JAPAN’S ENERGY CONUNDRUM
A Discussion of Japan’s Energy Circumstancesand U.S.-Japan Energy Relations
Edited by Phyllis Genther Yoshida

Sasakawa Peace Foundation USA

JAPAN’S ENERGYCONUNDRUM

JAPAN’S ENERGYCONUNDRUM
A Discussion of Japan’s Energy
Circumstances and U.S.-JapanTHE U.S.
MILITARY
EnergyRelationsLAYDOWN ON GUAMPROGRESS AMID CHALLENGES

Edited by Phyllis Genther YoshidaJeﬀrey W. Hornung

Sasakawa Peace Foundation USA
Washington, D.C.

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Contents
Preface���������������������������������������������������������������������������������������������������������������������������������������������������������� vii
Ambassador James Zumwalt

Acknowledgments������������������������������������������������������������������������������������������������������������������������������������� ix
List of Contributors������������������������������������������������������������������������������������������������������������������������������������ xi
PART 1: SETTING AND CONTEXT FOR JAPAN’S ENERGY CONUNDRUM
Chapter One

Japan’s Energy Conundrum������������������������������������������������������������������������������������������������������������������� 1
Phyllis Genther Yoshida

Chapter Two

The Geopolitics of Asian Energy�������������������������������������������������������������������������������������������������������� 11
Dennis Blair

Chapter ThreeJapan’s Energy Miracles����������������������������������������������������������������������������������������������������������������������� 25
Robert Alan Feldman

PART 2: ROLE OF ENERGY SUPPLY AND MARKETS
Chapter Four

Reliance on Imported Fossil Fuels: Oil and Natural Gas���������������������������������������������������������� 37
Ken Koyama

Chapter FiveThe Return of Coal���������������������������������������������������������������������������������������������������������������������������������� 47
Jane Nakano

Chapter Six

Japan’s Radical Incrementalism in Power Market Regulation
and Renewable Energy������������������������������������������������������������������������������������������������������������������������� 59
Llewelyn Hughes

Chapter Seven

Nuclear Energy: Light Water Reactors at a Crossroad������������������������������������������������������������� 69
Nobuo Tanaka

A Special Proposal for U.S.-Japan Nuclear Cooperation��������������������������������������������������������� 91
Nobuo Tanaka

PART 3: INFLUENCE OF DEMAND AND PRODUCTIVITY
Chapter Eight

The Rise of Energy Efficiency������������������������������������������������������������������������������������������������������������� 97
Yukari Niwa Yamashita

Chapter Nine

Transforming Transportation�������������������������������������������������������������������������������������������������������������113
Michael Smitka

Chapter Ten

Demand-Side Management in Japan: Moving Beyond
Gaman and Pilot Programs����������������������������������������������������������������������������������������������������������������123
Ken Haig

PART 4: COOPERATION GOING FORWARD
Chapter Eleven

Japan’s Energy and Climate Quadlemma�����������������������������������������������������������������������������������139
Jun Arima

Chapter Twelve

U.S.-Japan Energy Trade and Investment�����������������������������������������������������������������������������������155
Tom Cutler

Chapter Thirteen

Considerations for the 2020s and Beyond����������������������������������������������������������������������������������171
Phyllis Genther Yoshida

Index�����������������������������������������������������������������������������������������������������������������������������������������������������������185

PREFACE

vii

Preface
Sasakawa USA is pleased to bring together an outstanding group of senior scholars,
all with extensive knowledge and experience, to analyze and explain the many facets ofTokyo’s energy situation and its intersection with the U.S.-Japan relationship. This bookprovides insights into how Japan is seeking to resolve its current energy conundrum bybalancing energy security, economic growth, environmental sustainability, and safety inthe aftermath of the Great Eastern Japan Earthquake and Tsunami. It also recommends
ways in which the U.S.-Japan energy security relationship can become stronger andcollaboration deeper.
Japan’s energy development, in particular, provides critical insights into how it has,so far, successfully managed to sustain economic growth even in the face of severeenergy challenges. The contributors to this book and I all vividly remember and became
involved in Japan’s most recent energy challenge as a result of the tragic events of March
11, 2011. We provided advice and support to the U.S. and Japanese governments, helped
explain developments to American and other audiences around the globe, and, mostimportantly, supported those affected through our long-standing personal connections
and friendships. Japan’s response to the 3-11 challenge continues, but it remains to be
seen where that response will take the country. We hope this volume provides insights
and useful suggestions as Japan shapes its energy future.
At the same time, global energy markets continue to alternate between long-term
oversupply and undersupply and among different potential energy mixes, all of which
generate energy security concerns but also push advances in state-of-the art technologies. While it is impossible to predict the future, we know energy will continue to be
critical for the Japanese and American economies and for global security.
Sasakawa USA remains committed to identifying and raising issues of importance thatdeserve greater attention, coordination, and cooperation in the U.S.-Japan relationship.
In this regard, in an era when energy and environmental issues are increasingly complex
and intertwined with technological capacity and economic strength, it behooves us tounderstand the changes underway. We hope that this book contributes to a greater recognition by experts, policy makers, students, and the broader public of the critical roleenergy has played, and will continues to play, in economic growth, national security,and environmental sustainability.
Ambassador James Zumwalt
CEO, Sasakawa Peace Foundation USA

ACKNOWLEDGMENTS

ix

Acknowledgments
I greatly appreciate the contributors’ work and support in helping us explain thecontext and significance of the Great Eastern Japan Earthquake and Tsunami for Japan’s
energy use and for U.S.-Japan cooperation. Energy security and energy resiliency are top
concerns for both the United States and Japan. Indeed, both countries are undergoingprofound changes in their energy sectors, driven in the United States by the unconventional gas and oil revolution and in Japan by the March 11, 2011 events that led tothe shutdown of Japan’s nuclear capacity. These changes have altered both countries’
economies and the U.S.-Japan bilateral relationship. The outsized role both countries
play internationally also is deeply affecting many aspects of the global energy picture,
be it nuclear energy, energy efficiency or fossil fuels. Therefore, cooperation on energy
and related environmental issues offers an opportunity to strengthen our bilateral relationship and spread the many fruits of our strong energy relationship globally.
I am thankful for the generous support of Sasakawa USA, especially its Chairman,
Admiral Dennis Blair, who has long supported intellectual inquiry into Asian energy
security issues and provided me with a platform to research these issues after my retirement from the government. The Sasakawa Peace Foundation in Japan, especially Nobuo
Tanaka, its Chairman and former Executive Director of the International Energy Agency,
who cares deeply about the future of U.S.-Japan energy relations also has provided me
generous support and advice over the years. Both Chairmen also graciously agreed toshare their thoughts with our readers by writing chapters. Sasakawa USA’s Ambassador
James Zumwalt, Chief Executive Officer, Dan Bob, Distinguished Senior Fellow, Junko
Chano, President, and the rest of my colleagues all provided greatly appreciated advice
and support.
As I spoke with the contributors, several names of those who have supported ortaught many of us came up repeatedly. They include but are not limited to Kent Calder,
Yoichi Kaya, Hugh Patrick, Richard Samuels, and Masakazu Toyoda. We appreciate theirpioneering work on Japanese economic, policy and energy issues. I would be remiss
not to mention the critical role played by my Ph.D. advisor and long-time friend, the late
Dr. Eleanor Hadley, in encouraging me to study Japan and to spend my life in public
service. We also could not have written this book without the analysis and information
provided by the dedicated analysts of the U.S. Department of Energy and its Energy
Information Agency, the Japanese Ministry of Economy, Trade and Industry’s Agency for
Natural Resources and Energy, and the International Energy Agency.
Finally, I am grateful for the support of my husband, Charles Yoshida, and sons,
Matthew and Peter, who have cheerfully put up with my long hours and extensive travel
over the years.

Dr. Phyllis Genther Yoshida
Editor

CONTRIBUTORS

xiContributors
Jun Arima
Jun ARIMA has been a Professor at the Graduate School of Public Policy, University ofTokyo since 2015. After joining in the Ministry of Economy, Trade and Industry in 1982,
he held various positions related to international energy and environment issues in­cluding Counselor, Japanese Delegation to the Organisation for Economic Co-operation
and Development, Head, Country Studies Division, Director of the International Energy
Agency, Director, International Energy Division, Agency for Natural Resources andEnergy, Deputy Director General, Global Environmental Affairs and Director General,
Japan External Trade Organization London Office. He participated in the United Nations
Framework Convention on Climate Change negotiations as one of the chief negotiators.
In addition to the Professorship at the University of Tokyo, he serves as Visiting Professor, the International University of Japan, Project Leader for the 21st Century Public
Policy, a Distinguished Senior Research Fellow at the Asia Pacific Institute of Research,
Consulting Fellow at the Research Institute of Economy, Trade and Industry and Senior
Policy Fellow on Energy and Environment, Economic Research Institute for ASEAN andEast Asia (ERIA). He graduated from the Faculty of Economics, University of Tokyo.

Dennis Blair
Admiral Dennis BLAIR is Chairman of the Board and Distinguished Senior Fellow(Non-Resident) of Sasakawa Peace Foundation USA. He joined the foundation in 2014
and, as Chief Executive Officer from then until February 2017, led the team through a
refocusing of its mission and a greatly expanded staff. Blair has long experience in Japanand Asia issues and also serves as a member of the Energy Security Leadership Council,
and is on the boards of Freedom House, the National Bureau of Asian Research, theNational Committee on U.S.-China Relations and the Atlantic Council. As Director of
National Intelligence, from January 2009 to May 2010, Blair led sixteen national intelligence agencies, managed a budget of $50 billion and provided integrated intelligencesupport to the President, Congress, and operations in the field. Blair was president andchief executive officer of the Institute for Defense Analyses (IDA), a federally funded
research and development center that supports the Department of Defense, the Department of Homeland Security, and the Intelligence Community, from 2003 to 2006. During
his 34-year Navy career, Blair served on guided missile destroyers in both the Atlantic
and Pacific fleets and commanded the Kitty Hawk Battle Group. Ashore, he served as
Director of the Joint Staff and held budget and policy positions on the National Security
Council and several major Navy staffs. Prior to retiring from the Navy in 2002, Blairserved as Commander in Chief of the U.S. Pacific Command, the largest of the combatantcommands. He graduated from the U.S. Naval Academy.

Tom Cutler
Tom CUTLER is an energy consultant specializing in Asian energy security and trade.
He has nearly 40 years’ experience in international energy affairs, including serving as
Director for European and Asia Pacific Affairs at the U.S. Department of Energy until
July 2013. He is currently President of Cutler International LLC. Cutler has numerous

xiiJAPAN’S ENERGY CONUNDRUM

publications to his credit, including U.S.-Japan energy security, trade and investment,
and strategic cooperation, and Asian energy security. He graduated from Lawrence University in Wisconsin and obtained his M.A. at The George Washington University.

Robert Alan Feldman
Dr. Robert FELDMAN is Senior Advisor to the Research Department of Morgan Stanley
MUFG Securities. As part of Morgan Stanley’s global economic team, he is responsible
for thematic research on the Japanese economy, financial markets and policy developments. He also has an appointment at the Tokyo University of Science and Technology.
He served as the Chief Economist of Morgan Stanley MUFG Securities from August 26,
2015 to March 8, 2017. He served as the Chief Economist Japan from February 1998 until
September 02, 2015; Head of Fixed Income Research since July 2012; Head of Japan
Economic Research since December 2007; and Co-Director of Japan Research since April
2003. Dr. Feldman joined the firm in 1998. Prior to this, he served as the Chief Economist
for Japan at Citigroup Inc, Research Division from May 1989 to 1997. Dr. Feldman
worked at the International Monetary Fund from 1983 to 1989 in the Asian, European
and research departments. He worked at both the Federal Reserve Bank of New Yorkand Chase Manhattan Bank. Dr. Feldman spent study years at both the Nomura ResearchInstitute from 1973 to 1974 and at the Bank of Japan from 1981 to 1982. He has been
Outside Director of ORIX Corporation since June 2010. Dr. Feldman is a member ofseveral economic study committees of various ministries of the Japanese government
and is a commissioner of the Japan-United States Friendship Commission. He is a regularcommentator on World Business Satellite, the nightly business program of TV Tokyo. He
has a Ph.D. in Economics from the Massachusetts Institute of Technology, and did his
undergraduate work at Yale University.

Ken Haig
Dr. Ken HAIG brings a multicultural background (bilingual/bicultural English and Japanese fluency) and an unusual blend of experience in the worlds of policymaking, publicaffairs, and academia to U.S.-Asia relations. He is Director of Market Development andRegulatory Affairs at Oracle Utilities in Japan. He also is an Abe Fellow at Hokkaido
University Graduate School of Public Policy. He has co-chaired the Energy Committee ofthe American Chamber of Commerce in Japan (ACCJ) since 2015. Prior to his time with
Oracle, he served as an Assistant Professor of Political Studies at Harvard University andthe University of California, Berkeley. He received a Fulbright-Hayes Fellowship underwhich he studied at Keio University, Japan from 2005-2007. He is a graduate of Harvard
University, and received his M.A. and Ph.D. from the University of California, Berkeley.

Llewelyn Hughes
Dr. Llewelyn HUGHES is an Associate Professor at the Crawford School of Public Policy,
Australian National University (ANU). He is also Research Director for GR-Japan, a government affairs and public policy consultancy focused on the Japanese market (http://
grjapan.com/). Dr. Hughes’ research focuses on the governance of natural resource
markets, and the energy sector and climate change. In 2014, his book Globalizing Oil

CONTRIBUTORS

xiii

was published through Cambridge University Press. He holds a Bachelor of Arts fromthe University of Melbourne, Australia, a Master of Laws from the University of Tokyo,
Japan and a Ph.D. from the Massachusetts Institute of Technology.

Ken Koyama
Dr. Ken KOYAMA is Chief Economist and Managing Director at the Institute of Energy
Economics, Japan (IEEJ). He also is a Visiting Professor at Graduate School of Public
Policy at the University of Tokyo; and an Adjunct Professor at Institute of Innovative
Research at Tokyo Institute of Technology. He was awarded the degree of: (1) B.A. in
Economics in 1982 from Waseda University, Tokyo, Japan; (2) M.A. in Economics in 1986
from Waseda University, Tokyo, Japan; and (3) Ph.D. in 2001 from University of Dundee,
Dundee, Scotland. His specialized field of research is energy security issues and geopolitics of energy, and analysis for global energy market and policy issues with emphasison the Asia-Pacific region. He has served as a member on energy policy related advisory
councils and committees of Japanese government on many occasions. He also serves asa member of International Advisory Board, Energy Academy Europe (Netherlands) andInternational Advisor (Chair in Energy Economics) at the Energy Commission of Tenaga
Nasional University (Malaysia). He was awarded the BrandLaureate’s “Brand Personality
Award 2016.”

Jane Nakano
Jane NAKANO is Senior Fellow in the Energy and National Security Program at theCenter for Strategic and International Studies (CSIS), which is a bipartisan think-tankbased in Washington, D.C. Her areas of expertise include U.S. energy policy, global
market and policy developments concerning natural gas, nuclear energy and coal, andenergy security issues in the Asia Pacific region. She frequently writes and speaks onthese issues at domestic and international conferences and to the media from around theworld. She has also testified before Congress on U.S. liquefied natural gas exports. Prior
to joining CSIS in 2010, Nakano worked in the Office of Policy and International Affairs
in the U.S. Department of Energy (DOE), where she covered a host of energy, economic,
and political issues in Asia. From 2001 to 2002, she served at the U.S. embassy in Tokyo
as special assistant to the energy attaché. Nakano graduated from Georgetown University’s School of Foreign Service and holds a master’s degree from Columbia University’s
School of International and Public Affairs.

Michael Smitka
Dr. Michael SMITKA is a Professor of Economics at Washington and Lee University
where he has taught since 1986. He is a highly regarded scholar and frequent contributorof articles on the Japanese economy, the U.S. and Japanese automotive industry and theChinese economy. He is a past president of the Virginia Association of Asian Studies, andserved as treasurer of the Washington and Southeast Japan Seminar. He has served as a
judge of the Automotive News PACE Supplier of the Year Innovation Award since 1994.
He was a Fulbright Researcher at Chiba University in 2006-2007. He graduated with an
AB in East Asian Studies from Harvard University and a Ph.D. in economics from Yale.

xiv

JAPAN’S ENERGY CONUNDRUM

Nobuo Tanaka
Nobuo TANAKA is Chairman of The Sasakawa Peace Foundation. He was Executive
Director of the International Energy Agency (IEA) from 2007 to August 2011. He began his
career in 1973 in the Ministry of Economy, Trade and Industry (METI), and has served ina number of high-ranking positions, including Director-General of the Multilateral Trade
System Department. He was Minister for Industry, Trade and Energy at the Embassy ofJapan, Washington DC. He has also served twice as Director for Science, Technology
and Industry (DSTI) of the Paris-based international organization, the Organization for
Economic Co-operation and Development (OECD).

Yukari Niwa Yamashita
Yukari Niwa YAMASHITA, as a Board Member for the Institute and the Director in
Charge of the Energy Data and Modelling Center at the Institute for Energy Economics, Japan (IEEJ), is responsible for quantitative and qualitative analyses on energy andclimate change policy issues. Her modeling team prepares the annual IEEJ Outlook,
continues to develop a Practical Approach to Climate Change and performed analyses
that contributed greatly to Japan’s debate on a national energy mix. She is currently amember of the Zayed Future Energy Prize Selection Committee (United Arab Emirates),an Editorial Board member of The Energy Journal and a Clean Energy Education &Empowerment (C3E) Ambassador of Japan, an initiative under Clean Energy Ministerial(CEM). She is a graduate of the International Christian University in Tokyo and holds a
M.A. from the University of Tsukuba.

Phyllis Genther Yoshida
Dr. Phyllis Genther YOSHIDA is the Senior Fellow for Energy and Technology at the
Sasakawa Peace Foundation USA. She also is President of Pimmit Run Consulting LLC,a private consultancy on international energy and technology issues. Prior to joining
Sasakawa, she served as Deputy Assistant Secretary for Asia, Europe, and the Americas
at the U.S. Department of Energy (DOE), coordinating bilateral relationships and serving
as the Lead Shepherd of APEC’s Energy Working Group. She was the team leader of
the International Energy Agency’s 2016 in-depth review of the energy policies of Japan,
and negotiated the establishment of the International Partnership for Energy Efficiency
Cooperation (IPEEC). She also served as DOE’s Director of the FreedomCAR and FuelPartnership, a government-industry cooperative research partnership. Dr. Yoshida has
written extensively on Japanese and international science, technology, and energy
issues. She also has held policy and research positions over her career at the U.S. Houseof Representatives, the Japan Economic Institute, George Mason University and the U.S.
Department of Commerce. As Director of the Department of Commerce’s Asia-PacificTechnology Program, she received the Commerce Department’s Gold Medal for expanding U.S. access to foreign science and technology, and Silver Medal for work creating theInternational Intelligent Manufacturing Systems Partnership. She received her B.A. from
Carleton College, and M.A. and Ph.D. from The George Washington University. She was
the first recipient of Japan’s GARIOA/Fulbright Fellowship, under which she studied in
1983-1984 at the University of Tokyo, Japan.

