[Feature: The Future of International Order] Junichiro Shiratori: Japan's Energy Security Facing a "Triple Whammy"

2022/07/05

International politics in the 21st century is characterized by the fact that "global interdependence among heterogeneous states has become the norm." While some proclaim the end of globalization due to the U.S.-China confrontation and Russia's invasion of Ukraine, even if globalization stagnates, we must proceed on the premise that the current situation remains one of "global interdependence among heterogeneous states."

The situation where EU (European Union) countries and Japan rely on imported energy resources, while Russia, a "resource superpower," needs exports to fund its war efforts, is structural. Furthermore, unlike oil, which has a reasonably well-established global market, it is not easy to find alternatives for natural gas imports. Due to Russia's invasion of Ukraine, turmoil in the energy market is expected to continue for several years.

In this short essay, I would like to confirm Japan's current position while focusing on energy security. In times of international crisis, Japan's response has often been criticized for delays or divided national opinion, but at least for the first few months of the war, it has remained stable. Although there was some hesitation in the government's stance at the very beginning of the crisis, it has since strongly criticized Russia, imposed sanctions, and provided support to Ukraine that marks a clear departure from previous policies.

That said, focusing the discussion solely on economic sanctions against Russia could be misleading and a source of unnecessary conflict. From the standpoint of prioritizing a stable energy supply, one might conclude that imports from Russia are essential, at least in the short term. Conversely, from the standpoint of prioritizing international solidarity and pressure on Russia, one would conclude that harsher sanctions should be imposed.

In reality, the stances of various countries lie somewhere between these two positions. The EU, which had deepened its energy dependence on Russia, has made a 180-degree turn in its previous stance, but is responding in a strictly phased manner.

One reason is that as long as there is an interdependent relationship with Russia, excessive sanctions would also damage the EU itself, but that is not all. When considering energy issues, it is necessary to grasp the element of "price" along with "quantity." Sanctions put upward pressure on oil and natural gas prices, and if countries that do not impose sanctions purchase them, it leads to increased foreign currency income for Russia. If handled incorrectly, it could bring profits to Russia, at least in the short term, making it impossible to achieve the purpose of the sanctions.

Even EU sanctions, which appear to be a proactive response, take time to be actually implemented. The ban on coal imports agreed upon in April will not be fully implemented until August. For oil agreed upon in June, a grace period of six months was set for spot transactions and the fulfillment of existing contracts, and eight months for petroleum products, along with various other exceptional measures.

There are sound reasons why Japan, whose energy dependence on Russia is lower than that of EU countries, has taken a step back in its sanctions against Russia. Let us first confirm this point.

When considering energy security, the current situation Japan faces is extremely difficult. First, Japan is a "resource-poor country" that relies on imports for the majority of its energy resources. This situation is unlikely to change significantly for the time being, and unfortunately, even in an era where renewable energy takes center stage, it is highly likely that Japan will remain a "resource-poor country."

Second, as the "energy shift" accompanying climate change measures takes shape, the difficulties are gradually surfacing in Japan as well. In a situation where the restart of nuclear power plants is not progressing smoothly, the path to ensuring a stable power supply while increasing the proportion of renewable energy is narrow and steep. It should also be noted that energy issues are not limited to electricity.

In addition to these, the third problem is the response to Russia's invasion of Ukraine. It is clear that Russia, which has made its stance of using energy resource supplies as a "weapon" explicit, is not a reliable and stable supplier. There will likely be few voices directly opposing a reduction in dependence on Russia in the medium to long term. Nevertheless, the options Japan can take are limited, and a tightrope walk is expected to continue.

Let us examine each of the above "triple whammies."

Japan is a "resource-poor country." While water resources are reasonably abundant, the underground resources it can provide for itself are limited, and it relies on imports for most of its energy resources. The energy self-sufficiency rate in fiscal 2020 was 11.2%. Even looking at figures prior to the 2011 Fukushima Daiichi Nuclear Power Plant accident, it was generally around 20%, meaning about 80% depended on imports from overseas.

It is difficult to solve the situation of an extremely low energy self-sufficiency rate through the introduction of renewable energy. This remains true not only in the short term but also in the medium to long term.

