ISSN 1880-9286

IEEJ
Energy Journal
Vol.17, No.3 2022

New Oil and Natural Gas Landscape under USMCA-Energy Provisions and Implications for Oil and Gas Businessin North AmericaImpacts of COVID-19 pandemic on Japan’s CO2 emissions in FY2020
Impacts of the Russian invasion to Ukraine on Japan’s energy policy
From the viewpoint of 3E+S
The Potential & Challenges of Renewable Energy Deployment
in JapanFIT Auction Trends for PV Power Generation
What is Happening Now in the Flow Battery Space?
A Growing Demand for Long-duration Energy Storage,
and the Rise of New Players

The Institute of Energy Economics, JapanIEEJ Energy Journal

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Contents━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━New Oil and Natural Gas Landscape under USMCA -Energy Provisions
and Implications for Oil and Gas Business in North AmericaDaisuke Nakamori

1

Impacts of COVID-19 pandemic on Japan’s CO2 emissions in FY2020
Ryo Eto16

Impacts of the Russian invasion to Ukraine on Japan’s energy policy
From the viewpoint of 3E+S
Ryo Eto20

The Potential & Challenges of Renewable Energy Deployment in Japan
Hiroko Nakamura

22

Hideaki Obane

27

FIT Auction Trends for PV Power Generation

What is Happening Now in the Flow Battery Space?
A Growing Demand for Long-duration Energy Storage, and the Rise of New
Players
Masato Yoshida30━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━IEEJ Energy Journal

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New Oil and Natural Gas Landscape under USMCA-Energy Provisions and Implications for Oil and Gas Business in North AmericaDaisuke Nakamori*
1. Introduction
The United State-Mexico-Canada Agreement (USMCA), which replaced the North American Free Trade (NAFTA),
entered into force on July 1, 2020. Former U.S. president Donald Trump delivered his initial promise to renegotiate NAFTA
during the presidential campaign. After two-year negotiations, for the first time in over twenty years, the North American
economic activities would develop under the new rules. The launch announcement gathered attention on what Trump
claimed to be critical, such as rules of origin for automotive goods and labor provisions. Most of the studies of USMCA
focus on such provisions and rules on digital trade which represent modernization of NAFTA.1 The new rules over theenergy sector, meanwhile, were not in the spotlight despite the interesting change, that is, NAFTA’s “Energy” Chapter(Chapter 6) disappeared from the USMCA.
The primary awareness of the Energy chapter dates back to the Cold War era. When faced with the oil crisis in the 1970s,
the U.S. realized that its dependence on Middle Eastern oil was a major national risk. During the NAFTA negotiations, theU.S. pursued efforts to secure oil supply as its bipartisan priority. The major objective of the U.S., securing oil from Canada
and Mexico, was, thus, clearly reflected in the energy-related provisions, notably the “energy proportionality clause”
discussed later in detail (Clarkson & Mildenberger 2011).2
At the time of the USMCA negotiations, however, the three North American countries had experienced dramatic changes
in their energy sectors: the U.S. shale revolution, Canada’s oil sands development, and Mexico’s constitutional reform.3
Especially, the U.S. shale revolution did not only solve the long-term U.S energy security concerns by promoting oil selfsufficiency but also had multiple impacts on the world energy market.4 As Fig. 1 and Fig. 2 show, U.S. net oil imports
noticeably decreased since 2010. The U.S. has increased its export volumes to Canada and Mexico, indicating its new roleas an oil exporter.5* Researcher, Global Energy Group 2, Strategy Unit, IEEJ

参議院調査情報担当室「USMCA（新 NAFTA）の注目点~米国と各国との間の貿易交渉を検証する一材料として~」,https://www.sangiin.go.jp/japanese/annai/chousa/keizai_prism/backnumber/h31pdf/201917802.pdf (Accessed November 24, 2021) and Center for
Strategic and International Studies. “The Road to Ratification: The U.S. ITC’s Economic Analysis of the USMCA” https://www.csis.org/analysis/roadratification-us-itcs-economic-analysis-usmca (Accessed November 24, 2021).
2 The U.S. energy security policy mainly targeted oil because the country had been more self-sufficient in coal and natural gas resources. Fig. 2 shows
the U.S. energy trade flows with its North American neighbors in 2019. Crude oil and petroleum products are still the main products although natural
gas had been more prominent in recent years.
3 As of 2019, the U.S. and Canadian oil production roughly doubled compared to the early 1990s (Fig. 1). Mexico had long suffered declining oil
production, but the constitutional reform in 2013 had attracted international attention to Mexico’s unexplored resources.
4 For details, see O’Sullivan (2017) and Yergin (2020).
5 The share of U.S. oil in Canada’s oil import grew from 10% to 80% over the last decade. For Mexico, see Section 3. Canada Energy Regulator.
“Market Snapshot: Crude Oil Imports Decreased in 2020, and so Did the Cost.” https://www.cer-rec.gc.ca/en/data-analysis/energy-markets/marketsnapshots/2021/market-snapshot-crude-oil-imports-decreased-in-2020-and-so-did-the-cost.html (Accessed November 24, 2021).
1

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30,00014,00012,00025,00010,00020,0008,000
15,000
6,000
10,000
4,000
5,000

2,000

0

0
1990

1992

1994

1996

1998

Canada(Mb/d)

2000

2002

2004

Mexico(Mb/d)

2006

2008

US(Mb/d)

2010

2012

2014

2016

2018

US Net Import(mb/d)Fig. 1 Oil production in USMCA’s parties and U.S. net oil import from 1990 to 2019
Source: U.S Energy Information Administration

Fig. 2 Energy Trade Flow between North American Countries in 2019
Source: US Census Bureau6

The U.S. shale revolution led its members to reconsider potential energy cooperation in North America.7 Canada and
Mexico began to claim the increasing importance of regional energy security because fracking did not only promote U.S.
oil and natural gas self-sufficiency but also increased their energy imports from the U.S. (O’Sullivan 2017).8 In recent years,

6 This graph refers to Mildenberger & Stokes (2021).
7 Congressional Research Service. “Cross-Border Energy Trade in North America: Present and Potential.” https://sgp.fas.org/crs/misc/R44747.pdf(Accessed November 24, 2021) and United States Government Accountability Office. “North American Energy Integration: Information about
Cooperation with Canada and Mexico and among U.S. Agencies.” https://www.gao.gov/assets/gao-18-575.pdf (Accessed November 24, 2021).
8 The idea of aiming for energy independence through energy trade between the three North American countries is called “North American Energy- 2 -IEEJ Energy Journal

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the North American countries have actively pursued efforts to expand the regional energy market by constructing
transportation infrastructures, such as the U.S.-Canada Keystone XL Pipeline and the U.S.-Mexico Wahalajara System.9
However, energy protectionism in Mexico has developed at a rapid pace while environmental and indigenous communities
have opposed the pipeline construction in the U.S. and Canada. Joe Biden’s presidency heightened additional uncertainty
as to future energy cooperation in North America.
The study of the new energy provisions in USMCA is a key to look at what the three member countries learned from
NAFTA’s experiences described above, the goals they are aiming for, and the challenges they may face in the future.
Addressing the question “What kind of energy landscape does the new energy-related provisions create?” has important
implications for energy policy development in North America.
This paper reviews the major points of the USMCA’s energy provisions and examines how the North American energy
environment would develop under the new rules. In the next section, the focus is on Canada and Mexico. Compared to
NATFA’s provisions, the noticeable amendments occurred in the USMCA provisions regarding Canada. Canada has beena major energy supplier for the U.S. because NAFTA’s provision obliged Canada to export fossil fuels to the southernneighbor. With the onset of the shale revolution, however, the U.S. no longer has severe energy security concerns. The
perceptional change of the U.S. led to the modification of NAFTA’s provisions regarding Canada. Meanwhile, although nosignificant change occurred in the provisions regarding Mexico, it is worth noting that Mexican president Andres MunuelLopez Obrador (AMLO), who came into power during the USMCA’s negotiation, claimed to preserve Mexican
sovereignty in the energy sector and inserted the protectionist provisions which are more prominent than NAFTA’s. Section
3, giving consideration to recent developments, looks at how the independent yet simultaneous U.S. engagement with
Canada and Mexico could develop under the new USMCA provisions. Finally, this paper concludes with a discussion on
the USMCA’s implications for North American regional cooperation.

2. Energy-Related Provisions of USMCANAFTA superseded the United States-Canada Free Trade Agreement (USCFTA) signed in 1988 by having Mexico,
which hoped to attract foreign investment, as a new party. Cameron and Tomlin (2000) argue that NAFTA’s negotiatorsfrom the U.S. and Canada perceived Mexico as a latecomer to the established USCFTA. With this background, although
the impetus for NAFTA was designed to facilitate free regional trade among the three countries, the agreement contained a
mixture of independent provisions specific to U.S-Canada and U.S-Mexico. Clarkson (2008) describes this regional
characteristic as “double bilateralism.” The USMCA clearly reflects this “double bilateralism” structure of NAFTA. Theenergy provisions are no exception. Rather, the three countries were particularly eager to put their own interests in the energy
provisions. Despite the elimination of the Energy Chapter, energy-related provisions lie scattered in different USMCA
chapters. The U.S. had negotiated with Canada and Mexico independently to set these rules. This section summarizes eachof them with careful attention to the changes from NAFTA.
2-1. U.S.-Canada Provisions(1) Elimination of proportionality clause
The USMCA removed NAFTA’s controversial provision known as the “energy proportionality clause” in Article 605.
The clause required Canada to maintain oil and natural gas export to the U.S. “as compared to the proportion prevailing in
the most recent 36-month period.” Under this rule, Canada’s oil producing states, especially Alberta, could not reduce export
volumes to the U.S. and could not provide their oil to eastern Canada’s importers even if an international oil crisis caused a

Independence.” For the views of Canada and Mexico about this idea, see The Globe and Mail. “For Mexico and Canada, There’s Room to Grow.”https://www.theglobeandmail.com/opinion/for-mexico-and-canada-theres-room-to-grow/article5698332/ (Accessed November 24, 2021).
9 Congressional Research Service. “Keystone XL Pipeline: Overview and Recent Developments.”
https://crsreports.congress.gov/product/pdf/R/R43787/8 (Accessed November 24, 2021) and US Energy Information Administration. “U.S. Natural
Gas Exports to Mexico Set to Rise with Completion of the Wahalajara System.” https://www.eia.gov/todayinenergy/detail.php?id=44278 (Accessed
November 24, 2021).

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supply shortage in Canada.
The U.S. raised the original idea of the proportionality clause. The reason is that, at the time of the NAFTA negotiations,the U.S. had energy security concerns due to increasing demand for foreign oil. No similar provision exists in other trade
agreements including NAFTA’s provisions between the U.S. and Mexico. Canada did not violate the obligation since theinception of NAFTA, but there was growing criticism against the clause in Canada because the rule forced the country toprioritize U.S. energy security rather than Canada’s.10 In recent years, U.S. and Canadian environmental groups also began
to view the clause as a problematic factor of continuous oil sands exploration and increasing oil export.11
Canada proposed to remove the proportionality clause at the renegotiation; the U.S., which had once requested
uninterrupted access to Canadian resources, did not ask to maintain the clause. The American Petroleum Institute (API), a
lobbying group representing the U.S. oil and natural gas industry, had stated to the U.S. government that the country nolonger needed the clause.12 In light of the original purpose of the proportionality clause, the elimination demonstrates therevolutionary change in U.S. energy security perceptions after the shale revolution.
(2) Rules of origins for diluent
The rules of origin in the USMCA drew much attention regarding their impacts on automotive trade, but importantchanges can also be found in the energy sector, especially the rules for diluent. Canadian exporters of crude oil blend diluentsto enable pipeline transportation. Canada imports the diluents from several countries–Peru, Bolivia, and Pakistan–and storesthem together in domestic tankers. Such procedures made it difficult for Canadian oil exporters to prove the origin of diluentsfor tariff exemption.13 Crude oil exporters, thus, accepted tariff payments for approximately 65% of crude oil exports, whichis estimated to have amounted to $60 million a year.14
Against the backdrop of increasing crude oil export to the U.S and stagnant oil prices in recent years, the cost of tariffs
became more damaging for the Canadian oil industry. Diluent transportation faced one of the few remaining tariff barriers
between the U.S. and Canada; therefore, for the Canadian side, updating the rules for diluent was the main goal during the
USMCA negotiations.15
In the outcome of the USMCA negotiations, the parties assented to the exemption of the rules of origin for diluents so far
as the diluents do not account for more than 40% of crude oil export volumes.16 This update technically eliminates the tariffon diluent because the agent generally accounts for 30% of crude oil export volumes. The upper limit in the USMCA
presumably modeled the Trans-Pacific Partnership which both the U.S. and Canada joined.17(3) Exemption of Investor-State Dispute Settlement
The USMCA also amended the investment provisions. Canada entirely withdrew from the investor-state disputesettlement (ISDS) mechanism stipulated in NAFTA Chapter 11. The ISDS mechanism allows a party’s investors to sue
another party’s government. An investor can launch an international arbitration consisting of arbiters agreed upon by the
10 Gordon Laxer and John Dillon. “Over a Barrel: Exiting from NAFTA’s Proportionality Clause.” https://s3-us-west-2.amazonaws.com/parkland-

research-pdfs/overabarrel.pdf (Accessed November 24, 2021).
11 The Numbers. “The New NAFTA – What’s the Deal with Energy.” https://behindthenumbers.ca/2018/11/21/the-new-nafta-whats-the-deal-withenergy/ (Accessed November 24, 2021).
12 Trusted Energy Intelligence. “New NAFTA shows U.S. no longer needs Canadian oil guarantees.”
https://www.jwnenergy.com/article/2018/10/3/new-nafta-shows-us-no-longer-needs-canadian-oil-gu/ (Accessed November 24, 2021)..
13 Global Affairs Canada. “The Canada-United States-Mexico Agreement: Economic Impact Assessment.” https://www.international.gc.ca/tradecommerce/assets/pdfs/agreements-accords/cusma-aceum/CUSMA-impact-repercussion-en.pdf (Accessed November 24, 2021).
14 Government of Canada. “Energy Provisions Summary.” https://www.international.gc.ca/trade-commerce/trade-agreements-accordscommerciaux/agr-acc/cusma-aceum/energy-energie.aspx?lang=eng (Accessed November 24, 2021).
15 Financial Post. “Canada’s Oilpatch Pays America $60 Million a Year to Export Crude – And New Trade Deal May Not Help.”
https://financialpost.com/commodities/energy/canadas-oilpatch-pays-america-60-million-a-year-to-export-crude-and-usmca-may-not-help (Accessed
November 24, 2021).
16 U.S. Department of Commerce. “Transporting Alberta Oil Sands Products: Defining the Issues and Assessing the Risks”
https://crrc.unh.edu/sites/default/files/media/docs/noaa_oil_sands_report_09.2013.pdf (Accessed November 24, 2021).
17 The U.S. decided to withdraw from TPP in January 2017. See Law 360. “Opportunities for the Oil Industry in NAFTA Renegotiations.”
https://www.thompsonhine.com/uploads/1137/doc/Opportunities_For_The_Oil_Industry_In_NAFTA_Renegotiations.pdf (Accessed November 24,2021).

