The Iron Triangle before Fukushima
“The Japanese vested interest structure is a genuine iron triangle of politics, bureaucracy, and industry”
Things changed in Japan after March 11. The Great East Japan Earthquake and the ensuing nuclear crisis at the Fukushima Daiichi nuclear plant — the series of events the Japanese somberly call “3.11” — was a turning point of sorts. It was certainly a turning point for Japan’s energy system.
True, there is some debate about the extent of changes. But the pausing of nuclear reactors, the introduction of policies to boost renewables, and, at the same time, the dramatic increase in the share of fossil fuels in Japan’s energy mix were all triggered by 3.11.
Japan and the world have changed drastically since 2011. So much so that it’s easy to forget what prevailed before. But what prevailed before is exactly what I want to explore here. And there’s good reason to. 3.11 didn’t wipe away how Japan did energy policy. In fact, many of the processes, institutions and mentalities that created the nation’s energy policy since the 1970s still remain today, despite the upheaval of 2011.
Espen Moe’s article “Vested interests, energy efficiency and renewables in Japan” (Energy Policy), published in 2012, is a classic in this field. On Google Scholar, it’s been cited 125 times, which, for an admittedly niche topic like the political dimensions of Japan’s energy policy, is an achievement.
Moe found a curious pattern in Japan’s response to the 1973 oil crisis (set off by the attack on Israel by Egyptian and Syrian forces). The oil crisis was a crisis because the price of oil spiked almost 300%, forcing petroleum importers like Japan to scramble to find ways to reduce their reliance on oil. Here was the puzzling thing: among the different strategies for easing its dependence on oil, Japan strongly promoted energy efficiency and partially supported the growth of solar energy, but virtually paid no attention to wind energy.
Why is this strange? Because you’d think that a country poor in energy resources would do absolutely everything it can to wean itself off of volatile petroleum by seriously supporting the growth of all alternative energy sources. Why was Japan’s approach to the three strategies so different?
Moe’s answer is elegant and jives with what we know about the Japanese policymaking process in other areas. He calls it the…
Japanese Vested Interest Structure
It’s easy enough to picture. Imagine a triangle. One corner of the triangle is the power generation industry. Moe explains: “[T]he main industrial actor is the electric utilities, (including the nuclear industry) and their interest organizations — primarily the Denjiren (the Federation of Electric Power Companies of Japan). They have been adamantly opposed to any rival power-generating actors, and they own both nuclear and thermal facilities.”
Occupying another corner of the triangle is the government bureaucracy, exemplified by the Ministry of Economy, Trade and Industry (METI) and the public investment organization that it backs (New Energy and Industrial Technology Development Organization, or NEDO. Phew, a mouthful!). But the bureaucracy, and for that matter METI, are not monolithic. “Typically ‘tribes’ within METI actively represent their most important ‘clients.’” The “clients,” in this case, were the electric utilities, so “there is a strong convergence of interest between the two.” Also strengthening the bond between the bureaucracy and the electric utilities was the practice of amakudari (”descent from heaven”), where prominent civil servants “retire” into top-jobs in precisely the same companies they dealt with as civil servants.
The third and last corner is where Japan’s long-ruling political party, the Liberal Democratic Party (LDP) stands. As an umbrella party, the LDP consists of rival factions and interest groups of all color are represented in its ranks, the LDP has a long history of pork-barreling and major policy concessions to the utilities.
Simply put, “The Japanese vested interest structure is a genuine iron triangle of politics, bureaucracy, and industry.”
So What?
Okay, an iron triangle. But what does it mean for policymaking? What does it mean for ensuring energy security? For the transition to renewable energy?
Imagine this. In the absence of a close alliance between industry, bureaucracy and political party, economic change under capitalism should proceed in successive waves of industries that grow, which are then overtaken by newer, better industries. To grossly simplify, this is the Schumpeterian creative destruction.
But economic change in reality often doesn’t follow this model. Once an industry grows, people with vested interests in that industry (owners and managers of leading companies, investors, workers and their families, consumers of their goods and services, politicians that represent them, etc.) often use their political influence to resist, exclude, and tip the playing field against newcomers. So, even if the industrial newcomers offer a technology, a product, or a service that’s better and cheaper, the vested interests can throw obstacles in their way by swaying policymakers. This is an insight Moe borrows from political scientist Mancur Olson.
