Japan Searches for the Optimal Energy Mix

Energy is probably Japan’s greatest vulnerability, both in environmental terms and in assured sources of supply. Japan’s long-run energy policy is simple — obtain stable supplies at low cost — but implementation is complex in what is a global, dynamic, rapidly changing set of related industries.

Energy is probably Japan’s greatest vulnerability, both in environmental terms and in assured sources of supply. Japan’s long-run energy policy is simple — obtain stable supplies at low cost — but implementation is complex in what is a global, dynamic, rapidly changing set of related industries.

Fossil fuels are the predominant energy sources for Japan. Japan has to import essentially all its oil, LNG (liquefied natural gas) and coal, making security of supply a major concern. Meanwhile, the rapid development of cheap shale oil and gas, as well as efforts to harness solar and wind power, are revolutionising energy around the world. Energy costs and prices are dropping dramatically. Therefore, a major issue for Japan is how to achieve the best mix among fossil, nuclear, and renewable resources to ensure it has secure, stable and cost-competitive energy supplies.

One way to meet this challenge is with technological change. In Japan and globally, a myriad of ongoing technological advances, large and small, is increasing the efficiency of energy production, transportation, distribution and use.

The recent drop in the world price of oil is also substantially benefiting Japan through improved terms of trade. This has also helped reduce LNG prices as LNG sells globally under long-term fixed-price contracts linked to the price of oil.

Regarding electricity pricing, the greatest achievement of Japanese Prime Minister Shinzo Abe’s third arrow of economic reform has been the reduction of the monopolistic power of the 10 regional electric power companies. The retail market for electric power is to be fully liberalised by about 2016, and by 2020, the companies will have to divide their generation, transmission and distribution businesses into separate companies.

Still, the challenges to Japan in energy policy are many. The Fukushima crisis undermined Japan’s ability to continue as a global leader on climate change. The Abe government recently announced more modest emission reduction targets, but even these will be a substantial achievement.

Stability, security and affordability of fossil fuel imports are high priorities for Japan. Japan is so deficient in natural resources that in 2014 it imported more than 90 percent of its primary energy supply. Japan is the world’s largest LNG importer, second-largest coal importer, and third-largest net importer of crude oil and oil products.

The challenges of securing stable supply are not likely to get easier. The Ministry of Economy, Trade and Industry (METI) recently announced its projections for the mix of sources for primary energy and electricity production in 2030. For the next 20 to 30 years at least, Japan will continue to rely predominantly on fossil fuels.

In 2030, oil, coal and LNG project to provide 75 percent of the primary energy supply. Renewables will provide 13 to 14 percent and nuclear power 10 to 11 percent. The big changes projected for electricity generation: renewables will comprise 22–24 percent and nuclear power 20–22 percent (compared with about 30 percent before all of Japan’s nuclear plants closed following the Fukushima disaster).

Three aspects of these projections are striking. First is the continued importance of coal, generating 26 percent of electricity, slightly above the average 24 percent in the 10 years before Fukushima. Japanese companies have developed effective clean-coal technology. New, large-scale coal-based electricity projects are both, clean and apparently cost competitive in Japan.

The second striking issue is that coal’s greatest competitive challenge in Japan will largely continue to be LNG and nuclear power. The projected major reliance on nuclear power by 2030 implies not only reopening many existing plants, but also building new ones. This will be difficult to achieve.

Following Fukushima, this will require a major change in the public mindset. Electricity prices have increased significantly since Fukushima, and reductions attributed to cheap nuclear power generation will be important in overcoming Japanese anxieties. Additional selling points may be that safe nuclear power generation does not pollute the air and security of fuel supply is not a problem. However, disposal of radioactive waste and decommissioning of old plants remain serious unresolved issues.

The new, stringent safety regulations developed by the Nuclear Regulatory Authority (NRA) may ease concerns. So far, the NRA has approved reopening five nuclear plants and another 16 are under review. Still, a 2015 Reuters analysis concluded that only seven will likely restart over the next several years. The first plant reopenings will be a critical test as to whether Japanese will accept nuclear power.

The third issue of note is that renewable energy sources expect to increase significantly to 22–24 percent of electricity generation. The big increase will be in solar, to some 7 percent, thanks to the corporate response to Japan’s extraordinarily high feed-in tariffs for electricity sold to Japan’s 10 utilities. Solar power prices and installation costs have also been dropping sharply, but the growth of solar facilities is constrained by suitable sites and access to power grids.

In the coming decades, radical new technologies will further alter global energy sources and supplies. They will involve major breakthroughs to achieve efficiencies, cost competitiveness and environmental benefits, as well as social and political acceptance.

In the 70 years since Japan’s surrender in 1945, Japan has done very well economically, politically, and socially. To continue with this success, it will be critical that Japan manages its energy vulnerabilities in the coming years. One of Japan’s strengths is that it adjusts to tremendous changes in a stable and usually gradual way. The process may seem inefficiently slow, but it is often effective. While there are significant challenges, there is reason to believe Japan can manage its energy transition as well as it has managed other areas of change.

Japan’s post-Fukushima energy challenge is republished with permission from East Asia Forum