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parties when a party’s government is found to discriminate against an investor or impede its ability to earn profits.18
According to the Canadian Centre for Policy Alternatives, a Canadian think tank, Canada had been sued 41 times–48%of all cases–from NAFTA’s launch in 1994 to January 2018.19 Canada had paid out more than $314 million for investors’
damages and legal costs. Not only had ISDS caused economic costs, but the Canadian side found it problematic that thecompanies used ISDS as a coercive tool to pressure the Canadian government. Canada thus made a claim against theeconomic and political costs of ISDS and sought to withdraw from ISDS at NAFTA renegotiations. Although U.S. industry
initially opposed Canada’s request, the USMCA reflected Canada’s concern. As a result, the USMCA replaces ISDS except
in certain causes regarding fossil fuel investments between the U.S. and Mexico.20
2-2. U.S.-Mexico Provisions(1) Mexican sovereignty over domestic resources
The new agreement kept some of the NAFTA Chapter 6 provisions regarding Mexican sovereign right in USMCA
Chapter 8. Chapter 8 stipulates that: in Section 1, “the parties confirm their full respect for sovereignty and their sovereign
right ... in accordance with their respective Constitutions and domestic laws”; in paragraph (a) of Section 2, the U.S. andCanada recognize Mexico’s “sovereign right to reform its Constitution and its domestic legislation”; and in paragraph (b)of Section 2, “Mexico has the direct, inalienable, and imprescriptible ownership of all hydrocarbons in the subsoil of thenational territory ... pursuant to Mexico’s Constitution.” As in NAFTA, the USMCA confirms the special treatment for
Mexico’s sovereign right on its domestic resources.
Mexico’s exclusive right in Chapter 8 stemmed from Article 27 and 28 of the Mexican Constitution, which restricted
foreign activities over Mexican territory (Hufbauer & Schott 2005).21 As exemplified by the nationalization of Petroleos
Mexicanos (Pemex), the biggest petroleum company in Mexico, the governmental control over domestic resources was
inseparable from Mexico’s national identity and thus had been reflected in the Constitution. As mentioned above, NAFTA
contained similar provisions concerning Mexico’s sovereignty in Chapter 6. USMCA Chapter 8 was designed to succeed
the NAFTA provisions and accept Mexico’s exclusive right in the energy sector even though the agreement soughtliberalization of energy trade (Herran & Poretti 2011).
It would, however, be reasonable for Mexico to remove the protectionist provisions in the USMCA given the fact that
Mexico had been encouraging foreign investment in its energy sector since the 2013 Constitutional Reform. Here, current
Mexican President AMLO exercised his power during the NAFTA renegotiations. President AMLO has been a prominent
critic against the reform pushed through by former President Peña Nieto. During the electoral campaign, AMLO won public
support by calling out the influx of foreign capital infringing Mexico’s sovereignty over energy resources. After taking office,
AMLO urged the USMCA’s negotiators to keep the provisions regarding Mexico’s sovereignty on its domestic resources,
resulting in Chapter 8.22
(2) ISDS’s protection for U.S. investors
As noted above, USMCA Chapter 8 recognizes Mexico’s exclusive right to its domestic resources. Annex 14-E prevents
abuses of such right. The Annex provides access to ISDS, abolished among three parties in the USMCA, for investment
only in the hydrocarbon sector between the U.S. and Mexico.23 The USMCA, therefore, allows U.S. companies investing
18 Article 1123 of NAFTA’s Chapter 11 rules that the Tribunal comprises three arbitrators, one appointed by each of the disputing parties and the third

appointed by agreement of the disputing parties.
19 Scott Sinclair. “Canada’s Track Record Under NAFTA Chapter 11.”https://www.policyalternatives.ca/sites/default/files/uploads/publications/National%20Office/2018/01/NAFTA%20Dispute%20Table%20Report%202
018.pdf (Accessed November 24, 2021).
20 For investment during NAFTA era, the USMCA Chapter 14 rules that the Parties can access ISDS three years after NAFTA’s termination.
21 Article 27 established the nation as the direct owner of oil and all hydrocarbons disregarding its form, and Article 28 sets the exclusivity of national
control over strategic areas including hydrocarbons. The 2013 Constitutional Reform encouraged private investment in the oil and gas sector andelectricity sector by amending both articles and Article 25, which obliges the government to promote the public and private sectors.
22 Reuters. “Mexico’s Next Leader Says NAFTA Deal Preserves Energy Sovereignty.” https://www.reuters.com/article/us-trade-naftamexico/mexicos-next-leader-says-nafta-deal-preserves-energy-sovereignty-idUSKCN1LC2BP (Accessed November 24, 2021).
23 United States International Trade Commission. “U.S.-Mexico-Canada Trade Agreement: Likely Impact on the U.S. Economy and on Specific- 5 -IEEJ Energy Journal

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in the oil and gas sector to sue the Mexican government in an arbitral tribunal in a case where investors were involved in a
dispute with the Mexican government. The access to ISDS was critical for the U.S. side to protect its investors as the U.S.
companies had invested heavily in Mexico’s energy sector since the Constitutional Reform.24(3) Licensing of Mexican energy products
In North America, the oil and natural gas trade had been liberalized to a considerable extent since NAFTA’s launch.
USMCA Chapter 2 outlines the principles for such free trade, but Annex 2-A sets out exceptions to the Articles restricting
discriminatory measures against another party: Article 2.3 “National Treatment” and Article 2.11 “Import and Export
Restrictions.” Article 2.A.3 of the ANNEX authorizes import and export licensing of energy products pursuant to theHydrocarbons Law. The listed items include petroleum products, natural gas, and propane. This Article succeeds NAFTA’s
Annex 603.6 which identified the hydrocarbon goods for which Mexico could grant import and export licenses. This special
treatment for Mexico offers more specific measures based on Chapter 8.

3. North American Oil and Gas Trade under the USMCA
The amendments from NAFTA to USMCA demonstrate that Canada achieved its initial goals through the NAFTA
renegotiation process. As for trade, Canada could successfully remove the proportionality clause and amend the rules oforigin for diluent; as for investment, the country is no longer a part of ISDS and can avoid lawsuits from U.S. industries,
especially over environmental issues. Also, President AMLO, inaugurated during the USMCA negotiations, successfully
protected Mexico’s sovereign right on the energy sector as promised. The USMCA’s provisions clearly signals AMLO’s
protectionist energy policy. Given that Canada and Mexico have achieved their initial goals, what are the implications of
the USMCA’s provisions for the North American energy landscape? This section examines how the USMCA’s energy
provisions may affect the U.S.-Canada and the U.S.-Mexico relations, respectively.
Regarding Canada, the amendments to the rules of origin and ISDS would only reduce financial costs for the governmentand companies. The cost reduction would not have a large impact on resource trade between the U.S. and Canada. Moreattention, on the other hand, should be paid to the elimination of the proportionality clause because the clause determined
the ratio of oil and natural gas exports from Canada. Amendment of the clause may create a new landscape for U.S.-Canada
energy trade. This section argues that the impact of ongoing decarbonization in the U.S. and Canada would, with the removalof the proportionality clause, place more burdens on Canadian oil suppliers trying to increase export volumes to the U.S.
Meanwhile, the Mexican government will continue to promote the protectionist measures in its energy sector pursuant
to the provisions of the USMCA. Among the USMCA parties, the U.S. has expressed more serious concerns about
Mexico’s energy policy than Canada because the shared border with Mexico allowed the U.S. to build a closer relationshipwith its southern neighbor. The ISDS mechanism, which remained effective between the U.S. and Mexico, is expected tomitigate the U.S. fears towards AMLO’s protectionist policies.
3-1. Elimination of Proportionality Clause and Outlook for U.S.-Canada Oil Trade(1) Proportionality Clause and Current Oil Export to the U.S.
The U.S. had tried to facilitate crude oil import from Canada by investing and expanding infrastructures–pipelines andrailroads–to enable large-volume and low-cost transportation even before the making of NAFTA. Besides the economic
and geographical advantages, the significance of Canadian oil for the U.S. laid upon the less political nature of trade with

Industry Sectors.” https://www.usitc.gov/publications/332/pub4889.pdf (Accessed November 24, 2021).
24 Some point out that the ISDS mechanism in the USMCA has limited efficiency compared to NAFTA’s because the USMCA mandates 30-month
negotiations in Mexican courts before arbitration. Such process, however, is exempted for projects contracted with the Mexican Government, which
include most investments in the energy sector. In addition, Article 32.11 of Chapter 11 prevents the Mexican hydrocarbon measures from being more
restrictive than other international agreements such as the CPTPP. This Article works with ISDS to protect U.S. companies’ business in Mexico. See
Holland & Knight. “Demystifying Energy Investment Disputes in Mexico Through the New USMCA.”
https://www.hklaw.com/en/insights/publications/2019/04/demystifying-energy-investment-disputes-in-mexico-through (Accessed November
24 ,2021).

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Canada, unlike the Middle East where state-owned enterprises intervened in trade with political intentions. As the
proportionality clause in NAFTA prevented western Canada’s suppliers from exporting to consumers in the eastern states,
the large portion of crude oil produced from oil sands was forcibly directed toward the U.S., which led to building pipeline
infrastructures (Fig. 3).25
As of 2019, Canadian crude oil accounted for 56% of total U.S. heavy oil imports. Notably, the U.S. Midwest and Rocky
Mountain regions were 100% dependent on heavy oil from Canadian oil sands.26 Even after the shale revolution reduces
U.S. crude oil imports from OPEC countries, Canadian oil export to the U.S. has been gradually increasing due to its
competitiveness and the advantages discussed above, confirming the important role of Canadian oil in U.S. energy supply(Fig. 4).27

Fig. 3 U.S.-Canada Pipeline Map
Source: The Canadian Association of Petroleum Producers

25 Clarkson & Mildenberger (2011).
26 Venezuela had also been a major supplier of heavy oil to the United States, but U.S. import plummeted due to sanctions. Canadian oil has

compensated for the decline in U.S. oil import from Venezuela. Also see Oil Sands Magazine. “Assessing America’s Appetite for Canada’s Crude: A
look at Canadian Crude Usage by U.S. Refineries.” https://www.oilsandsmagazine.com/market-insights/american-appetite-canadian-crude-usage-usrefineries (Accessed November 24, 2021).
27 Shale (tight) oil does not compete with Canadian heavy oil, which positions Canada’s oil as a significant share of U.S. oil import. U.S. Energy
Information Administration. “U.S. Crude Oil Imports from OPEC Are Down, but Imports from Canada Remain High.”
https://www.eia.gov/todayinenergy/detail.php?id=47836 (Accessed November 24, 2021).

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Fig. 4 International Comparison of Oil Export to the U.S. from 1960 to 2019
Source: U.S. Energy Information Administration(2) Elimination of proportionality clause and outlook for Canada’s oil export to U.S.
Canada is no longer required to export a certain proportion of oil and natural gas to the U.S. under the USMCA. Since
suppliers do not need to follow the most recent three-year records, the volumes of Canadian oil and natural gas export to
the U.S. can shift flexibly unlike the stable fluctuation under NAFTA. What changes, then, could the amendment to the
USMCA bring about in Canada’s crude oil export to the U.S?
One should first look at Canada’s potential for increasing export volumes, a longstanding issue for Canada’s oil industry.
In recent years, the pipeline capacity in Canada has not met its increasing oil production. The stagnant export leads to awidening price gap between the Western Canadian Select (WCS) and Western Texas Intermediate (WTI). As Canadianprovinces earned royalty income from the export of oil, this problem was not just for the oil industry.28 The producers inAlberta, for instance, had to reduce oil outputs to prevent excess inventories for offsetting economic losses. The
strengthening of pipeline capacity, thus, has been a major goal for promoting oil export business in Canada.29

28 Brandon Schaufele and Jennifer Winter. “Measuring the Economic Impact of Alberta’s Crude Oil Curtailment Policy.”

https://www.ivey.uwo.ca/media/3793185/iveyenergycentre_policybrief_dec2020_measuringeconimpactalbertacrudeoil_curtailment_2-9.pdf(Accessed November 24, 2021).
29 石油天然ガス・金属鉱物資源機構「カナダにおける原油パイプライン及びオイルサンド事業の最近の動き」、https://oilgasinfo.jogmec.go.jp/_res/projects/default_project/_page_/001/007/950/1912_c_ca_oilsand_r.pdf (Accessed November 24, 2021).

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Fig. 5 WTI and WCS prices from 2011 to 2021
Source: Government of Alberta

However, the Canadian oil industry is facing a difficult situation in strengthening its export capacity with the setback of
the Keystone XL pipeline project from Alberta to the Gulf Coast in June 2021 and with the environmental protests gaining
momentum (Fig. 6). As well, Canada’s future oil production and export volumes have become more uncertain due tostagnant investment in oil sands and climate change policies by the federal government. Facing such uncertain future, theCanadian oil industry is likely to have a hard time maintaining the current export volumes rather than increase its export.
With the elimination of the clause, future efforts include diversifying export destinations such as the Trans Mountain Pipeline
expansion which will increase oil export capacity from Alberta to the Canadian west coast.