PART 1:SETTING AND CONTEXTFOR JAPAN’S ENERGYCONUNDRUM

CHAPTER ONE

1

Chapter One
Japan’s Energy Conundrum
Dr. Phyllis Genther YOSHIDA
Senior Fellow, Sasakawa Peace Foundation USA

Introduction
Japan’s energy policy for over a century has sought to compensate for geographic
and resource vulnerabilities while supporting economic growth. More than any othermajor country, its actions have centered on lowering risk, maintaining security, andsafeguarding an uninterrupted supply. It implemented policies quite successfully toachieve these goals through a commercial oligopolistic market tempered by a persistent
government presence. Yet, more than once, Japan encountered challenges of suchsize and scope that it was forced to change policy direction dramatically and seek a
new base energy source. These reoccurring challenges have constituted a frustratingly
persistent and familiar conundrum; how to provide a secure, affordable and environmentally-friendly energy supply resilient to the unexpected in a country with inadequate
domestic energy resources. The Great Eastern Japan Earthquake and Tsunami and its
aftermath triggered the most recent such challenge.

Pre-World War II Challenges and Responses
Japan faced its first energy challenge in producing the fuel for its industrial expansion
launched in the latter half of the nineteenth century, which it overcame by turning todomestic coal. As Professor Richard Samuels has noted, “Coal was the primary industrial
fuel and feedstock for the first half-century of Japan’s industrial transformation. Long
before the industrial revolution started, however, the coal mines had attracted state intervention. In fact, coal was the first business of the Japanese state.”1 Coal mining, alreadyfairly advanced by the early nineteenth century, was controlled by the governments ofvarious han (feudal fiefdoms). The building of a strong and efficient coal industry set
the scene for what would become a long series of transactional interactions between thestate and industry that have defined Japanese energy policy ever since.
Energy also underlays the first important interaction between the United States andJapan when the U.S. Navy’s need for a coaling station led to Commodore William Perry’s
expedition with the goal of “opening of Japan.” The forced opening of its ports, in turn,cemented Japan’s realization that it had to industrialize to avoid China’s fate—accepting
unequal treaties and ceding territorial and sovereignty rights to foreign powers. Japan
recognized that it needed a reliable energy source to fulfill the Meiji era call for fukoku
kyohei (rich country, strong army), and so restructured and instituted centralized regulation of the domestic coal industry.
1
Samuels, Richard J. The Business of the Japanese State: Energy Markets in Comparative and Historical­Perspective, (Cornell University Press: 1987), Page 68.

2JAPAN’S ENERGY CONUNDRUM

While domestic coal remained Japan’s primary energy source for industrializationand economic growth until after World War II, by the early 1900s, Japan faced its second
energy challenge: an increased need for oil—a resource almost non-existent in Japan—
for air and naval power. Meeting that need played a critical role in Tokyo’s policy
decisions and its interactions with the United States.
By the 1930s, affiliates of Royal Dutch/Shell and Standard Oil of New Jersey/Standard Oil of New York held 30 percent of Japan’s internal oil refining capacity. Japanproduced only seven percent of the oil it consumed by late 1930s—about two million
barrels of oil yearly from fields in Akita, Niigata, and Nutsu (an amount representing
less than one day of U.S. production at the time). Most of the remainder came from theUnited States (80 percent) and the Dutch East Indies (10 percent).
In the 1930s, as in other industries Japan deemed strategic—but had substantial
foreign ownership—Japan nationalized its refining industry. The 1934 Petroleum Industry Law gave the government the power to control imports, set quotas, fix prices, andmake compulsory purchases to build the domestic refining industry and reduce the roleof foreign companies. It also included a stockholding requirement of six months. The
American Embassy protested and succeeded in postponing the stockholding provision
but not the other provisions of the law.2 The U.S. response was muted due to isolationism, the Great Depression and U.S. Secretary of State Cordell Hull’s policy of avoiding
serious crisis with Japan.
Foreseeing the oil embargo that would be imposed by the United States and its allies
Britain and the Netherlands, Japan passed the Synthetic Oil Industry Law in 1937 toaccelerate research and production of fuel from coal, a process Japan initially pushed in
the 1920s.3 However, advances came slowly. Meanwhile Japan’s overseas territories ofFormosa and Sakhalin added only another 2 million barrels of oil yearly. By the time ofthe embargo in 1941, Japan still depended on the United States for 80 percent of its oil.
Japan’s resource vulnerabilities and its need for oil thus played a major role in Japan’s
great gamble of going to war with the United States.

Post-World War II Challenges and Responses
In the first decade after the war, Japan pursued an energy policy of “coal first–oil
second” with continued government support for the coal industry and restrictions on
industrial use of oil.4 By the mid-1950s, however, Japan faced its third energy challenge—finding a new cheap source of energy to support rapid economic growth andfuel Japan’s new, internationally competitive, energy-intensive industries such as ironand steel.
Japan had quickly exhausted its small oil reserves, and the price of domestic coal
had come to exceed that of imports due to advances in mining and falling shipping
costs. Oil imports from the Middle East, meanwhile, declined in price due to increasing
standardization and diffusion of technology, and increased reliability due to the security
2
Hughes, Llewelyn. Globalizing Oil, Firms and Oil Market Governance in France, Japan and the UnitedStates (Cambridge, UK: Cambridge University Press, 2014).
3
Stranges, Anthony N. “Synthetic Fuel Production in Prewar and World War II Japan: A Case Study in Technological Failure.” Annals of Science 50 (1993): 229-65.
4Kobori, Satoru. Japan’s energy policy during the 1950s: reasons for the rapid switch from coal to oil, Conference Paper at the Asia-Pacific Economic and Business History Conference, AEPBH09, 2009.

CHAPTER ONE

3

afforded by the Pax Americana. Japan thus lifted restrictions on oil’s use and expanded
port facilities for its importation. To ease the transition from coal, the Japanese government continued to subsidize what remained of its coal industry by limiting imports until
the early 1990s.5 However, between 1951 and 1971, the share of imported and domestic
coal as a primary energy source declined from over 50 percent to 8 percent, withdomestic coal production shrinking from a peak of 55 million tons in 1960 to slightly
more than 16 million tons in 1985.
With Japan’s rapid expansion in the 1960s, energy use grew too, sometimes fasterthan gross domestic production (GDP). By 1973, oil accounted for 80 percent of total
Japanese energy consumption. Japan’s energy policy now included two of the three“Es” (economic growth and energy security) that would become the basis for Japan’s
pre-Fukushima 2003 Basic Energy Plan.
Masakazu Toyoda, President of Japan’s Institute of Energy Economics, says energy
security means “to secure adequate energy at reasonable prices necessary for people’s
lives, and economic and industrial activities of a country.”6 This definition emphasizes
maintenance of the availability and affordability of energy notwithstanding politicalevents and actions, accidents, changes in demand, global competition, depletion of
resources and/or lack of adequate investment.

Figure 1: Domestic Coal Production/Imports

Source: Ministry of Economy, Trade and Industry

5
Hein, Laura E. Fueling Growth: the Energy Revolution and Economic Policy in Postwar Japan (Cambridge,
Mass.: Harvard University Press, 1990).
6
Toyoda, Masakazu. “Energy Security and Challenges for Japan,” 14 February 2012, http://eneken.ieej.or.jp/
data/4856.pdf.

4JAPAN’S ENERGY CONUNDRUM

The plan’s third “E,” environmental sustainability, became an important factor inenergy policy later, though concerns over the environment started gaining popular
attention in the 1950s and 1960s due to toxic chemical spills and increased air pollution.
The third “E” therefore adds acceptability to energy policy in addition to availability
and affordability. Japan created a subcabinet-level Environment Agency in 1971; it later
became the cabinet-level Ministry of the Environment in 2001. Japan also paid close
attention to the passage of the Clean Air Act in 1970 in the United States, passing its own
Clean Air Act in 1973.
Tokyo faced its fourth energy challenge with the onset of the first oil crisis in
1973-1974 when oil became both far more expensive and far less reliable. Japan was
more dependent on oil than any other advanced economy at the time, and so quickly
had to reinvent its energy policy and diversify its energy mix away from oil. It did so
by expanding production of nuclear energy and consumption of liquefied natural gas(LNG). By 2011, oil had declined to 43 percent of Japan’s total energy consumption from80 percent in the 1970s.
The Atomic Energy Basic Law, limiting use of nuclear technology to peaceful purposes, was passed in 1955. Japan signed an agreement with the United States thatsame year to work together on the research and development of nuclear energy as partof President Dwight Eisenhower’s global “Atoms for Peace” initiative. Japan’s Atomic
Energy Commission (AEC), established in 1956, promoted research and nuclear power
development. The country’s first commercial nuclear power reactor came online in
mid-1966; in response to the 1973 oil crisis, Japan made nuclear energy expansion anational strategic priority. Nuclear power was attractive as a high-tech “domestic” energy
source, the potential to create a new globally competitive industry, and environmental
benefits compared to fossil fuels in terms of clean air. Japan also thought that its ability
to reprocess spent nuclear fuel for use in nuclear power plants would enhance energy
security by reducing its need for imported energy. When the first oil crisis started, Japan
had five nuclear reactors in commercial operation and several under construction. The
number expanded to 54 commercial reactors by 2010, which provided approximately 30
percent of electricity production. In addition, in plans announced that year, Japan sought
to increase the amount to 40 percent by 2017.
LNG became a viable global commodity with the first commercial shipments to theUnited Kingdom from Algeria in 1964. Japan received Asia’s first LNG shipment in 1969,
and the country helped fund Brunei Darussalam’s LNG industry, which started exportingin 1972. With the first oil shock, Japan’s interest in the fuel escalated with a focus on
the potential for reliable supply even more so than price. In their first contracts withIndonesian producers, Japanese utility companies agreed to a pricing scheme basedon an “LNG element” linked to crude oil export prices and a “transportation element”
based on a seller’s cost of transportation, an arrangement that would become a major
policy and economic irritant after the Fukushima disaster. By 1984, Japan was buying
72 percent of the world’s LNG exports. While other buyers emerged creating a seller’smarket in the late 1990s, Japan remained the largest buyer, purchasing 66 percent of
globally traded LNG in 1999 and 48 percent in 2002.
During this period, Japan also sought to use energy more efficiently, directing large
amounts of funding into industrial processing and manufacturing. It built upon a historyof sporadic conservation efforts begun in the early 1900s. In 2016, the American Council

CHAPTER ONE

5

for an Energy Efficient Economy’s (ACEEE) 2016 International Energy Efficiency Scorecard ranked Japan as the second most energy efficient country, tied with Italy and justbehind Germany.
In response to the 1973 oil crisis, Japan developed policies to increase energy self-reliance through expanded research, development, and utilization of alternatives to oil.
In 1974, the Ministry of International Trade and Industry (MITI) launched its Sunshine
Project to foster new solar, hydrogen, coal, and geothermal energy technologies.
The second oil crisis of 1978 reinforced Japan’s shifting emphasis on LNG, nuclear
power and energy efficiency. MITI, through the Agency for Industrial Science andTechnology, launched its Moonlight Project to add energy conservation to the newenergy technologies targeted by the Sunshine Project. Japan combined the two projects
in 1993 along with work on environmental technologies to form the New Sunshine
Program. The 1980 “Law Concerning Promotion of the Development and Introductionof Oil-Alternative Energy” led to the establishment of the New Energy and Industrial
Technology Development Organization (NEDO), a special corporation funded by tariffs
on crude and heavy fuel oil imports as well as a petroleum fuel tax to promote thedevelopment and introduction of new energy technologies.7 Its mandate expanded in1988 to promote industrial technologies.
Japan increased its role in climate change by hosting the 1997 conference that
produced the Kyoto Protocol. Tokyo’s ratification of the Protocol in 2002 included apledge to reduce greenhouse gas emissions six percent below 1990 levels by 2012.
As a result, Japanese energy policy placed additional emphasis on climate and theenvironment, while public support for new climate friendly technologies and industries
increased. Japan made a new pledge in 2009 to reduce 2020 greenhouse gas emissions
by 25 percent from 1990 levels.
Japanese policymakers announced the country’s Third Strategic Energy Plan in June
2010. It included a proposed energy mix that was both more environmentally friendly
and less dependent on imports by building on existing policies favoring nuclear power.
The 2010 plan sought to expand nuclear power from 30 percent to 50 percent in 2020of total electricity consumption and to 70 percent in 2030; to a much smaller degree, italso supported renewable energy.

March 11, 2011
The events of March 11, 2011, which rendered the 2010 plan obsolete, presented
Japan with its fifth and latest energy challenge. New circumstances forced Japanese policymakers once again to undertake an in-depth review of the country’s energy situation.
The country shut all its nuclear reactors in the aftermath of the disaster at Fukushima andthe resulting intensified anti-nuclear sentiment, and so faced an immediate 30 percent
shortfall in electricity production. Over the longer-term, nuclear power seemed to havebeen ruled out as Japan’s primary energy source in coping with geographic and resource
vulnerabilities or enhance environmental sustainability.
Without nuclear power, Japan relied almost completely on imports of coal, oil, andnatural gas to meet its primary energy demand. Meanwhile, Japan’s GHG emissions
7
Nakayama, Shigeru. A Social History of Science and Technology in Contemporary Japan, Volume 4 (Melbourne, Australia: Trans Pacific Press, 2016).

6

JAPAN’S ENERGY CONUNDRUM

quickly increased, its trade deficit grew, and its economy slowed due to higher LNG
prices, which doubled in large part because Japan’s demand for the fuel increased 30
percent, forcing up electricity rates, which had already been among the highest in theworld.
Once again, Japan’s policymakers had to reconsider the energy market’s structure
and the government’s role in advancing energy security, economic growth, and environmental sustainability. Their deliberations also took place in the context of a revolution
in the global energy market brought about by new gas and oil extraction techniques
perfected in North America that is creating a new phase of U.S.-Japan energy interactions. The prospect of U.S. LNG brought about a flurry of agreements with Japanesecompanies for purchases of LNG with 14 million tons contracted for delivery between
2017 and 2022. Japanese companies also are investing in U.S. LNG infrastructure. With
the diversification of supply, Japan also has been able to begin to replace the system thatlinked LNG price to the crude oil import price.
The government scrapped the Third Strategic Energy Plan even before it was
implemented, developing a fourth Strategic Energy Plan issued in 2014, the Long-term
Supply and Demand Outlook to 2030 released in 2015, and the National Energy andEnvironment Strategy for Technological Innovation Towards 2050 adopted in 2016.
The new strategies posited a flexible and diversified energy supply-demand structure to meet energy security and climate change objectives. They called for a smaller rolefor nuclear energy than the 2010 plan; reductions in demand through energy efficiency,
reform and deregulation of both the electricity and gas markets; accelerated deployment
of innovative technologies in renewable energy, solar and wind in particular; optimization of the oil refining and distribution industry; promotion of efficient coal-fired power
plants; robust investment in advanced energy research and development; and creation ofa strong safety culture in a smaller nuclear industry. Policy now revolved around not justEnergy security, Economic growth and Environmental sustainability—the “3Es”—butalso included “S” for Safety. This plan’s implementation is taking place in a market stilldefined by the events of March 2011.

Figure 2: Electricity 2015
JAPAN’S ELECTRICITY MIX BY FUEL

Source: International Energy Agency, Japan Federation of Electric Power Companies

CHAPTER ONE

7

The Way Forward
Japan has faced its many energy challenges over the years and successfully managed to make necessary transitions in its primary energy sources through a commercial
oligopolistic market tempered by a persistent government presence. What is different
after March 2011 is a global energy market made more complex by changes in supply
from the North American unconventional oil and gas revolution, changes in demand,
particularly in China and Southeast Asia, and increased market competitiveness ofrenewable energy due to technological advances. Japan also has made a clear decision
to deregulate its domestic electricity and gas markets more quickly than prior to 2011.
Renewable energy production, while already underway, now is seen as imperative if
the country is to overcome its latest energy challenge, especially if the role for nuclear
remains limited.
What other ideas should Japan consider going forward? The International Energy
Agency (IEA) does a peer review of the energy policy of each of its members approximately every four years.8 The latest review for Japan, completed in 2016, is more consequential than usual given the complexity of the country’s current energy circumstances.
As Japan moves forward, it begins with an energy market changed drastically by
the events of March 2011. Total Japanese primary energy supply (TPES) in 2014 was 442
million tons of oil-equivalent (Mtoe). Fossil fuels dominated, accounting for 94.7 percent
of TPES in 2014, a level not seen since the energy crisis of 1973-1974. The 2014 Strategic
Energy Plan seeks to lower fossil fuel consumption by bringing some nuclear reactors
back into operation, growing renewable energy, and advancing energy efficiency. Coal
(imported) for use in highly efficient power plants is making a comeback as a lower costalternative to oil and natural gas.
With only a handful of nuclear plants online, Japan still relies almost completely
on imports for its total primary energy needs. In 2015, energy imports accounted for
434 Mtoe, out of which crude oil and oil products made up the biggest portion (49.5
percent), followed by coal (27.7 percent), and natural gas (22.7 percent). The strongest
increases in energy imports came from natural gas (19.3 percent) and coal (4.3 percent).
In 2014, domestic production stood at only about six percent of TPES. Domestic
production consisted of biofuels and waste (42 percent), hydro (26.5 percent), naturalgas (9.7 percent), solar (9.3 percent), geothermal (9 percent), oil (1.9 percent) andwind (1.6 percent). This mix differs considerably from pre-Fukushima 2010 levels when
nuclear accounted for 75.9 percent, renewables for 20.2 percent, and oil and gas for 3.9
percent. In the years just prior to the Great Japan Eastern Earthquake and the nuclear
shutdown, domestic production ranged between 16 and 20 percent of TPES.
The key recommendations made by the IEA peer review committee for Japan toconsider as it moves forward in implementing its post-2011 energy policy include:•	Strive toward a well-balanced and diversified energy mix, including renewable andnuclear energy, and efficient thermal power generation, taking into account safety,
energy security, economic efficiency, and environmental protection.
•	Take all necessary measures to meet the 2030 objectives and to continue toward2050 objectives,9 including byInternational Energy Agency. Energy Policies of IEA Countries: Japan 2016 (Paris, France: OECD/IEA, 2016).
As set out in the 2014 Strategic Energy Plan, the 2015 Long-term Supply and Demand Outlook to 2030 and
the National Energy and Environment Strategy for Technological Innovation Towards 2050.
89

8JAPAN’S ENERGY CONUNDRUM

	facilitating increases in low-carbon sources of primary energy and electricity
supply, while addressing safety, cost, and public acceptance	continuing to gradually introduce fiscal incentives and stricter requirements forenergy efficiency
	ambitiously promoting Japan’s proven and considerable potential for innovationin critical low-carbon technologies.
•	Finalize the implementation of the electricity and gas market reforms as scheduled;ensure that the regulator and competition authority are adequately resourced; specifically, for electricity, facilitate and encourage building infrastructure for creating
a well-integrated national grid and a market design that includes strong signals to
locate generation where it is most valuable to the system.
•	Continue to support renewable energy deployment and focus on	
controlling additional burden on consumer tariffs from support costs andaligning support towards global benchmarks increasing the effectiveness of the
support and reviewing it regularly to reflect advances in technology	facilitating the deployment of a technologically and geographically balanced
portfolio	introducing neutral institutional arrangements to accelerate grid integration.
The report contains many specific recommendations for Japan’s policymakers toconsider that support the general recommendations listed above. These include recommendations related to climate change, energy efficiency, oil, coal, natural gas, electricity,
renewable energy, nuclear energy, and research and technology. There is no energy
silver bullet for Japan to successfully meet its latest energy challenge. Energy efficient,demand side solutions are necessary but are becoming more complex as they require
an integrated approach among industries, cities, and the Japanese people. In addition,
the structure of the energy market itself will change through deregulation, and theintroduction and development of new technologies.

