be an important component of the Abe government’s growth strategy moving forward and therefore likely to remain a focus of political and policy attention.

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Screenshot 2016-09-05 14.30.03This article appeared in an eight page special report produced in association with GR Japan. Click here to download the report

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