Fig. 6 Outlook for Canadian oil export and export capacity from 2010 to 2050
Source: Canada Energy Regulator

The future decline of oil export volumes will possibly become an imminent issue in the age of decarbonization. As
previously pointed out, the proportionality clause mandated oil and natural gas export during NAFTA era, making it difficult- 9 -IEEJ Energy Journal

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for Canada to take measures for reducing export volumes and avoiding emissions in the oil and natural gas sector. The
removal of the clause, therefore, might create an environment where both the U.S. and Canada can actively develop
decarbonization policies that could cause adverse effects on oil sands business. Although Canada’s export volumes will
largely depend on U.S. policies led by Joe Biden, who came into power six months after the USMCA took effect, andCanadian policies, there will be a greater likelihood of a decline in Canadian crude oil exports if the current trend continues.
The elimination of the proportionality clause and the accelerated decarbonization trend occurred in different contexts as
described above. Nonetheless, if the former backed the direction of decarbonization, the Canadian oil business would havedifficulty keeping current export volumes. Assuming that the proportionality clause survives in the USMCA, the growing
momentum for decarbonization could have a limited impact on Canadian suppliers. If the Trump administration stayed in
power, the potential for Canadian export growth would be higher because of the strengthening of pipeline capacity andstagnation of decarbonization policies regardless of the removal of the proportionality clause. From the discussion on
removing the proportionality clause presented in the previous section, it could be inferred that the U.S. and Canada did not
expect the possible difficulties that Canada’s oil export business would face in the USMCA. Biden’s victory, however, has
accelerated decarbonization in both countries, and the negative impact on oil sands business has become more imminent.
(3) U.S. and Canadian Climate Change Policy Trades and Possible Impacts on Canada’s Export
Canada’s crude oil export to the U.S. will largely depend on the climate change policies in the U.S. and Canada, both ofwhich aim for carbon neutrality by 2050. Whereas the climate change policies in both countries include uncertain variables
including policy feasibility and technological development, the already implemented policies provide a glimpse into thechallenges that the Canada’s oil sand business would face amid the decarbonization trend.
Canada’s recent climate change policies have caused controversy between the ambitious federal government and oil andnatural gas producers, prominently Alberta. Among such policies, Canada’s carbon pricing, one of the most efficient means
to reduce greenhouse gas emissions, has increased the costs for producers since the federal Parliament passed theGreenhouse Gas Pollution Pricing Act in 2018.30 Producers had been criticizing the ambitious federal carbon tax as
infringing states’ sovereign rights, and claimed against a provincial carbon tax. The Supreme Court ruled, however, that thefederal carbon pricing was constitutional in March 2021.31 The judgement enabled the federal government to increase thecarbon pollution price by $15 per year to $170 per tonne CO2e in 2030. The federal carbon pricing is charged if the Canadianprovinces fail to create their own emission reduction mechanism which has the equivalent effect of the federal tax. The
impact of carbon pricing presumably varies depending on the types of projects and tax collection methods; however, if
Canadian producers suffer higher production and transportation cost due to the carbon tax, the oil sands business is likely tolose its competitiveness and be forced to reduce oil production and export.32
Simultaneously, the Biden administration has taken a tougher stance on the fossil fuel industry than Canada to accelerate
decarbonization of its economy. The U.S. government has been aggressively regulating oil and gas exploration by halting
oil and gas leasing on federal land and waters and by canceling drilling permits.33 As of November 2021, the key policy
action by the Biden administration towards Canada went no further than abandoning the permit for the construction of the
Keystone XL pipeline. President Biden has never mentioned other oil sands and pipeline projects. However, the othercontroversial projects–the modernization of Enbridge Line 3, a crude oil pipeline between the U.S. and Canada, and

30 石油天然ガス・金属鉱物資源機構「カナダにおける温暖化ガス排出規制：制度概要と課題」,https://oilgas-

info.jogmec.go.jp/info_reports/1008604/1008775.html (Accessed November 24, 2021).
31 Supreme Court of Canada. “References re Greenhouse Gas Pollution Pricing Act.” https://www.scc-csc.ca/case-dossier/cb/2021/38663-3878139116-eng.aspx (Accessed November 24, 2021).
32 For the impact of carbon pricing on oil sands projects, see Branko Boskovic and Andrew Leach. “Leave it in the Ground? Oil Sands Development
under Carbon Pricing.” https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2920341 (Accessed November 24, 2021).
33 Environmentalists in the Democratic Party and the Secretary of the Interior, Deb Haaland, have called for stricter regulations on fracking and maytighten fossil fuel regulations further. See The White House. “Executive Order on Tackling the Climate Crisis at Home and Abroad.”
https://www.whitehouse.gov/briefing-room/presidential-actions/2021/01/27/executive-order-on-tackling-the-climate-crisis-at-home-and-abroad/(Accessed November 24, 2021).

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Enbridge Line 5, a pipeline from Canada to Michigan–faced strong opposition from environmental groups.34 Canadian
suppliers cannot ignore the criticism against both new projects and existing infrastructures. If the heated environmental
movement succeeds in halting or shutting down these infrastructures, Canada’s exporters would face more severe challenges
due to the lack of exporting capacity.
The progress of climate change policies, as noted above, depends on massive uncertain factors, and it is important to notethat some of them may cause positive outcomes for the oil sands industry. The federal government of Canada, for example,
is funding GHG reduction technologies: carbon dioxide capture and storage (CCS) and carbon dioxide capture, utilization,and storage (CCUS). The successful deployment of these technologies would mitigate the negative impact of carbon pricing
on Canada’s oil sands companies.35 Moreover, unlike the Keystone XL, Enbridge Line 3 has not been recognized as aproblem by the U.S. federal government, and it began to operate in October 2021, leading to export capacity expansion asshown in Fig. 5.36 Even in the U.S., the EIA’s low oil price scenario and low oil and gas supply scenario project the declineof U.S. oil production, under which the country may once again become a net importer of oil. In addition, if the U.S.
Congress passes Biden’s infrastructure bill, building new infrastructures, such as roads and bridges, would require Canadianheavy oil for producing bitumen. From these prospects, it may be too early to conclude that decarbonization policies leadto lower oil exports from Canada.37
Despite the myriad uncertainties listed above, however, even an optimists would only say that Canadian crude oil export
to the U.S. could remain at the current level at best due to the lack of transportation capacity and pressures for
decarbonization. The role of Canadian crude oil, which makes long-standing contributions to U.S. economic activities andenergy security, under the USMCA deserves more attention as it helps to tell how seriously both countries will take climatechange measures beyond the existing collaboration.
3-2. Effects of Mexico’s Energy Protectionist Policy on U.S. Business(1) U.S.-Mexico Energy Trade after the Constitutional Reform
The Mexican Constitutional Reform in 2013 opened up a major opportunity for U.S. companies to enter into Mexico’senergy market. The reform failed to privatize the state-owned oil company, Pemex, but the company started several joint
ventures with U.S. oil and gas companies in the Gulf of Mexico. Mexico called for more than 100 tenders for private
investment. In the first three auctions, one held in 2016 and two held in 2017, more than $1 billion was awarded to U.S.
firms.38 With regard to trade, Mexico’s market value increased as an export destination for U.S. oil and natural gas
productions boosted by fracking and exploration of the Gulf of Mexico. The new transportation infrastructures have helped
to increase U.S. oil and natural gas export to Mexico since the reform (Fig. 7).39 Mexico surpassed Canada as the biggest
importer of U.S. natural gas in 2015; meanwhile, U.S. oil export to Mexico amounted to $30 billion in 2018, a three-foldincrease from 2008.

34 S&P Global. “Enbridge Moves Closer to Line 3 Construction While Line 5 Shutdown Is Threatened” https://www.spglobal.com/platts/en/market-

insights/latest-news/oil/111620-enbridge-moves-closer-to-line-3-construction-while-line-5-shutdown-is-threatened (Accessed November 24, 2021).
35
Government of Canada. “Budget 2021” https://www.budget.gc.ca/2021/report-rapport/toc-tdm-en.html (Accessed November 24,2021).
36 Enbridge. “Line 3 Replacement Project Substantially Completed and Set to be Fully Operational.” https://www.enbridge.com/mediacenter/news/details?id=123692&lang=en (Accessed November 24, 2021).
37 Bloomberg Green. “Biden’s Latest Surprise Boost for Oil Involves Lots of Asphalt.” https://www.bloomberg.com/news/articles/2021-03-31/oilsector-gets-surprise-boost-in-biden-s-roads-wells-plan(Accessed November 24, 2021) and U.S. Energy Information Administration. “Annual Energy
Outlook 2021.” https://www.eia.gov/outlooks/aeo/narrative/introduction.php (Accessed November 24, 2021).
38 The U.S. companies participating in Mexican oil and gas exploration include Murphy Oil, Chevron, Fieldwood Energy, ExxonMobil, Talos Energy.
See US Department of Commerce. “Mexico - Country Commercial Guide.” https://www.trade.gov/knowledge-product/mexico-n-oil-and-gas(Accessed November 24, 2021) and USAID. “Institutional Framework for Auctions in Mexico.” https://www.usaid.gov/energy/auctions-mexico(Accessed November 24, 2021).
39 Congressional Research Service. “Mexico: Background and U.S. Relations.” https://fas.org/sgp/crs/row/R42917.pdf (Accessed November 24,2021) and US Energy Information Administration. “In 2019, the U.S. Imported $13 Billion of Energy Goods from Mexico, Exported $34 Billion.”
https://www.eia.gov/todayinenergy/detail.php?id=45756 (Accessed November 24, 2021).

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Fig. 7 U.S. oil and gas export to Mexico from 2000 to 2020
Source: U.S. Energy Information Administration

However, President AMLO, who came into power by criticizing the open market policies, actively pushed back incoming
foreign investment in Mexico to protect domestic energy companies, prominently Pemex. At the very beginning of his
presidency, AMLO successfully inserted Chapter 8 into the USMCA which reflects Mexico’s exclusive right on its domestic
resources. The Mexican protectionist policies have threatened the U.S. oil and gas industry due to possible adverse impacts.
Backing such concerns, Mexico leaned toward protectionist measures and began to justify its policies by referring to Chapter
8 and its Constitution.40(2) U.S. concerns about Mexico’s protectionist policies
The U.S. fossil fuel industry began to feel conscious about Mexico’s protectionism. The Chief Executive of the API,
Mike Sommers, took the lead to express such concerns in a letter sent to U.S. government officials in June 2020, shortly
before the USMCA entered into force. Following this letter, other stakeholders would send similar petitions to both the U.S.
and Mexican governments. Sommers claimed that the recent measures taken by the AMLO administration undermined thesuccess of the USMCA. He encouraged the U.S. government to use diplomatic channels to urge Mexico to assure theopenness of energy markets.41 Also, Sommers described AMLO’s energy policy as “inconsistently applied or inconsistent
with past practice” and expressed strong concerns about the negative impacts on the permits for fuel trade, storage facilities,
and liquids and LNG terminals.42 In July 2020, Sommers’ concern became a reality when the U.S. Talos Energy and Pemex
came into conflict over the operating rights in the Zama field of the Gulf of Mexico.43 In October 2021, 43 members of the
Mexico is the hardest-hit country by COVID-19, with Pemex downgraded to junk by a rating agency in April 2020. President AMLO attributed
Mexico’s economic downturn to the liberalization by the previous regime, and COVID-19 accelerated such claim and the policies targeting its private
sector. As of early 2021, Mexico’s protections targeted renewable energy by limiting access to the grid. The possible spillover to the U.S. oil and gas
industry become more of a reality as AMLO seeks to rescue Pemex.
41 American Petroleum Institute. https://www.api.org/~/media/Files/News/Letters-Comments/2020/API_Comments_Mexico_061120 (Accessed
November 24, 2021).
42 To confirm Sommers’ concerns, Iberdrola, a Spanish electricity company, halted building a combined-cycle power plant in Mexico. Although theeffect of Mexico’s protectionist policy is not clear, AMLO has long expressed concerns about Iberdrola’s influence in the Mexican electricity market.
The company’s announcement to withdraw from Mexico would suggest that the government’s discriminatory intentions were at work. See Mexico
News Daily. “Spanish Energy Firm Iberdrola Threatens to Halt Further Investment in Mexico.” https://mexiconewsdaily.com/news/iberdrolathreatens-to-halt-further-investment/ (Accessed November 24, 2021).
43 Reuters. “Mexico’s Pemex, Talos Energy Told to Seek Deal on Shared Oil Find.” https://www.reuters.com/article/us-mexico-oil-zamaidUSKBN249358 (Accessed November 24, 2021).
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U.S. Congress sent a similar letter to President Trump.44 Amid the worsened situation in January 2021, on the eve of theinauguration of the Biden administration, Secretary of State Mike Pompeo, Energy Secretary Dan Brouillette andCommerce Secretary Wilbur Ross wrote in a letter to Mexican officials that the Mexican energy policy threatened U.S.
companies’ investment.45
These letters clearly presented the U.S. intentions to negotiate with Mexico in accordance with the USMCA principle,committed to liberal practice. The virtual meeting between President Biden and President AMLO in March 2021
demonstrated that such intentions were passed on to the new U.S. administration.46 It is worth noting, however, that there
is a divergence of perceptions between the Biden administration and the U.S. fossil fuel sector over to what extent the
government should protect its oil and natural gas industry.47 As one prominent example, Biden’s trade chief Katherine Taiargued for prioritizing the U.S. climate goals in protecting U.S. investment during the first USMCA Free Trade Commissionin May 2021. With an eye to Biden’s climate agenda, the API argued that the recent Mexican protectionism was in favor ofits fossil fuel sector and that addressing the U.S. fossil fuel sector’s complaints would “align with the White Housepriorities.” 48 The reconciliation between the Biden administration–focusing primarily on the Mexican Government’s
regulation on renewable energy–and the U.S. fossil fuel sector–seeking protection against Mexico’s infringement of its
interests–will be the key to U.S. energy policy towards Mexico.
(3) Accelerated Protectionist Policies by AMLO Administration
The Mexican side, in response to the U.S. claims, has continued its discriminatory energy policies by highlighting
USMCA Chapter 8. Facing U.S. lawmakers’ complaints against the Mexican energy policies, President AMLO
downplayed the criticism by saying the lawmakers were an “insignificant minority.” 49 Despite such bold statement,
however, Mexico has been suffering from a decline n energy self-sufficiency due to domestic resource depletion, which led
to the increasing oil and natural gas import from the U.S. (Fig. 7). U.S. natural gas especially matters for Mexico because it
substitutes more expensive liquified natural gas (LNG).50 Given Mexico’s increasing dependence on U.S. fossil fuels, itwould not be desirable for the AMLO administration to undermine the relationship with the U.S., but the recent Mexican
policies appear to neglect the reality of its energy market for protecting its own companies.51
As a significant step, President AMLO reiterated his intention to protect a nationally owned utility company, Comisión
Federal de Electricidad (CFE), and to amend the Constitution in case the current legislation would not save the company.
In October 2021, AMLO submitted a bill to Congress for amending the Constitution to strengthen government control overthe electricity sector in Mexico. At that point, the bill was not likely to pass because the ruling coalition did not have enoughseats in the Congress. If the government does not improve the status of nationally owned companies, however, President

44 Congress of the United States.

https://gonzalez.house.gov/sites/gonzalez.house.gov/files/10.22.2020%20Cornyn%20VGonzalez%20POTUS%20Mexico%20Market%20Issues%20
Ltr%5B3%5D%202_0.pdf (Accessed November 24, 2021).
45 The Hill. “U.S. Officials Raise Concerns over Mexico’s Handling of Energy Permits.” https://thehill.com/policy/energy-environment/534506-usofficials-raise-trade-concern-over-mexicos-handling-of-energy (Accessed November 24, 2021).
46 The White House. “U.S.-Mexico Joint Declaration.” https://www.whitehouse.gov/briefing-room/statements-releases/2021/03/01/u-s-mexico-jointdeclaration/ (Accessed November 24, 2021).
47
Bloomberg. “Biden Trade Chief Voices Strong Concern for Mexico Energy Policy.” https://www.bloomberg.com/news/articles/2021-05-19/bidentrade-chief-voices-strong-concern-for-mexico-energy-policy (Accessed November 24, 2021).
48 Mexico’s restrictions on renewable energy led U.S. investors to increase their investment in Mexico’s oil and gas sector. See Argus. “US Raises
Energy Industry Complaints with Mexico.” https://www.argusmedia.com/en/news/2215923-us-raises-energy-industry-complaints-with-mexico(Accessed November 24, 2021).
49 Argus. “AMLO Shrugs Off US Lawmakers’ Energy Complaints.” https://www.argusmedia.com/zh/news/2236986-amlo-shrugs-off-us-lawmakersenergy-complaints?amp=1 (Accessed November 24, 2021).
50 US Energy Information Administration. U.S. Natural Gas Exports.
51 EIA’s Low Oil and Gas Supply Case expects stagnant U.S. natural gas export to Mexico, and the export remains flat even in the High Oil and Gas
Supply Case. Faced with uncertainty regarding U.S. natural gas supply in the future, Mexico may need to install more renewable generation andincrease domestic oil and gas production to meet future demand. The market pressure, thus, could be a factor to change the protectionist policies. For
the scenarios, see U.S. Energy Information Administration. “Annual Energy Outlook 2021.”
https://www.eia.gov/outlooks/aeo/narrative/introduction.php (Accessed November 24, 2021).

