What’s next for the energy transition in Japan?

The G7 Climate, Energy and Environment Ministers' communiqué recalls that we are facing a triple global crisis of climate change, biodiversity loss and pollution, in addition to the global crisis caused by Russia's invasion of Ukraine. This is leading to economic and social disruption, threats to health and worsening environmental destruction. Based on scientific evidence, immediate and concrete action is needed to reduce greenhouse gas (GHG) emissions and build climate resilience globally to stay on track to limit warming to 1.5°C.

The World Economic Forum’s Japan Energy Transition Initiative, in collaboration with Accenture, has evaluated Japan's decarbonization measures based on the System Value framework, which evaluates holistically economic, environmental, social and technical outcomes of potential energy solutions across markets. The framework aims to shift political and commercial focus beyond cost to include societal value.

In Japan, there are unique circumstances such as low energy self-sufficiency and lack of interconnections with other countries' power grids. In addition, transformations in the surrounding environment, such as the progress of liberalization in the electric power and gas markets and the energy market volatilities, need to be factored in.

To achieve the goal set by Japan for decarbonization, accelerated utilization of renewable energy has the highest system value potential not just in mitigating greenhouse gas emissions, but in cost-effective use of capital, generating green jobs, and enhancing energy security. In addition, since there are concerns about the limits of suitable sites and securing capacity with renewable energy alone, safe utilization of nuclear power generation plants can support the transition.

In 2020, 36% of Japan's CO2 emissions were from industry. Decarbonization in the industrial sector is therefore a key priority to achieve Japan's emissions reduction goals. For example, heat demand cannot be easily electrified: even if the Japanese sector has improved its energy efficiency by introducing various technologies (e.g. use of waste heat and by-product gases), the majority of its energy consumption comes from fossil fuels, and significant CO2 emissions are still being released from production processes but also from captive power generation.

Factors such as the availability of energy and materials in specific locations also have a large influence on the product portfolio. For example, Japan’s steel production is highly dependent on the blast furnace (BF) route, which is more emissions-intensive than the scrap-based electric arc furnace (EAF) or direct reduced iron (DRI) routes, because of the high-quality output required by steel buyers and limited access to resources (e.g. natural gas, DRI-grade iron ore).

Technological developments such as the deployment of low-emission hydrogen and ammonia, and the utilization of CCS/CCU are currently underway, and widespread utilization of these technologies will accelerate the decarbonization of the industrial sector. To further accelerate decarbonization in the industrial sector, cooperation between companies in industry clusters will also be critical.

Given the structure of Japan’s energy system, the role of heavy industries and manufacturing in its economy, and strong expertise in engineering, low-emission hydrogen and ammonia can be critical enablers of an accelerated transition. Low-emission hydrogen and ammonia are also attracting attention for decarbonizing energy sources by substituting fuel for existing thermal power plants.

The Japanese government is leading deliberations involving interested parties. The Basic Policy for the Realization of GX (Green Transformation), approved by the cabinet in February 2023, outlines specific policies for constructing hydrogen and ammonia supply chains and investing in infrastructure to establish hydrogen and ammonia hubs.

Beyond this, accelerating private investments will be crucial to facilitate the scaling up of the market for these technologies. To do that, a short and long-term vision will need to be shared with market participants, and clarity on standardization, as well as legal certainty, will be essential.