[Feature: Thinking About Energy Security] Sumiko Takeuchi: How to Advance Japan's GX (Green Transformation)

2024/02/05

The government is currently promoting GX (Green Transformation) as a major policy. In July 2022, the GX Implementation Council, chaired by the Prime Minister, was established. The following year, the GX Basic Policy was approved by the Cabinet, and in May, related bills were passed into law.

The objective is to realize a decarbonized society while ensuring a stable energy supply, leading to the strengthening of Japan's industrial competitiveness and economic growth. Large-scale public and private investment of 150 trillion yen over 10 years is expected in this field. To stimulate private investment, the government plans to spend 20 trillion yen, a scale comparable to the support provided by the Inflation Reduction Act enacted for similar purposes in the United States, when considering GDP and population ratios.

Amidst fiscal pressure caused by a declining birthrate, an aging population, and increasing social security costs, the government has, so to speak, staked everything on drawing a growth strategy in this field. However, it is difficult to say that this vision has been sufficiently communicated. Some surveys show that more than 50% of small and medium-sized enterprise (SME) managers do not know what GX is*1. Despite being a measure that significantly affects national life and the economy, a serious communication gap has occurred.

GX is an extremely long-term initiative and a social transformation that includes industry and daily life. Just as it is necessary to confirm the position of the North Star*2 during a long voyage, a shared vision is required first. In this article, I would like to organize the challenges and prospects based on the discussions held at the GX Implementation Council.

First, let's confirm the definition of GX. GX aims for a transformation of the entire economy, society, and industrial structure, with the transition from fossil fuels to clean energy at its core. The government seeks to enhance social sustainability through the simultaneous progression of GX and DX (Digital Transformation).

Climate change is not the only reason the energy transition is urgent. Energy and resources are now openly wielded as weapons on the international political stage, and Japan must hurry to raise its energy self-sufficiency rate, which is the lowest among developed nations.

Furthermore, it can be pointed out that the conventional network-type energy supply system is becoming difficult to maintain due to population decline and depopulation, and the need to increase resilience due to the increase in natural disasters has made the construction of "autonomous decentralized systems" an urgent matter.

However, GX is not limited to energy transition. It is expected to serve as a catalyst or means to advance the structural transformation of society. Humanity has experienced several industrial revolutions prompted by energy transitions, and GX can be called the "Industrial Revolution of the 21st Century." Digitalization means electrification, and it must be considered integrally with the power supply system. By overlaying digital infrastructure and the power grid to build a new social system, social sustainability is expected to increase dramatically. This is why the simultaneous progression of GX and DX is necessary.

I understand that the shift in thinking from "Carbon Neutral (CN)," which aims to reduce CO2, to "Green Transformation (GX)," which creates added value and enhances social sustainability, holds great significance.

Various technologies are required for the decarbonization of society. However, the pillars are the simultaneous progression of electrification on the demand side (e.g., the transition from gasoline vehicles to electric vehicles) and the decarbonization of power sources (e.g., the transition from thermal power generation to renewable energy and nuclear power).

Currently, electricity accounts for about 30% of final energy consumption, while the remaining 70% consists of non-electric sources such as gas, gasoline, and kerosene. While CO2 from this 70% can be reduced through higher efficiency, it cannot be eliminated. However, if, for example, people switch from gasoline vehicles to electric vehicles and that electricity is generated by decarbonized power sources such as renewables or nuclear power, CO2 emissions during operation can be reduced to zero.

Securing an abundant supply of inexpensive, decarbonized power sources to promote electrification autonomously is the first step of GX.

In addition to the electrification of demand, digitalization is rapidly increasing electricity demand. According to a report*3 by the Japan Science and Technology Agency (JST), the global volume of information (IP traffic) accompanying the progress of the information society is expected to reach more than 30 times the current level by 2030 and 4,000 times by 2050. Since current technology would result in enormous power consumption, improvements in energy-saving technology and the development of innovative new technologies are essential.

In Singapore, which has positioned itself as a Smart Nation and taken a leading role in digitalization, the construction of new data centers was banned for three years starting in 2019 because a stable power supply could no longer be guaranteed. If power supply cannot be secured, it could become a major constraint on digitalization. The increase in power demand from new data centers already accepted by TEPCO Power Grid is expected to reach approximately 6 million kW by 2028. Singapore's ban on new data centers is by no means someone else's problem.

To advance GX and DX consistently, an energy policy that secures abundant, low-cost, and stable decarbonized power sources is a major prerequisite. Toward that end, I would like to discuss two challenges that Japan's GX must clear. The first is the correction of electricity liberalization, and the second is the rebuilding of nuclear policy.

I mentioned that securing abundant, low-cost, and stable decarbonized power sources is the first step of GX, but in recent years, Japan has frequently been hit by power supply shortages. Following the Fukushima nuclear power plant accident, approximately 16 GW of nuclear power plants were decommissioned, and since 2016, when the full liberalization of the retail business took place, 14 GW of thermal power plants have been suspended or closed. During the same period, renewable energy increased by more than 9 GW, but supply-demand crunches have become more likely, particularly when solar power—the core of renewables—is not generating (cloudy winter days, summer evenings). While the lack of supply capacity is due to complex factors, there is no doubt that the conventional market design has reached a deadlock.

