Japan's Energy Supply Mix and the Economic Impact

What does the new feed-in tariff (FIT) law mean for Japan, and how will it affect Japan’s energy market?

Previously, there had been delays to introduce renewable energy to the mix of energy resources in Japan compared with other countries. Renewable energy is only 1%–2% of Japan’s entire energy supply, excluding large-scale hydroelectric power. These delays have been because producing renewable energy is still very expensive to generate and sustain. Also, renewable energy was not supplying as much energy as we had thought, especially considering the costs to build and operate infrastructure. Traditionally, Japan’s energy supply system was controlled by the government. However, the global trend to use alternative energy supplies convinced government representatives and energy experts in Japan, whether they advocated the use of nuclear power, to adopt renewable energy and create a mechanism—i.e., the FIT—that would be self-sustainable. There has not been strong opposition to the FIT. Rather, many have been concerned over Japan’s slow reaction to the potential of renewable energy. The FIT is considered a promising mechanism to (1) introduce and encourage more investment in a new mix of energy resources, (2) bring competitiveness into an energy-pricing mechanism, (3) contribute to a sustainable supply against rising demand, one that does not rely mostly on energy imports, (4) promote environmental sustainability and reduce global warming, and (5) support industrial development domestically.

When the FIT law was introduced, however, there were concerns over improvements that needed to be made to the current law. For example, the price for electricity produced by solar power was set at 42 yen per kilowatt-hour (kWh), when we originally assumed it would range from 32 yen to 33 yen per kWh. Although the final price was much higher than expected, I believe that setting the price higher in the earlier stage is effective in implementing something new and creating an impact at the beginning. The government could later adjust the price as appropriate in the years ahead based on data gathered during the implementation and gradually shift away from the law altogether in five to ten years, so that the market and its mechanisms, once established, can determine pricing and create competitiveness.

Under the new law, the cost of enacting a FIT will be paid for by Japanese customers through their electric bills. What financial impact will the FIT have on households and companies?

To offset the burden on electric utility companies to purchase electricity generated by renewable energy, an extra surcharge will be applied to consumers through their bills. The impact of this new law on household expenditures will continue to be an important issue to tackle. The effect of the FIT will be burdensome, even if at current levels it increases average monthly electricity bills by only 1%–2%. Yet the FIT is a policy for introducing renewable energy, so even if the immediate impact of this policy is high for consumers, it does present alternatives into the mix of energy resources. In the long term, the FIT will reduce costs and increase the energy supply. The need for Japan to create a sustainable mix of energy resources is higher than it has ever been. The main aspect to consider very carefully is the buyout price and its structure. [2] It would be ideal to set up a price that could introduce this new method of selling and buying renewable energy, and then slowly shift away from the government’s incentive program. As mentioned earlier, the FIT policy can eventually create competitive pricing in itself without government intervention.

Does participation and investment by non–energy-related companies facilitate the diffusion and advancement of renewable energy in Japan?

After the FIT law was introduced, Japan saw many of its non–energy-related companies, such as Kyocera, Mitsui Chemical, and Lawson, expand their businesses into the renewable energy sector by changing their articles of incorporation to include renewable energy. Companies like SoftBank, a Japanese telecommunications and Internet company, and Rakuten, Japan’s largest online shopping company, also participated in this trend, demonstrating that industries have started funding renewable-energy projects. Some work together or partner with local prefectural governments or not-for-profit organizations to take advantage of the new law and enter new energy businesses.

It is favorable that those who traditionally have had little to do with electric power supply get involved with this challenge. The Fukushima Daiichi nuclear incident has taught us that we need to change the existing system where energy production is monopolized by the country’s nine electric power companies. When it comes to nuclear energy, there have been doubts about its efficiency, particularly because of safety issues and the costs to sustain and remove hazardous waste. It has become clear since the incident that enough surplus electricity was generated by individuals and entities throughout the country. Selling electricity to those who need it must be in compliance with market principles and bring competition to the market. With new technology development and a new pricing structure, the costs associated with operating renewable-energy production will go down and become manageable. The FIT promises to improve efficiency and provide a win-win mechanism for the future energy market in Japan.