First, after the Fukushima Daiichi accident, the introduction of renewable energy was promoted at great cost through systems such as the FIT (Feed-in Tariff). However, the total amount of levies added to electricity bills for the introduction of renewable energy (the burden on citizens) has reached nearly 3 trillion yen annually, and the burden is approaching its limit. The reason the self-sufficiency rate, which once dropped to about 6% due to the suspension of nuclear power plants, rose to a certain extent was more due to the introduction of renewable energy than the restart of nuclear plants, but its effect is limited. Furthermore, regarding offshore wind power, which is being introduced in other countries as an inexpensive renewable energy source, there is the circumstance that suitable sites in Japan are limited due to the lack of shallow coastal areas.

Second, a stable power supply requires a base-load power source that is not affected by weather, and there are limits to the introduction of renewable energy. Although it varies by region, solar power facilities already exceed demand at certain times, and it is not uncommon for "output control" to be implemented during fair weather. Even if the reinforcement of interconnection lines for sharing power between utility companies and the introduction of storage batteries progress to some extent, the situation where certain limits exist will not change.

Third, electricity is only one part of the energy resource problem, and there are many problems that cannot be solved, or are difficult to solve, through the introduction of renewable energy. Most transportation fuels are fossil fuels, starting with gasoline, and as we will see next, there are various difficulties even if we proceed with an energy shift. Furthermore, estimates published by the International Energy Agency (IEA) in 2021 suggest that even if the energy shift progresses globally by 2050, about half of current natural gas and about a quarter of current oil will still be consumed.

Additionally, in terms of the difference from EU countries, it is also important that Japan must consider energy security on a single-country basis. Unlike Europe, where international power grids are established, Japan's domestic power grid is not sufficiently developed. In a situation where relations with neighboring countries cannot be described as good, increasing interdependence also carries risks.

In any case, the circumstance that Japan is a "resource-poor country" will continue for the time being.

In October 2020, Prime Minister Yoshihide Suga announced in his policy speech that Japan would aim to achieve "carbon neutrality," zeroing out greenhouse gas emissions as a whole by 2050. As the climate change problem becomes more serious, this was a step forward for Japan based on the Paris Agreement adopted in 2015.

Nevertheless, while an energy shift centered on renewable energy is being sought, it should be confirmed that the shift from fossil fuels to renewable energy entails great difficulties on a global scale.

As shown by the two oil crises and the situation following Russia's invasion of Ukraine, issues surrounding energy resources have brought tension to international relations. Among those who have high hopes for renewable energy, some argue that the energy shift will make such tensions a thing of the past, but it has also been pointed out that various types of turmoil will arise, at least during the process.

While the energy shift is being loudly proclaimed, investment in the upstream sectors of fossil fuels such as oil and natural gas is stagnating. Coupled with the sharp drop in resource prices in the mid-2010s, energy prices soared in 2021, particularly in Europe (for natural gas, the possibility of tight supply and demand had been pointed out in 2020, but the crisis was effectively postponed by a year due to the COVID-19 pandemic). This is likely largely due to the impact of excessive dependence on natural gas, for which a global market is not developed.

In Japan as well, the power crisis is becoming a reality, as seen with the "Electricity Supply-Demand Tightness Alert" issued within the Tokyo Electric Power Company's service area on March 22, 2022. This summer and winter will likely see quite severe conditions. The reasons are complex, but part of the cause lies in the government's response, which resulted in stepping on the brakes twice: on one hand, power transmission policies hesitate to shift to renewable energy to leave open the possibility of a full-scale restart of nuclear power, while on the other hand, policies are adopted that dampen the incentive to invest in thermal power generation from the perspective of climate change measures.

While both Europe and Japan can be said to be facing the results of their respective policy errors, these should be considered a prelude to the various types of turmoil that the new energy revolution toward renewable energy will bring, similar to the energy revolution from coal to oil.

To add a point to avoid misunderstanding, this does not mean that the energy shift should not be pursued. In order to proceed with the energy shift smoothly, we must recognize the new risks and challenges that arise in the process.

At the very moment Japan, a "resource-poor country," began its difficult path toward an energy shift, on February 24, 2022, Russia invaded Ukraine. Along with subsequent developments, it is clear that Russia has lost its status as a reliable supplier of energy resources.

The Soviet Union during the Cold War was a source of oil and natural gas on par with the United States and the Middle East. Around the beginning of the 1970s, while détente (easing of tensions) between the superpowers progressed, the offensive by oil-producing countries also intensified, and Western European countries, centered on Germany, began to seriously consider importing energy resources from the Soviet Union.