Conclusion
Just as Japan met previous energy challenges, Japan proved remarkably resilient inresponse to the Great Eastern Japan Earthquake and Tsunami, the disaster at Fukushima
Daiichi, and dramatic changes in the global market. It managed to fill the gap in electricity supply and demand by replacing nuclear power with fossil fuels—especially LNG
and coal, mandatory temporary cut-backs in industrial energy use, and other energy
efficiency improvements. Economically, it was fortunate that oil and natural gas prices
declined due to the rise in non-OPEC, primarily North American, production.
Longer term, however, the situation may become more difficult as the cost of oil
and gas will remain volatile, the global energy market evolves, and environmental andclimate concerns grow. Combined with Japan’s COP21 goal to reduce GHG emissions
by 26 percent from 2013 levels by 2030, it is unclear if the country’s proposed energy
policies and new energy mix will allow it to balance its objectives of energy security,
economic growth, and environmental sustainability. Japan has also pledged to cut emissions by 80 percent by 2050 from current levels (2015) if that amount is compatible
with economic growth. The proposed energy mix for 2050 is less detailed than thatfor 2030, but if nuclear is not phased out, the pledge suggests 30 percent nuclear, 40

CHAPTER ONE

9percent renewables, and 30 percent fossil fuels. If nuclear is phased out, the amounts
change to 50 percent renewables and 50 percent fossil fuels. The 2014 plan and therelated measures announced in 2015 and 2016 are not sufficient to reach the 2050 target,
especially if nuclear energy or other low-carbon energy sources are not brought backonline quickly or coal use continues to expand.

Figure 3: Japan’s Proposed 2030 Energy Mix

COA L

RE N E W A BLE S

N U CLE A R

3%

22%
1%

LN G

13.70%

2030

24%

10.70%

26%

30.30%

27%

PERCENT

43.20%2013

OI L

SUPPLY
Source: METI

Japan once again faces an energy conundrum—the most complex to date. The
country’s current energy plans and the suggestions by the IEA all point in the right
direction, but are they sufficient? The United States has played a role in each of Japan’s
energy challenges sometimes directly and sometimes indirectly. What role will its strong
alliance and partnership with the United States play going forward? Can the two countries
expand their research, development, and utilization of leading edge technologies formutual benefit? Will the North American gas and oil revolution provide needed supply
diversity? Will the U.S.-Japan nuclear partnership emerge stronger or weaker? Japan must
figure out how, once again, to successfully balance energy security, economic growth,and environmental stability and do so safely if it is to remain a global leader.

10JAPAN’S ENERGY CONUNDRUM

CHAPTER TWO

11Chapter Two
The Geopolitics of Asian Energy
Admiral Dennis BLAIR, (Ret.)
Chairman, Sasakawa Peace Foundation USA

Introduction
Every country’s quest for energy security – having adequate and affordable energy
supplies to support the economy – drive the geopolitics of energy. National economies
are dependent on electrical power and transportation, both in turn relying on energy
from a variety of domestic and imported sources. Electrical power generation uses coal,
along with natural gas, nuclear power and renewable sources. Refined oil products dominate transportation energy. National governments therefore have a vital concern that
supplies of energy for electrical power generation and for transportation are adequate
and that energy prices are neither too high nor too volatile.
Energy security means not only an adequate supply and affordable price on a dayto-day basis, but also during natural disasters, political crises or even wars, when energy
supplies will be under strain or attack, with potentially punishing economic results. For
countries with substantial imports, these considerations focus attention on diversity ofsources for imported energy materials, security of imported energy during transit bypipeline over land or by ship, and buffer stocks to counteract supply disruptions.
Neither the United States nor any major country in Asia is self-sufficient in energy.
The United States, China and India use mostly domestic coal for electrical power generation, while Japan and Korea must import a variety of fuels to supply power plants. All
must import half or more of the oil they use to fill the tanks of the cars, trucks, trains
and airplanes of their citizens and businesses. The geopolitics of energy come into playin the relations between energy importing countries and energy exporting countries, incompetition between importing countries for adequate and secure energy sources, andthey often affect other issues between importing countries.
In recent years, growing global awareness of the dangers of climate change has
introduced another powerful factor into the geopolitics of energy. All countries recognize that the continued unconstrained use of fossil fuel energy sources risks raising theearth’s temperature to the point that it will cause economic and social disaster. Coal is
the greatest source of greenhouse gas, the primary factor in climate change over whichhumans have control, with oil next. However, the costs of converting to less polluting
energy sources today’s fossil-fueled transportation and electricity sectors in both thedeveloped and the developing world are huge. The energy geopolitics of climate change
are primarily to convince other countries to reduce their use of fossil fuels drastically,
while evolving more slowly and less expensively in one’s own country.
The geopolitics of energy in Asia boil down to the quest of individual countries toensure a reliable and affordable flow of imported energy into their economies under arange of conditions from peacetime through natural disasters through conflict. Countries

12

JAPAN’S ENERGY CONUNDRUM

sometimes take initiatives to use energy supplies or purchases to support friends andcoerce enemies on specific political issues. There is a general desire to reduce the useof fossil fuels, but these considerations come into play only after a country is confidentof its fundamental energy security in the immediate future.

International Energy Markets
Energy supplies come from international markets. The nature of international oil,natural gas and coal markets therefore heavily influence the geopolitics of energy. There
are both private and state-owned companies in these markets, as well as cartels. The
desire to make profits over time primarily drives private companies. National companies
also want to make profits, but they often must provide direct cash flows to their governments from their revenues. Their governments also can direct them to withhold sales
and deliveries to other countries for political reasons. The cartels have both economic
and political objectives.

Oil
Because tankers distribute most of the oil in the international market around theworld and the shipping costs are a small fraction of the value of the product, and there
is a world market and price for oil. Both importing and exporting countries pay theinternational price. State-owned oil companies play a strong role in the market. Of theten largest by revenue, half are state-owned10 and they own about three-quarters ofreported proven reserves.11
Transportation systems are the major user of oil, and transportation demand is generally inelastic. High world oil prices therefore translate directly into economic penalties
for oil importing countries. Volatile oil prices also exact an economic penalty, as they
make it impossible for companies and individuals to carry out efficient plans. If theyplan conservatively, anticipating high prices, and prices stay low, they miss investment
opportunities; if they plan for low prices, and prices rise, they must postpone investment
or borrow.
The supply/demand relationship basically sets the international price over the longterm. Horizontal drilling and hydraulic fracturing technologies developed in recent years
have increased supplies in the United States, driving down the world price, but economic development, most of it in countries in Asia, is increasing demand, driving up theprice. The U.S. Energy Information Administration (EIA) predicts that in coming years
the price of oil will generally move higher.12
In the shorter term, a combination of natural and political events affects the priceof oil. Hurricanes that strike the American Gulf Coast, interrupting refinery operations,cause the price to go up. So do political crises in the Middle East and civil wars in Libya.
Both producers and importers take actions for both economic and political reasonsthat affect price and availability of oil. Producers act through state-owned national oil“Biggest Oil Companies In The World.” World Atlas, http://www.worldatlas.com/articles/biggest-oilcompanies-in-the-world.html.
11
Ausick, Paul. “The World’s Top 10 Oil Companies.” 24/7 Wall Street. December 15, 2014, http://247wallst.
com/energy-business/2014/12/15/the-worlds-top-10-oil-companies/.
12
U.S. Energy Information Administration. International Energy Outlook 2017. September 14, 2017, https://www.eia.gov/outlooks/ieo/.
10

CHAPTER TWO

13

companies; consumers act by government restrictions in imports. In 2014, for example,
the Saudi Arabian government directed Aramco, the largest oil company in the world,
to increase its production in order to keep the world price of oil low. Saudi Arabia’s
objectives were to maintain economic and political pressure on both Iran and Russia byreducing their oil revenues, and to drive American shale oil producers out of the market.13 Right now OPEC, a coalition of producers responsible for about a third of world
oil production, is attempting to limit production to raise the world price.14 Conversely,
importers can agree to put pressure on individual exporters by refusing to buy oil fromthem. The United States and major European countries limited purchases of Iranian oil
to pressure Iran to accept a freeze on its nuclear weapons development program.
With all this near-term uncertainty in the international oil market, the major countries of Asia all pursue a mixture of policies designed to reduce their overall dependence
on imported oil over the long term, and develop tools to handle short-term events.
Reducing oil use depends on the development of efficient public transportation systems,
improvement in the fuel efficiency of gasoline-powered vehicles, and development ofvehicles powered by other energy sources – electricity, natural gas and hydrogen. To
deal with short-term supply shortages, countries build strategic stockpiles of oil, andmake political decisions to join or work around international coalitions attempting to
influence prices and availability.

Natural Gas
The international gas market has two very different components – pipeline-delivered and liquefied natural gas (LNG) delivered by ship. Worldwide roughly 90 percent
of natural gas is distributed from well to consumer by pipeline.15 10-12 percent of natural
gas consumed is piped to a liquefaction plant, cooled to liquid form, loaded onto ships,
and sent around the world, where it is converted back to gas and piped on.16 The
proportion of LNG in world consumption is projected to increase, with new exports
from the United States and expansion of exports from other producing countries.
The natural gas market in Asia is unique. With its maritime geography limiting theconstruction of pipelines, LNG carried in ships is much more important in Asia than inother regions. Japan and Korea are the top two importers of LNG in the world.
The pricing structures for pipeline gas and LNG sold on international markets arevery different. Pipeline gas is generally bought and sold under negotiated long-term
contracts that reflect the costs of producing and transporting it. The agreement between
China and Russia in 2014 is the largest Asian agreement in recent years for pipelinedelivered gas.17 Although the details of the agreement are not public, the agreed price
Solomon, Jay, & Said, Summer. “Why Saudis Decided Not to Prop Up Oil.” Wall Street Journal. December
21, 2014, https://www.wsj.com/articles/why-saudis-decided-not-to-prop-up-oil-1419219182.
14
Reed, Stanley, & Krauss, Clifford. “OPEC Reaches Deal to Limit Production, Sending Prices Soaring.” The
New York Times. November 30, 2016, https://www.nytimes.com/2016/11/30/business/international/opecenergy-oil-saudi-iran.html.
15
World Energy Council. “World Energy Resources Natural Gas 2016,” https://www.worldenergy.org/wpcontent/uploads/2017/03/WEResources_Natural_Gas_2016.pdf, p. 19.
16
Clemente, Jude. “The U.S. Is Transforming The Global Liquefied Natural Gas Market.” Forbes. April 16, 2017,https://www.forbes.com/sites/judeclemente/2017/04/16/the-u-s-is-transforming-the-global-liquefied-naturalgas-market/2/#423863fd4f23.
17
Downs, Erica. “In China-Russia gas deal, why China wins more.” Fortune, June 20, 2014, http://fortune.
com/2014/06/20/in-china-russia-gas-deal-why-china-wins-more/.
13

14JAPAN’S ENERGY CONUNDRUM

resulted from protracted tough negotiations between the governments, with the Russians
pushing for guaranteed minimum purchases at a fixed price and the Chinese pushing forlow and flexible prices.
LNG prices traditionally have been indexed to the price of oil under long-term
contracts, and Asia has accounted for about three quarters of the LNG market. In recent
years, a spot market and other flexible market mechanisms have developed, and Asian
countries have been able to lower their natural gas import bills.18 With the United States
now exporting LNG from its shale gas production and production in Australia continuing
to increase, it is expected that the spot market and other flexible pricing mechanisms
will grow, providing both stability and lower prices to Asian importers.19
Use of the international gas market by governments for geopolitical purposes has
been most evident in Europe. Russia in the past has leveraged its monopoly pipeline
natural gas deliveries to Central and Eastern European countries for political concessions on a range of issues. In reaction, European countries have attempted to diversify
their sources of supply by thickening the pipelines in Europe and taking advantage ofincreased LNG imports.
In Asia, the primary concerns with natural gas have been price and supply, rather
than political advantage. Oil-linked supply contracts have been volatile and expensive
for countries like Japan and Korea, completely dependent on LNG. Traditional LNG suppliers – Qatar, Australia and Indonesia – have not attempted to exert political leveragethrough their exports. The 2014 gas agreement between China and Russia had political
overtones, but the primary issue was price. Japan has been in long-term discussions
with Russia concerning increased natural gas imports, either as LNG or even through anundersea pipeline. While part of Japan’s motivation is political – to provide alternative
natural gas markets in Asia to Russia besides China – a major part is also economic – todiversify sources of supply.
Virtually all countries in East Asia are in favor of an Asian natural gas hub where asingle price would be set, contracts and futures made and traded, and natural gas stored
to buffer supply shortages. The competition lies in the structure and location of the hub,and Singapore, China, Japan and Korea all would like to participate.

Coal
China, India and the United States account for about 70 percent of world coal use,
and all three produce almost all of what they consume.20 Climate change concerns, ascoal is the single largest producer of CO2 emissions worldwide, mostly drive the geopolitics of coal. China has announced that it will decrease its consumption of coal, and there
are early indications that it is serious. Although it has withdrawn from the Paris accord,
the United States projects decreased coal consumption, since natural gas power plants
are less expensive; India and other developing countries, however, plan to increase theuse of coal for electrical power generation, offsetting reductions in China and the UnitedStates.21
U.S. Energy Information Administration. International Energy Outlook 2017. September 14, 2017, https://www.eia.gov/outlooks/ieo/.
19
Ibid.
20
U.S. Energy Information Administration, “International Energy Outlook 2016,” p. 3.
21
U.S. Energy Information Administration, “International Energy Outlook 2017, Executive Summary,” pp 6-7.
18

CHAPTER TWO

15Most of the effective pressure on national governments to reduce coal consumption
comes from citizens within those countries rather than from external pressures frommultilateral negotiations. One rare, minor and not very successful official attempt toreduce coal consumption in other countries was the attempt by the United States from2013 to 2016 to restrict international financing for coal-fired power plants.22 Most of thepressure on the United States and China to restrict the burning of coal has come fromcitizens who observe the effects of coal burning in the form of acid rain or air pollution,
and who take note of increasing numbers of major unusual and more severe weather
events. Although citizen pressure in India so far has not been powerful enough to affectgovernment policies favoring economic development, the increasing pollution of major
Indian cities should exert pressure on the government over time.

Energy Geopolitics of Major Asian Countries
While the United States and all major Asian countries seek energy security, theirconsumption, production, import and export situations are unique, and therefore theirquests for energy security take different paths. In certain situations, countries can go
beyond energy security considerations to use their positions as exporters or importers ofenergy to support other international interests, from limiting the proliferation of nuclear
weapons through supporting the energy security of allies. However, the energy policies
of most countries are intended to ensure that their economies cannot be strongly andadversely affected by the energy decisions of other nations or groups of nations, and to
make sure that they cannot be harmed by energy shortages due to natural disasters.

Japan
Japan’s energy policies are most strongly affected by two factors, one traditional andone more recent. The traditional factor is the country’s virtually complete dependence
on energy imports; the more recent factor is the shutdown of the country’s roughly
50 nuclear power plants following the tsunami of March 11, 2011, that flooded the
Fukushima nuclear power plant. The day before the tsunami, nuclear power plants had
generated about 30 percent of the country’s electrical power.23
In its latest energy policy, published in April 2014, Japan provided a good summaryof its energy security objectives:“The point 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 make maximum efforts to pursue environment suitability(‘Environment’).”24
Despite importing 100 percent of the petroleum it consumes, Japan has been able
to achieve a high degree of energy security in the oil sector through its robust public
Shear, Michael. “U.S. Says It Won’t Back New International Coal-Fired Plants.” The New York Times. October
29, 2013, http://www.nytimes.com/2013/10/30/us/us-says-it-wont-back-new-international-coal-fired-powerplants.html.
23
Silverstein, Ken. “Japan Circling Back to Nuclear Power After Fukushima Disaster.” Forbes. September
8, 2017, https://www.forbes.com/sites/kensilverstein/2017/09/08/japan-may-be-coming-full-circle-after-itsfukushima-nuclear-energy-disaster/#5c5317da30e8.
24
Ministry of Economy, Trade and Industry. “Japan’s Fourth Strategic Energy Plan.” April 2014, http://www.
enecho.meti.go.jp/en/category/others/basic_plan/pdf/4th_strategic_energy_plan.pdf, p. 17.
22

16JAPAN’S ENERGY CONUNDRUM

transportation system, very fuel-efficient vehicles, and a substantial strategic petroleum
reserve. The American think tank Securing America’s Future Energy (SAFE) publishes aranking of the energy security of major nations, and Japan ranks third, higher than the
United States or any Asian country.25 Japan’s oil intensity, the amount of oil it consumes
per unit of GDP it generates, is the sixth lowest in the world. Higher oil prices therefore
have less of an effect on the economy of Japan than on other countries.
Despite these measures, Japan is the third largest importer of oil in the world, andthe largest importer of natural gas. Under these circumstances, the only logical energy
security policy for Japan is diversification of sources for both oil and gas, and cultivationof good relations with suppliers.26 This drive for diversification and good relations with
supplier countries sometimes puts Japan at odds with its principal ally the United States,
which enjoys the luxury of a much more advantageous energy security position. For
example, as American policy towards Russia has grown increasingly antagonistic since
Russia’s annexation of Crimea, Japan has continued to seek improved relations. Partof its rationale is to find oil and gas deals that would ease Japan’s dependency on the
Middle East, and part to give Russia another Asian market for oil and gas exports besides
China.
On occasion, Japan has acted against its general policy of maximum diversity of oil
and gas sources. Although in 2003 Japan had imported 17 percent of its oil from Iran,after long negotiations it joined U.S. and European oil sanctions against that country,
bolstered by strong public opinion in support of limiting nuclear proliferation.27
Another strong component of the geopolitics of energy in Japan is internationalenergy cooperation. Part of this component is the expectation of more business overseas for Japanese manufacturers of energy equipment, but Japanese policymakers also
believe that international energy cooperation can bring benefits for all in the form ofgreater supplies and more efficient use of energy. Japan has many cooperative energy
projects in India, Southeast Asia, and even is committed to working with China despite
strong tensions:“China, which has become the world’s largest energy-consuming country, is expected to increase its presence in the international energy
market. As for China’s relations with Japan, tensions are growing invarious aspects, so how to manage a relationship with rising China
is a difficult and important issue. However, in the energy field, it isimportant to maintain an appropriate, cooperative relationship with
China to tackle common issues, including the high LNG prices in Asia,
as consumer and importer.”28
The Fukushima disaster caused Japan to shut down all its roughly 50 nuclear power
plants that had produced about 30 percent of the country’s electricity.29 Although the
Securing America’s Future Energy, http://secureenergy.org/oil-security-index/.
“It is important to make comprehensive diplomatic efforts to develop comprehensive and mutually beneficial bilateral relations with countries that supply Japan with resources, instead of merely forming relations
based on resource trade. The countries include Saudi Arabia and UAE in the case of oil; Australia, Qatar,­Malaysia, Russia and Indonesia in the case of natural gas; Australia and Indonesia in the case of coal; and Chile,Peru, Australia, Canada and South Africa in the case of metal resources.”
27
Kafura, Craig. “The Iran Deal and the US-Japan Alliance.” The Diplomat, https://thediplomat.com/2016/03/
the-iran-deal-and-the-us-japan-alliance/.
28“Japan’s Fourth Energy Plan,” April 2014, p. 81
29
Ibid., 26.
25
26

CHAPTER TWO

17

government’s initial plan was to recertify the safety of the plants, and to bring most ofthem back on line, popular opposition has been strong, as of March 2018, only six havereturned to operation. The price of electricity has gone up in Japan,30 so consumption
fell, but the net result has been increased use of coal, natural gas and even oil for aperiod of time31 to produce electricity, with adverse effects on both Japan’s balancesof payments and on its environmental objectives. It is impossible to predict whether
the Government of Japan will be able to carry out its plan of restoring nuclear power
to a major role in electrical power production in Japan. To the extent it falls short,however, there will be additional pressure on Japan to continue to diversify overseas
energy sources, maintain good relations with source countries, and seek cooperative
opportunities for energy development.