How can Japan’s energy policy be strengthened in both the short term and the long term?

Goals and results will change based on the current situation. In September 2012, the Japanese government established a target to abolish nuclear power generation by the 2030s under the new national energy policy, although no one knows what the next eighteen years will look like. [3] I suggest establishing policy and goals at five-year intervals and looking into the feasibility of integrating more renewable energy into Japan’s energy mix every five years. A fact-based discussion brings more constructive dialogue. Even those who are pessimistic and skeptical about the diffusion of renewable energy think it might be able to generate power for at least 10% of the total energy supply. As of right now, the total supply of renewable energy, excluding large-scale hydroelectric power, consists of just slightly more than 1% of the total energy supply. It seems that achieving 10% of the total supply is a challenge. However, we do not know what will happen until we try it out.

What was the state of Japan’s electric power last summer? Was there any effect on public opinion about the future of energy in Japan?

Utility companies provided enough energy in the summer because they put old thermal power plants back to work in time. Earlier in 2012, Kansai Electric Power Company (KEPCO) had warned that there would be a great deal of concern over the shortage of power supply without the operation of the Ohi nuclear power plant in western Japan. However, last summer—the season when energy demand reaches its highest point in the year—KEPCO’s operating rate did not exceed 90%, despite unprecedented hot weather in the region. Japan thus could have managed to get through last summer without the Ohi nuclear power plant. [4] A sense of distrust in electric companies has risen domestically, and as it now stands, Japanese public opinion is against restarting nuclear power plants.

What Japan has learned from this experience is that we can conserve electricity. We can try the same conservation process this year and in the future, while continuing to explore new ways to generate sufficient electricity, such as through greater usage of renewable energy. This approach will create an environment to measure what is sustainable and then access what works best.

Endnotes

[1] A feed-in tariff (FIT) is a policy mechanism designed to accelerate investment in renewable energy technologies and as a result encourage a mix of energy supplies to meet the demand. As defined in a 2012 Japan Times article, “the feed-in tariff is an amount paid by a government to businesses, individual households and other organizations to generate renewable electricity. That power is then sold to the utilities at a fixed rate over a set period of time. The utilities, in turn, can require their customers to pay a surcharge for electricity generated from renewable sources, depending on the amount they individually use.” For more information on Japan’s feed-in tariff system, see “New Feed-In Tariff System A Rush to Get Renewables in Play” Japan Times, May 29, 2012, http://www.japantimes.co.jp/text/nn20120529i1.html.

[2] The purchase rate and period are carefully reviewed and determined every year by the Minister of Economy, Trade and Industry (METI) on the basis of the opinion from the newly established and appointed independent committee. For more information on the scheme, see METI’s website, http://www.meti.go.jp/english/policy/energy_environment/renewable/pdf/summary201209.pdf.

[3] “Japan Aims to Abandon Nuclear Power by 2030s,” Reuters, September 14, 2012, http://www.reuters.com/article/2012/09/14/us-japan-nuclear-idUSBRE88D05520120914.

[4] For more information on the restart of the Ohi nuclear power plant, see “Japan Restarts First Nuclear Plant after Post-Fukushima Shutdown,” CNN, July 1, 2012, http://www.cnn.com/2012/07/01/world/asia/japan-nuclear-power/index.html.

Risaburo Nezu is Senior Executive Fellow at the Fujitsu Research Institute. His research interests include free trade agreements and the Trans-Pacific Partnership, global warming and the carbon trade, and the East Asian economy. Previously, he was Senior Managing Director of the Fujitsu Research Institute and Director-General of the Science, Technology and Industry Bureau at the Organisation for Economic Co-operation and Development (OECD). He has also held various positions at the Japan Ministry of International Trade and Industry (now Ministry of Economy, Trade and Industry).

This interview was conducted by Dai Nagata, a former intern at NBR, and Toshie Ando, Controller and Assistant Director of the Kenneth B. and Anne H. H.Pyle Center for Northeast Asian Studies.