During both the 1967 Six-Day War and the 1973 Yom Kippur War, Arab oil-producing countries used oil as a "weapon" for political purposes. The former ended in failure, while the latter succeeded at least in the short term, leading to the first oil crisis. The United States opposed dependence on the Soviet Union for energy resources, citing it as a risk, but Western European countries nevertheless chose to connect pipelines with the Soviet Union and import energy resources.

American concerns remained unfounded for about half a century. Even during the turbulent periods of the end of the Cold War and the dissolution of the Soviet Union, the export of energy resources to Western European countries was carried out almost without a hitch. After the Cold War, although there was various friction with Eastern European countries that had previously been provided with energy resources regardless of market prices, Russia's response was based on the "common sense" of the energy industry. Many in the energy industry viewed Eastern European countries like Ukraine, which caused problems such as siphoning from pipelines and non-payment of fees, as the "problem children."

Even as concerns grew over Russia's foreign stance, such as the 2008 South Ossetia conflict, the 2014 annexation of Crimea, and the intervention in Syria from 2015, Western European countries actually increased their dependence on Russia. The fact that a pipeline to send natural gas to Germany without passing through Eastern European countries (Nord Stream 2) was nearing completion was precisely because Russia was regarded as a reliable supplier.

The situation was reversed by the invasion of Ukraine. Severe economic sanctions against Russia were hammered out in quick succession, primarily by the United States and Western European countries, and in response, Russia also applied pressure, such as demanding payment for natural gas in rubles. Furthermore, while the Russian military continued suspicious movements around Ukraine prior to the invasion, once Russia recognized the "independence" of pro-Russian controlled regions in eastern Ukraine, Germany announced the indefinite suspension of the Nord Stream 2 project. While it remains to be seen how effective the EU's phased sanctions will be, there is no doubt that the direction of breaking away from dependence on Russia in the future has been solidified.

Russia's invasion of Ukraine, occurring while Japan is an overwhelming "resource-poor country" and is forced to make difficult responses toward an energy shift, pushes Japan into an even more severe situation.

While Japan is joining the sanctions against Russia as a member of the G7, it has taken a step back regarding energy resources compared to the U.S., the U.K., and EU countries. Setting aside the United States, which is an energy exporter, many EU countries have a much higher energy dependence on Russia than Japan. Taking natural gas as an example, Germany relies on Russia for about 40% of its imports, and Italy and France for about 30%, while Japan's reliance is only about 10%. If one looks only at the degree of dependence on Russia, Japan's stance might appear to prioritize its own economic interests. However, as the explanation so far shows, the matter is not that simple.

Unlike EU countries that can share electricity with other nations, Japan, a "resource-poor country," is forced to respond to a difficult energy shift on its own. Russia's invasion of Ukraine occurred in this context. Furthermore, the nature of the energy market—where soaring energy prices due to sanctions conversely benefit Russia—cannot be ignored. This is also one reason why the EU's sanctions are phased measures. ExxonMobil and Royal Dutch Shell announced their withdrawal from interests in Russia, but this is also due to the circumstance that both companies, which hold interests worldwide, can compensate for their losses through rising energy prices.

Even after the annexation of Crimea, Japan continued to approach Russia with the Northern Territories issue and relations with China in mind, but after the invasion of Ukraine, it has clarified its position as a member of the G7. Although it may appear to be taking a step back compared to the U.S., the U.K., and EU countries, it should be evaluated as a calm response that also takes into account the negative impacts of sanctions.

It is not that there are no concerns. First, even if energy resource imports from Russia are maintained for the time being, a reduction in dependence will be required in the medium to long term. However, that path is not easy, and if the war is prolonged, a situation could arise where Russia further utilizes natural gas as a "weapon." We must consider what responses can be taken assuming a disruption of supply from Russia in both the short and long term.

Furthermore, while the Japanese government's response has generally received public support so far, there is a significant possibility that support will be lost as the burden on citizens increases, such as through prolonged inflation. Measures to alleviate the burden on citizens by suppressing price increases for gasoline and other fuels through the "Subsidies to Mitigate Radical Changes in Fuel Oil Prices" cannot be continued forever. There is a need to seek an exit strategy urgently.

Energy resources are the foundation of economic management and are also essentially closely related to power politics. For Japan, a "resource-poor country," energy issues force it to confirm its position within the international community. What kind of nation will Japan be as it moves forward in the international community, including its response to the energy shift? Once again, its resolve is being questioned.