Japan’s flexible energy plan poses unpredictable risk

An uncertain energy transition demands a range of policy options, but makes investment planning harder,

The Japanese government has addressed the uncertainty facing its new energy mix goal for the April 2040-March 2041 fiscal year by drafting multiple plans to tackle concerns over the future development of clean energy technologies. But the wide range of targets could also reduce predictability and complicate the country's energy strategy toward its 2050 net zero emissions goal.

The new power mix goal will be the centrepiece of Japan's Strategic Energy Plan (SEP), which is due to be updated before the end of March 2025. The SEP must be reviewed every three years, and the previous one was formulated in 2021, before Russia's invasion of Ukraine refocused Tokyo's discussion on how to prioritise energy security, decarbonisation and economic growth.

The latest review of the SEP has totally changed from the previous one, said Yoshifumi Murase, a commissioner of Japanese trade and industry ministry Meti's natural resources and energy agency, noting that Tokyo will take a flexible approach to its power mix goal while facing uncertainties that include a risk scenario for innovation failures. Meti has not disclosed details of these scenarios.

The draft 2040-41 power mix entails renewable energy making up 40-50pc of the country's power generation, up from 22.9pc in 2023-24 (see table). By contrast, Tokyo plans to curb the thermal share to around 30-40pc from 68.6pc over the period. Meti has refrained from disclosing a breakdown for thermal fuels for now, as the ratio of each will vary depending on technological developments in hydrogen, ammonia and carbon capture, utilisation and storage.

But the absence of a breakdown for thermal power targets could weigh on private-sector investment plans, warns one committee member. "[Technological] uncertainty does exist, but the industry can hardly invest without predictability," said Tatsuya Terazawa, chairman of the government-affiliated think-tank the Institute of Energy Economics Japan. Tokyo is supposed to increase predictability for investors with specific measures for each thermal fuel on the table, he added.

Long-term uncertainty

The ambiguous target also makes it difficult to map out Japan's long-term fuel procurement, especially for LNG, which would play a role in ensuring power generation flexibility alongside the growing share of solar and wind. Japan has faced falling long-term LNG supplies as previous SEPs that promoted renewables and the liberalisation of the retail power market disincentivised the industry to extend contracts. Japanese gas demand is expected to fall in the base scenario, but increase in the risk scenario, Teiko Kudo, deputy president of Sumitomo Mitsui Banking, said. It would be important to show the maximum volume of gas Japan may need within a specific period in the next SEP, she said.

The issue of fuel security may be further exacerbated if Japan's planned return of nuclear reactors is delayed. Under the draft power mix for 2040-41, nuclear accounts for around 20pc, up from 8.5pc in 2023-24. But it is still uncertain how many reactors will be operational by then because of safety concerns over Japan's nuclear power sector since the 2011 Fukushima meltdown. The new SEP has made some progress, allowing nuclear power operators who had decommissioned reactors to build next generation reactors at their nuclear sites, not limited to the same site. The previous SEP did not mention building new reactors or replacements.

The 2040-41 power mix aligns with a 73pc greenhouse gas emission reduction goal by 2040-41 based on 2013-14 levels. The new emissions target is currently under discussion, ahead of Japan's submission of its updated nationally determined contribution (NDC) to the UN Climate Change secretariat by February 2025. Power mix goals could be revised depending on the final NDC, Meti said.