Tatsuya Terazawa Chairman and CEO The Institute of Energy Economics, Japan
Message for January 2025
The draft for Japan’s 7th Strategic Energy Plan (the Plan) has been approved by the government policy committee of which I am a member. The Plan will be put to a public comment process and is expected to be decided by the Cabinet in February. In this month’s message, I would like to share with you an overview of the Plan.
<Main Points>
1. The Plan shows Japan’s energy road map towards 2040: New emphasis.
Japan has been developing its future energy mix approximately every three years since the beginning of this century, based on law. These energy mixes plans are unique worldwide but have become very important in Japan for two reasons. First, after the Fukushima nuclear accident in 2011, energy policy became highly politicized. Second, after then-Prime Minister Yoshihide Suga pledged that Japan would realize carbon neutrality by 2050, the energy mix became crucial for reducing GHG emissions. The current Plan, the sixth, was decided in October 2021 with a target year of FY 2030. The focus of the current Plan was reducing GHG emissions, with other considerations such as energy security or economics placed in the backseat. Since then, many developments have fundamentally changed the emphasis of the Government’s policies: Russia’s invasion of Ukraine and the subsequent energy crisis; the hike in energy costs; turbulence in the Middle East; near blackouts in Tokyo region due to power shortages in March 2022; expected power demand growth triggered by AI expansion; intensification of US-China tensions; and acceleration of industrial policies triggered by the US Inflation Reduction Act (IRA). These events have shifted priorities to ensuring sufficient power supply to meet the increasing demand, highlighting energy security; and containing cost increases to remain globally competitive. While GHG reduction remains one of the major policy goals, it is positioned in the context of expanding low-carbon power supply.
2. GHG reduction of 73% envisioned to stay on the path towards carbon neutrality.
As Japan has pledged to achieve carbon neutrality by 2050, the Plan envisions a 73% reduction in energy sector-related GHG emissions compared with FY 2013 by FY 2040. Japan is expected to submit its next NDC with a target year of FY 2035 based on this Plan. The 73% GHG reduction in FY 2040 will put Japan on the path towards carbon neutrality in 2050. Despite of the changes in emphasis, Japan remains committed to its pledge. However, the new emphasis significantly impacts Plan’s content, as explained below.
3. Strengthened role for nuclear energy.
Media attention has centered on nuclear energy. In previous Plans, it was determined that dependence on nuclear should be minimized. However, recent changes have significantly strengthened nuclear’s role. The new Plan states that nuclear should be utilized to the maximum degree, alongside renewables, as a decarbonized power source. It also mandates maintaining necessary nuclear capacity. The Plan also endorses “replacement”—the construction of new nuclear power units—and expands flexibility by allowing replacements within the same power company’s existing sites. While the most recent government document limited replacements to within the same location, this change enhances location flexibility for new nuclear construction. As most power companies have several retired nuclear power units, they can engage in replacement using the available spaces at their existing sites. The Plan envisions that nuclear will supply around 20% of the power mix in FY 2040. This will be a substantial increase in the share of nuclear from 5.6% in FY 2022. The share is similar to the level of 20~22% envisioned in the current plan for FY 2030 but considering the expected growth in power demand, the scale of power generated from nuclear must increase significantly. To meet the envisioned nuclear contribution in FY 2040, nearly all 33 remaining nuclear reactors—not just the current level of 14 restarted reactors— and three under construction must be operational, alongside replacements.
4. Power demand growth after nearly 20 years of contraction.
Power demand in Japan has declined over the past two decades due to energy efficiency and an ageing population. Slower industrial activities also led to weaker power demand. However, the expansion of generative AI, reshoring of industrial activities such as semiconductor chip plants, and electrification of manufacturing processes (e.g., as steel production) are expected to drive demand growth. The Plan anticipates a 10-20% increase in power demand by 2040. This marks a substantial shift from the current Plan’s expectation of a 7% demand reduction by 2030. The Plan stresses that Japan must ensure sufficient low carbon power supply to meet this growing demand. This recognition certainly helps elevate the role of nuclear energy.
5. Renewables as the main power source but facing constraints.
Renewables are positioned as the main power source in the Plan, targeting a 2 to 2.5 times increase in renewable power generation by 2040 (on a kWh basis). The share of renewables is expected to rise from 21.8% in FY 2022 to 40-50% in FY 2040. While this increase is very substantial, some readers from outside of Japan may feel this level to be modest. Large-scale solar parks face difficulties in finding available land while onshore wind projects face opposition from local communities. For these constraints, Japan will have to expand renewable energy supply in Hokkaido, our northern island that is less populated, and expand rooftop solar PV in urban areas. Offshore wind power must be accelerated but this too will have to obtain consent from fishermen. Japan’s deep coastal waters complicate offshore installations. Another constraint is the intermittency of variable renewable power. Addressing intermittency issues also requires investment in batteries and dispatchable power, increasing the integration cost as renewable penetration rises. A study submitted to the policy committee showed that the integrated cost in Japan would increase substantially as the penetration of variable renewable energies rises beyond 50% of the power mix. To minimize costs and considering location constraints, the Plan envisions a 40-50% share for renewables in FY 2040.