China
For the last three decades, China has been on an economic growth path unequalledin size and duration in human history. Adequate supplies of fuel for the transportationand electrical generation sectors have been fundamental to that growth, and China has
adopted an “all of the above” and “no strings attached” policy for securing energy supplies both domestically and abroad. With double-digit economic growth, energy prices
have been a secondary consideration. Energy security has been somewhat assured by
the sheer scale of energy imports, which have necessarily come from diverse sources.
Coal, almost all of it domestically produced, forms the base of China’s electrical
power generation. Only in recent years has citizen outrage at the air pollution caused byindiscriminate coal burning in power plants and other industrial furnaces affected government policies. Now China has announced that it will cap and then reduce the use ofcoal, substituting wind and solar, nuclear and hydro sources, and emphasizing efficiency
to reduce the size of demand growth. In 2014 for the first time, the Chinese government
committed to a numerical limit on coal consumption.32 In 2016, China submitted targets
it would meet for reducing carbon emissions as part of the Paris Agreement. Initial
indications are that the Chinese government is serious about these goals.33
It is only recently that China has seen the advantages of natural gas for energy
security and for its climate change goals. In the past, natural gas provided less than 5
percent of China’s energy consumption, and was almost all used by individual consumers by the bottle. Government fiat kept the price low, giving little incentive for domestic
exploration or overseas purchases.34 In addition, the domestic gas pipeline system in
China was rudimentary.
In the past five years, China has taken a series of measures to increase the use ofnatural gas, with a goal of doubling to 10 percent gas’s contribution to the overall energy
U.S. Energy Information Administration. “Japan’s electricity prices rising or stable despite recent fuel costchanges.” September 9, 2016, https://www.eia.gov/todayinenergy/detail.php?id=27872.
31
Gloystein, Henning. “After years of soaring growth, Asia’s fuel demand falters.” Reuters. April 13, 2017,https://www.reuters.com/article/us-asia-oil-analysis/after-years-of-soaring-growth-asias-fuel-demandfalters-idUSKBN17F0HU.
32
Lander, Mark. “U.S. and China Reach Climate Accord After Months of Talks.” November 11, 2014, https://www.nytimes.com/2014/11/12/world/asia/china-us-xi-obama-apec.html.
33
The evidence is mixed about recent coal consumption in China. The rate of growth has been declining inrecent years. However, most recently, there is evidence that Chinese coal use has again increased. See https://www.nytimes.com/interactive/2017/11/13/climate/co2-emissions-rising-again.html.
34
EIA report on China, p. 3.
30

18JAPAN’S ENERGY CONUNDRUM

consumption of China by 2020.35 Under a complicated scheme designed to cushion theeffect on consumers, China has gradually raised prices to international levels. The big
national energy companies, China National Offshore Oil Corporation (CNOOC), China
Petrochemical Corporation (Sinopec Group) and China National Petroleum Corporation(CNPC), often working with foreign partners, have increased production in China andoff its coasts. Development of higher production through hydraulic fracturing has been
disappointing, frustrated by the geology and location of Chinese gas deposits.
China is on track to double its natural gas pipeline network, allowing both efficient
distribution of domestic gas and greater imports. It has concluded pipeline and importagreements with Myanmar, and with several central Asian countries, increasing its pipeline imports to about 20 percent of natural gas supply per year.36 The major unknown
factor in China’s pipeline gas imports is whether its 2014 agreement with Russia todevelop the Yamal field for supply to China will produce the projected amounts ofnatural gas supplies.37
China also has greatly increased its imports of LNG. It is now the world’s third-­
largest importer. It has obtained its LNG through a combination of negotiated long-term
contracts and spot-market purchases, has built substantial re-gasification capacity, and isactively promoting Shanghai as an Asian natural gas hub.
China has access to all the natural gas it can absorb under current plans, and its
expansion plans have few geopolitical effects. Its natural gas agreements in Central Asia
were the first step in loosening Russia’s preponderant economic and political influenceon that region. The newly announced Chinese “One Belt One Road” initiative, which
is much broader than natural gas agreements, now drives the economic competition
between Russia and China in the region. However, the Sino-Russian relationship remains
one of political and economic competition and cooperation.38 The development of offshore oil production in areas of the East and South China Seas, where sovereignty isclaimed by multiple countries, has had geopolitical effects. However, currently nationalism seems to drive these disputes much more than economic considerations.
The disputed boundary between China and Japan’s exclusive economic zones (EEZs)
in the East China Sea crosses natural gas fields. China in recent years has pushed its
exploration and production wells into disputed territory, drawing protests from Japan.39
Rather than being a driver of Sino-Japanese enmity, however, these natural gas developments are more a symptom of poor relations. Up to 2008, there were active negotiations
between the countries for joint natural gas projects in the disputed areas. However,after 2010, when the Japanese government purchased the Senkaku/Diaoyu islands fromprivate owners, tensions in the area increased, marked primarily by aircraft and ship
deployments by the two countries to the vicinity of the islands. The Chinese projects andJapanese projects are a relatively minor part of the standoff in the East China Sea.
U.S. Energy Information Administration. “China leads the growth in projected global natural gas consumption.” October 25, 2017.
36
Ibid, p. 21.
37
Mazneva, Elena. “From Russia With Love: A Super-Chilled Prize for China.” Bloomberg. October 26, 2017,https://www.bloomberg.com/news/articles/2017-10-26/china-to-get-first-yamal-lng-cargo-as-russia-saysthank-you.
38
International Crisis Group. “Central Asia’s Silk Road Rivalries.” July 27, 2017, https://www.crisisgroup.org/
europe-central-asia/central-asia/245-central-asias-silk-road-rivalries.
39“Japan lodges protest against China’s activity in disputed sea gas field.” August 1, 2017, http://www.scmp.
com/news/asia/east-asia/article/2104894/japan-lodges-protest-against-chinas-activity-disputed-sea-gas.
35

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19

In the South China Sea, political rivalries have overshadowed the natural gas potential of the area. In 2011, Chinese government patrol vessels harassed Vietnamese oil
exploration ships in disputed waters. In 2014, China sent an oil rig into waters Vietnam
claims as part of its EEZ for several months of exploratory drilling. However, these incidents were minor compared to the 2015 and 2016 substantial expansion and constructionof militarily useful facilities on seven Chinese-occupied islands in the Spratlys. China’s
policy for asserting control over the South China Sea currently is much more focused onsovereignty for political and military purposes than it is on natural gas development. In
addition, a ruling of the Permanent Court of Arbitration has invalidated China’s claims
to an extensive EEZ in the South China Sea. Without a firm legal basis for drilling rights,
even the Chinese state-owned natural gas companies would resist direction to make theinvestments required for long-term production in vulnerable offshore fields.
It is in the oil sector that China’s quest for assured energy supplies has had thegreatest geopolitical effects, as it moved into the position of the world’s largest oil
importer.40 The basic Chinese energy security strategy has been to develop oil supplies
from as many countries as possible, seeking both adequacy and resiliency of supply
through diversity of sources. It has directed its national oil companies to bid for projects
wherever it can around the world, even in unstable countries with fragile authoritarian governments. China’s “no strings attached” approach has attempted to separate oil
development projects from political involvement in the countries where it has projects,
but it has been only partially successful. In South Sudan, for example, where China had
invested in substantial oil development, it has recently joined peacekeeping efforts in
Darfur to stabilize the region.41 In Libya in 2014, China evacuated a large number ofcitizens, most of them involved in oil projects.42 At the policy level, too, its internationaloil supplies have drawn it into geopolitics, causing China generally to cooperate withinternational initiatives to provide stability in oil-producing regions. For example, it
cooperated to a limited extent in the multilateral oil sanctions against Iran that led to theagreement by Iran to limit its nuclear weapons development program.
One other geopolitical effect of China’s increased oil imports has not been as positive, however. As China has imported more and more materials by sea to fuel its economic growth, the issue of the security of that shipping has become an issue in Chinese
national security policy. Some in China, especially those favoring a larger Chinese Navy,
have made the traditional argument that it is a matter of national security that China beable to protect shipping important to China’s economic development. These arguments
have made their way into official policy. In its 2015 defense white paper, entitled China’s
Military Strategy, is the observation,

Crooks, Ed. “The global importance of China’s oil imports.” Financial Times. September 25, 2017, https://www.ft.com/content/e7d52260-a1e4-11e7-b797-b61809486fe2.
41
China’s Foreign Policy Experiment in South Sudan. https://www.crisisgroup.org/africa/horn-africa/southsudan/288-china-s-foreign-policy-experiment-south-sudan.
42“Hundreds of Chinese workers are evacuated from Libya.” BBC News. August 7, 2014, http://www.bbc.
com/news/world-africa-28684555.
40

20JAPAN’S ENERGY CONUNDRUM“With the growth of China’s national interests…the security of overseas interests concerning energy and resources, strategic sea lines ofcommunication (SLOCs), as well as institutions, personnel and assets
abroad, has become an imminent issue …”43
China has been building its Navy, and increasingly sending it overseas, and this capability has caused concern about China’s intentions among a range of countries from India
through Indonesia.
The American maritime strategist Alfred Thayer Mahan in his 1890 book The Influenceof Seapower on History, first popularized the argument that national greatness depends
on a country’s access to overseas resources, and its ability to defend those resourcesfrom source back to the home country with naval power. Virtually all aspiring maritime
countries since, from Germany through the Soviet Union, and now to China, used thisargument as a rationale for a large and powerful Navy. In the modern era, it simply does
not hold up to logical analysis. Since the end of World War II, there has been a consensus among the major powers that they should all protect global shipping as a benefit toall, and the only threats to shipping have come from small countries in restricted waters,
most notably the “Tanker Wars” of the 1980s in the Persian Gulf. Indeed, China’s firstmajor deployments overseas have been to cooperate in the international naval patrolsthat have protected shipping of all countries against attacks by pirates operating out ofSomalia. In addition, China has not optimized its naval development for protection ofshipping, but for shows of force overseas and in future for a limited capability to put
small numbers of aircraft and troops ashore.
In summary, China has used its increasing dependence on overseas imports, including energy imports, as a pretext for increasing its naval power. This naval buildup has
caused both concern and offsetting military buildups in Asia by the United States, Japanand India, and in general has made cooperation with China more difficult for thesecountries.
China does have one legitimate concern with the security of its shipping, and thisis in the context of conflict with the United States, for which the primary flashpoints are
Taiwan and the Senkaku Islands. Should conflict occur in these areas, then it would be
relatively straightforward for the United States to declare and enforce a war zone thatwould include major ports along China’s coast, from Hainan to Shanghai, which would
effectively cut off the major part of Chinese imports by sea. For petroleum, it would force
China to institute rationing and use its strategic petroleum reserve, which it has built up
in recent years. The effects of this military reality are a restraint on China’s willingness to
become involved in a conflict with the United States, as well as a determination to build
up its maritime power to reduce this vulnerability.
In summary, the geopolitical effects of China’s increasing imports of natural gas
and oil are mixed. On the one hand, they are at times leading China to play a positiveand responsible role in many areas of the world from which these hydrocarbons come.
On the other hand, they are generating a sense of vulnerability that has resulted in arationale for the development of military forces that can operate both in East Asia andin the Indian Ocean far from China that in turn cause fear and reactions to protect theirown interests on the part of other countries.
The State Council of the People’s Republic of China, China’s Military Strategy, May 2015, http://eng.mod.
gov.cn/Database/WhitePapers/index.htm, p.3.
43

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21

India
India is increasingly important in the world energy picture. It is the third largest
energy consumer in the world after China and the United States, the fourth largest
consumer of oil, after China, the United States and Japan, and the fourth largest importerof LNG after Japan, South Korea and China.44 With projected economic growth higher
than any of those other four countries, India will become an even more substantial factor
in the future global energy picture.
The government of India issued a draft National Energy Policy (NEP) in June 2017.45
It frankly acknowledges the low energy efficiency of the economy, the heavy dependence on imported fossil fuels, the rudimentary state of that country’s energy policies,
and the multiple overlapping responsibilities of government agencies. A major focusof the plan is elimination of the price subsidies and price controls that discourage
energy efficiency. It is an important goal, but in India and in many other countries the
combination of popular resentment and entrenched interests makes this kind of reformvery difficult.
The focus of the NEP is on poverty elimination, with the first energy policy objective“Access at affordable prices.” Two of the most striking sections of the National Energy
Policy are the discussions of the challenges of extending electrical service to the currently unserved 340 million Indians, and discussion of providing clean cooking fuel tothe 40 percent of the Indian population that use firewood/chips, dung cake, kerosene
and coke/coal.46 The energy security issues of India are more basic than those of moredeveloped Asian countries.
The NEP acknowledges the massive but inefficient role of domestic Indian coalproduction. Complicated subsidies and price controls have led to deep inefficiency
in the operation of Coal India, Limited. The NEP calls for a doubling of domestic coalproduction and anticipates continuing imports of up to 25 percent of coal consumption.
Although it discusses air pollution in major Indian cities, and proposes a series of measures to improve it, the NEP contains no discussion of the greenhouse gas effects of coalon global climate change.
The second goal of the energy policy is “Improved security and independence.”
The policy acknowledges that for the past decade imports of oil and natural gas havebeen increasing sharply, making the country less energy secure. It projects that importdependence will increase through at least 2040.47 India has only a very small strategic
petroleum reserve, offering little protection from supply interruptions. There are plans toincrease it to the 90-day world standard by 2020, but it will be a difficult undertaking.48
With a focus on poverty alleviation, and deep and increasing dependence on fossil
fuel energy imports, it is little wonder that India bases its international energy policies
on maintaining positive relations with all supplier countries, avoiding participation insanctions regimes, and shifting the responsibility for dealing with climate change tomore developed countries. In fairness, this last position has softened recently. These
policies follow in the tradition of India’s self-centered and non-aligned policies during
the Cold War.
EIA Beta, https://www.eia.gov/beta/international/country.cfm?iso=IND.
Draft National Energy Policy, NITI Aayog, Government of India, Version as on 27.06.2017.
46
Draft National Energy Policy, NITI Aayog, Government of India, Version as on 27.06.2017, p. 19.
47
Ibid, p. 27.
48
EIA section on India: https://www.eia.gov/beta/international/analysis.cfm?iso=IND.
44
45

22

JAPAN’S ENERGY CONUNDRUM

India imports most of its oil from the Middle East, and it goes to extraordinarylengths to avoid antagonizing any oil-producing country in the region. It notably did notjoin in international sanctions to pressure Iran to give up its nuclear weapons program,
although it took a number of quiet moves behind the scenes to limit Iranian imports.49
India has ambitions to increase its natural gas imports. There are currently no gas
pipelines crossing its borders, and the one planned line from Central Asia crossing
Afghanistan and India’s arch-rival Pakistan, presents extraordinary political risks. India
is rapidly increasing its LNG imports. It has long-term contracts with Qatar, and makes
additional substantial purchases on the spot market.
In summary, the future impact of India on the world energy picture will be to generate greater demand for fossil fuels. It has the highest projected economic growth rate
among large countries, an inefficient coal production and electrical power sector, anddeclining production of oil and natural gas. Unless it can accomplish some very difficult
structural reforms, India’s imports of petroleum, LNG, and even coal, will continue
to increase, absorbing a greater share of international fossil fuel trade, as other majorcountries reduce their imports, because of lower economic growth and energy security
policies. With an international policy of cultivating good relations with all countries
except Pakistan, especially countries with which it has economic interests, India can be
expected to be an increasingly important advocate for international energy cooperationand stability.

United States
The United States plays an important role in the geopolitics of energy in Asia, boththrough its global economic, diplomatic and military policies, and through its energy
imports and exports. The big American energy story in recent years has been the development of hydraulic fracturing of both natural gas and oil.
For LNG, the United States is now a net exporter, rather than an importer. LNG liquefaction plants for exports have now replaced a set of LNG gasification plants constructed
for imports on the Gulf Coast in the 1990s. The largest LNG exports in 2016 went to thefollowing countries, in order: Chile, Mexico, China, Argentina, India, Japan and South
Korea.50 Pipeline exports to Canada and Mexico dwarfed these seaborne exports, andtotal exports of natural gas comprise less than 10 percent of the 27 trillion cubic feet that
the United States consumes every year.
For oil, the United States has become one of the top producers in the world, alongwith Saudi Arabia and Russia. Although the country still imports roughly half of theoil it consumes, because of refinery configurations and transportation arrangements, it
has been exporting roughly 1.6 million barrels of oil per day (MMbd) of crude oil andrefined products, mostly to North American neighbors.51
Energy security for the United States has always had both an economic and a national
security element. Ever since the Arab oil embargo of the 1970s, successive administrations have called for “energy independence,” with very little clear explanation of what
Conversations of the author with retired Indian officials.
U.S. Energy Information Administration. “U.S. Natural Gas Exports and Re-Exports by Country.” https://www.eia.gov/dnav/ng/ng_move_expc_s1_a.htm.
51
U.S. Energy Information Administration. “This Week in Petroleum: Crude oil and petroleum product exports
reach record levels in the first half of 2017.” September 27, 2017.
49
50

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23

the concept meant. In fact, the source of American energy insecurity is the 93 percent
dependence of the American transportation sector on oil. If the price goes up, American
consumers and businesses have no alternative but to pay higher prices, no matter how
much oil is produced domestically, with adverse effects on economic growth. The only
oil producers capable of increasing production in the short term to reduce a price spikeare in the Middle East, principally Saudi Arabia. It is for this reason that the United States
has continued to be tied closely to events in the Middle East, concerned for the securityof Saudi Arabia,52 and the free flow of reasonably priced oil from the region. The current
high level of American tight oil production does not change that situation. The only way
to break this dependence is to reduce the role of oil in the transportation sector, throughvehicles powered from alternative sources, and more efficient vehicles that continue toburn gasoline. There are encouraging initial steps in the deployment of electric vehicles
and hybrids, but with 250 million American vehicles on the road, and prices at the pumpthat Americans believe they can afford, progress will be slow.
In the meantime, the United States in general is a status quo country in Asia. It has
strong alliances, deep economic interests, and any changes in the geopolitics of theregion would be to its detriment. Consequently, its overall policies tend to be reactive
and stabilizing.
However, the geopolitics of American international energy policy are complicatedand often contradictory. As an importer of oil, as the victim of supply shortages andprice spikes, including those caused by OPEC, the United States has generally resisted
government interference in world energy markets, despite their domination by nationalenergy companies that take orders from foreign governments. The dramatic increasein American shale oil production combined with energy demand reduction caused by
the world economic recession of 2008 has created slack in the world supply/demandbalance. Oil prices since that time have been lower, lessening the concern about thethreat of market manipulation by producers. The United States has always been ready toemploy multilateral sanctions by importing countries against individual oil exporters. For
years, it led multilateral oil sanctions against Iraq. More recently, the slack in the world
oil market was also a factor in the American decision to pursue oil export sanctions
against Iran. The loss of Iranian exports to the world market did not drive up the world
price of very abundant oil.
The United States has tended not to use energy policies against its most powerful competitors, Russia and China. Apart from restricting financing of new exploration
projects and sanctions against some energy executives, sanctions against Russia for its
annexation of Crimea and aggression against Ukraine have not extended to oil.53 The
United States has actively assisted China in its attempts to exploit its own shale gas
reserves,54 and exports LNG to China.
As discussed earlier, American naval superiority is an implicit threat to China’s oiland LNG imports in case of a conflict in East Asia over Taiwan or the Senkakus. Although
The relationship with Saudi Arabia has even been able to absorb the 2014 Saudi actions that drove many
U.S. shale oil producers out of business.
53
Sanctions passed by Congress in 2017 target companies that are connected to Russia’s energy export pipelines. See H.R. 3364 – Countering America’s Adversaries Through Sanctions Act, Pub. L. No.115-44 (2017). Also,
see Dewan, Angela. “Russia sanctions: What you need to know.” CNN. August 2, 2017. Accessed November
22, 2017. http://www.cnn.com/2017/07/25/europe/russia-sanctions-explainer/index.html.
54
Author’s conversation with Chinese energy experts.
52

24JAPAN’S ENERGY CONUNDRUM

no American national security official has discussed it publicly, it is of deep concern
to paranoid Chinese military planners. The threat provides some restraint to Chinese
aggression on the two issues, and forms part of the justification for the sustained buildup
of Chinese maritime power in recent years. Because of the nature of the extended sea
lines of communication for Chinese oil imports, and the vulnerability of large oil tankers,
this vulnerability is unlikely to change for decades, if at all.
In general, then, American international energy policies have resisted interference
and cooperation among producers for either economic or political reasons, but havefavored cooperation among importing countries to punish or influence individual
exporters. The United States has generally kept energy issues out of its relations with themost powerful countries, whether allies or competitors. Although the country is taking
the initial steps towards breaking the dominance of oil in the transportation sector,
energy security in oil will be a long time coming.