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AMLO might seek to strengthen its protectionist orientation and try to win support from the opposition party.52 The politicaldevelopment in Mexico is notable; for, the constitutional amendment, if achieved, will impose further restrictions on foreigncompanies investing in Mexico.53
In the short run at least, the AMLO administration is likely to follow the path of energy protectionism in contrast to the
USMCA’s principles. In this regard, compared to the NAFTA era, the ISDS mechanism is expected to play a more importantrole for protecting U.S. companies from Mexico’s discriminatory policies. When the level of Mexican protectionist policies
reaches unacceptable, U.S. companies will seek to protect their own interests by accessing ISDS.54 While the ISDS
mechanism was primarily effective between the U.S. and Canada during the NAFTA era, the mechanism will become more
influential in oil and natural gas trade between the U.S. and Mexico under the USMCA.

4. Conclusion
This study summarized the USMCA’s energy provisions and provided possible outlooks for the two bilateral relations,
U.S-Canada and U.S-Mexico, respectively. The USMCA’s energy provisions present that both Canada and Mexico
succeeded in reflecting their interests in the new agreement. It is worth noting, however, that the elimination of the
proportionality clause creates an environment where the Canadian oil sands industry could face stagnant oil export volumes
to the U.S. The protectionist provisions regarding Mexico, on the other hand, threaten the U.S. oil and natural gas sector
which has been investing in Mexico since the 2013 Constitutional Reform. The energy relationship between the U.S. andMexico does not only unfold internationally but also develops as domestic political issues in the U.S. because the frictions
have already become intense between the Biden administration and the fossil fuel industry. The ISDS mechanism, which
remained only effective between the U.S. and Mexico, would presumably play a more important role in case the domestic
coordination efforts failed. As the “double bilateralism” of North America indicates, the implications of the USMCA’s
provisions differ between U.S.-Canada–in which new provisions amend the institutional foundations of oil and natural gas
trade–and U.S.-Mexico–in which the provisions endorse the concerned Mexican protectionist policies on its fuel sector.
Given such differences, this last section looks at how the North American regional energy landscape could develop in theage of the USMCA.
The USMCA is likely to stall any U.S. moves for pushing oil and natural gas supplies from Canada and Mexico, as has
been the case for more than two decades since NAFTA’s launch. Since the shale revolution radically increased U.S. oil andnatural gas production and decreased the importance of Canadian and Mexican fossil fuels for U.S. energy supply, the
USMCA was not designed to encourage oil and natural gas imports from the U.S. neighbors, especially Canada.
Furthermore, the elimination of the proportionality clause does not only mean that Canadian crude oil is less significant for
the U.S. but also creates a tough business environment for Canada’s oil exporters due to the U.S. decarbonization push. The
AMLO administration, on the other hand, uses the USMCA provisions as justification for continuing discriminatory policies
in the energy sector, which implies that U.S. companies may suffer adverse effects from their investments in Mexico. The
USMCA provisions, although created in different contexts of the two bilateral relations, share a common implication that
the U.S. may face difficulty in deepening cooperation in the oil and natural gas sector with Canada and Mexico.
The last comment touches upon the absence of climate change countermeasures, which have growing relevance to North
American countries, in the USMCA. Due to the absence of climate change provisions, the role of the USMCA for climatechange will presumably be limited to providing a platform for discussion, as was the case at the USMCA’s ministerial-levelmeeting in May 2021.55 The climate change initiatives in North America will likely develop outside the USMCA’s
52 The ruling coalition had 57.8% of the Senate’s seats and 55.5% of the House of Representatives’ seats. The constitutional amendment requires a

two-thirds of members present in both the Senate and House. See「日本貿易振興機構「AMLO 大統領、電力分野の国の影響力強化する憲法改正案を国会提出」、https://www.jetro.go.jp/biznews/2021/10/755d978f9785466e.html (Accessed November 24, 2021).
53 Reuters. “UPDATE 1-Mexico Could Change Constitution to Strengthen Pemex President.” https://jp.reuters.com/article/mexico-energy/update-1mexico-could-change-constitution-to-strengthen-pemex-president-idINL2N2F01KA (Accessed November 24, 2021).
54 To deal with the dispute with Pemex over the Zama field, Talos Energy has notified the Mexican government in writing that if the dispute cannot be
resolved through negotiations, this conflict may develop into an ISDS process.
55 The USMCA contains provisions on environmental protection in Chapter 24, which mentions the Montreal Protocol and the Washington- 14 -IEEJ Energy Journal

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framework such as the “Roadmap for a Renewed U.S.-Canada Partnership” which includes climate change measures.56
One of the future challenges for Mexico–a country prioritizing its hydrocarbon sector–is to follow the U.S. and Canadianleads for decarbonization. Although the U.S. and Canada appear to be aligned in their efforts for decarbonization, bothcountries will face difficulties in promoting cooperation given the competition of domestic political parties as well as thefrictions between the federal and state governments (Mildenberger & Stokes 2021). As the Keystone XL case indicates, theclimate policies in one country easily cause conflicts in North America where the interdependence of oil and natural gas
sectors has matured. Undeniably, domestic issues could turn into a regional conflict if the U.S. or Canada were to launch aseries of climate change measures independently. The regional cooperation over climate change may, thus, provechallenging in the age of the USMCA. One needs to keep a close look on how the development of energy policies and thechange in supply-demand structures inside the three member countries will affect the debate over the USMCA.
The USMCA aims to deepen economic cooperation among the three countries in the spirit of NAFTA. In energy field,
however, the updated agreement does not offer a framework that enables the cooperation for two important practices: first,
oil and natural gas business; and, second, climate change measures. U.S. legislators already expressed their complaints about
the first point in a letter condemning Mexico. Similar concerns may be expressed against the U.S. and Canadian policies in
the future. Regarding the second point, even though North America now produces as much oil as the Middle East, the
USMCA does not encourage the regional cooperation to tackle climate change.57 Considering the potential impacts on the
global energy landscape, close attention, therefore, should be paid to whether the USMCA’s provisions impede U.S.
leadership as well as the regional cooperation or whether the U.S. will take the lead for cooperation over fossil fuel anddecarbonization under the USMCA.
References
1)
Cameron, Maxwell A. and Tomlin, Brian W. 2000. The Making of NAFTA: How the Deal Was Done. Cornell
University Press.
2)
Clarkson, Stephen. 2008. Does North America Exist? Governing the Continent after NAFTA and 9/11. Universityof Toronto Press and Woodrow Wilson Center Press.
3)
Clarkson, Stephen, and Matto Mildenberger. 2011. Dependent America? How Canada and Mexico Construct USPower. University of Toronto Press and Woodrow Wilson Center Press.
4)
Herran, Roberto Rios and Pietro Poretti. 2011. “Energy Trade and Investment under the North American Free
Trade Agreement.” In Regulation of Energy in International Trade Law: WTO, NAFTA and Energy Charter, editedby Selivanova Yulia. Wolters Kuwer.
5)
Hufbauer, Gary Clyde and Schott, Jeffrey J. 2005. NAFTA Revisited: Achievements and Challenges. Institute forInternational Economics.
6)
Mildenberger, Matto and Stokes, Jeah C. 2021. “The Energy Politics of North America.” In The Oxford Handbook
of Energy Politics, edited by Kathleen J. Hancock and Julian Emmons Allison. Oxford University Press.
7)
O’Sullivan, Meghan L. 2017. Windfall. Simon & Schuster Paperbacks.
8)
Yergin, Daniel. 2020. The New Map: Energy, Climate, and the Clash of Nations. Allen Lane.

Convention but makes no reference to international climate change agreements such as the United Nations Framework Convention on Climate Change
and the Paris Agreement. See JURIST. “Dissecting and Unpacking the USMCA Environmental Provisions: Game-Changer for Green Governance.”https://www.jurist.org/commentary/2020/06/malkawi-kazmi-usmca-environment/ (Accessed November 24, 2021).
56 The White House. “Roadmap for a Renewed U.S.-Canada Partnership.” https://www.whitehouse.gov/briefing-room/statementsreleases/2021/02/23/roadmap-for-a-renewed-u-s-canada-partnership/ (Accessed November 24, 2021).
57 As of 2019, OPEC’s oil production was 29.3mb/d while the three countries produced 25.8mb/d. See OPEC. “Annual Report 2019.”
https://www.opec.org/opec_web/static_files_project/media/downloads/publications/AR%202019%20for%20web.pdf (Accessed November 24,2021).

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Impacts of COVID-19 pandemic on Japan’s CO2 emissions in FY2020
Ryo Eto*1. Energy-related CO2 emissions in FY2020 decreased by 5.9% on a year-on-year basis but mainly
due to the COVID-19 pandemic
According to the FY2020 Comprehensive Energy Statistics based on a wide range of energy-related statistics publishedin April 2022 by the Ministry of Economy Trade and Industry, energy-related CO2 emissions in FY2020 were 967Mt-CO2,
a 61Mt-CO2 (5.9%) fall from the level of FY2019 and the smallest since FY1990 when statistically available (Fig.1). Thisis the equivalent of 21.7% below the level of FY2013 and the reduction pace is ahead of the target, 45% below the level of
FY2013 in FY2030 published in the revised strategic energy plan October 22, 2021.

1,500

MtCO2
2020

1,000

500

2010

2015

2020

2025

2030

Fig. 1 CO2 emissions and the target
Source: Ministry of Economy Trade and Industry “Comprehensive Energy Statistics”
Note: Actual data from FY2010 to 2020. Target of strategic energy plan for FY2030.

When the changes in CO2 emissions from FY2013 are decomposed into three factors, a GDP factor, energy intensity
factor1, and a carbon intensity factor2, while the GDP factor contributed to a 40Mt-CO2 increase in FY2019 from the levelof FY2013, it turned out to contribute a 6Mt-CO2 decrease in FY2020 (Fig.2). CO2 emissions decreases in FY2020 wereachieved by economic depression triggered by the COVID-19 pandemic.

* Senior Economist, Energy and Economic Analysis Group (EEA), Energy Data and Modelling Center (EDMC), IEEJ
1 Energy consumption divided by GDP. If it gets smaller, it indicates an energy decrease, and if it gets bigger, it indicates an energy increase.
2 CO emissions divided by energy consumption. If it gets smaller, it indicates low carbon, and if it gets bigger, it indicates high carbon.
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100

0
MtCO2

0
-100

-97
-50
-89

-109

Energy intensity factor
Carbon intensity factor

-125

-166

-200

Confounding factor
CO2 emissions

-170
-207

-300

GDP factor

-6

-268
2013 2014 2015 2016 2017 2018 2019 2020

Fig. 2 Decomposition analysis of CO2 emissions
Source: Ministry of Economy Trade and Industry “Comprehensive Energy Statistics”

This article develops a case where there was no COVID-19 pandemic and evaluates the impacts of the COVID-19
pandemic on CO2 emissions in FY2020. Economic activity and energy consumption in this case are based on economicand energy outlook estimations of FY2020 published on December 23, 2019, by the Institute of Energy Economics, Japan,
before the COVID-19 pandemic. In this regard, however, we use actual data of FY2020 for temperature which affects
consumption in commercial and household sector, and plans of electric power supply such as the timing of restart of nuclear
power generation and the start of operation of renewable energy and coal-fired power generation because they are
considered unrelated to COVID-19.

2. Passenger transport and crude steel production were largely affected by the COVID-19
pandemic
When actual data is compared to the case without the COVID-19 pandemic, real GDP fell greatly (-5.0%) (Fig.3).

-5.0%

Real GDP

-9.9%

IIP
Crude steel
production-16.8%

Tertiary industry
activity index-7.5%

Passenger
trasnport-26.5%

Freighttransport-4.9%-30% -25% -20% -15% -10% -5%0%Fig. 3 Effects of COVID-19 on economic activity indicators in FY2020(Actual data compared to the case without the COVID-19 pandemic)- 17 -IEEJ Energy Journal

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2022

Passenger transport was affected most among energy-related economic indicators due to stay-at-home advisories (26.5%). Crude steel production was affected most among energy intensive industries (-16.8%). This was due to automobile
factory production halts and delayed construction due to COVID-19 infection control. The tertiary industry activity index
fell 7.5% with shortened opening hours of restaurants and entertainment services.

3. Coal decreased most among fossil fuel consumption due to COVID-19 pandemic
Fossil fuel in FY2020 decreased due to the economic activity fall caused by the COVID-19 pandemic (Fig.4).

-10.8%

Coal

-6.7%

Oil

Natural gas
City gas

-2.0%

-15%

-10%

-5%

0%

Fig. 4 Effects of COVID-19 on fossil fuel consumption in FY2020(Actual data compared to the case without the COVID-19 pandemic)
Coal decreased by 10.8% reflecting falls in coal-fired power generation in addition to decreases in crude steel production.
Oil decreased by 6.7% along with a fall in passenger transportation. Natural gas/city gas decreased by 2.0% along with falls
in electricity and city gas demand in the industry and commercial sectors.

4. Energy intensity factor and carbon intensity factor contributed to reducing CO2 emissions aswell as the GDP factor due to the COVID-19 pandemic
CO2 emissions were estimated to be 1,039MtCO2 in FY2020 in the case without the COVID-19 pandemic, a 1.0%
increase from FY2019. This indicates that 72MtCO2(6.9%) in emissions were reduced by the COVID-19 pandemic. With
the decomposition analysis of this 72MtCO2, the GDP factor contributed the most to the decrease (-51MtCO2) (Fig.5). In
addition, the carbon intensity factor and the energy intensity factor contributed to the decrease. The carbon intensity factor
contributed to the decrease because energy consumption decreased due to the COVID-19 pandemic and most of that
decrease came from fossil fuels. In addition, the energy intensity factor contributed to the decrease because passenger
transportation which has a small correlation with GDP fell. This indicates that in the rebound process from the COVID-19
pandemic, the energy intensity factor and the carbon intensity factor will contribute to increased CO2 emissions in addition
to the GDP factor.