Applied to Japan’s energy policy, Moe’s contention is that the industry-bureaucracy-politician triangle enshrines the industrial vested interests into the very policymaking structure. METI and the LDP share the nuclear and electric utility industries’ penchant for protection against newer energy sources (like renewables) that can threaten their leading position in the energy market.
That’s the theory. Now, let’s get specific. How, precisely, does the Japanese vested interest structure produce policies that proactively support energy efficiency, partially promotes solar energy, and virtually shuts out wind energy?
Energy Efficiency: A Non-Threat
Japan is renowned for its energy efficiency. It weathered the storm of the 1970s oil crises by becoming the most energy efficient country in the world — in other words, by making machines and appliances that consume less energy, and emphasizing frugality in households’ use of energy.
Although Moe has some qualms about this popular narrative, he basically accepts that Japan is one of the more energy efficient countries. What’s more important is the fact that energy efficiency was indeed the preferred policy response to the spikes in oil prices during the 1970s.
Why? In large part because enhancing energy efficiency through incremental improvements in high-tech export industries. This meant that manufacturing and energy sectors that were already internationally competitive didn’t have to drastically change their business models. It also meant that they didn’t have to contend with new, disruptive entrants into their industries. In other words, energy efficiency didn’t challenge the iron triangle of vested interests.
Solar: Partial Insider, Partial Winner
As a response to the 1970s oil crises, and up until the early 2000s, increasing solar energy was also high on the policy agenda for the Japanese government. Solar represented a link between industrial and energy policies; it could draw on traditional Japanese strengths in making high-tech equipment, yielding profits and international competitiveness for Japanese firms.
Here, too, Moe argues, much of the explanation lies in the vested interest structure. Solar energy is partly an insider to the iron triangle. This was true in several ways.
First, the major industrial players were the leading solar manufacturers before solar became a policy priority, so when it became clear that alternative energy sources needed to be increased, solar conveniently enhanced the competitiveness of the already existing industry rather than challenging it. Promoting solar strengthened Japan’s export industries.
Second, the solar industry enjoyed a reliable advocate within the bureaucracy. There was a policy tribe within METI supporting solar, and for METI and NEDO, the success of solar became a matter of prestige.
Third, even when smaller solar panel manufacturers succeeded, the growth of the solar industry didn’t seriously threaten the utility companies. This was structural. Solar panels were typically installed on rooftops of buildings (not many solar farms back then) that are usually already connected to the grid. Plus, most rooftop solar is installed in urban areas where the grid is strong and well-developed, and the electricity generated from solar panels is small enough to not raise concerns of overwhelming the grid.
Solar’s partial insider status meant that the bureaucracy was predisposed to support it through a range of policy measures. This began with MITI’s (METI’s predecessor) 1974 “Sunshine Project” which gave solar manufacturers substantial R&D funding. This funding was increased over the next two decades.
Aside from subsidies, NEDO also initiated a four-year demonstration project between 1986 and 1990s to show the stability of solar PV technology and persuade utility companies to contribute to this industry’s growth. There was also a program to offer 50% subsidy for installed residential rooftop solar, called “Seventy Thousand Roofs” in 1995.
Thanks to these measures, by 1990s solar power would supply 5% of total energy demand, and 7% by 1995. But alas, subsidies expired in 2005 and were not renewed. This was because METI had assured MOF that the subsidy would only run until self-sustained growth was achieved, and partly because of a general swing in favor of market-based policies, initiated by Prime Minister Koizumi Junichiro. Japan has since lost its international edge in solar manufacturing, far surpassed by China.
Wind: Outsider and Loser
What about wind? Until rather recently, the wind power industry has been an unmitigated loser. In 2007, wind power accounted for less than 0.3% of total generation capacity, compared to 13% in Germany and 24% in Denmark. While Japan was a frontrunner in solar manufacturing for some time before the early 2000s, its wind industry accounted for only 1.6% of the global market.
“While solar has lived a relatively charmed life,” Moe writes, “wind power has been the ultimate outsider.” Outside the iron triangle vested interest structure.
There were several reasons for this. First, wind power producers are independent power suppliers, which means that they compete against utility companies. This is in stark contrast to solar, which are already integrated and grid-connected.