The first point to note is that investment decisions on the power supply side have become extremely difficult. The background to this is the uncertainty of electricity demand. In the estimates shown in the book "The Energy Industry in 2050: Game Change to Utility 3.0" published in 2017, electricity demand in 2050 could be 0.8 times the current level due to population decline, while it could reach 1.2 times if electrification on the demand side progresses as a measure against global warming. Some research institutes estimate that if carbon neutrality is to be achieved by 2050, electricity demand in 2050 will be 1.5 times the current level. Even if the policy of aiming for carbon neutrality remains unchanged, the intensity of electrification promotion policies will be adjusted based on the reality of the economy and industry. Between the progress of population decline and electrification promotion as a climate change measure, there is a gap in demand forecasts ranging from 0.8 to 1.5 times the current level—nearly a twofold difference. Thermal power, which is required during the transition period, is particularly affected by the amount of decarbonized power sources introduced, making investment decisions extremely difficult.

The difficulty of balancing stable supply and decarbonization in a competitive market has also been pointed out overseas. The reform method adopted by countries around the world, including Japan, was to open up the transmission and distribution network as a common infrastructure and promote new entry into the fields of power generation, wholesale, and retail, against the conventional legal monopoly system based on economies of scale. In the power generation sector, the entry of many players would eliminate market power and realize a wholesale electricity market where prices are formed based on marginal costs. By entrusting it to that market, it was expected that social welfare would improve and appropriate investment for stable supply would be induced.

However, electricity is subject to the constraint of simultaneous production and consumption. If based on a wholesale electricity market where market prices tend to be determined by short-term marginal costs, the under-recovery of fixed costs becomes an issue. Researchers in various countries have recently pointed out that in order to appropriately secure investment in decarbonized power sources, which have a high fixed cost ratio and will become the pillar of energy supporting a carbon-neutral society, it is necessary to fundamentally rethink institutional design.

Given the current situation where appropriate power source investment is not being made, the government is trying to make decarbonized power source investment with high fixed cost burdens low-risk and low-return by introducing a new system called the "Long-term Decarbonized Power Source Auction." It will be necessary to monitor whether such a system functions sufficiently, along with the evaluation and verification of previous system reforms.

Originally, the main aim of electricity liberalization was to lower electricity rates. However, looking at the experience of various countries, it cannot be clearly said that liberalization reduces electricity rates. In Japan as well, while liberalized rates decreased during periods of falling fuel prices, there were instances where liberalized rates exceeded regulated rates after turning to an upward trend. It is necessary to verify the merits and demerits of liberalization from all perspectives, including bargaining power in fuel procurement and disaster response.

Furthermore, carbon pricing, which the government has decided to introduce, will have a major impact on lowering electricity rates. The government will introduce a levy on fossil fuel importers such as oil and coal around fiscal 2028. It has indicated a policy to fully implement emissions trading for companies from fiscal 2026 and introduce "paid auctions" of CO2 emissions for power generation companies from around fiscal 2033. If excessive carbon prices are applied to the power generation business, electricity rates will rise and hinder electrification. Care must be taken in the institutional design of carbon pricing so as not to stray from the main path of climate change measures.

To secure decarbonized power sources, the government has set a goal of making renewable energy the main power source. Through the Feed-in Tariff (FIT) system for renewables introduced in 2012, Japan ranks third in the world in terms of solar power installation capacity, following China and the United States, and plans to further focus on offshore wind power and other sources.

However, there are limits to its potential due to the narrow and mountainous land, less favorable wind conditions compared to Europe, the narrowness of shallow seas, and the complexity of fishing rights negotiations. In addition, in regions where large amounts of renewable energy have already been introduced, such as Kyushu, output must be suppressed at times when generation becomes excessive. While efforts are being made to develop the power grid to utilize renewable electricity, transmission lines for carrying renewable electricity with low capacity factors will naturally have low capacity factors themselves. Huge investments are required to utilize renewable energy that is unevenly distributed geographically and temporally. While the potential for renewables is limited, Japan has an industrial structure centered on manufacturing, and electricity demand is large.

If Japan, under these conditions, aims for decarbonization, it is self-evident that it cannot be considered without nuclear power, and it is necessary to resolve to face those hardships.

Last August, Prime Minister Kishida took a very important step by starting to rebuild nuclear policy, stating that he would "balance overcoming the immediate crisis with promoting GX." In response to this, some nuclear manufacturers have increased their recruitment of new graduates. However, due to more than 10 years of stagnation in nuclear policy, it has become difficult to maintain technology and human resources throughout the supply chain. Even in major electric power companies, it will be difficult to operate nuclear businesses soundly if young employees who joined as plant operators have "never seen a nuclear power plant in operation." Technology only progresses when it is used, and I feel that now is the last possible moment if we are to attempt a rebuilding.