- 18 -IEEJ Energy Journal

Vol. 17, No. 3

2022

0
-10

MtCO2

-20

-12

-8

-30

GDP factor-40

Energy intensity factor

-50

-51

Carbon intensity factor
Confounding factor

-60
-70
-80

-71
2020

Fig. 5 Decomposition analysis of CO2 emissions due to the COVID-19 pandemic(Actual data compared to the case without the COVID-19 pandemic)

5. Conclusion
While CO2 emissions in FY2020 decreased 5.9% from the level of FY2019, this was caused by decreases in fossil fuelconsumption mainly coal by COVID-19 pandemic. In the case without the COVID-19 pandemic, CO2 emissions reach
1,039MtCO2 in FY2020, an increase of 1.0% from the level of FY2019. The reduction pace, in that case, would be behind
45% below the level of FY2013 in FY2030. While the COVID-19 pandemic caused changes in consumption behavior,economic activity will be expected to be close to the case without the COVID-19 pandemic as back to a normal economic
situation, fossil fuels will rebound and CO2 emissions will increase. It is required for Japan to cut renewable energy costs
and facilitate the restart of nuclear power plants in addition to energy saving investment in each sector.

- 19 -IEEJ Energy Journal

Vol. 17, No. 3

2022

Impacts of the Russian invasion to Ukraine on Japan’s energy policy
From the viewpoint of 3E+S
Ryo Eto*On October 22, 2021, the Cabinet approved the Sixth Strategic Energy Plan. After the Fifth Strategic Energy Plan wasapproved by the Cabinet on July 3, 2018, the issue of climate change has been recognized as an urgent problem common
to mankind. On October 26, 2020, Japan declared Japan’s 2050 carbon neutral goal along with Japan’s new target of a 46%
cut by fiscal 2030 in GHG emissions compared to 2013 and to strive toward the higher goal of 50% announced on April
22, 2021. In addition to the growing interest in the climate change issue, changes in the lives of people due to the rapid
spread of COVID-19 infections and the economic security environment in response to the changes in geopolitical and geoeconomic situations are taken into account at the Sixth Strategic Energy Plan. In this regard, however, the geopolitical andgeo-economic situations mainly focus on the US-China conflict and the situation in the Middle East. LNG prices on spot
surge risk focus on changes in China’s demand and oil prices surge risk to focus on the situation in the Middle East.
The aim of the energy policy is to first and foremost ensure stable supply (“Energy Security”), and realize low cost energy
supply by enhancing its efficiency (“Economic Efficiency”) on the premise of “Safety.” It is also important to makemaximum efforts to pursue environment suitability (“Environment”). Geopolitical and geo-economic issues that have arisen
from the Russian invasion into Ukraine are required to be newly added to the viewpoint of 3E+S.
In the Sixth Strategic Energy Plan, Russia is recognized as increasing its military presence in the Middle East in terms ofgeopolitical and geo-economic issues. However, with the Russian invasion into Ukraine on February 24, 2022, newgeopolitical and geo-economic issues arose only four months after approval by the Cabinet. In March, the European Union’s
Council decided to exclude seven Russian banks from the SWIFT (The Society for Worldwide Interbank Financial
Telecommunication) system. With heightened concern regarding Russian energy exports, Brent crude hit over $130/bbl,
which was the highest in 13 and half years since September 2008. With this surge, current energy price levels are beyond
the scope of the assumption in the phase of creating the Sixth Strategic Energy Plan (the final report from the Working
Group on generation costs1).
Energy Security is the most affected viewpoint among 3E+S. Using fossil fuels increases CO2 emissions and price rises
cause an outflow of national wealth and higher electricity prices. However, fossil fuels are necessary for the transition tocarbon neutral in 2050 to secure installed capacity with sufficient supply capacity to respond to instantaneous and/or
continuous drops in electricity generated by renewable energy on the supply side and heat utilization on the demand side
and will account for 70% of primary energy supply in the 2030 target. Because Japan is dependent on the Middle East for
about 90% of its crude oil imports and LNG imports account for most gas demand, Japan carried forward independent
development of oil and natural gas, which Japanese companies are directly engaged in the development and production of,and developing domestic resources with the promotion of comprehensive resource diplomacy in terms of securing stablesupply.
With this background, the Sakhalin 1 and 2 projects are important for contributing to diversifying suppliers and raising
the independent development rate because they are geographically extremely close to Japan. However, sanctions against
Russia have been tightened since the Russian invasion into Ukraine, and many Western companies withdrew from Russia.
As well. Shell and ExxonMobil declared to withdraw from Sakhalin 1 and from Sakhalin 2 in the energy field. Japan needs
to make careful consideration for stopping importing and developing from Russia since this will increase disadvantages interms of energy security.
While the EU is dependent on Russia for about 45% of its natural gas imports, the EU made a plan to reduce the* Senior Economist, Energy and Economic Analysis Group (EEA), Energy Data and Modelling Center (EDMC), IEEJ
1 Fossil fuel prices are estimated with the trends in the new IEA policy scenario ”World Energy Outlook 2020.”- 20 -IEEJ Energy Journal

Vol. 17, No. 3

2022

dependency rate to zero by 2030. To achieve the target, the EU will increase LNG imports as well as enhance energy
efficiency and increase the use of renewable energy and nuclear. Since LNG is difficult to store and has little capacity toincrease supply, supply and demand will be very tight if the EU increases LNG imports. Thus, stable LNG supply for Japan
will be a more significantly important issue. In addition, the EU might seek postponement of the shutdown and restart ofcoal-fired power generation in order to reduce gas dependency on Russia. The EU imports half of its steam coal from Russia
and thus is starting to move to Asia and Oceania such as Australia to switch from Russia. While Japan eyes diversifying
energy sources and reducing import dependency, the importance of upstream investment besides in Russia will further
increase.
The view of the Environment is important because the world trend toward carbon neutral will be unchanged even if
concerns on stable supply become a bigger issue. Note that gas might be switched to coal with the postponement of
shutdown and restart of coal-fired power generation as a consequence of more focus on stable supply in the short term. We
need to look at how a focus on the importance of energy security due to the Russian invasion into Ukraine will affect thediscussion of global warming. Japan will seriously consider early introduction as well as lowering prices of non-fossil
energy such as hydrogen, ammonia, methanation, and offshore wind which will contribute to stable supply as well as
decarbonization. In addition, if nuclear can restart earlier, it will contribute to stable supply and curbing electricity price rises
as well as decarbonization.
In the view of Economic Efficiency, Japan also imposed economic sanctions on Russia, which negatively impacts
Japanese manufacturers such as through revocation of the most favored nation status for Russia, halting Japanese
automakers’ production in Russia, and export regulations on machinery such as semiconductors and communicationequipment. In the middle and long terms, manufacturers in Japan will suffer from higher production costs caused by highfossil fuel import prices induced by a tightened energy market due to the EU increasing LNG imports. Note, however, thatwhile it is a concern that private investment will be postponed due to higher uncertainty arising from the unstableinternational situation and economic depression, higher fossil fuel import prices will enhance economic efficiency ofenergy-saving and decarbonization investment. In the transportation sector, introduction of electric vehicles is expected for
decarbonization and if fossil fuel import prices rise, the competitiveness of electric vehicles will be higher. Note that therare-earth metals required for electric motors and batteries are mainly located in Russia and China; thus, it will be required
to cope with concerns about reducing the economic efficiency of energy-saving and decarbonization investment broughtby price hikes and unstable supply of rare-earth metal.
While nuclear is one of the options to contribute to reducing fossil fuel dependency and 3E, Russian forces attacked theZaporizhzhia nuclear power plant in Ukraine and military attacks on nuclear have come to pose a real threat. Discussions
on nuclear will be held with increasing interests in this new risk. In Japan, emergency facilities that will remotely control areactor in the case of a terrorist attack, natural disaster, or aircraft collision are required to be built for restart. What is firstnecessary is to strengthen and ensure nuclear safely by adjusting new nuclear safety regulations, then to take measures inview of the national defense that will be required against military attacks.
In this way, it is expected to examine individual policies against geographical issues which are not assumed in the current
Strategic Energy Plan before revising it as well as incorporating the issues into the next one.

- 21 -IEEJ Energy Journal Vol. 17, No. 3 2022
COVER STORY • 5

T◆he Potential & Challengesof Renewable Energy
Deployment in Japan
AuthorHiroko Nakamura

By Hiroko Nakamura*In fiscal 2020, Japan’s total power generation was 1,001 terawatthours (TWh), with 19.8% of the electric power supply generated
from renewable energy (hereafter “renewable power”), including
large scale hydropower. The share of renewable power has almost
doubled from fiscal 2011 levels (10.4%). The Feed-in-Tariff (FIT)
scheme introduced in July 2012 has contributed greatly to thismassive increase. However, given the high surcharges under the FIT
scheme shouldered by consumers, amounting to a total of around
2.7 trillion yen in fiscal 2021, an auction scheme was introduced forlarger projects in 2017. In April 2022, a Feed-in-Premium (FIP)
scheme will be introduced with the intention of encouraging power
generators to act more in line with market trends.
With Cabinet approval of the Sixth Strategic Energy Plan, Japanhas welcomed the new year with a new renewable deployment target
for the electric power mix in 2030. This paper will examine current
trends and challenges of renewable energy deployment in Japan.

How Challenging Are Japan’s Renewable Energy
Targets?
The Sixth Strategic Energy Plan, approved by the
Cabinet in October 2021, renewed Japan’s
renewable energy targets. The new overall target
aims to have an “ambitious” renewable power mix
of 36-38% in 2030 compared to the previous
target of 22-24% set out in the Strategic Energy
Plan published in 2018. This amounts to a total of336-353 TWh of renewable power, calling for
installed capacity of 103.5-117.6 gigawatts (GW)of solar power, 23.6 GW of wind power (17.9 GW
onshore, 5.7 GW offshore), 1.5 GW of geothermal
power, 50.7 GW of hydropower, and 8 GW ofbiomass.
How does this compare to previous targets? The
renewed targets do not call for significant
increases in hydropower and geothermal power,
but require efforts to upscale solar power, wind
power, and biomass for which previous targets
were 64 GW and 10 GW, and 6.02-7.28GW,
respectively (Chart 1). The installed capacity ofthese sources stood at 62.4 GW, 4.6 GW and 5.4
GW, respectively, as of June 2021. Taking into

consideration the capacity of facilities already approved under the FIT
scheme yet to be commissioned, an additional 22.6-36.7 GW will beneeded to meet the renewed target for solar power, and an additional
7.7 GW for wind power. However, even the offshore wind projects forwhich winning bidders were recently selected will only come online
in 2028 at the earliest.
This paper will focus on the three sources that require significant
efforts in increased deployment: solar power, wind power andbiomass.

Solar Power – Main Driver of Renewable Energy
Deployment
Solar power has been the main driver of renewable energy
deployment in Japan (Chart 2). Japan’s increases in renewableenergy will need to continue to rely on solar power in the short term,
due to the shorter lead time required to install solar power
generation facilities and the cost reductions already achieved for thistechnology. In order to achieve the renewed 2030 target, Japan will

CHART 1

Status quo of renewable energy deployment
against new 2030 targets
140
120

New target
103.5-117.6 GW

100
80
New target
50.7 GW

60
40
New target
17.9 GW

20
0

Solar

Onshore wind

New target
5.7 GW

Offshore wind

New target
8 GW

New target
1.5 GW

Geothermal

Hydro

Biomass

Previous target

Additional from previous target-20
Installed capacity

Yet-to-be-commissioned

Source: Compiled by the Institute of Energy Economics, Japan based on published METI data

◆ This paper was first published as the article COVER STORY • 5 in the March/April 2022 Issue (#242) of Economy, Culture & History JAPAN SPOTLIGHT Bimonthly, and was

published in this report with permission form Japan Economic Foundation.

- 22 -* Senior Researcher, New Energy System Group, International Partnership Group, Electric Power Industry & New and Renewable Energy Unit, IEEJIEEJ Energy Journal Vol. 17, No. 3 2022

have to deploy 4-5.5 GW every year during the coming decade.
However, with a FIP scheme to be newly introduced this year, a waitand-see mood is expected to prevail in solar investments this year.

Overcoming land restrictions

Power generation per area of flat land
(MWh/km2)

GW

Further increases in solar power entail many challenges. Japan
already has the third-largest installed capacity of solar power in theworld, only after the United States and China. The amount of solar
power generated per area of flat land tops all other countries with
570 MWh/km2. Germany follows with 190 MWh/km2, or only onethird the figure for Japan (Chart 3). This indicatesthe limits faced by Japan in increasing solar power
CHART 2
generation.
Renewable energy increases in Japan underSocial acceptance has become anotherthe FIT scheme
challenge. Natural disaster-induced accidents and90
landscape conservation issues have aroused local
resistance against utility-scale solar power80
projects. This has led to a recent increase in the
70
number of local ordinances that regulate the siting
60of solar power facilities. Therefore, in addition tothe objective judgment of whether an accident is
Solar
50(Commercial)really attributable to the siting or if there wereSolar
40
problems with the construction, there is a growing(Residential)
need for fostering good relations with the local
30
Wind
community, which often have a sense of ownership
Geothermal
20
Hydro
of local natural resources or the landscape andBiomass
10
ecosystem that it is a part of. Developers shouldmake efforts to foster a win-win relationship with
0
Before 2012 2013 2014 2015 2016 2017 2018 2019 2020 As of
local communities, for example by demonstrating
June
June
how the facility can be counted on for disaster
2012
2021
Fiscal year
relief. Local governments can play a key role inrepresenting local values and ethics. To this end,
Source: Compiled by the Institute of Energy Economics, Japan based on published METI data
the government seeks to initiate positive zoning
measures and support local development plans for
CHART 3
renewable energy.
Power generation per area of flat land
In 2021, the Ministry of Agriculture, Forestry
1600
and Fisheries eased a requirement for farmers who
install solar panels on abandoned farmland to
1400
produce 80% or more crops per square metercompared with the regional average. This will help
1200
promote agrophotovoltaics, which have become
1000
mainstream in many parts of Europe where suchprojects now represent a large share of winning800
bids in renewable power auctions. The Cabinet has
600
recently approved a bill to facilitate the utilizationof land plots with unknown owners. When this bill400
becomes law, more land area will be available for200
the installation of renewable power facilities.
0

Japan

Germany

FranceAll renewables

UK

China

US

India

Solar power

Source: Compiled by Institute of Energy Economics, Japan based on published METI data and IEA (2021)
Renewables 2020

- 23 -

Future applications
With the end of the FIT scheme for projects
exceeding 1MW, onsite power purchaseagreements (PPAs) are expected to continue toincrease in the short term, mainly for selfJapan SPOTLIGHT • March / April 2022

27

IEEJ Energy Journal Vol. 17, No. 3 2022

TABLE

Results of 2021 offshore wind power auctions
Area(capacity)
Winning
bidderAkita Yurihonjo

Choshi(16.8 MW)Akita Noshiro MitaneOga(478.8 MW)(819 MW)(390.6 MW)

Toda Corp-led
consortium

Mitsubishi Corp-led
consortium

Mitsubishi Corp-led
consortium

Mitsubishi Corp-led
consortium

Goto

Bidders

T

P

F

T

P

F

T

P

F

T

P

F

1)

207

120

87

208

120
(13.26)

88

202

120
(11.99)

82

211

120
(16.49)

91

185.6

87.60
(22.59)982)–161.52

87.52(18.18)73

156.6583.65(17.00)73

3)–157.7793.8(16.97)

64

149.7

58.73
(24.50)

91

–

4)

–

149.3571.4(22.30)78

144.7378.2(18.40)

66

–

5)

–

127.0469.0(27.00)68140.2062.58(23.00)78–

Notes: 1) – 5) indicate the ranking of bids. T stands for total; P for price score (total 120 points); F for feasibility score (total 120 points). Prices (yen/kWh)are provided in brackets for each bidder, calculated based on the price score, which represents the ratio to the winning bid.

