Chairman’s Message

Tatsuya Terazawa

Tatsuya Terazawa
Chairman and CEO
The Institute of Energy Economics, Japan

Chairman’s Message
“Progress Report of Japan’s GX Strategy”

Message for February 2024

One year has passed since Prime Minister Kishida announced Japan’s GX (Green Transformation) Strategy in December 2022. Let me share with you the progress made so far.

<Major Progress of Japan’s GX Strategy>

  • Allocation of 13 trillion yen including 3 trillion yen for hydrogen
  • Issuance of GX bonds
  • Tax credits to support production of EV, green steel/chemical and SAF
  • Enhancing acceptability of renewable energy projects in local communities
  • Framework to support cost recovery of hydrogen/ammonia introduction
  • Legal framework for CCS
  • Restart and extension of operation life of nuclear reactors

  • 1. Allocation of Government Funding

    When the GX strategy was announced in December 2022, Prime Minister Kishida pledged to allocate 20 trillion yen (about 140 billion US dollars) of government funding to realize within the next ten years a combined total investment of 150 trillion yen in green transformation, from both the public and private sectors.
    Last December, the Japanese Government announced its plan for the allocation of 13 trillion yen out of the pledged 20 trillion yen of government funding. The remaining 7 trillion yen will be decided upon later. Among the announced activities, 3 trillion yen were allocated for hydrogen, 1.3 trillion yen to support investment in the hard-to-abate sectors, 2 trillion yen to support energy efficiency investment, 1 trillion yen to support the next generation renewable energy technologies, 700 billion yen to support small and medium enterprises and 200 billion yen to support start-ups in the green transformation sectors.
    Such allocation of government funding is substantial in scale and provides predictability as the commitments are made on a long-term basis. These commitments are a departure from the traditional approach of the Japanese government which had been limiting its budget commitment to one year, constrained by its annual budget authorized by the Diet. This new funding approach reflects the recognition that a green transformation requires long term investments.

    2. Issuance of GX bonds

    To finance the government expenditure for GX, the Japanese Government will be issuing its first GX bonds this February. The total amount will be about 1.6 trillion yen with maturities of 5 years and 10 years. These will be exceptional government bonds in Japan with a defined purpose and will be the first transition bonds to be issued by national governments in the world.
    The repayment of GX bonds will be made through the revenue from carbon pricing to ensure fiscal soundness.

    3. Tax credits for producing EVs, green steel/chemical and SAF

    Tax credits to support the production of EVs, green steel, green chemicals and Sustainable Aviation Fuel (SAF) will be introduced. The amount of tax credit is expected to be 400K yen per vehicle for battery EVs and Fuel Cell Vehicles and 200K yen per vehicle for plug-in hybrid cars. The tax credit for SAF will be 30 yen per liter.
    These tax credits are expected to support clean energy products which require higher operating costs. This will be the first time for Japan to introduce a tax credit to support production. Historically, tax credits have been limited to support CAPEX and R&D. This is another example of expanding the limits of past policies.

    4. Enhancing acceptability of renewable energy projects in local communities

    After the Fukushima nuclear accident, a very generous FIT (Feed in tariff) system was introduced in Japan. This led to an explosion of renewable power projects, mainly solar PVs. As a result, Japan has realized the highest deployment of solar PVs per flat land area in the world.
    While this was good for the global climate, it unexpectedly caused many conflicts with local communities. The generous FIT, with a guaranteed fixed tariff rate for 20 years, incentivized many companies of various backgrounds, skills and values to jump into the business. There have been numerous reports about solar PV projects developed on mountain slopes without proper safety measures, projects that were abandoned, and projects ruining the landscape.
    These reports have made many solar PV projects unwelcome by the local communities. Recognizing that this is a serious impediment, the Japanese government introduced last year a legislation that requires developers to conduct prior consultation with the local communities before starting large scale projects and specifies the responsibilities of the developers.
    With these measures in place, it is expected that the development of renewable energy projects would proceed more smoothly and with better local acceptance.

    5. Framework to support the cost recovery of hydrogen/ammonia introduction

    Hydrogen is considered as the key to decarbonize the hard-to-abate sectors and can also help decarbonize thermal power generation. Ammonia is regarded as a very competitive carrier of hydrogen and can also be used as a fuel to decarbonize thermal power generation, for example.
    In spite of the promises of hydrogen/ammonia, their actual development is slow, and the biggest hurdle is their high cost. This is the reason why the Japanese government has announced that it will introduce a framework to support cost recovery by offsetting the cost differential of hydrogen/ammonia with conventional fuels. The bill to introduce the framework is expected to be decided by the cabinet and submitted to the Diet this February. This framework is expected to help develop the initial markets for hydrogen and ammonia. The 3 trillion-yen government funding allocated for hydrogen will be used to finance this framework.

