Megatrends shaping the 7th Strategic Energy Plan
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I don’t like the word “megatrends.” But it’s an apt term for the big economic, political, and technological currents that policymakers need to grapple with to craft any national-level policy strategy today.
So it is with Japan’s Strategic Energy Plan (let’s call it SEP to be concise). The SEP is a document that Japan’s Ministry of Economy, Trade and Industry (METI) issues every 3 years or so that explicitly sets the country’s roadmap for the medium- to long-term.
In mid-May, an expert committee convened by METI began discussions for crafting the 7th SEP. This revision will outline a roadmap up to the years 2035 and 2040.
It’s symbolic that these discussions are taking place this year. As we’ll see, 2024 is a critical year for Japan’s economy and energy system. Several “megatrends” are pulling policymakers in multiple directions, not least toward the dire need to decarbonize. Referring to the need to shift energy sources away from fossil fuels, METI Minister Ken Saito emphasized in his opening remarks during the expert panel meeting:
Japan is in the most difficult situation since the end of World War II … Whether we can ensure a stable supply of non-carbon energy will determine a large part of our country's national power.
Five Megatrends
A glance at the committee material, committee members' public statement and media reports make it very clear that there are 5 major considerations that the government and energy industry are grappling with.
Depending on who you ask, the relative importance of these megatrends can vary a lot. Here are those trends, in the order of importance that most stakeholders seem to rank them:
1. Energy security
We know that Japan is always concerned with energy security. But this concern has been exacerbated by recent global events. METI Minister Saito noted the increasing importance of dealing with geopolitical risks, given Japan's reliance on imported energy resources. The prices of liquefied natural gas spiked some six-fold on average from 2019-2022 because of the calamity in the market caused by Russia's invasion of Ukraine. Reverberations from the conflict in the Middle East is also overshadowing Japan's energy procurement.
In fact, key LDP and METI officials consider strengthening energy security as the defining priority for this SEP. To them, this is the crucial difference from the last SEP in 2021, which was guided by the need to reduce greenhouse gas emissions.
2. Growing power demand
When the last SEP was formulated, Japan’s energy demand was projected to be on the decline between early 2020s and 2030.
Today, that energy sector context is radically different. The growing use of AI, data center build-out, and new semiconductor manufacturing capacity are factors that emerged in the last couple of years. All of this consumes a lot of energy. In fact, electricity demand is expected to be as much as 5.37 GW higher in 2033 than in 2023 because of the construction and expansion of data centers and semiconductor factories. To put that into perspective, that's the equivalent to the output of about 5 nuclear reactors. Of cours, if AI's data processing capacity grows, that estimate will need to be revised upwards.
3. Economic revival and international competitiveness
Leveraging energy policy to stimulate the economy and competitiveness is another perennial concern among Japanese leaders. Chair of the METI committee Shūzō Sumi said in an interview that “We’ve also entered an age of global competition in which decarbonization is linked to energy strategy and industrial policy, not just reducing greenhouse gases … In the discussions to come, it’s extremely important to think about how to improve Japan’s industrial competitiveness.” He echoes a widespread sentiment among the political, bureaucratic, and corporate elite.
4. Complementarity with “GX 2040 Vision”
Just a few days before the METI committee had its first meeting to discuss the SEP, Prime Minister Kishida also floated the idea of a "GX 2040 Vision." Referring to the same megatrends as the METI committee, the GX 2040 Vision aims to promote renewables and nuclear as emissions-free power sources to meet the rising electricity demand and reform the power grid to accommodate these energy sources. It also envisions demand-side decarbonization and energy efficiency measures to limit some of the surge in electricity use.
5. Nationally Determined Contribution update
Under the UN Paris Agreement, governments are required to submit Nationally Determined Contributions -- greenhouse gas reduction targets -- every five years. Japan will need to submit an updated NDC by February 2025, which will extend its emission reduction targets to 2035. Its previous NDC was to reduce emissions by 46% by 2030 from 2013 levels. The updated NDC will have to be more ambitious than this, and its energy mix will need to be aligned with that target.
Likely outcomes
The tricky thing about prognosticating Japan’s energy strategy is that its government and industry are doing everything, all at once. And this basic reality is unlikely to change, especially when industry groups are clamoring to advocate for the expansion of their own particular technology or energy source. So predicting future scenarios is a matter of relative emphasis.
What seems to be beyond doubt is that the energy mix that will be set out in the new SEP will prioritize the expansion of nuclear energy and renewables. Let's take a look at the possible fortunes of each energy source.
Nuclear energy
It seems that many members of the METI committee, including its chair Shūzō Sumi of Tokyo Marine Nichido (one of Japan’s largest insurance groups) and Eiji Hashimoto, CEO of Nippon Steel and Vice Chair of the Japan Business Federation, as well as most of the powerful interest groups (regional utilities and industry associations) are advocating for an expanded use of nuclear energy. This is a reversal from the last SEP (published in 2021), which envisioned a limited expansion of nuclear.
People in high places are calling for all possible avenues to expand nuclear energy generation — from restarting paused reactors, replacing old ones, building new ones, and introducing next-generation reactors.
Renewables
Thankfully, there is serious discussions about deploying more renewable energy. And money to back it up, in the form of the Climate Transition Bond and Green Innovation Fund, to name a few subsidy mechanisms.
As we speak, there is a separate METI committee that's formulating a strategy for the mass production and adoption of perovskite solar cells.
Offshore wind will also be a major growth sector once legislative and regulatory reforms pave the way for more investments, domestic manufacturing and deployment. The large-scale fixed-bottom offshore wind projects now under construction won't start operating until 2028 at the earliest, but offshore wind capacity should be able to provide a sizable amount of power by mid-2030s. Expansion of floating offshore wind into Japan’s exclusive economic zones might also be under way by then.
Fossil fuels
So far, I haven't seen any discussions of a concerted push to phase out fossil fuels in the SEP energy mix. Yukari Takahashi of the University of Tokyo seems to be the lone voice firmly advocating for coal phaseout by referencing IEA analysis and this year's G7 agreement. But the overwhelming feeling is that coal and gas will continue to decline as a byproduct of growing nuclear and renewable energy generation. So no, don't expect any radical government action to decommission gas or coal plants any time soon.
One piece of evidence for the slow death of coal is that JERA, one of Japan's biggest CO2 emitters, plans to phase out inefficient coal power plants by 2030 and convert all other coal plants to ammonia-fired power plants by the 2040s. JERA recently began testing mixing ammonia with coal at its Hekinan Thermal Plant. As long as that ammonia is produced using Harbor-Bosch method with natural gas, though, ammonia combustion may be CO2-free in Japan but carbon intensive globally.
Gas consumption is also on a slow secular decline in Japan. This will continue into the 2030s as more nuclear and renewables come online.
What to expect over the near future
The METI committee will hold one to two meetings per month until the initial proposal is formulated by the end of this calendar year. Then, the SEP will be put in front of the Cabinet for approval by end of the 2024 fiscal year(which runs to the end of March 2025)
The LDP and general elections in September might have an impact on the broad framework of the SEP. But as far as I can tell, none of the potential contenders for prime minister (except Koizumi, if he can become a serious contender) diverge in clear ways from the standard LDP-METI position on energy that I outlined in this post. So it's not clear what impacts the election can have.