Source: Compiled by the Institute of Energy Economics, Japan based on the joint press release by the Ministry of Economy, Trade and Industry (METI) and theMinistry of Land, Infrastructure and Transport (MLIT) dated Dec. 24, 2021

consumption in the industrial and commercial sectors. PPAs, which
do not require upfront capital costs, will be an attractive option for
public buildings, for which the government seeks to make theinstallation of solar panels mandatory by 2040. In the residential
sector as well, a real estate developer has announced that it will
install solar panels on all new residential buildings, using a PPA
model.
Promising future applications for solar power are building facades,
automobiles, roads and greenhouses. Innovative solar photovoltaic
technologies can enable the application of solar modules to places
that we could never imagine before due to their lightweight andflexible features. At the end of last year, a national research anddevelopment agency, the New Energy and Industrial Technology
Development Organization (NEDO), announced plans to allocate 20
billion yen for the development of perovskite photovoltaic
technologies, for which Japanese companies have demonstrated
world-leading power conversion efficiency levels and innovating
coating methods that greatly reduce production time and costs.

Offshore Wind Momentum
Japan initially introduced onshore wind power in the 2000s, but its
deployment has been slow, accounting for only 0.9% of total power
generation in fiscal 2020. According to the Japan Wind Power
Association (JWPA), Japan bears the potential for around 128 GW of
fixed offshore wind power in shallow ocean areas 10-50 meters deep
and around 424 GW of floating wind power in areas 100-300 metersdeep. Most of these areas are located in the regions of Hokkaido,
Tohoku and Kyushu.
28 Japan SPOTLIGHT • March / April 2022

The year 2021 was a landmark year for offshore wind power, apromising technology for Japan, given its limited flat land area with
optimal wind conditions. The government held the first round of
auctions for offshore wind projects in sites designated as promotion
zones under the Act on Promoting the Utilization of Sea Areas for theDevelopment of Marine Renewable Energy Power Generation
Facilities. The first auction was held for a project off the coast of
Goto city in Nagasaki Prefecture. Only one bidder responded to thecall and the result was finalized in June. Auctions were also held forthree projects in the sea area offshore Noshiro city, Mitane town andOga city, all in Akita Prefecture; the sea area offshore Yurihonjo city
in Akita (northern and southern sides of the prefecture); and the sea
area offshore Choshi city in Chiba Prefecture. The winning bidders
for all three projects were announced on Dec. 24, 2021 (Table).
The auction results for the three projects aroused both optimism
and concerns for the future of offshore wind power development inJapan. The price target for offshore wind power in 2030-35 has been
set at 8-9 yen/kWh. This had been considered an ambitious target
compared to the FIT price of 36 yen/kWh for fixed-bottom offshore
wind power initially determined in fiscal 2014. The winning bid for
the Akita Yurihonjo project (11.99 yen/kWh) was less than half of thebid cap (29 yen/kWh) and offered reality to the feasibility of the2030-2035 target.
Hopefully, the fact that consortiums led by the same corporategroup won all three auctions with an outstandingly competitive pricewill not discourage future bidders from working closely with local
stakeholders to foster good relations. A significant feature of thecurrent Japanese auction scheme is that once a promising area foroffshore wind projects is selected, a council comprising interested- 24 -IEEJ Energy Journal Vol. 17, No. 3 2022

parties, including local government and fishery cooperatives, isassembled to discuss the designation of a promotion zone andaspects the auctions should consider. The price score and feasibility
score, which includes local considerations, are equally allocated 120
points. As aforementioned, fostering local understanding is essential
for successful renewable power projects. While we have yet to see
how these projects will play out, hopefully the Japanese auction
model will set a promising example for other Asia-Pacific countries
sharing similar circumstances, including those pertaining to local
resource management.
Commenting on the auction results, Minister of Economy, Tradeand Industry Koichi Hagiuda mentioned his idea to consider ascheme that would facilitate the participation of other players. The
large-scale deployment of offshore wind power, which requires as
many as 10,000-20,000 components, promises to have positive
impacts on domestic industry. As turbines get larger, suppliers will
have a larger incentive to develop and enhance local supply chains to
reduce transportation costs. A wider range of project operators
would allow for the diversification of the supply chain. However, therecent auction results could be a sign of early market consolidationin Japan.

Revisiting the Value of Domestic Biomass
Resources
Biomass power generation accounted for 2.9% of Japan’s total
electric power generation in fiscal 2020. It used to have the largest
renewable share in Japan’s electric power mix before it was
surpassed by solar power in fiscal 2014. The government haspromoted the deployment of biomass power generation through the
FIT scheme, but biomass power generation facilities of 10 MW andmore will be covered by the FIP scheme from April 2022. “Locallyintegrated” projects contributing to enhancing local resilience and/or
promoting the consumption of local products will remain eligible for
the FIT scheme.
Japan faces several challenges in increasing biomass power
generation, which requires a stable fuel supply. Many large-scalebiomass-fired power plants currently rely on imported palm kernel
shell (PKS) and wood pellets that can be procured stably. However,
not only are these imports expensive, the use of PKS, in particular, isinternationally debated from the perspective of socially andenvironmentally ethical supply chains.
With around two-thirds of its land covered with forest, Japan ishome to a promising source of domestic woody biomass. Using
domestic resources will increase the energy self-sufficiency rate,
improve its resilience against natural disasters and contribute to the
management and utilization of domestic forests, much of which havebeen left unmanaged for many years. Biomass power generation
therefore promises to bring enormous local economic benefits,
including employment. Government efforts to promote the use offorest residue and thinned wood have led to their increased use.
However, fuel costs, which account for 70% of biomass power
generation costs, still need to be reduced to ensure continued
operation after the FIT expires.
The current forestry system has been developed mainly for highvalue building materials, mostly made of conifers. Much domestic
woody biomass for energy use is produced from thinning residues
and other material that could not be used for building purposes.
Because woody biomass for fuel use is a byproduct, it is difficult toforecast supply. Furthermore, the collection and transport system
has been tailored to the needs of bulky lumber and should be mademore cost-efficient for woody biomass for fuel use. This has
disincentivized many biomass power generators from using
domestic biomass and instead rely on more stable imported
supplies.
Broadleaf trees, which comprise around 30% of forest
accumulation in Japan, are not widely used for construction because
they tend to grow crookedly. Therefore, systems to transport woody
resources out of broadleaf forests are underdeveloped in many partsof Japan. We have yet to seek ways to harness these abundantdomestic resources in a sustainable way. Thinning unmanaged
forests will contribute to sustainable forest management and thus
local water management. Securing demand would also contribute to
the stable development of the local forestry industry. Domestic
hardwood pulp materials may also be used in the pulp and paperindustry, which also relies heavily on imported resources.
Planting fast-growing trees exclusively for fuel use can also savetime and costs. The commercial use of fast-growing trees will lead toincreased revenue for local forestry workers. Local procurement ofwoody biomass for power generation can create a sustainable winwin relationship between the forestry and power sectors.
Challenges pertaining to the use of woody biomass in power
generation include retaining the quality of woody biomass resources,
such as the moisture content which can affect the capacity factor.
Local providers of biomass may develop drying processes or securestorage facilities to increase the value of their woody biomass
products. Yet there is no standardization scheme in place to evaluate
the quality of these products.
It will also be important to verify lifecycle GHG emissions, as wellas to certify that woody biomass products are from sustainably
managed forests. While biomass is considered a carbon neutralenergy source, it should be kept in mind that if large amounts offossil fuels are used along the supply chain, its CO2 emissions could
exceed the amount absorbed during photosynthesis. The
government has been addressing such supply chain issues.
Currently, there is limited information on the availability anddistribution of woody biomass products. A transparent system
visualizing supply and demand, tracing the origin of resources andtracking GHG emissions will be called for as more biomass is used in
the power sector.

- 25 -

Japan SPOTLIGHT • March / April 2022

29

IEEJ Energy Journal Vol. 17, No. 3 2022

Other Challenges & Potential Solutions
Increasing renewable energy – especially variable renewableenergy – in the power grid entails various challenges, including those
associated with power transmission, supply-demand balancing andenergy storage.
As aforementioned, offshore wind power is found in the Hokkaido,
Tohoku and Kyushu regions, located far from the major urban
electric power consumption areas. A masterplan for a transmission
network based on the Sixth Strategic Energy Plan and the potential
project areas is being discussed under METI. Related cost allocation
is another topic of ongoing discussions.
Energy storage is also an issue to be highlighted in the massive
integration of variable renewable energy in the power grid. Pumped
storage and battery technologies are key solutions to providing
flexibility to the grid. Grid-scale battery energy storage systems(BESS) can smooth out output fluctuation and thus contribute toaccommodating high shares of renewable energy. Japan is a global
leader in the development of various battery technologies but further
cost reductions are called for.
Surplus renewable power can also be used to produce hydrogen,which can be stored for longer periods of time in fuel cells. A powerto-gas (P2G) system using a water electrolysis process to use
electricity to split water into hydrogen and oxygen can provide gridbalancing services and demand management. A hydrogen utilization
business model that optimizes the exploitation of hydrogen both as acommercial commodity and an energy source for balancing the
supply and demand of the electricity grid is currently being
demonstrated at Fukushima Hydrogen Energy Research Field(FH2R), which only recently supplied fuel for the relay torch andhydrogen-powered vehicles used at the Tokyo Olympics andParalympics Games. Since hydrogen can be used in sectors otherthan power generation, the P2G model is an optimal solution forenergy system integration, or sector coupling.
Another issue often overlooked is the secure procurement ofmetals that will be required in large quantities as the world shifts tolow carbon forms of energy and to the massive deployment of
renewable energy. In addition to the rare earth and rare metals
required for various battery and fuel cell technologies, metals suchas copper will be required in greater amounts not only for electric
mobility but also for wind and solar power facilities.

auction in November 2021. Renewable energy value had been tradedin the Non-fossil-Value Trading Market, open only to electricity
retailers, who purchase credits to fulfill their obligation under the Act
on Sophisticated Methods of Energy Supply Structures to achieve a
non-fossil electricity ratio of at least 44% in their electricity sales by2030. The newly launched market, which was detached from theNon-fossil-Value Trading Market, allows consumers to directly
purchase renewable energy value certificates.
Some key discussion points in launching the Renewable Energy
Value Trading Market were the nature of the FIT certificates –whether they would simply guarantee renewable energy sources or ifthey would function as a guarantee of origin – and price levels. The
development of a permanent tracking scheme for certificates isunderway.
Japan saw a significant increase in onsite and physical (offsite)
PPAs in 2021. A number of milestone physical PPAs between
developers and consumers were signed with registered retailers
under the Electricity Business Act. METI changed the rule inNovember 2021 so that corporate consumers can use the selfwheeling program for electricity generated at new sites owned byother companies. The benefits of the self-wheeling program, which
include a smaller wheeling fee and exemption from surcharges,
could previously only be enjoyed for transferring self-generated
electricity to other locations through the grid. Sometime in the near
future, a deregulation of Non-fossil Value Credits market rules may
allow direct virtual PPA contracts between developers andconsumers.

Conclusions
It is often speculated whether or not the ambitious goals set out inthe new Strategic Energy Plan can be met. However, in our drive
toward a decarbonized society, the question is how we can achieve it.
Despite the various challenges associated with massive deployment
and integration of renewable energy, there is still much unlocked
potential. Creative market and business models, as well as innovativetechnologies, will help harness our renewable resources in asustainable way.

New Frameworks for Promoting Renewable Energy
The year 2021 saw many demand-driven changes in the market
framework of renewable power procurement. Amid the growing
momentum for achieving carbon neutrality, this trend was largely led
by major companies seeking to procure large amounts of renewable
power with “additionality” in Japan.
Japan’s Renewable Energy Value Trading Market held its first
30 Japan SPOTLIGHT • March / April 2022

Hiroko Nakamura is a senior researcher at the Institute of Energy Economics,
Japan. She has a Master’s degree in Education from Kagawa University and a
B.A. in Law from Keio University. Her expertise is in climate policy, renewableenergy and hydrogen policy, and participative democracy in energy policy.

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FIT Auction Trends for PV Power Generation
Hideaki Obane*
1. Recent clearing prices are roughly double the international average
Japan revised Feed in Tariff (FIT) in April 2017 to Photovoltaic (PV) system price above a certain scale based on auctions.
Up to now, eleven auctions have been held. The capacity of the PV systems offered for bidding, the price cap, and its
disclosure or non-disclosure have been reviewed several times. The most recent auction, the eleventh, was held with a pricecap of 10.25 yen/kWh (disclosed in advance) for facilities with a capacity of 250 kW or more.
The supply price trends from the first auction held from September to November 2017 through the most recent auction,
the eleventh, indicate that the price has halved in the roughly three-year period from a weighted average of 19.64 yen/kWh
at the first auction to 9.99 yen/kWh at the eleventh (Fig. 1). Further, the price was 12.98 yen/kWh (for 500 kW or higher) at
the fourth auction held in FY2019, which was below the generation cost target of NEDO’s solar power generation
development strategy of 14 yen/kWh through FY2020.
Though declining, however, Japan’s supply price remains high at more than double the global average bidding price forPV1 (3.72 ¢/kWh). Despite having the world’s third largest installed PV capacity, Japan’s bidding price for PV is indeed
high compared with just 6.79 ¢/kWh in Europe (2020 average), where irradiance tends to be lower than in Japan. With its
total FIT surcharge expected to exceed 4.5 trillion yen in FY20302, Japan needs to reduce its PV generation costs efficiently.