Conclusion
This chapter has surveyed the major international energy markets and the energy
positions and policies of the United States and the three largest countries in Asia. It has
discussed the geopolitics of the energy policies of these countries, the role that energy
plays in their overall national security policies.
The weight of evidence is that the future of energy geopolitics in Asia will be morecooperative than confrontational, and that cooperative energy relations have a chance ofbeing isolated from the great power rivalries of the region: America-China, China-Japan,
India-China, America-Russia.
There are several factors involved: In the first place, international cooperation
among the energy companies of the major powers, whether private or state-owned,is frequent and routine. In the second place, energy shortages and high prices hurt all
countries, and none of the major countries has yet found a way to use its energy policies
to punish or reward in a precise manner. There is no Saudi Arabia in East Asia with themeans and incentive to move the market for its geostrategic purposes. In the third place,growing evidence of climate change has given a sense of common threat to all the majorcountries, although India lags the rest. Although it is not an overriding policy imperative
for any country, domestic opinion in all countries favors common action to deal with thethreat.
Unexpected developments could upset this hopeful scenario. Conflict between
China and the United States over Taiwan, or among China, Japan and the United Statesover the Senkaku/Diaoyus could involve diversions or even attacks on energy shippingthat would fundamentally change the geopolitics of Asian energy in the future. The
United States and major Asian countries will meet conflict in the Middle East with cooperation, but conflict might also raise policy differences as oil supplies are threatened.
Great power rivalry might intensify in the region, leading to a chilling of cooperation.
However, it is more probable that the United States and the major countries ofAsia will see it in their interest to cooperate, which will ensure their individual nationalenergy security within greater energy security for all. This cooperation in a large andvital sector of the world economy should contribute to sustaining peace in the region
despite national rivalries.

CHAPTER THREE

25

Chapter ThreeJapan’s Energy Miracles
Dr. Robert Alan FELDMAN
Adjunct Professor, Management of Technology Program,
Tokyo University of Science
Senior Advisor, Research Department, Morgan Stanley MUFG Securities

Introduction
In February 2011, nuclear power provided about 1/3 of Japanese electricity. In
June 2011, three months after the Fukushima nuclear accidents, it provided virtuallynone. Many feared that replacing this nuclear-generated electricity with fossil fuel-based
electricity would be a knock-out blow for CO2 control. But it did not happen that way.
Japan has long been skilled at holding energy use and CO2 control. Indeed, between
1994 and 2010, real GDP rose by about 14.5 percent, but CO2 emissions were flat. Part ofthis performance derives from the increased share of nuclear power during that period.
However, even though CO2 emissions have risen by about 4 percent since 2010, thisperformance since then has been, in one sense, even more extraordinary than before.
Even losing 30 percent of power supply from non-CO2 sources, Japan still managed tohold CO2 increases to about 2/3 of the increase of real GDP. Regardless of whether one
is a supporter or skeptic on nuclear power, analyzing the success of the post-Fukushima
CO2 performance has lessons for a better energy future.

Figure 1: Real GDP and CO2 Emissions - Cumulative Changes since 1994
25%
20%
15%
10%
5%
0%

GDP, Cum chg from 1994 (%)

CO2, Cum chg from 1994 (%)

Sources: GDP data from Japan Cabinet Office; CO2 data from World Bank; and Morgan Stanley calculations.

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

-10%

1994

-5%

26

JAPAN’S ENERGY CONUNDRUM

Why has Japan Been Successful (So Far), Despite Fukushima?
There are two ways to look at the course of CO2 emissions, the Kaya Identity andan energy supply chain. Let us start with the Kaya Identity, which was used first in 1993,
by Yoichi Kaya, one of Japan’s premier energy researchers. The relationship is simple,
but profound:
CO2
X
GDP
CO2 =
*
*
* P
X
GDP
P
Where CO2 is the emission of CO2 from human-based sources, X is the quanity ofenergy used, GDP is real output, and P is the population. In words, this says that total
emissions equal the product of four factors, (a) CO2 intensity of the mix of energy used,(b) energy intensity of GDP, (c) the standard of living, i.e. real GDP per person, and(d) the population. When analyzing past and potential trends in CO2 emissions, thisbreakdown is extremely helpful.
Using data from the U.S. Energy Information Administration (EIA) on CO2 and totalenergy use, we compare the basic data and the Kaya Identity components for 2010 and2015 (Figure 2). First, on the components, total CO2 emissions grew by 0.82 percent per
year; this is not good, in light of the goals of actual reduction of CO2 emissions, but atleast is below the real GDP growth rate of 0.98 percent. The amazing number is the totalenergy consumption – which fell by 1.83 percent per year.
Next, looking at the Kaya Identity components, the bad news was the worseningof CO2 intensity. This worsening derived from the shutdown of the nuclear power
stations, and substitution of fossil-based fuels for the largest part of the primary energy
needed. The good news came in the stunning improvement of energy intensity in GDP,
which fell by 2.79%/year – a bit more than CO2 intensity worsened. While these two
factors largely offset each other, the standard of living rose by about 1 percent, and the
population declined slightly.

Figure 2: Japan — The Kaya Identity, 2010 vs. 2015
Total CO2 Emissions
Total energy Consumption
Real GDP(PPP)
Population

Variable Name
CO2
X
GDP
P

Unit
bln tnquads
US$ bln (PPP)
Mln

2010
1,108
21.5
4,319
127.3

2015
1,154
19.6
4,535
126.8

CAGR
0.82%
-1.83%
0.98%-0.08%

CO2 Intensity
Energy Intensity
Standard of Living
Population

CO2/X
X/GDP
GDP/P
P

bln tn/quad
quad/GDP$ GDP/Person
mln people

51.5350.00498
33.93
127.3

58.8830.00432
35.76
126.8

2.70%
-2.79%
1.06%-0.08%

Note: Total CO2 emissions in this table may differ slightly from those in Exhibit 1, due to different data sources.
Source: U.S. EIA, International Energy Outlook, various years; and author’s calculations.

In short, the first Japanese energy miracle was that energy intensity of GDP improved
at such a whopping pace.
There was a second miracle as well. The second miracle was the transformation ofenergy supply that restrained the growth of CO2 (Figure 3). The huge drop of the shareof nuclear power (12.5 percent) was filled very little by liquids – whose share rose only

CHAPTER THREE

27

0.7 percent. Indeed, the absolute amount of liquids used actually fell. There was a 2.8
percent rise of coal use; however, in light of the reduction of overall energy usage, theabsolute amount of coal use rose by only 0.2 quads (from 4.1 to 4.3). The lion’s shareof the increase of fossil fuels came from natural gas – which emits about half of theCO2 per unit of energy that petroleum or coal do. Moreover, the increase of renewables
should not be ignored (or exaggerated).

Figure 3: Japanese Energy Consumption, by Primary Energy Source, 2010-2015
Total energy consumption
Liquids
Natural Gas
Coal
NuclearRenewables

2010
21.5
8.9
4.1
4.1
2.8
1.6

2011
20.9
9.0
4.7
3.9
1.6
1.7

2012
20.4
9.5
4.9
4.1
0.2
1.7

2013
20.2
9.1
4.9
4.3
0.1
1.8

2014
19.9
8.6
4.9
4.4
0.0
2.0

2015
19.7
8.3
5.0
4.3
0.1
2.0

CAGR
-1.8%
-0.6%
0.9%
0.2%
-2.7%
0.4%

2010
100.0%
41.4%
19.1%
19.1%
13.0%
7.4%

Shares2015
Change100.0%-42.1%
0.7%
25.4%
6.3%
21.8%
2.8%
0.5%
-12.5%
10.2%
2.7%

Source: U.S. EIA, International Energy Outlook, various years; and author’s calculations.

To summarize, Japan’s good performance – given the circumstances of the nuclear
accidents – in restraining CO2 emissions stemmed from a major drop of energy intensity
and a major shift toward less polluting sources of primary energy.

The Supply Chain Approach: Kaya Identity on Steroids
The Kaya Identity is useful because it summarizes a complex process in simple
terms. However, some interesting detail is also lost. Hence, we also have created an“energy supply chain” for Japan, and compared 2010 to 2015 – again using EIA data. The
supply chain (Exhibit 4) starts with the different types of primary energy sources, shows
how they are converted to energy carriers (fuel and electricity), next shows the losses asthese are delivered to final users, and then shows which sectors of the economy use theenergy – and finally ends with net energy use.
Sources: The change of sources is exactly as seen in the previous table: (1) Extractables
are down, and renewables are up; a significant amount of this shift is attributable to thegovernment’s feed-in-tariff (FIT) system for electric power. The FIT rates were initially
set very high, and triggered a rush of investment into renewable energy, especiallysolar power; and (2) Among the extractables, LNG is up sharply and coal slightly, while
petroleum is down and nuclear (which we include as an extractable, because uranium
is mined) down very sharply.
Carriers: Given the overall decline of primary energy use, it is no surprise that both
fuel and electricity production fell between 2010 and 2015. The drop of electricity wasslightly larger in percentage terms. Within fuel, petroleum took most of the hit, whileother fuels remained largely stable. Within electricity generation, nuclear dropped tonear zero; the hole was filled first by LNG, second by renewables, and third by coal (anda bit of petroleum).

28JAPAN’S ENERGY CONUNDRUM

Figure 4: Japan’s Energy Supply Chain, 2010 vs. 2015 (Unit: quads)
Primary Sources
2010 2015
Total
21.5 19.7
Extractables
Petrol
LNG
Coal
NuclearRenewables

19.9 17.7
8.9 8.3
4.1 5.0
4.1 4.3
2.8 0.1

1.6

2.0

Carriers
Total2010 2015
21.5 19.6

Fuel Produced
Petrol
LNG
Coal
NuclearRenewables

12.9 12.0
8.6 7.8
1.8 1.7
2.1 2.0
0.0 0.0
0.4 0.5

Electricity Produced
Petrol
LNG
Coal
NuclearRenewables

8.6
0.3
2.3
2.0
2.8
1.2

7.6
0.5
3.3
2.2
0.1
1.5

Losses2010 2015
5.1
4.3
Fuel
Loss
0.0

0.0

Electricity
Loss
5.1
4.3

Total

Deliveries
2010 2015
17.0 15.4

Fuel Delivered
Residential
Industrial
Commercial
Transport

13.4 12.1
1.0 0.9
0.9 0.9
7.5 6.7
4.0 3.6

Electricity Delivered
Residential
Industrial
Commercial
Transport

3.6
1.2
1.4
0.9
0.1

3.0
1.1
1.1
0.7
0.1

Total

Sector Use2010 2015
17.0 15.4

Non-Transport 12.9 11.7
Fuel
9.4 8.5
Electricity 3.5 3.2
Transport
FuelElectricity

4.1
4.0
0.1

3.7
3.6
0.1

Economy2010 2015

Total
17.0 15.4

Source: U.S. EIA, International Energy Outlook, various years; and author’s calculations.

Losses: By definition, losses are assumed to be zero for fuels – although this definition
is a bit odd (for example, trucks have to deliver gasoline), we adopt it here, for ease ofanalysis. For electricity, losses actually shrank somewhat, from a loss rate of 59.3 percent
to 56.6 percent. Thus, the Japanese energy miracles in part were supported by better
performance of the electric grid.
Deliveries: The deliveries data show which sub-sectors saved the most. The standout
is the commercial sector, which reduced usage of both fuel and electricity significantly.
The industrial sector reduced electricity usage, but not fuel. The transport sector did
exactly the opposite, reducing fuel, but not electricity.
Sector Use: By large sector, both transport and non-transport (e.g., heating, lighting)
reduced use of fuel. Although the non-transport sector reduced use of electricity as well,transport did not do so – most likely because of the shift toward electricity-intense train
usage, resulting from higher demand for public transport.
This more detailed view of energy usage in the 2010-15 period shows that improvements were concentrated is certain parts of each stage of the supply chain. In particular,
the good CO2 performance was based on:(a) Increased renewables use,(b) A shift among extractables to lower-CO2 sources,(c) A modest shift away from electricity,(d) A reduction of losses in electricity transmission, and(e) A strong effort by the commercial sector in particular to save energy.

CHAPTER THREE

29

Can the Miracles Continue?
While Japan’s energy accomplishments in the wake of the Fukushima accident arepraiseworthy, they also raise a difficult question: Are these accomplishments harbinger
or artifact? Indeed, while the performance was impressive, the fact is that CO2 emissions are up, not down. Price matters too, because Japan remains highly dependent on
external energy. Japan’s energy future depends on whether it can redouble the efforts ofrecent years.
Let us start with price (Figure 5). Energy prices were already high when the Japanese energy miracle started. Indeed, prices had been rising steadily since 2004 – thefrightening spike in 2007-08 increased attention to energy conservation. Some impactof higher energy prices is immediate, such as high gasoline prices leading to less auto
travel, more efficient routing, and switching to other means of transport. Other impacts
take much longer to realize, in light of the tendency for energy infrastructure to takelong times to build and to be long-lived (and thus hard to abandon, even when a goodalternative comes along). The upward trend of oil prices and the shock of 2007-08 could
well have shifted energy investments toward high-efficiency alternatives, which bore
fruit in improvements of energy efficiency in later years.

Figure 5: The Price of Oil (WTI), US$/bbl
140
120
US$/bbl (WTI)

100
80
60

40

Jul-17

Nov-16

Jul-15Mar-16

Nov-14Mar-14Jul-13

Nov-12

Jul-11Mar-12

Nov-10Mar-10Jul-09

Nov-08

Jul-07Mar-08Nov-06Mar-06

Jul-05

Nov-040

Mar-0420

Source: Nikkei NEEDS.

Since 2014, however, energy prices have fallen sharply. The high price of oil inearlier periods had triggered oil investments in many regions, and the technology of
shale oil developed rapidly in the 2005-15 period, increasing oil supply further. With
demand edging up only slowly (and with shale gas bringing the overall supply ofenergy up), energy prices collapsed. The incentive to save energy dropped sharply as aresult. It remains to be seen whether the ratchet effect from better technology on energy
efficiency offsets the price effect from lower energy prices. The income effect from lower
energy prices also could increase demand, canceling part of the reduction of CO2.

30JAPAN’S ENERGY CONUNDRUM

Another issue is how fast technology will spread. The latest outlook from the U.S.
Energy Information Administration (EIA) is skeptical about Japanese prospects. In thelatest International Energy Outlook,55 the EIA presents projections for real GDP growth
and total energy use. From these data, it is easy to derive the implicit projections forenergy intensity of GDP (Figure 6). There is a striking difference between Japan andother nations: Energy intensity of GDP in Japan hardly improves at all over the 45
years of the projection period, while most other countries show substantial improvements. How can this difference be explained? Will Japan suddenly suffer from scientificsakoku ?56 Alternatively, is this a case of very slow diffusion of new innovations, due toeconomic circumstances?

Figure 6: Energy Intensity of GDP (Th Btu/$ Real GDP [PPP])

1000 BTUs / $ Real GDP (PPP)

8.0
7.0
6.0

5.0
4.0
3.0
2.0
1.0
0.0

2015

2020

US

China

2025

2030

Japan

2035

2040

OECD Europe

2045

2050

India

Source: U.S. EIA, International Energy Outlook, 2017, and author’s calculations.

Modeling the diffusion of technology change has been a difficult task.57 The canonical model is an S-Curve, where technology moves very slowly in the first few years (ordecades), then diffuses very quickly for a short period, and then slows before reachingsaturation.58 However, this process applies to many interacting technologies simultaneously; therefore, the overall rate of efficiency improvement is hard to determine.
For the EIA’s projection of energy intensity to be true, one would have to argue thatthe interaction of new energy technologies will result in some countries (both developedand emerging) having rapid technology diffusion, while others have slow diffusion.
See Energy Information Administration. International Energy Outlook, 2017, at https://www.eia.gov/outlooks/ieo/pdf/0484(2017).pdf.
56“Sakoku” was the Edo period policy, enforced from 1633 to 1853, of closing the Japan to foreign influence.
57
Among useful books on this issue are: Rogers, Everett. The Diffusion of Innovations, (Fifth Edition), Free
Press, 2003; Valente, Thomas W. Network Models of the Diffusion of Innovations, (Second Edition), Hampton
Press, 1995; Moore, Geoffrey, Crossing the Chasm, (Third Edition), HarperCollins, 2013.
58
An example is hybrid electric vehicles. Ferdinand Porsche built the first such vehicle in 1900. (See “Prof.
Ferdinand Porsche Created the First Functional Hybrid Car,” at http://press.porsche.com/news/release.
php?id=642. The car had a driving range of 200 km, and a top speed of 35 km/h.) The idea was largely­dormant thereafter, until 1973, when VW produced a hybrid in the wake of the first oil crisis. As oil prices fell,
the idea hibernated again, until revived by Toyota in the late 1990s. Toyota triggered the acceleration phase of
the hybrid car S-curve began.
55

CHAPTER THREE

31

Key variables might be: (a) the level of real GDP, which helps to determine the sizeof the energy market; (b) the rate of real GDP growth (which determines the need for
new energy, and hence for new energy technologies); and (c) the initial level of energy
efficiency (which determines the economic incentive to introduce new technologies).
With these three variables in mind, how does Japan fare (see Figure 7)? First, real
GDP is the smallest of the five countries considered, arguing for a slower rate of diffusion. Second, the rate of GDP growth is projected to be low, in light of demographics,
arguing for a slower rate of diffusion. Third, the initial level of energy efficiency is high,arguing for a slower rate of diffusion. In short, all three elements argue for Japan to be
slow. The EIA projections are at least consistent with this simple, macro-based diffusion
model. The correlation between the average ranking of the three criteria and the ranking
Chart to replace Figure 7 on page 47 in the Feldman Chapter
of EIA projections of energy improvement (See Exhibit 8) are very close.
(keep same title and same source)

Figure 7: Macro Criteria and Rankings
Real GDP(2015 real $,PPP)

GDP growth(2015-50),
CAGR

16.4
18.2
4.5
19.8
7.3

2.1%
3.7%
0.1%
1.3%
4.3%

US
China
Japan
OECD Europe
India

Energy Intensity
Improvement
Energy Intensity(2015-50), CAGR(2015)

5.95
7.33
4.32
4.03
3.88

1.8%
2.7%
0.3%
0.9%
1.4%

GDP
Level
Rank

GDP
GrowthRank

EnergyIntensity
Rank

Average
Rank

Rank of Energy
Intensity
Improvement

3
2
5
1
4

3
2
5
4
1

2
1
3
4
5

2.67
1.67
4.33
3.00
3.33

2
1
5
4
3

Source: Data from EIA; Author’s rankings.

