Renewable energy in Japan

In the Land of the Rising Sun, a new era is dawning as Japan steers its energy landscape towards a brighter, greener horizon. With a steadfast commitment to environmental responsibility, Japan has set ambitious targets to transform its energy sector. By the fiscal year 2030, Japan aims to derive 36-38% of its electricity from renewable sources, a monumental shift from its current reliance on natural gas, coal, and oil, which collectively account for over 70% of the country's energy mix. In this transformative journey, Japan has set its sights on the ultimate goal of achieving carbon neutrality by 2050.

As of now, renewables, excluding nuclear power, constitutes 20% of Japan's energy portfolio. However, there is still work to be done, as 40% of Japan's energy mix in 2030 is projected to originate from carbon-intensive sources, including oil, gas, and coal. To bridge this gap and embrace a more sustainable future, Japan is actively introducing decarbonisation technologies.

The year 2022 marked a significant turning point in Japan's renewable energy sector. The nation celebrated a decade of progress with its Feed-In Tariff (FIT) scheme, and launched its successor, the Feed-In Premium (FIP) scheme, which in turn has led to increased negotiation of corporate power purchase agreements (PPAs), both physical and virtual.

Japan's commitment to renewable energy took a significant step forward with the approval of the New Energy Strategy in October 2021 as part of the 6th Strategic Energy Plan. One of the key legislative changes to support this strategy was the amendment of the Act on Special Measures Concerning Procurement of Electricity from Renewable Energy Sources by Electricity Utilities. This amendment marked a transition away from the existing FIT scheme, which had been instrumental in driving the growth of renewable energy in Japan.

Under the FIT scheme, utility companies were mandated to purchase all electricity generated by renewable sources at a fixed price, irrespective of market fluctuations. While this approach led to rapid growth in Japan's renewable energy sector, particularly in solar and onshore wind, it came with certain drawbacks. The fixed pricing decoupled generators from market dynamics, disincentivising them from optimising electricity generation during peak hours and managing supply-demand imbalances effectively. Furthermore, consumers bore the surcharge associated with the FIT scheme.

The introduction of the FIP scheme brought a more market-oriented approach. Instead of a fixed price, the premium paid to generators under the FIP scheme is calculated as a margin added to the wholesale market price or an agreed purchase price in bilateral trades. This link to market prices gives generators the flexibility to participate in wholesale markets or negotiate corporate PPAs. This shift is expected to provide generators with stronger incentives to increase electricity supply during peak demand periods. It also frees utility companies from the obligation to purchase renewable energy output, eliminating the exemption from Imbalance Costs that was part of the FIT scheme.

During the initial stages of the FIP scheme, renewable generators may receive financial support for Imbalance Costs as part of the premium, incentivising their transition from the FIT scheme. While FIP schemes have been used in various European countries, they expose renewable generators to pricing volatility, albeit with the added benefit of the premium, a trade-off worth considering in Japan's evolving renewable energy landscape

On December 22, 2022, the government unveiled the Green Transformation (GX) Basic Policy, marking the initiation of a profound transformation in Japanese policy on industries and energy. GX, which stands for "Green Transformation," represents a significant shift that aims to transform Japan's fossil-fuel-centered industry and social structures into a clean energy-centered one. In the subsequent year of 2023, the two pivotal acts, the GX Decarbonisation Energy Resources Act and the GX Promotion Act, came into effect.

The GX Decarbonisation Energy Resources Act, enacted in May 2023 and set to be effective from April 2024, encompasses a package of amendments to existing legislation, including the Electricity Business Act and Renewable Energy Act. Under the amendment to the Electricity Business Act, nuclear power plants can now operate for up to 60 years, an extension from the previous limit of 40 years. Additionally, changes to the Renewable Energy Act introduce a range of obligations and requirements. Renewed emphasis is placed on obtaining key permits within three years of certification, with proper contractor oversight and community engagement. The Act empowers authorities to withhold payment of FIT and FIP prices until compliance issues are resolved.