Supply price (Yen/kWh)

For 2000 kW or higher

For 500 kW or higher

For 250 kW or higher

No bid2020 target (NEDO)

2025 target

AuctionFig. 1 Trends in supply prices at PV FIT auctions [yen/kWh](estimate based on various results from the bidding system based on the Act on Special Measures
Concerning Procurement of Electricity from Renewable Energy Sources, OCCTO)

2. Awarded capacities have fallen below auctioned capacities in seven of 11 auctions so far
The purpose of the auction system is to reduce costs efficiently by securing opportunities for competition and facilitating
price competition. However, if we compare the total capacity offered at the first to the eleventh auctions and the capacities* Senior Economist, Energy and Economic Analysis Group (EEA), Energy Data and Modelling Center (EDMC), IEEJ
1 International Energy Agency, Average auction prices for solar PV by region and commissioning date, 2016–2022
2 Kenji Asano, Hideaki Obane, “Estimate on the Installed Capacity and Purchase Price of Renewable Energy in 2030,” Socio-Economic ResearchCenter publication Y19514, 2020

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that were awarded, the awarded capacities were lower than the auctioned capacities in seven of the 11 auctions. In particular,bids were placed for only 10% of the auctioned volume at the seventh auction (Fig. 2). Moreover, though the total capacityof bids placed was larger than the auctioned capacity and counted 81 bids in total at the tenth auction, many bidders wereplacing multiple bids, and the number of actual participants was just 45 companies.
Unlike offshore wind power in which plants have to be installed at designated sites, PV generation operators have a lower
risk of losing business to competitors in areas which they are planning to develop. This allows them to place bids at relatively
high prices, and if they lose, to try again at the next auction. As such, when bids repeatedly fall short of auctioned volumes,
the situation tends to create an incentive to place bids at prices as close to the price cap as possible. Indeed, a comparison of
the weighted average of the highest bidding prices and the clearing prices shows that the highest bidding prices were
extremely close to the clearing prices at all eleven auctions (Fig. 3). This suggests that the bidding prices have been declining
so far not because of cost reductions induced by competition, but because the price cap itself has been declining. To reduce
costs through competition going forward, it will be important to revise the system, such as expanding the scale of eligible
generation facilities and changing the auctioned volume.

Auctioned volume

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25

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Fig. 3 Comparison of highest bids and clearing prices (weighted averages) [yen/kWh]- 28 -

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3. Future cost reductions must proceed simultaneously with siting guidance and ensuring
reliability
As described earlier, the clearing price for the eleventh auction (9.99 yen/kWh, weighted average) was roughly double
the global average bidding price and has not reached the 2025 target generation cost (7 yen/kWh) sought by the Japanese
government. While further reductions in PV generation costs are desired, the following matters must also be considered.
First is the change in locations of PV plants. Utility PV plants have so far been installed largely in residential areas (noton buildings) close to the power grid to lower installation costs, or in forests and woods with low land prices. According to
the Forestry Agency, approximately 90 km2 of forests had been modified by 2019 to install PV systems3 under its forest
development permit system. However, installation in residential areas and forests is set to face tougher regulations going
forward based on amendments to municipal ordinances and positive zoning that the Ministry of the Environment has beenplanning in recent years. As such, it will be increasingly important to install PV panels in places that are less susceptible toregulations, such as rooftops of buildings. Meanwhile, PV panels installed on buildings will tend to be smaller in size andmore complex to install compared to ground installations. Whether costs can be reduced for these locations will be key.
Second is ensuring reliability. While PV generation costs have fallen significantly in some cases, many PV system-related
accidents have also occurred, such as PV panels being ripped off during typhoons and torrential rains. According to a survey
by the Commerce Distribution and Industrial Safety Policy Group of the Ministry of Economy, Trade and Industry4, about
40% of the 79 installations surveyed did not have their calculated strength, did not meet their design basis wind speed, or
their design basis wind speed was unknown. While not all inexpensive installations have issues, it is important to ensure
reliability simultaneously when reducing costs.
As described above, given the expected changes in circumstances and the design requirements for PV systems going
forward, there is no guarantee that PV power generation costs will continue to decrease as they have done so far; in fact,
these factors could even drive up costs. It is hoped that the reduction of PV generation costs will proceed simultaneouslywith the siting guidance through municipal ordinances and zoning, as well as ensuring reliability.

3 Forestry Agency, “Forestry Agency’s Efforts regarding the Development of Forests to Install Solar PV Facilities,” September 2021
4 Ministry of Economy, Trade and Industry, Commerce Distribution and Industrial Safety Group, Electric Power Safety Division, Strengthening

Efforts to Ensure Safety of Solar PV Facilities- 29 -IEEJ Energy Journal

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What is Happening Now in the Flow Battery Space?
A Growing Demand for Long-duration Energy Storage, and the Rise of New Players
Masato Yoshida*
1. Introduction
Published in an April 2021 IEEJ publication1, this paper looks at the technical characteristics, costs, global market size,
and role at Japanese companies of vanadium redox flow batteries (VRFBs), which are seeing commercial use in power
grids worldwide. It also explores cases of commercial applications and presents issues requiring resolution if the market isto see further proliferation and growth. Recent years have seen unprecedented changes happen in the flow battery space as
it matures into a business domain. This paper provides an overview of characteristic changes taking place with respect toflow batteries, and examines the implications and impact of these changes.

2. Expanding investment in batteries as a clean energy technology
To begin, we will look at the amounts being invested in the clean energy technologies needed to achieve greenhouse gas
neutrality by 2050, as well as the role of batteries in this endeavor. As part of the Net Zero Emissions by 2050 Scenario in
its World Energy Outlook 2021, the International Energy Agency (IEA) estimates that 4 trillion dollars of annual clean
energy technology investment will be needed by 2030. It further estimates that a total investment of 27 trillion dollars will
be needed by 2050, more than 60% of which will be in batteries, and sees three terawatt hours of battery capacity being
deployed worldwide by 2050 (including automotive batteries, Fig. 1)2.

Over 60%

Fig. 1 Clean energy investment market size (by technology and region, 2020-2050)
Note: Stated Policy Scenario (STEPS): A scenario that accounts for all publicized policies and targets
Source: IEA, World Energy Outlook 2021 (October 2021)

The Announced Pledges Scenario, announced by the IEA at WEO2021, continues to diverge significantly from the Net
Zero Emissions by 2050 Scenario and points to a need to fill gaps by prioritizing the reduction of emissions in the electricity* Senior Researcher, New Energy System Group, Electric Power Industry & New and Renewable Energy Unit, IEEJ
1 Yoshida (April 2021), What Would Be the Most Suitable Battery for Utility-scale Energy Storage?- Redox Flow Battery Has Great Potential -,Institute of Energy Economics, Japan
2 IEA (October 2021), World Energy Outlook 2021, International Energy Agency, p.30.

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sector, improvement of energy efficiency, reduction of methane emissions, and investment in hydrogen fuels and other lowcarbon fuels, along with clean energy technologies. Low-carbon power3 accounted for roughly 28% of global emissions
as of December 31, 2020. Citing a need to increase this to 61% by 2030 and 88% by 2050, the Net Zero Emissions Scenario
predicts that batteries for the power grids needed to achieve that goal will, by 2030, grow to 18 times the 2020 level
under the Announced Pledges Scenario and to 30 times that level under the Zero Emissions Scenario4.
A sharp decline in the costs of solar PV and wind power generation over the last 10 years has driven this increased
deployment worldwide. Similarly, costs are expected to drop considerably for long-duration (8-24 hours) energy storage
technologies. Assuming a conservative learning curve, the equipment costs for long-duration energy storage
technologies are predicted to conceivably decline by up to 60% per unit output ($/kW) and up to 40% per unit
energy ($/kWh) over the 15-year period beginning in 2025 (Fig. 2).

Fig. 2 Outlook on long-duration energy storage technology costs (2025-2040)
Source: LEDS Council (November 2021)5

3. Mature sectors - Characteristic changes in the vanadium redox flow battery space
This section will look at characteristic trends and changes happening in the vanadium redox flow battery space, which ismaking advances both in terms of technology and the market.
(1) Largo Resources - Vanadium product manufacturers getting into VRFB production and sales through vertical
integration
Largo Resources (Canada) supplies customers in the steel, aviation, and chemicals industries with highly purified
vanadium products. In December 2020, the company announced that it would establish Largo Clean Energy and acquirefrom VionX Energy a group of patents related to vanadium redox flow batteries6. This enabled Largo Clean Energy to sell

3 Refers to zero-carbon energy or extremely low-GHG energy
4 IEA (October 2021), op.cit., pp.37-40
5 LDES Council (November 2021), Net-Zero Power Long Duration Energy Storage for a Renewable Grid, Long Duration Energy Storage Council,

p.27
6 Largo Clean Energy (December 10, 2021), “Largo Resources Launches Largo Clean Energy,” https://www.largocleanenergy.com/post/manage-- 31 -IEEJ Energy Journal

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VRFBs under the VCHARGE +/- brand. Meanwhile, Largo Clean Energy hired core members from VionX Energy's
technical team and succeeded in self-developing the kind of VRFB expertise and core technologies that took VionX Energy
many years to achieve. Along with VRFB technologies that have been proven commercially viable, this deal has also seen
the groundwork laid for scaling up in the future, including VionX Energy's investment of over 150 million dollars toward
optimizing operations. These deals have led to the advent of vertically-integrated VRFB companies by major vanadiumindustry players. (Fig. 3)

Verticalintegration

Fig. 3 Entry into the VRFB manufacturing industry by Largo Resources (vertical integration)
Source: Prepared by the author based on data from Largo Clean Energy7

Largo Resources' vertically-integrated approach, which consists of a combination of using patented VRFB
electrolyte processing technologies and industry-leading flow battery stack technologies, and supplying the highlypurified vanadium needed for vanadium electrolyte production, is a competitive one that will enable the company
to reduce VRFB production costs by up to 40%. In July 2021, it was agreed that Largo Resources would supply its firstever VRFB system (5 hours, 6.1 MWh) to a Spain-based subsidiary of Italy-based Enel, with operations to commence in
4Q 20228. Largo Resources is planning to boost its VRFB production to 180 MW / 1,400 MWh by 2025 by fully leveraging
the strengths of its vertically-integrated approach.
(2) Bushveld Minerals - A vanadium mining company that produces and sells VRFB through a combination ofhorizontal and vertical integration
Bushveld Minerals (South Africa) is a major miner, exporter, and supplier of vanadium. It had been indirectly involvedin vanadium supply as well as VRFB production and supply through horizontal investments in Austria-based Enerox
GmbH (50% stake), a producer of VRFB and supplier of VRFB under the CellCube brand, and UK-based Invinity Energy
Systems (less than 3% stake), a major manufacturer and supplier of VRFB. In 2016, however, it became directly engaged
in the VRFB production and sales industries with the establishment of Bushveld Energy (vertically integrated) (Fig.
4).

your-blog-from-your-live-site
7 Largo Clean Energy, “About Us,” https://www.largocleanenergy.com/about
8 Largo Clean Energy (July 21, 2021), “Largo Enters into its First Battery Sales Contract with Enel Green Power España for VCHARGE± System,”https://www.largocleanenergy.com/post/largo-enters-into-its-first-battery-sales-contract-with-enel-green-power-espa%C3%B1a-for-vcharge-system- 32 -IEEJ Energy Journal

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Fig. 4 Bushveld Minerals' expansion of the vanadium business domain (horizontal-vertical integration)
Source: Prepared based on data from Bushveld Energy's website9 and various other data10,11

Bushveld Energy is starting by opening the vanadium market in South Africa. Working with the Industrial Development
Corporation of South Africa Ltd (IDC) Bushveld Energy is supplying VRFB systems (120 kW, peak energy 450 kWh) tostate-owned power utility Eskom, and is currently conducting a proof of concept for the systems Furthermore, at its
vanadium mines, the company is building mini-grids consisting of both solar PV (3 MWp) and VRFB systems (1 MW, 4MWh) with the goal of reducing power costs and peak usage (Fig. 5).

Fig. 5 VRFB project by Bushveld Energy (Vametco Hybrid-Mini-Grid)
Source: Bushveld Energy's website12

4. Maturing sectors - Paving the way for more venture companies with new technologies andpossibilities of early scaling up
In the previous section, we looked at characteristic trends and changes happening with vanadium flow batteries, atechnically mature space and rapidly expanding market. This section will summarize trends and changes happening in theflow battery space due to new and technically immature technologies.

9 Bushveld Energy, https://www.bushveldminerals.com/bushveld-energy-3/
10 Mining Weekly (November 13, 2019), “Bushveld group advances vanadium redox flow battery plans through Enerox deal,”

https://www.miningweekly.com/article/bushveld-group-advances-vanadium-redox-flow-battery-plans-through-enerox-deal-2019-11-13/
11 Energy Storage News (April 6, 2021), “Vanadium producer Bushveld invests in scale up of Enerox flow battery manufacturing,”
https://www.energy-storage.news/vanadium-producer-bushveld-invests-in-scale-up-of-enerox-flow-battery-manufacturing/
12 Bushveld Energy, “Projects - Vametco Hybrid-Mini-Grid,” https://www.bushveldenergy.com/company/projects/- 33 -IEEJ Energy Journal

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2022(1) U.S.-based ESS Inc. - A specialized venture company that deals in iron flow batteries and that has the attention ofeven Bill Gates
ESS Inc.13 was listed on the New York Stock Exchange through a SPAC14 merger. Shockingly, despite having no revenues,
the company was valued at ¥110 billion at the time of its listing. As an indication of the considerable expectations investors hadfor its growth, its stock price went up 70% on the first day of trading.
ESS Inc. is a venture company that specializes in iron flow batteries (Is). What exactly are IFBs and why is so much attention
being given to ESS' IFBs, despite their immaturity as a technology?
Fig. 6 shows the principle of operation for ESS' IFBs, while Fig. 7 shows their cell unit and power module. ESS' IFBs have acarbon substrate with carbon material used for the positive electrode and carbon composite substrate with polypropylene spacer
for the negative electrode. A pump injects electrolytes (in aqueous solution containing iron chloride (FeCl2), and charging anddischarging occur from the resulting oxidation-reduction reactions. According to ESS, as with VRFBs, IFBs can charge anddischarge without limit as they suffer no degradation, even from over-discharging15. Furthermore, since they are made primarily
from iron, salt, and water, they are a non-toxic, highly-safe battery with zero fire risk.

Fig. 7 Cell unit and power module

Fig. 6 Principle of operation for IFBs
Source: ESS Inc.16

The most groundbreaking thing about ESS' IFBs is their cost. ESS is targeting the market for power grids and other suchlarge-scale markets that require long-duration energy storage of four to twelve hours, which is something for which lithiumion batteries (LiBs) are ill-suited. LiBs lead the market and have found widespread adoption, primarily in automotive andhousehold applications, due to their high energy density, small size, and light weight17. However, they are not well-suited
to a larger form factor as the rising cost of the lithium inside them would compromise their cost competitiveness. Moreover,they can only charge and discharge for up to about four hours. In general, VRFBs are said to be more cost competitive than
LiBs when their charge and discharge time exceeds eight hours. On the other hand, IFBs are said to be cost competitive

13 Its ticker symbol is "GWH" (gigawatt hours)
14 A special purpose acquisition company (SPAC) is a publicly traded company created in order to merge with an existing company in the future.