6. Thermal power will play an important role but needs decarbonization.
To ensure reliable power supply and address intermittency concerns, the Plan envisions thermal power supplying 30-40% of the power mix in FY 2040. While this would represent a substantial reduction from the current share of 68.6%, it can be said that thermal power will continue to play a reduced but important role. Decarbonizing thermal power through hydrogen/ammonia use and CCUS is critical to achieving the 73% GHG reduction target.
7. Decarbonization of the non-power sectors.
While electrification of the energy demand will be pursued, the Plan suggests that non-power sectors will represent about 60% of final energy demand in 2040. To realize the 73% reduction of GHG emission, a large part of the non-power sector must be decarbonized. Decarbonizing these sectors requires widespread adoption of low-carbon energies such as hydrogen, ammonia, biofuels, e-fuels, and e-methane (or e-natural gas). As the future cost of such low carbon energies and the development of technologies are hard to predict, the Plan leaves technology choices flexible to accommodate future developments in energy technologies. Additionally, future policies will also have a great impact on the relative competitiveness of such energies/technologies. While the need for flexibility is understandable, I feel that this approach may affect industry predictability. I sincerely hope that complementary plans with clearer visions for specific technologies, possibly with shorter timeframes, should be developed alongside the necessary policies to provide better guidance for the industry.
8. Uncertainties and Plan B.
During the discussion at the policy committee, uncertainties about the future were repeatedly stressed. The perceived uncertainties have led the Government to stay away from depicting specific volumes for various energies/technologies in FY 2040 as discussed above. Recognizing uncertainties, the Plan includes an alternative path (Plan B) alongside the main path. The main path, as described above, shows the roadmap to reduce GHG emissions by 73% by FY 2040. The new Plan is accompanied by a risk scenario that is based on a case where the GHG reduction in line with Japan’s NDC is not realized. This risk scenario, Plan B, assumes a CO2 emission reduction of 56% by FY2040. Plan B is important to ensure that Japan will have sufficient energy supply if energy efficiency improvements, deployment of renewable energies, and the use of nuclear do not reach the desired levels. In such an event, it is especially important for Japan to secure a sufficient amount of LNG, which is largely procured through long term contracts. Plan B assumes 74 million tons of LNG demand in FY 2040. We cannot find ourselves short of energy in the future just because the desired main path according to the Plan is not realized. We should aim at the desired roadmap to substantially reduce the GHG emissions as described in the main path. But at the same time, we should be prepared for the contingencies.
9. Policies need to be made more concrete.
The energy mix for FY 2040 in the Plan is a desired outcome to realize a 73% reduction in GHG. But without the necessary policies this energy mix could just become “a pie in the sky”. The Plan describes a broad range of policies that would be required to realize the roadmap. However, at this point, most policies remain abstract. The desired FY 2040 energy mix requires concrete policies to become a reality. I would just like to list a few of them. First, effective policies to enhance energy efficiency especially related to AI must be put into place. Second, long distance transmission lines must be constructed to transmit renewable power from generation in Hokkaido to high demand in Tokyo. Third, financing frameworks to enable investment in nuclear must be introduced. Next, support measures for CCS must be developed. The list can go on. With the Plan soon to be formally decided in two months, the emphasis should be shifted to developing the necessary policies. The policies will determine if the energy mix is just a pie in the sky or is turned into reality. I would like to share with you the updates of the policy developments in the Chairman’s Messages in the coming months. Finally, I would like to introduce the 18th IEEJ Webinar for the World scheduled for January 31st. In this webinar, IEEJ will present a quick overview of Japan’s 7th Strategic Energy Plan which is expected to be decided by the Cabinet in February 2025. Later in this webinar we will have a QA Session and I will participate in it. Please feel free to click the hyperlink below to register. ■The 18th IEEJ Webinar for the World 1. Date/Time: January 31st,2025/06:00PM JST 2. Webinar App.：Zoom 3. Agenda： ・Presentation Japan’s 7th Strategic Energy Plan ・QA Session 4.Registration: https://us02web.zoom.us/webinar/register/WN_86Xgb73zRj2L2EJ1YJKgtw For those who cannot view the Webinar, you can access the video on our Home Page after the Webinar. IEEJ Video Gallery https://eneken.ieej.or.jp/en/movie_list.php
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