Rank of energy intensity improvement

Figure 8: Macro Criterial Average Ranking vs. Energy Intensity Improvement Ranking
5
Japan

4

OECD Europe

3
India
US

2

1

China

1

2

3
Average rank of three criteria

Source: Data from EIA; Author’s rankings.

4

5

32

JAPAN’S ENERGY CONUNDRUM

However, we are skeptical of the EIA conclusion for several reasons.
1.	First, the slow level of Japanese real GDP growth may well be due to demographics,
but other countries will face the same problem. Indeed, the Chinese population will
begin to shrink in the mid-2020s, and thus the strength of this factor may be worse
for other countries than the EIA projects.
2.	Second, the nature of dependence of technology on macro factors may differ fromthe approach used in the model of the EIA. Especially today, when knowledge canbe shared instantaneously through the internet, historical correlations of diffusion
with macro variables may be less reliable. This factor may be especially importantfor Japan. Despite having moved in tandem in the 1980s, Japanese energy intensity stagnated in the 1990s, while U.S. and German energy intensity continued to
improve (Figure 9). However, once the recessions of the 1990s ended and business
investment restarted, Japanese energy intensity resumed its downward path, quite
in line with improvements in the United States and Germany. The implication is
simple: When overall investment stagnates due to macro factors, energy intensity
stagnates as well.
3.	Third, the mere ranking of factors cannot assign numerical sensitivity to the impactof any single factor; that is, even if the rankings are right, the growth rates of energy
intensity of GDP for Japan could be wrong.

180
160
140
120

100
80

JP

US

Ger

CH

2014

2012

2010

2008

2006

2004

2002

2000

1998

1996

1994

1992

1990

1988

1986

1984

1982

60

1980

Energy Intensity of GDP (2000=100)

Figure 9: Energy Use per Unit of GDP (2000=100)

IND

Note: Data for China and India begin in 2000.
Source: International Energy Agency, http://www.iea.org/statistics/, IEA Headline Energy Data, and author’s calculations.

For these reasons, we are skeptical of the EIA’s forecast of long-term stagnation ofJapanese energy intensity improvement.

A Deeper Concern: Speed of Diffusion
Despite our skepticism on the EIA’s numerical projections, we remain concerned
about Japan’s energy future. Our primary concern is about the speed of technology
diffusion. We think that the diffusion contains three stages: Science, Innovation, andEntrepreneurship.

CHAPTER THREE

33

At the science stage, our concern involves both budgets and education. On budgets:
The International Energy Agency (IEA – not to be confused with the U.S. government’sEIA) review of Japanese energy policy in 2016 estimated that government spending onenergy RD&D (research, development, and diffusion) was ¥0.29 trillion, or 0.06 percent
of GDP. This is an extremely small amount, compared either to total energy imports(4.3 percent of GDP, on average, 2007-2016) or spending on social programs (about 22
percent of GDP). On education: As demographics quickly lower the number of students
in Japanese schools, the ability of the nation to produce enough energy scientists will
be further limited. Some universities are actively trying to recruit foreign students, andthose students have an easy time obtaining employment in Japanese firms – due tothe labor shortage. However, the attractiveness of Japan as a destination for students ishampered by the lower international ranking of Japanese universities and the relativelack of English-language programs.
At the innovation stage, we have few worries about the innate innovation capacityof the Japanese people. However, the heavy influence of vested interests in the energy
industry tends to skew corporate innovation toward legacy technologies (i.e. incremental improvements), and away from novel ones. Even within government funded energy
R&D, there remains a heavy emphasis on nuclear power research, to the detriment ofvanguard technologies that other countries are pursuing.
At the entrepreneurship stage, the situation in Japan is even more worrisome. The
amount of venture capital funding in Japan is extremely small, relative to other countries.59 That said, the recent changes in the regulatory structure for the electric powerindustry have ushered in much more competition – for the first time since the regional
electric monopolies were authorized in the early postwar period. Thus, the returns toentrepreneurship may be higher than before.

Conclusion
Japan’s energy miracle of 2010-15 is under-appreciated. Despite the virtual elimination of nuclear power after the 2011 earthquake, Japan managed to contain the increaseof CO2. This outcome was accomplished through changing the mix of primary energy
and herculean energy saving efforts on the part of business. Policy aided the improvement, due to the effective feed-in-tariff system for electricity generation. Moreover, risingenergy prices in 2004-10 also spurred more conservation.
Looking forward, the outlook may not be as good. The drop of global energy prices
from 2015 has taken the edge off the need for conservation. The government has lowered feed-in-tariff rates substantially, especially for solar power. Meanwhile the official
report on the “best mix” of energy for the country contains a role for nuclear powerthat would necessitate the building of new nuclear power stations – which is politicallyunlikely and probably not economic either. Vested interests continue to have tremendous power in the energy industry, and may further impact the science, innovation,and entrepreneurship in energy industries. These factors suggest that Japanese energy
policy may have fallen into the Complacency phase of the CRIC cycle – a cycle of Crisis,
A 16 page report on global venture capital by Ernst&Young (“Back to Reality: EY global venture capital trends 2015” estimated that the U.S. saw $72.3 bln of venture capital deals (3916) in 2015, China saw$49.2 bln (1611), India $8.0 bln (528), and Japan only $0.8 bln (354). See http://www.ey.com/Publication/vwLUAssets/ey-global-venture-capital-trends-2015/$FILE/ey-global-venture-capital-trends-2015.pdf, p. 3.
59

34

JAPAN’S ENERGY CONUNDRUM

Response, Improvement, and Complacency that describes the interaction of policy andmarkets.60
In earlier CRIC cycles (be they in the financial sector, industry, or government), theprimary question is whether a Response is ready when a Crisis phase starts. If so, thenthe Crisis can be short-lived and in the end constructive. If not, then precious time will
be lost.

For an account of the CRIC cycle, see Feldman, Robert, “CRIC Cycle Reprint,” Morgan Stanley, December
20, 2013. This report was originally published on April 4, 2001.
60

PART 2:

ROLE OF ENERGYSUPPLY AND MARKETS36

JAPAN’S ENERGY CONUNDRUM

CHAPTER FOUR

37

Chapter Four
Reliance on Imported Fossil Fuels: Oil and Natural Gas
Dr. Ken KOYAMA
Chief Economist and Managing Director, Institute of Energy Economics, JapanThe Role of Fossil Fuels
Energy is essential for sustaining our lives and economic activities, and stable, sustainable energy supplies and prices are crucial for any society or state today. Today, theworld’s energy supply consists mostly of fossil fuels, namely oil, coal and natural gas.
Like most of the rest of the world, Japan relies heavily on fossil fuels and will continue
to do so for the foreseeable future. This chapter focuses on the role two of those fuels,
oil and natural gas, have played and play in Japan’s energy mix.

Oil
Oil is still the most important source of energy supply in Japan, accounting for 45.0
percent of total primary energy supply (TPES) in Japanese fiscal year (JFY) 2015. The
share of oil in TPES was much higher during the 1970s, peaking at 77.4 percent in JFY
1973.
Because of the lack of domestic oil resources, Japan has been highly (almost 100
percent) dependent on imports for its oil supply. As for its import source, the Middle
East has been the dominant source of supply to Japan with the share of Middle East
crude oil in total crude oil imports peaking at 90 percent in JFY 1966.
Oil plays a critically important role in fueling the Japanese economy and civil life as
an energy source used widely in variety of economic sectors. In JFY 2015, oil consumption in the transportation sector accounted for the largest share at 47.4 percent of total
final oil consumption, followed by the industry sector (36.5 percent) and the household
sector (13.9 percent).
Because of high oil dependence in TPES and Middle East import dependence, oilcrises in the 1970s, with their higher oil prices and concerns over the physical shortageof oil, caused serious damage to the Japanese economy and civil lives. Since then, oilpolicy – more appropriately oil supply security policy has continued to be a top priorityof Japanese energy policy. Since the 1970s, Japan’s oil supply security policy has been a
combination of five policies:a) Reduce Oil Imports,b) Diversify Oil Import Sources,c) Strengthen Relations with Oil Producing Countries,d) Enhance Emergency Preparedness, ande) Strengthen Oil Industry in Japan.

38JAPAN’S ENERGY CONUNDRUM

Policy to Reduce Oil Imports
This policy approach can be broken down further into the following three policy
categories, namely energy source diversification, energy efficiency/saving enhancement,
and promotion of domestic oil production.
The Japanese government, spearheaded by the Ministry of International Trade andIndustry (MITI), later renamed as the Ministry of Economy, Trade and Industry (METI),
has implemented policy measures to promote alternative energy sources to oil such as
nuclear power, natural gas, coal and renewable energy since the 1970s.61 The energy
supply from these alternative sources continued to increase and as a result, the share ofoil in TPES in Japan continued to decline from the peak of 77.4 percent in JFY 1973 to
44.5 percent in JFY 2010 (Figure 1).

Figure 1: Trends in Japan’s Primary Energy Supply
600,000（％)（10＾10Kcal)

9080500,000
70
400,000

60

Renewable
300,000

NuclearHydro

200,000

Gas
Oil

Coal
100,000

Oil share

50
40
30
20
10
0

1965
67
69
71
73
75
77
79
81
83
85
87
89
91
93
95
97
99
01
03
05
07
09
11
13
15

0

Source: IEEJ/EDMC, “Handbook of Japan’s and World Energy and Economic Statistics”

The share of oil temporarily increased after JFY 2011 when the Great Eastern Japan
Earthquake and Tsunami, and the Fukushima nuclear accident resulted in the shutdown
of Japan’s nuclear fleets in turn resulting in a substantial increase in use of fossil fuels,
including oil in power generation, to offset the reduction in nuclear power generation.
However, it is important to note that there still is a fundamental trend of a declining
share of oil in TPES. The share of oil actually declined again from 48.4 percent in JFY2012 to 45.0 percent in JFY 2015.
Energy efficiency improvement has played an important role behind the scene
in the decline of oil dependency. MITI (METI) promoted policies to improve energy
efficiency by introducing such measures as powerful energy saving laws, regulations,

61

Refer to the relevant chapters for a detailed discussion of each alternative energy source development.

CHAPTER FOUR

39

and economic incentives.62 Thanks to the success of these policies and efforts made byindustry and Japanese citizens to improve energy efficiency, most of the world now
regards Japan as the global “top-runner” of energy efficiency/saving. Fuel efficiency
improvement in vehicle transportation sector especially resulted in a structural decline
in oil consumption in Japan. Oil consumption in Japan actually peaked in JFY 2005 andsince has continued to decline.
The policy to promote domestic oil production had very limited effects because of
the lack of domestic oil resources in Japan. Given this situation, MITI/METI embarked
on a policy to promote overseas oil development by Japanese companies by providing
financial assistance through government related entities such as the Japan National Oil
Corporation (JNOC), later renamed as the Japan Oil, Gas and Metals National Corporation (JOGMEC), details about which are in a later section of this chapter.

Policy to Diversify Oil Import Sources
As a high dependency on Middle East oil is a perceived source of concern, MITI/
METI tried hard to diversify oil import sources and reduce Middle East dependency. In
this regard, a typical example of the policy efforts is the promotion of crude oil imports
from China, Indonesia and Mexico. The government promoted these imports under theumbrella of government-to-government (G-to-G) dialogues/negotiations between Japanand each of these respective countries.
Crude oil imports from the three countries temporarily increased in the 1980s, lowering Middle East dependency to 67.9 percent in JFY 1987 (Figure 2). Crude oil imports
from the three countries then started to decline. For China and Indonesia, the availabilityof their crude oil for exports declined (as their domestic oil demand expanded) until
finally they became net importers of oil. For Mexico, Japanese refiners did not find theeconomics of importing Mexican crude oil attractive enough.

Figure 2: Trends in Japan’s Dependence on Middle East Crude Oil
350,000（％)（1,000Kl)10090300,00080

250,000

70
60

200,00050
150,000

50,0000

Crude oil imports

20

Middle East dependence

10

Source: IEEJ/EDMC, “Handbook of Japan’s and World Energy and Economic Statistics”
62

30

Import from Middle East

1965
67
69
71
73
75
77
79
81
83
85
87
89
91
93
95
97
99
01
03
05
07
09
11
13
15

100,000

40

Refer to the relevant chapters for a detailed discussion of energy efficiency policy.

040JAPAN’S ENERGY CONUNDRUM

Therefore, Middle East crude oil import dependence bottomed out and started torise again, reaching as high as 89.5 percent in JFY 2009. While the recent developmentof Russian crude oil exports from its Sakhalin projects and the ESPO (Eastern Siberian
Pacific Ocean) pipeline is contributing to lowered Middle East dependence, the fact
remains that Japan continues to be highly dependent on Middle East oil supply.

Policy to Strengthen Relations with Oil Producing Countries
Despite its various efforts, Japan’s status is unchanged as a highly oil import/Middle
East dependent country. That is why the Japanese government regards the policy tostrengthen relations with oil producing countries as very important with an expectationthat it should contribute to Japan’s oil supply security.
The government has employed a comprehensive approach to strengthen these
relationships, promoting economic, industrial, investment and trade relations as well as
promoting cooperation in the areas of economy, culture and human networking including capacity building. In order to carry out this approach, not only MITI/METI but also
other government ministries such as the Ministry of Foreign Affairs, and even diplomacy
at the highest levels of government all played their respective roles in strengthening
relationships.

Policy to Enhance Emergency Preparedness
The severe experiences brought about by the oil crises in the 1970s taught Japan that
it was extremely important to enhance its capability to deal with oil supply emergencies.
With this recognition, MITI started to build an oil stockpile in Japan as a counter measure
to oil supply emergencies.
Even before the first oil crisis in 1973, MITI introduced oil stockpile obligations forJapanese oil companies. Nevertheless, after the crisis, MITI decided to increase the day
cover requirement for mandatory stockpiling to 90 days of consumption in Japan. Furthermore, the government decided to develop government-owned strategic stockpiles
on top of the stockpiling obligation of the industry. JNOC/JOGMEC is the designatedgovernmental entity responsible to manage the strategic stockpile. In recent days,
Japan’s oil stockpile covers more than 200 days of oil consumption in Japan (Figure 3),
contributing to improvement of emergency preparedness for oil supply security.
Japan also regards international cooperation to prepare for, and deal with, supply
emergencies as a critically important policy tool. In particular, participation as a founding
member and cooperation with the International Energy Agency (IEA), established in1974 to counter oil supply insecurity, is a centerpiece of Japan’s policy. Japan has joined
IEA-led coordinated response measures to deal with oil supply problems in the world
market three times (the Gulf crisis in 1991, Hurricane Katrina in 2005 and the Libya crisis
in 2011). In comparison with its capability before the 1973 oil crisis, Japan has improved
its emergency preparedness substantially.

CHAPTER FOUR

41

Figure 3: Trends in Japan’s Oil Stockpile
12,000（10,000 KL)（Day cover)210

National stock
10,0008,000

Private sector

160

Day cover
110

6,000
60
4,000

10

2,000
0

70 73 76 79 82 85 88 91 94 97 2000 03 06 09 12 15-40

Source: IEEJ/EDMC, “Handbook of Japan’s and World Energy and Economic Statistics”

Policy to Strengthen Oil Industry in JapanFor upstream side of the industry, MITI/METI has continued to promote overseasoil (and gas) development by Japanese companies. This policy has been based on theperception that oil fields developed by Japanese oil companies (not foreign companies)
can be regarded as “more secured sources of supply” because they are under control ofJapan (Japanese companies). Another element behind this policy is the recognition thatthe promotion of Japanese upstream companies can help strengthen the international
competitiveness of those companies as the upstream segment is an important source ofrevenue/profit for the oil industry.
JNOC/JOGMEC has provided financial assistance to overseas oil (and gas) exploration and development activities of Japanese companies as a tool to support the government policy. For example, METI has a target that oil and gas developed overseas
by Japanese companies should account for more than 40 percent of total oil and gas
imports by 2030.
For the downstream side of the industry, a very important policy approach taken so
far is the deregulation/liberalization of the downstream market in a bid to streamline theindustry and enhance its competitiveness. The oil industry in Japan was under strong
and direct government control until the late 1980s when the process of deregulation/liberalization started. The process continued in the 1990s and completed in 2002 when
the government abolished the Oil Industry Law, the basic law to regulate the industry.
Coupled with the severe competition that resulted from liberalization and declining
domestic oil demand, oil companies in Japan came under strong pressure to streamline
not only company operations and financial capabilities but also the industry structure
itself. Mergers between companies continue in the Japanese downstream market. Most
recently, JXTG group emerged from the merger between JX and Tonen General on April
2017 as the new dominant company with a domestic market share exceeding 50 percent
in Japan.

42

JAPAN’S ENERGY CONUNDRUM

Natural Gas
LNG as an Important Energy Source for Japan
Natural gas accounted for just around 1 percent in TPES in Japan during the 1960s
and early 1970s because domestic gas production was very limited and there were nogas imports as a supply source. However, the first introduction of liquefied natural gas(LNG) imports from Alaska in 1969 by Tokyo Electric Power Company (TEPCO) andTokyo Gas became an important milestone for gas market development in Japan. Since
then, Japan’s LNG imports have continued to expand, making Japan the world’s largest
LNG importer. LNG is now becoming a critical part of the country’s energy market.
Japan promoted LNG use as an energy security measure in particular after the firstoil crisis because LNG could reduce oil dependency, diversify the energy mix and thus
reduce dependence on Middle East oil. Furthermore, the country regarded LNG supply
itself as “stable and reliable” backed by its contractual characteristics of long-term supply
guarantees with very close and stable relationships between sellers and buyers. In otherwords, LNG became a preferred option to contribute to Japan’s energy security, which
had become a national priority.
However, LNG’s role as a clean fuel was arguably more important than its contribution to energy security when first introduced. During the 1960s and early 1970s when
Japan’s economy and energy consumption continued to grow rapidly, strong publicconcern emerged over local and regional environmental problems, such as air pollution
and water pollution caused by emissions from factories. Rapid growth in fossil fuel(particularly oil) consumption also had created health-hazardous air pollution problems
in many urban and industrial regions in Japan. Air and water pollution became national
problems attracting very strong social and political attention. The introduction of LNG,
a clean energy with far less SOx and NOx emissions than oil, as an energy option for
urban and industrial areas made a significant contribution to improving air quality. This
environmental situation was an important background factor influencing TEPCO andTokyo Gas to introduce LNG. Other power and gas companies followed their example
for similar reasons.
By the 1990s, climate change was recognized as a worldwide problem. The issue on
how to manage or reduce CO2 as a main source of greenhouse gas (GHG) emissions
became a serious energy and environment policy issue in many countries including
Japan. Particularly after agreement on the Kyoto Protocol in 1997, which included concrete targets to reduce GHG emissions for the period 2008-2012 for Annex 1 countries(including Japan), de-carbonization of the primary energy supply structure became apriority in national energy policy. Given its advantage as the least CO2-intensive of fossil
fuels, Japan expected that the expanded use of LNG would contribute to Japan’s GHG
reductions.
Given these advantages, LNG use both in power generation and in the city gas sector continued to increase (Figure 4). As of JFY 2015, power generation is the dominant
use for LNG in Japan, accounting for 67 percent of sales with the other major use, citygas, holding a 33 percent share.