The GX Promotion Act, enacted in May 2023, introduces mechanisms designed to incentivise investments in the transition towards a decarbonised society. It lays the groundwork for future carbon pricing strategies, including fossil fuel levies and emissions trading programs.

The Act mandates the establishment of the "GX Promotion Organisation," an institution assigned the responsibility of managing emissions trading systems and overseeing activities such as contributions and the GX Surcharge. This organisation plays a crucial role in introducing a hybrid carbon pricing scheme that integrates emissions trading and carbon surcharge systems.

Furthermore, the Act paves the way for the issuance of "GX Economy Transition Bonds", a financial instrument to stimulate long-term investments and enhance predictability for private sector stakeholders. These bonds represent an upfront investment of approximately 20 trillion yen over a decade, beginning in FY 2023, and will be dedicated to funding initiatives that drive the GX transition. Importantly, these bonds will be redeemed by 2050 and financed by the Fossil Fuel Levy and Specified Business Contributions, symbolising a commitment to using industry-generated funds to support decarbonisation efforts.

The Act also introduces a comprehensive Carbon Pricing Scheme, which aims to increase the value of GX products and businesses by pricing carbon emissions. Although this scheme is deferred for an initial period, to allow dedicated focus on GX initiatives, it comprises two distinct components:

1. The Nationwide Emissions Trading Scheme, is set to be launched in 2026, will enable the trading of emissions allowances, creating a market-based approach to managing carbon emissions.
2. The Carbon Surcharge Scheme is set to be implemented from 2028, providing a mechanism to levy charges on carbon emissions. 

Japan has made significant strides in its journey towards harnessing offshore wind energy, albeit starting from a more modest position compared to global leaders. As of 2022, Japan had 136 megawatts (MW) of offshore wind capacity, a fraction when compared to the nearly 14 gigawatts (GW) in the UK and 31 GW in China, as reported by the Global Wind Energy Council. However, Japan has set ambitious targets for itself. By 2030, the nation aspires to achieve an offshore wind capacity of 10 GW, complemented by 17.9 GW of onshore wind power. To further realise this vision, Japan is actively charting a new course for floating offshore wind power with plans to finalise its roadmap by March 2024.

Japan has underpinned its commitment to offshore wind energy with strategic legislative and policy initiatives. The government's support for offshore wind began with the revision of the Port and Harbour Act in 2016, followed by the enactment of the Marine Renewable Energy Act in 2018.

The Marine Renewable Energy Act has played a pivotal role in Japan's offshore wind energy growth. This act introduced the area designation and auction process, streamlining the allocation of ocean areas suitable for offshore wind farm development and creating opportunities for investors and developers.

As part of the area designation for project development, the progression from "preparatory areas" to "prospective areas" and "promotion areas" under the Marine Renewable Energy Act is a meticulous process ensuring regulatory compliance and environmental suitability. During the transition to "prospective area" designation, activities include investigations by the Minister of Economy, Trade and Industry and the Minister of Land, Infrastructure and Transportation. Consultations involve administrative heads and opinions from a specially organised council, fostering comprehensive decision-making. Public engagement is maintained through public notices, enhancing transparency and stakeholder participation.

In the auction process, rigorous planning and selection procedures are followed. Guidelines for occupancy are established, and business operators submit action plans for assessment. Successful bidders receive occupancy permits lasting up to 30 years, providing project stability.

Japan's offshore wind sector has celebrated key milestones, notably in Round 1 of offshore wind bidding in 2021, where a consortium led by Mitsubishi secured all three auctions, totaling 1.7 GW capacity. These projects, featuring bottom-fixed structures, are set to start development between 2028 and 2030, highlighting Japan's dedication to offshore wind expansion.

Round 2 of offshore wind bidding in December 2022 was another significant step. The government auctioned an additional 1.8 GW capacity across four promotion zones, all with bottom-fixed structures. The results are eagerly awaited, with announcements scheduled by the end of March 2024. This ongoing expansion underlines Japan's unwavering commitment to clean and sustainable energy sources in its offshore wind sector.