Japan Impresses with its FIT (Feed-In-Tariff)

The effects of Japan’s feed-in tariff (FIT) for renewable energy have been impressive. Since 2011, Japan has seen a massive expansion of solar photovoltaics (PV). The size of the domestic market increased from 1GW in 2010 to almost 7GW in 2013. This solar expansion is expected to continue with the 2020 target for PV installations raised from 14GW to 28GW. But the success of renewable energy should not be taken for granted.

The effects of Japan’s feed-in tariff (FIT) for renewable energy have been impressive. Since 2011, Japan has seen a massive expansion of solar photovoltaics (PV). The size of the domestic market increased from 1GW in 2010 to almost 7GW in 2013. This solar expansion is expected to continue with the 2020 target for PV installations raised from 14GW to 28GW. But the success of renewable energy should not be taken for granted.

So far, the expansion of renewables in Japan has overwhelmingly been about PV, while wind power remains underutilised. Eighty per cent of the projected expansion will be in PV and the FIT has not led to any upswing in wind power installations. In 2013, Japan installed nearly 100 times more solar power than wind. This is partly because new regulations have temporarily slowed wind power installation down. But Japan is also not emphasising wind power — the 2020 target for wind is only 5GW.

There are also worries that Japan’s FIT may be too generous. The solar FIT is currently about twice as high as Germany’s. One may wonder if this is a problem — if Japan is serious about renewables then surely a large FIT is better than a small one? After all, the more generous the FIT is, the higher the number of installations.

Here a comparison with Europe is instructive. Europe has experienced spectacular solar booms and busts. The reasons behind the busts all apply to Japan.

A key problem with FITs is that the more successful they are, the more expensive they become (more capacity means bigger subsidies). For European countries still suffering from the global financial crisis, this cost has been heavy. In Germany, expenses for 2014 will come to around €24 billion (US$30.5 billion). Japan has gone through two and a half decades of economic stagnation, runs heavy budget deficits, and has a national debt higher than virtually any other developed country. Sooner or later, Japan must ask itself whether or not it can sustain the costs incurred from its FIT.

In Europe, the expansion of renewable energy was partly premised on the creation of green jobs from green industries. But European markets have been flooded by Chinese PV, leading to bankruptcies rather than jobs in Europe. In Germany, the number of PV jobs have dropped from 111,000 in 2011 to 56,000 in 2013, and a series of prominent firms like ConergyAG, SolarHybrid, Solon, Solar Millennium and Q-Cells have either closed down or been bought by foreign companies, whereas Bosch Solar and Siemens have pulled out of the sector.

In Japan as well, solar expansion is subsidising Chinese imports as much as stimulating the domestic PV industry. The cost of PV panel imports rose from ¥100 billion (US$924 million) in 2011 to a projected ¥940 billion (US$8.7 billion) in 2014. Granted, there have been considerable upswings for Japanese PV manufacturers Sharp and Kyocera. But Japan only controls around 6 per cent of the world PV module market and is unlikely to ever return to the 50 per cent market share it enjoyed ten years ago. Thus, green growth may elude Japan too. And if a generous but expensive FIT ends up primarily benefiting China it may be less than popular.

Germany is now turning away from its FIT and towards a tendering system, due to cost concerns and grid problems. Grid problems also apply to Japan. One of the problems with the German FIT was that installations kept running ahead of grid expansion. Intermittency problems made it ever harder to maintain grid stability. The rapid expansion of renewable energy in Europe is challenging the grid network to such an extent that €1 trillion (US$1.2 trillion) in upgrades may be necessary by 2020.

The Japanese grid is in a far worse condition. Japan is not connected to any foreign grid that it could draw on in case of a crisis. Also, Japan’s grid is not well integrated. It does not even run on the same frequency nationwide — southwestern Japan runs on 60Hz and northeastern Japan on 50Hz. Thus, its ability to cope with large amounts of renewable energy is far lower than in Europe.

But, despite rapid expansion since the Fukushima nuclear accident, the amount of renewable energy presently fed into the Japanese grid is actually pretty small and is certainly manageable. PV in Japan accounts for little more than one per cent of electricity consumption and wind power around half a per cent.

The lack of a domestic backup load is another problem. Having lost most of its nuclear power, Japan’s backup load will have to take the form of coal or liquid natural gas (LNG). Japan has a little coal — which from a climate change mitigation perspective is a bad option — and all its LNG is imported.

So where is Japanese renewable energy headed?

Japan’s grid is weak and poorly integrated. Upgrading it is a major challenge. This will be costly and will likely be met by resistance from Japan’s once mighty utility companies, who have regained some of the influence they lost after the Fukushima nuclear accident under the current government, led by Prime Minister Shinzo Abe. Scaremongering from the utilities about the intermittency of renewables could easily be part of an ongoing energy political struggle. Exaggerating the difficulties that renewable energy presents could be a ploy by the utilities to limit structural change. It has been in the past. But the poor state of the grid is no reason to abandon renewables.

A few years ago, there was near unanimous agreement that FITs were the most efficient way of phasing in renewable energy. The pendulum is now swinging in the direction of market-based instruments, at least for countries that derive large amounts of their electricity from renewables. The Japanese economy is no healthier than many of the European economies that have decided FITs are economically unsustainable.

But Japan is not yet at a stage where it feeds particularly large amounts of renewable electricity into the grid. For this reason, a Japanese FIT still seems like the best way to promote renewable energy. It may eventually become too expensive, especially if it turns out to promote Chinese rather than Japanese PV, but Japan is not there yet.

Can Japan’s feed-in tariff continue to promote growth in renewable energy? is republished with permission from East Asia Forum