    6. Legal framework for CCS

    Even with best efforts to reduce CO2 emissions, there will still be residual CO2 emissions. This is why CCS is essential. For Japan, due to its extensive manufacturing activities, CCS will be more important than in other countries.
    While Japan still needs to explore CO2 storage locations outside of Japan, it is always desirable to ensure CO2 storage locations nearby. But there is no established legal framework for CCS in Japan yet.
    This is why the Japanese government has announced its plan to set up a legal framework for CCS which will specify the rights and obligations of CCS operators and establish a time limit to the extent of the responsibility of the private sector in managing (monitoring) CCS. After proper management of CCS for the required time period, the responsibility will be transferred to a government organization. This legal framework will eliminate ambiguity for CCS projects and enable companies to operate CCS in Japan. It is expected the bill embodying this framework will be decided by the cabinet this February and subsequently submitted to the Diet.

    7. Progress in nuclear

    As a result of the Fukushima nuclear accident, all nuclear power plants were suspended from operation. Since then, a total of 12 nuclear reactors have been restarted, including two units in the last year. A few more nuclear reactors are expected to restart this year.
    The operation life of nuclear reactors had been limited to 40 years with a one-time extension of 20 years. With a legislative change last year, this 60-years maximum time limit was extended to account for the number of years the reactors were suspended. As many nuclear reactors have been suspended since the Fukushima nuclear accident in 2011, this change could enable an extension of more than 12 years on top of the former maximum operation life of 60 years.
    As you can see, nuclear policy is now being pursued in a steady manner after years of difficulties following the Fukushima nuclear accident.

    8. Overall assessment of the progress and the issues for 2024

    I believe it is fair to say that the progress made on the GX strategy has been steady and comprehensive. Many entirely new policies, hard to imagine before, have been introduced.
    Compared with the US IRA (Inflation Reduction Act), which has introduced all the policies in one legislation, the development of policies in Japan may be characterized as “step-by-step”. While the IRA is basically a set of tax credits to incentivize the supply side, the Japanese policies are more comprehensive incorporating demand side measures and regulations as well. Seven trillion yen is kept aside ensuring flexibility to the GX Strategy to address the new demand for budget arising from new changes.
    It is clear that more have to be done to realize the GX Strategy. Not every aspect can be determined in the next year and there are still many issues that need to be addressed in 2024. Let me share with you some of them.
    The hydrogen/ammonia projects that will be eligible for support by the cost recovery framework, through offsetting cost differentials, must be selected. While the 3 trillion-yen budget allocated for hydrogen is substantial, it is not enough to support all the projects for the next 15 years through the framework. The selection process will have to be competitive. Those companies considering applying for the support must understand the conditions that need to be satisfied and the elements that would affect their competitiveness.
    As part of the carbon pricing, the concrete design of the ETS (Emissions Trading System) will have to be decided in 2024. Japan will be studying the preceding examples of Europe and of other countries and inputs from interested parties will be valuable in designing a better system.
    In line with the global pledge to increase energy efficiency, Japan will be exploring further measures to improve its already high energy efficiency. In addition to accelerating energy efficiency, demand side measures to reduce CO2 emissions will be explored. For this year’s policy making, the residential sector is considered a priority sector as it offers more room for improvement than the industrial sectors.
    After developing the legal framework for CCS, financial support for projects could be discussed to help overcome the relatively high cost of CCS.
    To connect the renewable energy rich regions to the energy demand centers, discussion about long distance transmission lines is expected to proceed. It is hoped that concrete plans with frameworks to support them could materialize within 2024. The timely construction of long-distance transmission lines could help expand the renewable energy development in Japan.
    It is hoped that there could be further progress in the process of restarting nuclear units. Restart of nuclear units can contribute to realizing Japan’s NDC (Nationally Determined Contribution) and to reducing its energy costs. There are still 21 nuclear units not yet restarted and 3 units under construction.

    As there are plenty of issues to be addressed in 2024, I will update on their progress in the coming months in my Chairman’s Messages.