Many SPACs have been listed in the U.S. because of the relatively simpler procedures and shorter time frame involved in getting listed relative to theconventional listing process.
15 Refers to an extremely low-voltage state in which discharge continues even after the voltage falls below the discharge cut-off voltage (the lowest
discharge voltage at which discharge can still be safely done)
16 ESS Inc., “Long Duration Energy Storage Systems for a Cleaner Future,” https://essinc.com/wp-content/uploads/2021/08/ESS_Analyst-DayPresentation-8-30-21.pdf
17 Ibid., Yoshida (April 2021), Institute of Energy Economics, Japan- 34 -IEEJ Energy Journal

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versus LiBs in systems where charge and discharge time exceeds four hours (see Fig. 8). Electrolyte costs account foraround 40% of the cost of producing VRFBs (this cost rises as a percentage of total battery cost as charge and discharge
time increases), and the cost of vanadium, which is the primary component of electrolytes, accounts for about 45% ofelectrolyte costs. This makes reducing electrolyte costs key to reducing overall VRFB system costs. Unlike lithium, where
resources are unevenly distributed, vanadium are ubiquitous worldwide. However, vanadium, the primary component of
VRFB electrolytes, exists only in low concentrations in ore due to the many byproducts of mining activities such as
phosphate rock, magnetite, and uranium that are produced when it is mined. Furthermore, the export market for vanadiumis oligopolistic, with three countries - China (60%), Russia (17%), and South Africa (7%) - accounting for roughly 85% of
all vanadium production. Furthermore, vanadium prices are rising18 in the international commodities market due to risingdemand for long-duration energy storage as a means to achieve net zero GHG emissions by 2050. Vanadium producers
therefore face two risks: resource constraints and rising procurement costs. In contrast to VRFBs, IFBs suffer from noresource constraints as they are made from iron, salt, and water - all widely available and readily usable resources. Being
relatively more stable in price and easier to procure gives them a significant advantage. By scaling up, it is said that they
could be capable of achieving a lifecycle cost of storage (LCOS) of 0.02 $/KWh in 12-plus-hour systems ( Fig. 8).

Cost competitive past four hours

Fig. 8 Iron flow battery cost competitiveness (compared to LiBs)
Source: ESS Inc.

Using the 300 million dollars it has raised through its listing, ESS plans to rapidly scale up its business. Specifically, it
will bring the production capacity of its IFB manufacturing facility in Oregon, which is currently at 250 MWh, to 2 GWh
by the end of 2022 and 6 GWh by the end of 2023, achieving a 24x increase over the next two years. Moreover, in addition
to expanding its facility in the U.S., the company is currently thinking about making the most of the aforementioned lack ofresource constraints and building new IFB production facilities in Asia and Europe.

18 https://www.investing.com/commodities/ferro-vanadium-80-min-europe-futures-streaming-chart- 35 -IEEJ Energy Journal

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Average+29%/year

Fig. 9 Deployed nameplate capacity and market size of long-duration energy storage batteries (2020-2027)
Source: Guidehouse19

ESS' haste to scale up is to meet rapidly growing market demand. In recent years, California has been conducting largescale planned power outages in order to prevent major forest fires caused by aridness and strong winds. Texas saw cold
snaps in 2021 that far exceeded expectations and led to a power failure that lasted several days. These frequent outages andpower failures caused by frequent natural disasters, themselves partly the product of global warming, have shaken theworld's confidence in the United States' power grids, creating an urgent need to deploy long-duration energy storage
technologies for use in backup applications. California estimates that it will need to deploy up to 11 GW of batteries capableof four-plus hours of charge and discharge time by 2030, and to deploy you can also get on up to 55 GW by 2045 to achieve
climate change mitigation targets20. The increasing magnitude of natural disasters is a growing concern around the world.
Consequently, demand for batteries with a four-plus hour charge and discharge time is expected to increase at anannual average rate of more than 29% over the next seven years (Fig. 9).
Based on the above, ESS estimates that the market for long-duration batteries could grow to 700 billion dollars by 2027.
ESS signed numerous large sales contracts in 2021, indicating that expectations are indeed high for the company's IFBs.
SoftBank subsidiary SB Energy signed a contract with ESS to purchase up to two gigawatts of IFBs through 202621.
Similarly, Italy-based Enel concluded an agreement to buy 17 Energy Warehouse systems (a consumer-side battery system;
ESS will also supply Energy Center as a front-of-the-meter product; Fig. 10) through a renewables subsidiary in Spain22.
Taking advantage of a technical characteristic of IFBs whereby they do not degrade after repeated charges and discharges,
ESS will work with Munich Re, the world's largest reinsurance company, to provide quality assurance for 10 years.
Developments such as these illustrate the visionary and convenient sales methods being implemented23.

19 Guidehouse (October 20, 2021), “White Paper: Energy Storage for the Decarbonizing Grid,” https://guidehouse.com/-/media/www/site/insights/energy/2020/gh_eos_whitepaper_decarbstoragelongduration_2020.pdf?la=en
20 California Energy Storage Alliance (December 8, 2020, press release), “New research finds California alone will need deploy 2-11 GW of long
duration energy storage by 2030, and up to 55 GW by 2045,” https://www.storagealliance.org/pr_long-duration
21 ESS (September 30, 2021, press release), “ESS and SB Energy Sign Agreement to Deploy Two Gigawatt-hours of Long-Duration Storage,”https://essinc.com/ess-and-sb-energy-sign-agreement-to-deploy-two-gigawatt-hours-of-long-duration-storage/
22 ESS (September 23, 2021, press release), “ESS Inc. Contracts With Enel Green Power España to Deliver 17 Energy Warehouse™ Long-Duration
Iron Flow Battery Systems,” https://essinc.com/ess-inc-contracts-with-enel-green-power-espana-to-deliver-17-energy-warehouse-long-duration-ironflow-battery-systems/
23 S&P Global (October 13, 2021), “ESS seeks to expand energy storage universe after stock market blastoff,”
https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/ess-seeks-to-expand-energy-storage-universe-after-stock-marketblastoff-67058674- 36 -IEEJ Energy Journal

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Fig. 10 ESS' iron flow battery product lineup
Source: ESS Inc.

(2) Form Energy - A venture company specializing in "iron-air batteries" led by a former Tesla executive
U.S.-based Form Energy is a venture company specializing in iron-air batteries (IAB) and was launched by a former
head of the stationary energy storage business for Teslaa. Since Form Energy has been taking a passive stance on disclosing
information, no information important to assessing the technological characteristics of IABs have been released. Despite
this, the company has captured the interest of many investors with its IAB technologies, and succeeded in procuring 240
million dollars in the latest funding round24.
The principle of operation for IABs is a simple one: it can reverse the chemical process whereby iron oxidizes and rusts.
More specifically, when discharging they take in oxygen from the air, oxidize it, and convert it to rust. When charging, they
apply an electrical current to turn rust back into iron and release oxygen in the process (Fig. 11 and 12)25.

Fig. 11 Principle of operation of iron-air batteries
Source: Form Energy

Fig. 12 Form Energy's iron-air batteries
Source: Form Energy

24 Energy Storage News (August 25, 2021), “Iron-air long-duration battery startup Form Energy closes US$240 million funding round,”https://www.energy-storage.news/iron-air-long-duration-battery-startup-form-energy-closes-us240-million-funding-round/
25 Form Energy, “Technology –The Battery Cycle-,“https://formenergy.com/technology/battery-technology/- 37 -IEEJ Energy Journal

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According to Form Energy, IAB's greatest technical advantage lies in its use of iron, water, and air, which are low costand exist in abundance all over the world, and it aims to get the production cost to 20 $/KWh. With such non-flammableand safe components, IABs can be used even in urban areas. Along with not degrading with repeated charging anddischarging, IABs are well-suited to scaling up as the lack of resource constraints involved enables them to be produced
anywhere in the world. Form Energy's IABs can also be used in long cycles of 100-plus hours. As such, the technologies
to compete with IABs are not LiBs but rather hydrogen and other long-duration energy storage technologies.
As previously discussed, despite the technical immaturity of IABs, expectations are high among users looking for a lowcost, long-duration energy storage technology. In the state of Minnesota, Form Energy is working with Great River Energy,
a cooperative of electricity producing, transmitting, and distributing companies to prepare for the launch of a pilot projectin 2023 that will see the installation of a 1 MW module at a natural gas-fired power plant (Fig. 13). In the winter of 2019,
temperatures in Minnesota dropped to -10°C. This caused wind turbines to shut down, resulting in the shutdown of windfarms in the Upper Mid West as well as coal and natural gas plants in the area. Preparing for these sorts of tragedies is thegoal of the pilot project and, if Great River Energy obtains conclusive technical proof, it is thinking about expanding its IAB
systems to 300 MW. Form Energy's pilot project using IABs is that the results could lead to advancing IAB technology andstimulating market growth, thereby spurring development of Minnesota's steel industry26.

Fig. 13 Pilot plant operated in conjunction with Great River Energy (1 MW module)
Source: Form Energy

IAB's technologies are not especially new, and have a simple principle of operation. Furthermore, they are seen as
commercially viable from the perspective of raw material costs. However, due to the fact that Form Energy is refusing torelease performance data, many doubt the feasibility of it achieving its target production cost of 20 $/KWh27.

5. Characteristic changes taking place in the flow battery space - An examination of implications
and impact(1) Mature sectors - Those with access to core resources will stake their survival on vertical integration

26 Renewable Energy World (September 3, 2021), “Minnesota utility co-op sees big battery as piece of grid reliability puzzle,”

https://www.renewableenergyworld.com/storage/minnesota-utility-co-op-sees-big-battery-as-piece-of-grid-reliability-puzzle/
27 CNBC (August 25, 2021), “Stealthy battery company backed by Bill Gates, Jeff Bezos has a lot to prove,” https://www.cnbc.com/2021/08/25/formenergy-raises-240-million-on-iron-air-battery-promise.html- 38 -IEEJ Energy Journal

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Verticalintegration
V resource
miningV high-grade
purification

V electrolyte
production

VRFB production

VRFB sales

Fig. 14 Example of vertical integration in the mature sector of the flow battery space
Note: Prepared by the author

VRFBs are what represent the mature sector for flow batteries. As discussed above, in this space, industry players withaccess to core resources and technologies in the form of vanadium mines and production technologies are strengthening
their control in the market by expanding their business domains through vertical integration (Fig. 14). Their aim here is the
pursuit of a strategy centered on cutting costs in order to survive amid fierce competition. VRFBs have seen dramatic costdecreases over the last several years. This trend is expected to continue, and should galvanize further VRFB proliferation(Fig. 15). The commercial use of VRFBs is expanding around the world, a trend that is likely to only accelerate. This will
make it easy for those who have access to core resources, particularly vanadium, to establish an advantageous position
relative to those who do not. As renewables deployment grows around the world, demand for the long-duration energy
storage technologies that support them (especially batteries) is expected to rise even further, just as has been seen with LiBs
for electric vehicles. With demand predicted to grow for VRFBs as a viable and mature technology, companies with accessto the vanadium that goes into them and the core technologies to process vanadium are taking the initiative to cut costs by
reducing middlemen margins in order to survive amid market competition that is likely to intensify. Vertical integration is
one traditional means of prevailing in mature market competition.

Fig. 15 Projected energy storage technology equipment costs (2018-2027)
Source: Guidehouse(2) Maturing sectors - A bid to scale up over the shortest possible time horizons by those with core technologies
This section provides an outline of the characteristic changes happening at specialized venture companies with IFBs and
IAFBs in maturing industries. Keywords that apply to both are "core technologies" and "scaling up over shortest time
horizons."- 39 -IEEJ Energy Journal

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Fig. 16 Positioning of new players in the flow battery space
Source: Prepared by the author

With the Y axis showing scaling and X axis indicating technical maturity, Fig. 16 presents a comparison of changes
brought by new flow battery players to NAS batteries and to VRFBs, a grid-scale battery. Technically, ESS' IFBs arearguably immature. However, by scaling up over the shortest possible time horizon using funds procured through the stock
market, the company is attempting to jump straight to full technical maturity. Sumitomo Electric Industries and NGK
Insulators have been developing VFRB and NAS technologies, respectively, for many years, and while pilot projects andother accomplishments they have made around the world have put them in a better position than their competitors, they
have no clear path for scaling up. One could say that ESS and Form Energy are taking a completely different approach from
Sumitomo Electric Industries and NGK Insulators.

Fig. 17 Number and total amount of investments in long-duration energy storage technologies
Note: Applies to heat, mechanical, chemical, and electrochemical energy storage technologies with durations beyond eight hours
Source: LDES Council28

28 LDES Council (November 2021), op.cit., pp.11-12- 40 -IEEJ Energy Journal

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ESS has been focused on the global market since its founding, with green energy investors and the venture development
ecosystem pushing the company's vision along. According to the LDES Council, investments in the long-duration energy
storage technologies grew having nearly tripled in the last four years over the four-year period from 2018 to 2021, from 980
million dollars to 2.6 billion dollars (Fig. 17). Along with Breakthrough Energy, a clean energy investment fund being
supported by Microsoft founder Bill Gates and Amazon founder Jeff Bezos, SoftBank subsidiary SB Energy and Germanybased BASF are also investing in ESS (Breakthrough Energy has also made investments in Form Energy). Italy-based ENI
and Thailand-based PTT are also investing in flow batteries in the oil and gas industries, while BASF is investing as adiversified chemicals industry player. Such investments illustrate a broadening of venture investment and the scope ofdevelopment ecosystems to now cover batteries for use in long-duration energy storage. They also make clear thatconditions are coming together for a considerable scaling up of these technologies (Fig. 18).

Fig. 18 New venture investment and development ecosystem in the flow battery space
Source: Prepared by the author based on various data

6. Conclusion
This paper has presented an overview of characteristic changes happening in the flow battery space based on technicalmaturity levels, and has examined the implications and impact of these changes. We have seen that mature sector players
who have access to resources are taking the initiative and vertically integrating in order to further strengthen their positions,while those in immature industries are focusing on the global market from the start and laying ambitious groundwork forscaling up in the future. This seems to foreshadow interest growing even further for flow battery space.
In Japan, mass adoption of electric vehicles, the renewal of expired solar FIT agreements, a great enthusiasm among
companies to conclude corporate PPA, and other such developments indicate that demand is only going up for renewables
aimed at decarbonization. Meanwhile, further development of the IoT and IoE is spurring explosive growth in data volume
and driving tremendous demand for data centers. Data security problems are prompting businesses to bring their data centersback into the country from overseas, but they are faced with the need to use clean energy in their operations. With the battle
over renewables already underway, we can expect to see an acceleration in the deployment of the long-duration energy
storage technologies that will support the fight. Despite the flow battery space being an area in which Japanese companies
excel, it would seem that there is yet no pathway to scaling up. As the global market for flow batteries expands on the backof rising demand, survival amid international competition will require that public and private sectors work together to build
and strengthen supply chains while working to scale up business.

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Editor:Yoshihiko Omori

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The Institute of Energy Economics, Japan