Wind power’s challenge to utility companies was compounded by their generation capacity and location. Wind turbines generate far more energy than one rooftop solar panel, requiring a bigger investment in terms of grid lines. Wind turbines are also typically built away from urban areas where the grid is stronger, begging the question of who should pay for the cost of grid connection. In the era before electricity market reforms that separated generation and transmission, electric utility companies had the power to shut wind power out from their grid.
For wind energy to have been successful, it needed to have priority access to the grid, which in turn would have required a far bigger structural change than for solar. “The main problem,” Moe writes, “is that the 10 electric utilities — each with a regional monopoly — strongly oppose this.” His words are worth quoting at length:
For the utilities to let wind power into the grid is by some seen as acquiescing to a process of liberalizing the entire electricity sector, which they fave fought tooth and nail for 15 years. They have no interest in letting a rival power producer into the market. Wind power is produced by independent power generators, which essentially means that they are competing against the utilities. The utilities buying electricity from wind power generators is like making a contribution to the enemy.
This is not to say that the wind industry didn’t receive any government support. The government set a target of reaching 3,000 MW of wind power capacity by 2010 and enacted a subsidy system in 1997 to hit that goal, incurring half the construction cost for the local government and 1/3 for the private company. Thanks to this measure, wind power capacity did increase at a reasonable pace.
But regulatory change and the global recession that began in 2008 dealt a blow on the growth of the wind industry. Between 2000 and 2010, wind power capacity grew from 136 MW to 2,304 MW, falling short of the government’s 2010 target of 3,000 MW.
Why climate policy has been underwhelming in Japan
The vested interest structure made up of the utilities, METI, and the LDP explains the differing fates of energy efficiency, solar, and wind in Japan. But even if we agree that solar has been a relatively successful renewable energy industry in Japan, its success was modest by international standards. Japan has never been a true leader when it comes to clean energy or climate change policy. This was actually the second question that Moe identified. Why does a resource-poor country like Japan so lukewarm when it came to developing home-grown energy source — i.e. renewables?
This, too, is because of the dominance of the bureaucracy peculiar to Japan’s policymaking process. Since the late 1980s, METI has framed climate change as an energy issue, with its in-house Agency for Natural Resources and Energy (資源エネルギー庁) in control of energy policy. With industrial and economic growth a main METI concern, energy policy has been framed primarily in terms of supplying a growing energy demand without impeding economic development. Climate policy has been framed as energy policy, without interference from MOE, despite the fact that the MOE has the expertise in environmental matters. Inside of METI, energy policy is formulated in “advisory councils,” which bring together representatives of energy suppliers, industry, consumer groups, labor unions, academics, etc. Among these representatives, voices of utility companies seem particularly influential.
This is reflected most clearly in the main policy instrument designed to phase in renewables in the pre-3.11 era: the Renewable Portfolio Standards (RPS). RPS requires utility companies to supply a certain share of their electricity from renewables. But since 2003, it was set at a very low 1.63% of electricity output by 2014, which the utilities have no problem fulfilling. So “the main government instrument on renewables puts no pressure or provides any incentives for the utilities.” And yes, the weak RPS was directly traceable to influence of the utilities on METI.
What Changed After 3.11?
Cataloguing all of the changes triggered by the Fukushima nuclear accident would fill several volumes. Suffice to say that the power of electric utilities in the vested interest structure has weakened somewhat. This was because of reputational damage from ignoring repeated warnings of potential earthquakes before the accident, the creation of a new, independent and stringent nuclear power regulator, and because of the feed-in-tariffs (FIT) policy that was enacted by the Democratic Party of Japan in the aftermath of the accident.
We also can’t ignore the far stronger international pressures pushing the clean energy transition. The Paris Agreement happened in 2015. Successive IPCC reports use ever stronger language warning governments to take action. Advocacy groups and investors around the world are much more vocal about political and corporate leaders walking and walk on emissions reduction. Voters are more worried about climate change. These things matter in Japan, too.
So the appetite for scaling up renewables is stronger now in Japan than it was before 3.11. Offshore wind is a policy priority. Solar, especially with the new excitement around peroveskite is, too.
But the iron triangle remains. METI still calls the shots, the LDP still adopts bills formulated by METI advisory councils and looks favorably upon nuclear.
So the question remains: if a crisis like Fukushima didn’t dislodge Japan’s vested interest structure, what will?