CHAPTER FOUR

43

Figure 4: Trends in Japan’s LNG Consumption（1,000 tonne）

90,00080,000City Gas

70,000Power Industry

60,00050,00040,00030,00020,00010,000

1965
67
69
71
73
75
77
79
81
83
85
87
89
91
93
95
97
99
01
03
05
07
09
11
13
15

0

Source: IEEJ/EDMC, “Handbook of Japan’s and World Energy and Economic Statistics”

These factors led to LNG imports expanding from 0.18 million tonnes/year (mtpa)
in JFY 1969 to 70.6 mtpa in 2010 (Figure 5). In the early 1970s, the country became theworld largest LNG importer, and by 2000, accounted for more than half of global LNG
trade. The share of natural gas in Japan’s primary supply increased from 1.0 percent in
JFY 1969 to 17.5 percent in JFY 2010, contributing to diversification of energy supply
in Japan as well as to environmental protection both in terms of air quality and climatechange.

Figure 5: Trends in Japan’s LNG Imports
100,000 （1,000 tonne）
90,00080,00070,00060,00050,00040,00030,00020,00010,000

1969
71
73
75
77
79
81
83
85
87
89
91
93
95
97
99
01
03
05
07
09
11
13
15

-

Source: IEEJ/EDMC, “Handbook of Japan’s and World Energy and Economic Statistics”

44

JAPAN’S ENERGY CONUNDRUM

LNG/Natural Gas after Fukushima
The importance of LNG in Japan’s energy portfolio further increased after JFY 2011
when the Fukushima nuclear accident on March 11, 2011 resulted in shutdown of Japan’s
nuclear fleet of power reactors. Actually all nuclear reactors in Japan stopped their operations in JFY 2014. No reactors could restart operation after the regular maintenance dueto the widely held public concern about nuclear safety and social/political sensitivities.
Given this situation, use of all fossil fuels expanded to offset the decline in nuclear
power generation with LNG playing the central role in offsetting the decline. LNG played
the central role because Japan used LNG-fired power generation for middle-load power
generation. Coal-fired power generation was base-load generation that, by definition,
meant coal generation already was at almost full capacity until such time new coal
power plants could be built.
LNG imports by Japan jumped up immediately after the nuclear accident. The
import volume of LNG increased from 70.6 mtpa in JFY 2010 to 83.2 mtpa in JFY 2011
and increased further to 89.1 mtpa in JFY 2014. The share of natural gas in TPES in Japan
reached at 24.0 percent in JFY 2014.
The recent development of nuclear restarts (five reactors as of November 2017)and continued improvement of energy efficiency finally resulted in a decline in LNG
imports to 84.7 mtpa in JFY 2016. Despite the decline, the fact is LNG is still playing avery important role in Japan’s energy mix. In particular, thanks to expanded use of LNG
together with other fossil fuels in power generation, Japan has successfully up to now
avoided any unplanned and large-scale blackouts after the Fukushima accident.
However, the timing of the surge in LNG imports in Japan coincided with that ofhigher LNG import prices. Higher LNG import prices happened because: a) almost allof LNG long-term contracts for Japanese buyers adopted crude oil indexation for LNG
pricing; and b) the crude oil price continued to stay at around $100/barrel between 2011
and the first half of 2014.
The combination of the larger volume of LNG imports and higher LNG prices created serious economic problems for Japan. Japan’s energy prices, in particular electricity
prices, increased and affected citizens’ daily lives and the economic competitivenessof industry. Furthermore, the substantially larger LNG import bill became an importantfactor forcing Japan to become a trade deficit country after JFY 2011.
Under these circumstances, how to procure LNG more competitively has become anational priority for Japan’s LNG policy and a major corporate strategy for LNG importing companies. In this regard, METI established a very high-level international forum in2012 for dialogue — the “LNG Producer-Consumer Conference” — with the objectivethat the dialogue could contribute to more competitive LNG procurement. METI also
published its “LNG Market Strategy” in 2015 to highlight the importance of the pricecompetitiveness of LNG compared to other competing fuels. It also highlighted theimportance of improved LNG supply flexibility through such factors as the eliminationof destination clauses that restrict reselling of cargoes.
After 2015, the global LNG market became a “buyer’s market” because of the prevailing oversupplied situation in the global market. Large-scale LNG buyers in Japan,such as JERA (an alliance between TEPCO and Chubu Electric Company), Tokyo Gas,
Kansai Electric Power Company and Osaka Gas, are now using this situation to negotiate

CHAPTER FOUR

45

with sellers to realize more competitive and flexible LNG procurement. Given this circumstance, Japanese companies regard LNG imports from United States as an importantsource of supply diversification as well as pricing diversification because U.S. LNG uses
the Henry Hub price as a benchmark rather than an index to the oil price. Japanesebuyers also view the flexible supply characteristics of U.S. LNG without any restriction
on destination as valuable.
Japanese buyers who face uncertainty over future LNG requirements regard
improvement of supply flexibility of LNG as crucially important. First, uncertainty overnuclear restarts will affect Japan’s LNG demand. Second, recent substantial increases inrenewable energy such as PV solar in Japan supported by feed-in-tariff (FIT) policies canalso significantly affect future LNG demand. Last, but not least, electricity and gas market
reform or liberalization can have significant impacts. The reforms will create uncertainty
over the demand of LNG for individual market players in the future. With the uncertainty
in mind, LNG market players will be required to continue to pursue more competitiveand flexible LNG procurement for their survival.

46

JAPAN’S ENERGY CONUNDRUM

CHAPTER FIVE

47

Chapter FiveThe Return of Coal
Jane NAKANO
Senior Fellow, Center for Strategic and International Studies

A Coal Renaissance
Coal is having a renaissance in Japan. The power supply concerns following thenuclear accident at the Fukushima Daiichi Power Station in March 2011 illuminatedcoal’s strategic value in Japan’s energy and economic security. Key numerical indicators,
such as coal consumption volumes and share in the power mix, reflect the strong roleof coal in Japan and distinguish the nation from the rest of developed economies, wherecoal power generation is receding. In fact, Japan’s installed coal power capacity of 41
GW (gigawatt) appears to be on a growth trajectory. A closer examination reveals,
however, that coal’s future is in flux as the notion of de-carbonization begins to takehold in the Japanese society and challenge the fuel’s value propositions. This chapter
illustrates key drivers of the recent resurgence in coal power generation in Japan as wellas the evolution of coal resource diplomacy and Japan’s promotion of advanced coal
power technology exports. It considers the future of coal power generation in light ofJapan’s transition to a lower-carbon future.

Energy and Economic Security Benefits Render Coal a Staying PowerThe nuclear accident dealt a major shock to Japan’s energy system. However, it also
illustrated the value coal played in helping avert a major power supply shortage and thus
in assuaging Japan’s energy security concern in the accident’s aftermath. By shattering
public faith in the country’s nuclear sector governance, the accident took the nation’s 48
post-accident operable commercial nuclear reactor units63 off-line by August 2015. It also
negated Japan’s planned transition away from fossil fuels as part of the nation’s broader
effort to heighten its energy security as well as manage carbon emissions. According toJapan’s Strategic Energy Plan of 2010, the share of nuclear in the nation’s 2030 power
supply mix was to roughly double to 53 percent while that of coal was to be roughly
halved to 11 percent.
In order to fill the void in power generation capacity left by the nuclear outage,
Japanese electric utilities turned to fossil fuels to meet shortfalls. Between 2010 and2015, the share of coal in the nation’s power generation increased from 23 percent to 31
percent,64 and the nation’s coal consumption increased by about 20 percent.65 Especiallysince 2013, coal power generation has been growing as coal capacity damaged by theJapan had 54 reactor units at the beginning of 2011. Four units were disabled following the tsunami and twounits in the same plant became inaccessible due to plant contamination.
64
U.S. Energy Information Administration. Country Analysis Brief, February 2, 2017.
65
Stephen Stapczynski. “Japan Utilities Burn Record Coal Amid Minister’s Call for Cuts,” The Bloomberg, September 11, 2015, http://www.bloomberg.com/news/articles/2015-09-11/japan-utilities-burn-record-coal-amidminister-s-call-for-cuts.
63

48

JAPAN’S ENERGY CONUNDRUM

earthquake was restored and new coal capacity added.66 By 2016, the nation’s coal
power supply had grown to 16 times the level in the mid-1970s when the oil embargos
and Japan’s attendant effort to reduce dependence on imported oil reversed the declineof coal’s share in the nation’s primary energy consumption.
Moreover, the post-accident energy situation underscored coal’s strategic value inenhancing Japan’s economic security. The aforementioned switch away from nuclear
power generation prompted a greater use of gas power plants as well as coal power
plants, and the share of gas in the national power generation mix grew from 30 percent
to 42 percent between 2010 and 2015.67 The increased reliance on gas power generationin turn led to a dramatic uptick in imports of liquefied natural gas (LNG). Increases inboth the volume and the price of oil-linked LNG imports68 caused the overall cost of
LNG imports to roughly double, from $35 billion in 2010 to about $70 billion in 2013.69,70
During this time, Japan’s trade deficit steadily increased, and reached $115 billion in
2013.71 In 2014, the LNG import expenditure accounted for nearly 9 percent of the total
import expenditures (Figure 1).
In comparison, coal imports affected the trade balance more moderately. In 2015,
when coal accounted for 25 percent less than gas in the total power supply mix, coal’sshare of import expenditure in total import expenditures was about 2.5 percent whilethat of gas import expenditure was 5.5 percent (Figures 1 and 2). Note that a moredetailed data set is required to portray more precisely the scope of expenditure impact
by the two power sources as the Figure 2 data on the shares of coal import expenditure(red line) does not differentiate thermal coal—used for power generation—from coking(metallurgical) coal—used for iron and steel making. Likewise, the Figure 1 data (barsand the green line) do not specify end-use. Natural gas usage in Japan includes not only
power generation (61 percent), but also consumption as city gas (31 percent).72 Yet, thegraphs effectively portray how coal’s impact on Japan’s overall import expenditures has
generally been smaller than that of LNG.
Coal’s economic appeal goes beyond its effect on the current account. In Japan,
coal has traditionally been the cheapest type of fossil fuel for electricity generation.
Nuclear restarts thus far have mostly reduced oil-fired generation with the consumptionof thermal coal remaining strong. Although slightly lower than the historic high of 59.9
million tons in 2013, the nation’s thermal coal consumption in 2016 was 59.4 million
tons.73

Ministry of Economy, Trade and Industry of Japan, The Energy White Paper (平成28 年度 エネルギーに関する年次報告), June 2017, p.162.
67
U.S. Energy Information Administration, Country Analysis Brief, February 2, 2017.
68
The weaker Japanese yen against the U.S. dollar increased Japan’s trade deficit levels in 2012 and 2013.
69
The exchange rate between the U.S. dollar and Japanese yen is set at US$1 = ¥100 throughout this chapter.
70
Ministry of Economy, Trade and Industry of Japan. “Japan’s Energy Situation,” April 2015, p. 36.
71
Ibid.
72
Ministry of Economy, Trade and Industry of Japan. The Energy White Paper (平成28 年度 エネルギーに関する年次報告), June 2017, http://www.enecho.meti.go.jp/about/whitepaper/2017pdf/, p.156.
73
Coal-fired power output at the third highest level in history (Sekitan Koh-suijun—Kako 3-banme), Denki
Shimbun, May 8, 2017.
66

CHAPTER FIVE

49

Figure 1: LNG Import Expenditures and their Shares in the Total Import Expenditures(¥ 10,000/ton)

LNG Landing (left axis)

LNG’s import expenditure share in
total import expenditure (right axis)

Source: Energy White Paper 2017, p. 158.

Figure 2: Coal Import Expenditures and their Shares in the Total Import Expenditures(¥ 1 trillion/ton)
Coking coal import expenditure
Thermal coal import expenditure
Coal’s import expenditure share in
total import expenditure (right axis)

Source: Energy White Paper 2017, p.163.

However, these economic value propositions are fluid as they are highly subject tofuel prices. Specifically, the cost competitiveness of coal power generation in Japan ishighly subject to not only the price of thermal coal but also the price of LNG. In fact, thecollapse of the oil price in the mid-2014 and the attendant reduction in the price of oil
price-linked LNG led LNG power generation to be cheaper than coal power generationin Japan in JFY 2016 (Figure 3). In the context of power generation cost competitiveness,the history cannot be taken as a guide to future.

50

JAPAN’S ENERGY CONUNDRUM

Figure 3: Comparison of Power Generation Costs in Japan by Fuel, JFY 2014 vs. JFY 2016
(JPY/kWh)35(30.6)
0
2.5

30
25
20
(13.7)

15
10
5
0

Capital

0
1.3

0
2.9
5.5
1.7
0
2.1
Coal
(2014)(17.6)
0
2.5

21.7

10.8

0
1.3
1.5
3.5
0.6
3.1

2.6

0.6
0
LNG
(2014)

3.8

Safety Investments

Oil(2014)

Nuclear

O&M

Fuel

0
2.9
3.8

C02

(8.3)

8.7

0
1.3
5.4

2.6

1.7
0
2.1
Coal
(2016)

0.6
0
LNG(2016)

PolicyAccident Risk

3.8
Oil
(2016)

Source: Author’s compilation, with the data from Trade Statistics of Japan, Ministry of Finance and Cost Review Sheet, by thePower Generation Cost Verification Working Group.74

The renewed focus on coal power generation reflected in the 2014 Strategic Energy
Plan took into account major changes in the energy supply and demand conditions
surrounding Japan since the last plan issued in 2010. The government’s energy andelectricity targets for Year 2030 per the 2014 document suggests near doubling of coal’sshare in the power supply from that in the 2010 version.75 In fact, both the shares ofcoal and gas power generation are posited to revert back to their pre-earthquake 10-year
average (Figure 4).

Figure 4: Japan’s Electricity Supply Mix Outlooks for 2030
100%
80%
60%
40%
20%
0%

13
11
2
21

27
24
12
11

27

53

Average in thedecade pre-3.11

The 2010 plan

NuclearRenewables

27
26
3
22
22

The 2014 plan

Source: Author’s compilation, with data from the Agency for Natural Resources and Energy of Japan.

The Cost Review Sheet (excel), by the Power Generation Cost Verification Working Group, Ministry of
Economy, Trade and Industry can be found at the following link: http://www.enecho.meti.go.jp/committee/
council/basic_policy_subcommittee/#cost_wg.
75
Ministry of Economy, Trade and Industry of Japan. “Japan’s Energy Situation,” April 2015, p. 22.
74

CHAPTER FIVE51

The added momentum stems from power sector deregulation that is part of thethree-step deregulation effort launched in 2013. Among other actions, the government
most notably opened up the electricity retail market to new entrants and existing gas
companies in order to generate competition in the power sector. Since April 2016 whenthe electricity retail sector was fully liberalized, about 380 enterprises—including existing gas companies—have joined 10 existing electric utility companies in the electricity
retail business.76 As they seek to survive the competition, many such new entrants haveexpressed interest in operating coal power plants over other fuels because coal is muchcheaper than LNG although the capital cost of building a coal power plant is roughly
double that of building a gas power plant (Figure 3).77

Coal Resource Diplomacy is Deepening and Widening
Japan is known for its high level of energy import dependence, but this was notalways the case. Coal mining was fairly widespread across Japan in the 18th and 19th
centuries, from Hokkaido to Fukushima, and to Ibaraki and Fukuoka. In the early Meiji
period (the mid-1870s), Japan exported a little over half of its domestic output to various places, including China. Yet, declining competitiveness of indigenous coal has
significantly shrunk mining operations in Japan. Consequently, Japan’s energy importdependence has extended to coal as well. As of 2015, imports accounted for over 99
percent of Japanese coal consumption after the domestic production of coking coalceased in 1990 while the mining for thermal coal has declined significantly.78 Today, only
half a dozen open-pit mines remain in operation in Hokkaido, producing about 100,000
tons of thermal coal each and the output is sold to regional power plants for electricity
generation while a 500,000 ton scale underground mining operation also remains in
Kushiro, Hokkaido. This underground mine serves not only to supply coal, but also toprovide capacity-building training in extraction technology, operational management
and safety practices to trainees from countries with coal power generation growth, suchas China and Vietnam.79
Relations with coal supplier countries is therefore yet another area of focus in the Japanese government’s “energy diplomacy.” Australia is the leading coal supplier to Japan,
accounting for about 75 percent of coking coal imports and 50 percent of thermal coal
imports.80 The quality of coal, reserve level, proximity, infrastructure availability, andgovernment policy make Australia a superior supplier of coal to Japan. But, the Japanese­government is mindful of rising environmental awareness among the Australian populationand how sensitivity associated with fossil fuel extraction could generate some adversarial
effect on the future of their coal industry. In an effort to diversify a pool of coal suppliercountries, the Japanese government has held bilateral consultations on coal resource
development and trade with Indonesia, Vietnam, and Mongolia. More recently, Tokyo has
Ministry of Economy, Trade and Industry of Japan. The Energy White Paper (平成28 年度 エネルギーに関する年次報告), June 2017, http://www.enecho.meti.go.jp/about/whitepaper/2017pdf/, p.107.
77
Ministry of Economy, Trade and Industry of Japan. The Recent Status of Thermal Power Generation(火力発電に係る昨今の状況), October 10, 2017, www.meti.go.jp/committee/sougouenergy/shoene_shinene/
sho_ene/karyoku/pdf/h29_01_04_00.pdf, p.9.
78
Ministry of Economy, Trade and Industry of Japan, The Energy White Paper (平成28 年度 エネルギーに関する年次報告), June 2017, http://www.enecho.meti.go.jp/about/whitepaper/2017pdf/, p.161.
79
Kushiro Coal Mine Co., Ltd., “On the Training,” http://www.k-coal.co.jp/training.html.
80
Ministry of Economy, Trade and Industry of Japan. The Energy White Paper (平成28 年度 エネルギーに関する年次報告), June 2017, p. 161.
76

52

JAPAN’S ENERGY CONUNDRUM

begun eyeing closer ties with Russia, and the United States.81 For example, when Russian
President Vladimir Putin visited Japan in December 2016, Japan’s Minister of Economy,
Trade and Industry Hiroshige Seko and his Russian counterpart signed a Memorandum ofUnderstanding that sought enhanced coal trade between the two countries.82
Most notably, coal has been among the topics of bilateral discussions between
the governments of Japan and the United States, under President Trump. The Trump
Administration sees the production and exportation of energy resources, such as coal,
as a major driver of economic growth and job creation at home and a key avenue for
improving U.S. trade deficit with Japan. Notwithstanding the lack of coal export facilities
along the U.S. west coast, the Administration seeks to facilitate U.S. coal exports to Asia,
including Japan. Following the U.S.-Japan Economic Dialogue, in Washington, on October 16, 2017, the two governments launched the Japan-United States Strategic Energy
Partnership (JUSEP) and identified cooperation on the deployment of highly-efficient,
low emission (HELE) and carbon capture and storage (CCS) technologies as one of thefour near-term priorities.83
Additionally, as the Japanese government seeks to raise the ratio of coal supplies
that are developed by Japanese entities or produced domestically (“shigen jikyu-ritsu”)
to over 60 percent by 2030,84 the Japanese government supports private sector investment in coal production projects overseas through loan guarantee, investment financeand investment/export insurance through its financial institutions, such as the Japan
Oil, Gas and Metals National Corporation (JOGMEC), the Japan Bank for International
Cooperation (JBIC), and Nippon Export and Investment Insurance (NEXI). Some ofthe specific activities that the Japanese government supported in 2016 include coal
exploration and infrastructure impact assessment activities (¥1.2 billion), and promotionof Japan’s exploration technologies through technical training (¥1.41 billion).85

Coal Technology as a R&D and Export Focus
Japan is one of the leaders in advanced coal technology research and development(R&D), especially in the development of HELE coal technologies. The idea is to elevate
the temperature and the pressure of steam higher and higher to improve the efficiency ofthe boilers and turbines that use steam as the working fluid, thus requiring less coal andproducing less greenhouse gases. While R&D interest in HELE is virtually non-existent in
the United States, mirroring the dearth of investment interest in coal power generation,
the cost competitiveness of coal power generation and strong manufacture interests
sustain R&D focus on HELE in countries like Japan, China and South Korea. The official
R&D roadmap illustrates the push to improve power generation efficiency (Figure 6).
Specifically, the current focus includes increasing the efficiency of Ultra-Super Critical(USC) units as well as developing integrated gasification combined cycle (IGCC) andintegrated gasification fuel cell cycle (IGFC).
Ibid., p. 254.
Ibid., p. 255.
83
Ministry of Economy, Trade and Industry of Japan. Japan-United States Strategic Energy Partnership,­November 7, 2017, http://www.meti.go.jp/english/press/2017/pdf/1107_001a.pdf.
84“How to ensure secure supply of natural resources and fuels (Shigen/Nenryo-no Anteikyukyuu-no-Kadai-to Kongo-no Taiou), http://www.enecho.meti.go.jp/committee/council/basic_problem_committee/027/
pdf/27-4-2.pdf.
85
Ministry of Economy, Trade and Industry of Japan. The Energy White Paper (平成28 年度 エネルギーに関する年次報告), June 2017, p.257-258.
81
82

CHAPTER FIVE

53

Figure 5: Japan’s Coal Import Ratio
1mm tonCoal import ratio (1%)

Thermal Coal imports

Coking coal imports
Domestic coking

Domestic thermal

Source: Energy White Paper 2017, p.160.

