IEEJ：April 2019○ｃIEEJ 2019
Special Bulletin
A Japanese Perspective on the International Energy Landscape (424)

April 17, 2019

An Analysis on Clean Energy Introduction and Price Affordability
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, Japan
Use and consumption of energy as an indispensable good for economic activities andcitizens’ daily life increases on economic and population growth. In that process, the mosteconomically efficient, available, cheap and convenient energy sources have been selected, though
the selection differs greatly depending on national or regional conditions, as shown by history.
However, the selection may not necessarily be the best from the viewpoint of externalities including
energy security and environmental conservation. Rather, energy sources or energy mixes selected
only from the viewpoint of economic efficiency frequently create vulnerability to externalities.
Policies to counter the vulnerability have been constituted as energy and environmental policies.
Regarding environmental conservation, for example, clean energy sources must beintroduced and diffused politically and strategically to resolve or overcome problems with energy
sources or mixes selected from the viewpoint of economic efficiency. Such measure may cost morethan business-as-usual ones. It may be important to accept and overcome such additional cost.
The year 2019 marks the 50th anniversary of Japan’s liquefied natural gas (LNG)
introduction. Japan introduced LNG as Tokyo Gas Co. and Tokyo Electric Power Co. imported LNG
from Alaska of the United States in 1969. In the 1960s, energy demand was expanding rapidly amid
high economic growth in Japan. Major energy supply switched from coal to oil, leading oil tocontinue increasing its share of primary energy supply and the power generation sector’s energy
consumption toward a peak. Rapid growth in energy demand and in dependence on oil deteriorated
air pollution in major urban and industrial regions such as Tokyo and Osaka.
Then, tough regulations were introduced to require oil-fired power plants as the thenleading electricity generation source to use ultra-low sulfur crude oil in major urban regions. Citygas production depended on oil-based naphtha and coal. In such situation, it was significant tointroduce natural gas featuring much less sulfur and nitrogen oxide emissions. This clean energy
source had to be liquefied at very low temperatures for transportation using special tankers, making
LNG “a premium fuel” costing more than other fuels. In the face of the serious air pollution,
however, Japan introduced and diffused LNG under a strategic decision to balance economic growthwith environmental conservation.
Later, LNG was promoted from the viewpoint of not only environmental conservation butalso energy security enhancement through the diversification of energy sources and the reduction ofdependence on oil and on the Middle East following the oil crises in the 1970s. Since the 1990s,
LNG was further promoted as a fossil fuel emitting less carbon dioxide from the viewpoint of global
warming prevention. In this way, the introduction and diffusion of LNG was designed to address theexternalities such as environmental conservation and energy security.
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An important point in this respect is how seriously the government, industry and citizens
considered such externalities. In Japan, a view has been shared that the externalities would be very
serious and urgent challenges/threats and should quickly be addressed with large-scalecountermeasures. Another important point is that Japan has had economic capacity to implement
responses to externalities even at some cost. For example, Japan’s per capita real gross domestic
product (GDP) in 1971 was $19,328 in 2010 dollars. Compared with the global average of $5,323
and the non-OECD average of $1,433 then, the Japanese per capita real GDP indicates that Japan as
one of the industrial countries then had economic capacity to pay for environmental conservationand energy security measures. As a matter of course, any energy cost increase is a macroeconomic
burden for Japan as a major energy consumer and net energy importer. However, Japan has viewed
externalities as clear and present problems and introduced and diffused the key clean energy sourceof LNG as a country with economic capacity to address the problems.
A half century after Japan became the first Asian country to introduce LNG, Japan is still
the world’s largest LNG importer. In the future, however, LNG demand is expected to expand
mainly in emerging Asian countries such as China, India and Southeast Asian nations. As seen in
Japan a half century ago, serious air pollution has become a grave matter of social concern andloomed as an urgent problem to be tackled by governments in China, India, South Korea andSoutheast Asian countries. In this respect, natural gas or LNG as a clean energy source is expected toplay a major role. Some countries, including China, have taken regulatory measures to ban the use ofcoal and expand natural gas or LNG in response to the deterioration of air pollution. As seentypically in China and India, Asian countries have used coal as a major energy source and introduced
the clean energy source to reduce their dependence on coal.
The problems here are the cost of clean energy introduction and its affordability. The
extent to which additional costs are accepted for environmental conservation widely differs fromcountry to country depending on national conditions and economic development stages. China’s per
capital real GDP in 2016 was only $6,894. However, the number represents a nationwide average.
Given the Japanese experience, large coastal Chinese cities with per capita GDP far exceeding$10,000 can apparently withstand some cost burden. In this sense, China could promote theintroduction of clean energy sources and accelerate their diffusion with strong government
incentives. In India and Southeast Asia as growth markets after China, however, affordability could
become a tougher constraint. For example, India’s per capita real GDP in 2016 was limited to $1,856
or less than one-third of the Chinese level. This is also a nationwide average, indicating that someregions could have far higher per capita GDP. However, affordability will become a key factor
behind energy choices. It is important to employ policy initiatives and incentives and restrict supply
costs for competitive supply to overcome the affordability constraint and take advantage of LNG or
natural gas as a clean energy source.
Regarding the introduction of clean energy sources, I have taken up LNG and pointed out
the seriousness of the problem awareness and the significance of countermeasures and economic
capacity to pay for them. This point may be common to all clean energy sources that are not limited
to LNG. As for renewable energy, consideration must be given to the cost for overcoming theintermittency of supply. The development and utilization of innovative energy sources such ashydrogen should be tackled from the long-term viewpoint of climate change and energy security. We
must acknowledge energy as an indispensable good again, keep the viewpoint of affordability inmind and consider the reduction of costs and the enhancement of competitiveness as indispensable.
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