If we expect nuclear power to play a role as a force that safely provides inexpensive and stable electricity to the public, there are many things that politics must do. I will point out three urgent issues.

The first is policy stability. Unless it is shown that the shift in nuclear policy is not temporary, both local communities and the industrial world may fall into suspicion. As is the case with any use of technology, the casual use of nuclear power—such as "I want to use it a little because it's necessary now"—is particularly impossible. Last May, the Atomic Energy Basic Act was amended to state that the utilization of nuclear power plants is a responsibility of the state. However, since the TEPCO Fukushima nuclear power plant accident, the formulation of the Framework for Nuclear Energy Policy has been abolished, and Japan's policy for the use of nuclear technology is now primarily shown only in the Strategic Energy Plan.

The formulation of the Strategic Energy Plan is a government obligation stipulated by the Basic Act on Energy Policy, but it is merely formulated by the government and approved by the Cabinet. It has not undergone Diet deliberations, and if there is a policy change due to a change in government, the contents stipulated in the Strategic Energy Plan are not necessarily carried over. Furthermore, it is difficult to say that even the Strategic Energy Plan has been able to present a clear policy on nuclear utilization. It is necessary to build a system that clearly indicates the positioning of nuclear power for the country at a higher level and manages progress, and accountability to the public and local communities should also be fulfilled in that process.

The second is the evolution of safety regulations and the review of the compensation system. Nuclear power is a technology with high potential risks, and ensuring preventive measures (safety regulations) and post-accident relief systems (compensation systems) is extremely important. After the Fukushima nuclear power plant accident, Japan's safety regulations, including the organizational structure of the regulatory body, were fundamentally reviewed. While I pay respect to the fact that new standards were formulated and screening activities proceeded amidst public distrust of the regulatory body, it is difficult to say that they are sufficient in terms of the efficiency and consistency required for administrative activities. To give one example, the policy of conducting screenings after shutting down nuclear power plants became established as a "personal proposal" by the then-chairman of the Nuclear Regulation Authority, and its legal basis is not clear. As an administrative body, it will also be necessary to consider a system where the Diet performs a check function. In the United States, Congress checks the activities of the regulatory commission.

Furthermore, in Japan's nuclear damage compensation system, operators bear unlimited liability for compensation, and the government merely provides interest-free loans to those operators. It is too much to entrust a business that may bear unlimited liability for compensation to private operators placed in a liberalized competitive market. If the use of nuclear technology is to be a responsibility of the state, the state's responsibility in the event of an accident must be strengthened.

The third is the correction of electricity liberalization. Nuclear power requires enormous initial investment, and if waste disposal is included, the business period is extremely long-term. While liberalization is expected to bring the benefit of efficiency, it has the disadvantage of reducing the predictability of investment recovery. Even if new construction is considered, the cost of financing rises in a liberalized market, making projects unfeasible. Japan also needs to consider institutional designs that reduce financing costs and increase resilience to income fluctuations, which various countries that have liberalized, such as the U.S. and the U.K., have introduced to promote the construction of new nuclear power plants.

In addition to these, there are issues such as the selection of radioactive waste disposal sites, support for the steady progress of Fukushima's reconstruction and decommissioning, and the review of nuclear fuel cycle policy. Solving complex issues one by one is extremely difficult.

Nuclear technology goes beyond being a means of power generation; its use calls into question the resolve of the nation. Many of the challenges of nuclear power are political issues rather than technical ones. Energy policy is a survival strategy for the nation, and nuclear power is an indispensable piece of the GX strategy that Japan is promoting. I hope that realistic and full-scale discussions toward the utilization of nuclear power will begin.

The reason Japan should advance GX is not just for climate change measures. Local communities face many challenges, such as population decline and depopulation, a decreasing workforce and lack of successors, people with limited access to transportation or shopping, and medical and welfare services. These regional issues must be solved and transformed into a sustainable society. To realize a sustainable society, changes and evolution in the power system, which is the social infrastructure, are required. However, to achieve this, collaboration between the energy industry, which creates new customer value, and other industries is essential, and I call this "Energy with X." For example, to introduce larger amounts of highly variable renewable energy, businesses could be considered that utilize decentralized computing systems to generate and provide digital and environmental value. While there are moves to develop the power grid to expand the introduction of renewables, fiber optic cables for transmitting digital information have a cross-sectional area two orders of magnitude smaller than power cables and are very easy to lay. It is more rational to process data at the site of electricity production before transporting it.

In this way, the fusion of industries such as energy x digital x finance, or energy x mobility, will be the key to future GX. Collaboration across industry, government, and academia, or across industrial sectors, will be the driving force for GX. A shift toward human resource development and organizational management that creates such collaboration is necessary.

*1 "More than 50% of SME managers 'don't know GX,'" private survey (April 14, 2023, Nikkei GX) "More than 50% of SME managers 'don't know GX,'" private survey - Nikkei GX