Commodities 2024: Japan to begin key energy policy review in 2024 with focus on 2035 targets

A review of Japan's principal energy policy, the Strategic Energy Plan, will be a dominant theme in the country's energy sector in 2024, with policy makers expected to begin discussions early in the year to carve out new primary energy supply and power generation mix targets.

The current 6th Strategic Energy Plan was approved by the cabinet in October 2021 and a review needs to start within three years, as required by law. The review period also coincides with a requirement for Japan to submit a new Nationally Determined Contribution ahead of the United Nations Framework Convention on Climate Change, or COP30, in November 2025 in Brazil, and it is widely expected that the energy mix laid out after the review will form the basis of that NDC.

The upcoming review is expected to look at changes in the energy landscape and review Japan's power demand outlook in light of new areas of growth emerging, notably from the IT sector, leading experts told S&P Global Commodity Insights.

Japan's current energy situation will be reviewed with discussions focusing on how to ensure stable and affordable supply for the next Strategic Energy Plan, Minister of Economy, Trade and Industry Ken Saito said in a group interview Dec. 20.

During a Dec. 14 press conference, Petroleum Association of Japan President Shunichi Kito said he expects the formal discussions for the Strategic Energy Plan to be launched in early 2024 and to "see an outline to some extent" by early 2025 ahead of COP30.

The review is likely to look at issues including energy and economic security and their associated costs, and the impact on power demand from digitalization, Ken Koyama, senior managing director and chief economist at the Institute of Energy Economics, Japan, said.

"Considering the issue of economic security, it is important to give due consideration to such issues as critical minerals, whose demand is expected to increase significantly in the process of advancement of energy transition," Koyama said, adding that digitalization is in a new phase today and the power demand outlook towards 2030 and 2035 will be a major theme with the size of power demand affecting the progress of achieving targets of GHG emission reduction.

"Even if the target of renewable energy and nuclear power can be met, should there be an increase in power demand, it could create a need of meeting them by using some additional sources," he added. "I believe such factors would need to be discussed and [we will need to] consider the issues of security of supply of fossil fuels and LNG from this viewpoint."

Multiple power demand scenarios

Jun Nishizawa, Group CEO of Mitsubishi's Natural Gas Group, said multiple power demand scenarios should be drawn up in the next Strategic Energy Plan, with preparations made to address electricity shortages.

"Traditionally, the Strategic Energy Plan has had one power demand scenario. However, it is necessary to prepare multiple scenarios," said Nishizawa, who is also a member of METI's natural resources and fuel committee. "The biggest reason is that the power demand could potentially grow rapidly in the IT sector driven by generative AI such as ChatGPT-4."

Power demand in the IT sector, which stood at about 11% of the total power demand in 2020, could grow tenfold by 2030, Nishizawa said, adding that Japan would need to avert electricity shortages that could cause a wave of impacts including stoppages of semiconductor plants and electric vehicles.

Nishizawa said the fact that Japan saw a relatively lesser impact from the Ukraine crisis is "proof that securing LNG long-term contracts is indispensable for the energy security."

"However, Japan's long-term contractual volumes are dwindling because many power and gas companies have not been able to swiftly move to secure long-term LNG contracts on the back of deregulation and decarbonization," Nishizawa said, adding that it was essential to expand frameworks such as the "Strategic Buffer LNG" that allow companies to sign larger than required LNG contracts and sell surplus volume in the market, while getting compensated for a part of any losses they might incur from the sale.

Energy mix & ambitious targets

Meanwhile, Takeo Kikkawa, president of the International University of Japan, said that the next Strategic Energy Plan should focus on power demand and primary energy supply outlooks for 2035 and 2050, instead of focusing on the power generation mix.

Kikkawa pointed out that the target to cut GHG emissions by 60% by 2035 from 2019 levels that was adopted by the G7 Sapporo climate and energy ministerial communique in April equated to a 66% cut from Japan's base year in 2013. This is a 20 percentage point increase in Japan's 2030 GHG reduction target of 46% adopted in 2021.

Given that the current 2030 target is already considered "ambitious," it would create "absurd numbers" in the country's power generation mix for 2035 should Japan rigidly stick to the 66% reduction target, said Kikkawa, who was involved in the formulation of the Strategic Energy Plan for many years as a member of METI's advisory committee.

During a METI strategic policy committee meeting in August 2021, Kikkawa was the only member who was against the final draft of the current Strategic Energy Plan based on his belief that there was no need of 2030 energy mix with little time for major investments.

The 6th Strategic Energy Plan calls for non-fossil fuel power supply sources to account for roughly 60% of the country's electricity mix by fiscal year 2030-31 (April-March), compared with a 24% share in FY 2019-20.

Under the plan, Japan expects renewable energy to account for 36%-38% of the country's electricity generation mix in FY 2030-31, with the introduction of 1% hydrogen/ammonia, and 20-22% nuclear power -- totaling 57-61% of the non-fossil fuel power supply.

It envisages LNG comprising 20% of FY 2030-31 power supply sources, with coal accounting for 19% and oil for 2%.

"As expected, it has become clear that it is impossible to achieve it," said Kikkawa, pointing to slow progress being made for nuclear restarts and expansion of renewable energy, with thermal power expected to make up the balance of any shortfall against the target.

In the event LNG ending up to make up around 27% in the 2030 power generation mix, it would increase LNG demand by 10 million mt from an expected demand of around 55 million mt/year under the Strategic Energy Plan, Kikkawa said.

Commenting on Japan's 2030 and 2035 power generation outlooks, Kaori Tachibana, director of gas, power & climate solutions at S&P Global, said that the current trajectories suggest renewables will continue to grow, and its share will grow to 26% by 2030 and to 31% by 2035.

With continued delays in restarts, nuclear is forecast to reach 16% by 2030, falling short of the government target of 20-22%, with its share largely unchanged in 2035, Tachibana said.

"What this trajectory suggests is that Japan is still not on track to achieve its 2050 net-zero goals," Tachibana said. "Renewable, and other non-carbon dioxide emitting technology including nuclear needs to increase its share further, and emission from thermal generation needs to be decreased through new technology such as hydrogen co-generation."