Playing a key role in advancing coal technologies is the New Energy and Industrial
Technology Development Organization (NEDO), which is Japan’s largest public management organization promoting R&D as well as deployment of industrial, energy andenvironmental technologies. For example, NEDO’s ongoing coal related projects aim to
improve the sustainable development of low quality coal resources (JFY 2016-2019, with
the JFY 2017 budget of ¥440 million);86 demonstrate high efficiency turbine technologies
and IGFC (JFY 2016-2021, with the JFY 2017 budget of ¥11.5 billion);87 and carry out
international collaboration to demonstrate high efficiency coal power technologies anddevelopment of advanced coal power generation system (JFY 2017-2021, with the JFY2017 budget of ¥1.66 billion).88
Because HELE does not eliminate carbon emissions, CCS is another major focus ofadvanced coal R&D in the world today. Per the 2014 Strategic Energy Plan, Japan hopes
to demonstrate and deploy CCS technologies around 2020.89 Their R&D focus consists ofa CCS technology demonstration project in Tomakomai, Hokkaido that has been under
way since 2012; R&D on elemental technologies to reduce cost and improve operational
efficiency; and survey to identify about three sites, each capable of storing 100 million
tons of CO2 for geological storage by 2021.90 In terms of international cooperation, the
New Energy and Industrial Technology Development Organization. “Clean Coal Technology Development,”
last updated on July 14, 2017, http://www.nedo.go.jp/activities/ZZJP_100116.html.
87
New Energy and Industrial Technology Development Organization. “Next-Generation Thermal Power
Generation Technology Development,” last updated on August 22, 2017, http://www.nedo.go.jp/activities/
ZZJP_100115.html.
88
New Energy and Industrial Technology Development Organization. “Operations for the global promoteof advanced thermal power generation technology,” last updated on June 23, 2017, http://www.nedo.go.jp/
activities/ZZJP_100131.html.
89
Ministry of Economy, Trade and Industry. “The Strategic Energy Plan (エネルギー基本計画),” April 2014,
http://www.enecho.meti.go.jp/category/others/basic_plan/pdf/140411.pdf, p.45.
90
Ministry of the Environment of Japan. Japan’s CCS Projects (Waga-kuni ni okeru CCS jigyo-ni tsuite), September 5, 2017, http://www.env.go.jp/council/06earth/y0618-17/ref01.pdf, p.12.
8654

JAPAN’S ENERGY CONUNDRUM

United States is a key partner to Japan. Based on the Memorandum of Cooperation,
signed between METI and the U.S. Department of Energy in April 2015, the two countries look to have robust exchange of data, experts and equipment related to CCS.91

Figure 6: Roadmap for Development of Next-Generation Coal-Fired Power Technologies

Source: Council for Promoting the Early Achievement of Next-Generation Thermal Power Generation, June 2016

The advancement in coal power technologies is not meant only for the domestic
market. In fact, the Japanese government sees coal as a key fuel to help enhanceenergy access in developing countries, and promotes the export of advanced coal power
technologies that are developed and manufactured by Japanese companies—such as
Mitsubishi Hitachi Power Systems, Ltd., Toshiba Corp. and IHI Corp.—as a cleaner alternative to dated power generation assets in these countries. For example, the Japanese
government actively calls for the sustainable use of coal resources and promotes HELE
technology—namely the Ultra Supercritical plants—at international forums, such as G20
and the Asia-Pacific Economic Cooperation (APEC), and through bilateral engagementswith governments of Australia, India, Ukraine and Vietnam.92
Also, aiming to achieve Japan’s emission reduction target while facilitating diffusion of Japan’s low-carbon technologies, products and services, Japan has launched its
own offset mechanism known as the Joint Crediting Mechanism (JCM). The JCM allows
Japanese companies to invest in emission reduction projects in developing countries toearn offset credits. Since the first bilateral agreement was signed with Mongolia in 2013,16 countries have become JCM partners.93 While the JCM does not exclude coal power
generation equipment and services, no HELE project appears to be under consideration.
Ministry of Economy, Trade and Industry of Japan. Japan’s CCS Policies (Waga-kuni no CCS porishi),­December 2016, https://unit.aist.go.jp/georesenv/information/20170104/R_Matsumura.pdf, p.33.
92
Ministry of Economy, Trade and Industry of Japan. The Energy White Paper (平成28 年度 エネルギーに関する年次報告), June 2017, p.339, 344-45.
93
Ministry of Foreign Affairs of Japan. “Joint Crediting Mechanism,” January 16, 2017, http://www.mofa.go.jp/
ic/ch/page1we_000105.html.
91

CHAPTER FIVE55

The Japanese promotion of advanced coal power technologies has not been without
setbacks. In fact, it was a source of tension in the relationship with the United States
under the Administration of Barack Obama. Following a 2013 call by then President
Obama to end the public financing for new coal power plants overseas, the UnitedStates and the like-minded governments from the United Kingdom and the Netherlands
proposed to the OECD Export Credit Group a carbon emissions performance standard
that limits export credit agency support of high-carbon power plants. Japan opposedsuch restrictions as its financial institutions were active in promoting HELE exports.
The senior officials from Japan and the United States reportedly had a few intense
exchanges on this matter. In the end, the two governments struck compromise andagreed in November 2015 to begin limiting the export credit financing available for new
construction of inefficient coal-fired plants by instructing the use of Ultra-Supercriticaltechnologies from January 2017.94
Notwithstanding the resolution of tension over OECD export credit financing issue,
the Japanese stakeholders in HELE exports remain anxious, however. Their main concern for some years has been the unchecked expansion of coal power plants by China,
which they view as the primary competitor in this sector. The Japanese are frustrated
that coal plant exports by China, whose public financing accounted for approximately
40 percent of the total amount of public financing provided by major countries from2007 to 2013,95 remains unrestricted by such OECD policies and rules as China is nota member of OECD. Moreover, the Japanese believe that China’s unchecked export oflower quality coal power technology could aggravate GHG emissions in non-OECD
economies.
Partly in an effort to promote sustainable economic development in Asia throughinfrastructure development, but also to counter the robust export of Chinese infra­
structure for example like coal plants, Japanese Prime Minister Shinzo Abe launched in
May 2015 the Partnership for Quality Infrastructure, a framework by which the Japanese ­government would provide about $110 billion over 5 years—roughly a 30 percent
increase from their overseas infrastructure spending in the past five years. More than $50
billion of this lending and investment would come from the Asia Development Bank,
over $30 billion from the Japan International Cooperation Agency, and $20 billion fromthe Japan Bank for International Cooperation and the Japan Overseas Infrastructure
Investment Corp. for Transport & Urban Development.96 The scope of success will be
subject to not only the pace of technology advancement by Chinese manufacturers
but also the market preference; cost rather than lifecycle quality is often the overriding
determinant for buyers in many developing country markets.

Organization for Economic Co-operation and Development. “Sector Understanding on Export Credits for
Coal-Fired Electricity Generation Projects,” November 27, 2015, www.oecd.org/officialdocuments/publicdisplaydocumentpdf/?cote=TAD/PG (2015)9/FINAL&docLanguage=En.
95
Ueno, Yanagi and Nakano. “Quantifying Chinese Public Financing for Foreign Coal Power Plants,” Tokyo
University, November 2014, http://www.pp.u-tokyo.ac.jp/wp-content/uploads/2016/03/GraSPP-DP-E-14-003.
pdf.
96“Abe focuses on ‘quality’ investment for Asia,” May 22, 2015, https://asia.nikkei.com/Politics-Economy/
International-Relations/Abe-focuses-on-quality-investment-for-Asia.
94

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JAPAN’S ENERGY CONUNDRUM

Climate Change Awareness Sharpens Public Scrutiny on Coal Power Use
Despite its strong economic value propositions, coal power generation comes witha significant challenge from the environmental and climate perspective. While a USC
plant emits 0.81 to 0.84kg of CO2 per kWh of electricity generation, an existing LNG
plant emits 0.415kg-CO2/kWh.97 Since 1990, both the volume of CO2 emissions fromcoal power generation as well as the share of coal power generation as a source of CO2
emissions have generally been on a steady rise (Figure 7).

Figure 7: Changes in Power Sector CO2 Emissions and Shares by FuelOil

C02 emitted (100mt-C02)

Natural Gas

Coal
Japan’s energy
related C02
emissionsPower sector
share in Japan’s
energy related
C02 emissions

Source: The Ministry of the Environment, November 2016

Finding the right balance between reaping its economic benefits and minimizing
emissions became a major agenda for the Japanese government. Some intense interagency work to find the right balance led to the revision in early 2016 of the Act on
Sophisticated Methods of Energy Supply Structures of 2009.98 Per the revision, electricity
retailers are required to ensure that 44 percent of power supply comes from non-fossil
fuel sources by 2030, corresponding to the energy mix targets per the 2014 Strategic
Energy Plan. Also, pursuant to the Energy Conservation Act of 1979,99 a new coal power
plant is required to meet the generation efficiency of over 42 percent (a USC level)100

Ministry of the Environment of Japan. Measures for countering the global warming by the power sector,­November 9, 2016, p.4, https://www.env.go.jp/earth/ondanka/denryoku/jokyo_01/mat_ichi.pdf.
98
The law is officially titledエネルギー供給事業者による非化石エネルギー源の利用及び化石エネルギー原料の有効な利用の促進に関する法律, and is generally referred asエネルギー供給構造高度化法.
99
The law is officially titled エネルギーの使用の合理化に関する法律, and is generally referred as 省エネ法.
100
The required generation efficiency for natural gas oil are 50.5 percent and 39 percent, respectively.
97

CHAPTER FIVE

57

while each power generation company is required to meet the generation efficiency of
41 percent for its existing coal power fleet and 44.3 percent for its existing fossil fuelpower fleet.101
The business community has taken a step, too, in the effort to address carbon
emission from the power sector. The Electric Power Council for a Low Carbon Society,comprising of about 50 companies in the power business, has introduced voluntarymeasures to achieve an emission factor of approximately 0.37kg-CO2/kWh from fossil
fuel power generation in JFY 2030, by “adopting the best available technology that is
economically feasible when building new thermal power plants.”102
With the successful enforcement of regulations and voluntary practices, Japan hopes
to reduce CO2 emissions from the entire power sector by one-third, from 505 million
tons in 2014103 to 360 million tons of in 2030.104 Specifically for coal, based on its power
supply target of 26 percent from coal in 2030 (281 TWh), the government estimates
230 million tons of CO2 emissions from coal power generation that year,105 which is 15
percent points lower than the 2014 level of 270 million tons.106 (See Figure 7.) The power
sector achievement would be crucial for Japan’s ability to meet its pledge under the Paris
Agreement to reduce GHG emissions by 26 percent by 2030 against the 2013 level as thesector is the largest emitter of GHG in Japan.
A key sign-post for the successful emissions reduction from coal power generation is
how technologically advanced the future fleet can be. Currently, Japan’s 41 GW installed
coal capacity is comprised of 0.42 GW of IGCC, 20.46 GW of USC, 9.95 GW of SC,
and 10.54 GW of Subcritical plants.107,108 The 2030 target of 26 percent power supply
from coal would translate into 47 GW of installed capacity (at the 80 percent utilizationrate).109 Assuming that one-third of 41 GW existing coal fleet would reach 40 years of life
by 2030 and be ready to retire,110 there could be a room for as much as 20 GW of new
capacity. According to the government, Japan’s future fleet is expected to be less carbon
intensive, with new capacity additions of 15 GW from USC and 1.25 GW from IGCC.111

101
The required generation efficiency for each company’s gas-fired fleet is 48 percent and oil-fired fleet is 39
percent.
102
Federation of Electric Power Companies. “Establishment of the Electricity Business Council for a Low-­
Carbon Society,” February 8, 2016, http://www.fepc.or.jp/about_us/pr/pdf/kaiken_s_e_20160219.pdf.
103
Ministry of the Environment of Japan. “The Environmental White Paper (平成28年度 環境白書),” 2017,
p.48.
104
Ministry of the Environment of Japan. Measures for countering the global warming by the power sector,­November 9, 2016, p.1, https://www.env.go.jp/earth/ondanka/denryoku/jokyo_01/mat_ichi.pdf.
105
Ministry of the Environment of Japan. “The Environmental White Paper (平成28年度 環境白書),” 2017,
p.48.
106
Ministry of the Environment of Japan. Measures for countering the global warming by the power sector,­November 9, 2016, p.1, https://www.env.go.jp/earth/ondanka/denryoku/jokyo_01/mat_ichi.pdf.
107
Ministry of Economy, Trade and Industry of Japan. The Recent Status of Thermal Power Generation (火力発電に係る昨今の状況), October 10, 2017, www.meti.go.jp/committee/sougouenergy/shoene_shinene/sho_ene/karyoku/pdf/h29_01_04_00.pdf, p.6.
108
In terms of actual coal power supply, of 223.8 TWh generated, 60 percent (134.6 TWh) came from USC
plants, 27.8 percent (62.3 TWh) came from SC plants, and 12 percent (27 TWh) came from subcritical plants.
Agency for Natural Resources and Energy, http://www.meti.go.jp/committee/sougouenergy/shoene_shinene/
sho_ene/karyoku/pdf/003_01_00.pdf, November 17, 2016, p.15.
109
Agency for Natural Resources and Energy, On Power Generation Efficiency Standards to Improve the Efficiency of Thermal Power Generation,” November 17, 2016, http://www.meti.go.jp/committee/sougouenergy/
shoene_shinene/sho_ene/karyoku/pdf/003_01_00.pdf, p.5.
110Ibid. p. 3.
111
Ibid. p. 4.

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JAPAN’S ENERGY CONUNDRUM

As noted above, Japan’s 2030 coal power supply target might require as much as 20
GW of new capacity after retirements are offset. This number seems to roughly matchthe total capacity of projects that are planned, under environmental impact assessment
or under construction as compiled by Japan’s environmental nonprofit organization,
Kikko Network.112 However, the NGO list113 reveals that a few of the planned plants
have installed capacity of just under 112.5 MW—a threshold above which environmental
impact assessment are warranted per the Environmental Assessment Act of 1997.114 Notably, small capacity plants have a known tendency to deploy subcritical technologies.
The planned capacity just below the threshold is likely motivated by interest in circumventing environmental impact assessment that ordinarily take a minimum of three years.
Meanwhile, two of the planned projects that were cancelled since the beginning of 2017
were slated to deploy HELE. How the coal fleet will transition warrants close attention.

Conclusion
Coal has regained its prominence in terms of thermal coal consumption volume,
coal power generation volume, and its share in the total power output. The electricity
supply concern post-Fukushima underscored the economic competitiveness of coal
generation and reversed the role of a once declining fuel in the government’s power
supply mix vision for 2030. Moreover, the deregulation of the power sector is elevating
electricity retail market competition, fostering commercial interest in building new coal
power capacity as the fuel is cheaper than natural gas. Additionally, high efficiency, lowemission coal power technologies have become the nation’s focus for both researchand development as well as export as Japanese manufacturers observe strong market
potential in developing countries, where population growth and modernization trends
drive continued growth in power demand.
However, the sustainability of the renaissance is not a foregone conclusion forJapan. Absent a significant and permanent reduction in the global coal output or adebilitating level of levy on the use of coal in the future, coal power generation will
likely remain economically viable in Japan although its cost competitiveness is highly
subject to the price of thermal coal and competing fuels, particularly LNG. Meanwhile,the nation’s stagnant electricity demand growth, due to slow economic growth andaging and declining population, may well serve as a cap on the margin of growth for
new coal capacity. Furthermore, the growing awareness of climate change is only likely
to sharpen the public scrutiny of the scope and type of coal power capacity in Japan.
For example, in May 2017, the City of Sendai became the first municipality to eliminate
exemptions completely from the environmental impact assessment that previously wereenjoyed by small-scale coal power project applicants.115 Therefore, both the outlook forelectricity demand and climate change awareness will warrant close attention in order toascertain whether and how the value propositions of coal power generation continue to
evolve in Japan.
Kiko Network. “Japan Coal Plant Tracker,” http://sekitan.jp/plant-map/en/v2.
Kiko Network. “List of Proposed,” http://sekitan.jp/plant-map/en/v2/table_en.
The law is officially titled 環境影響評価法.
115“On the Abolishment of the Scale Thresholds in the Environmental Impact Assessment on Coal Power
Plants,” City of Sendai, last updated May 1, 2017, https://www.city.sendai.jp/kankyochose/kurashi/machi/
kankyohozen/kurashi/kankyo/sekitan.html.
112
113
114

CHAPTER SIX

59

Chapter Six
Japan’s Radical Incrementalism in Power Market Regulation and Renewable Energy
Dr. Llewelyn HUGHESAssociate Professor, Crawford School of Public Policy,
Australian National University

Introduction
Major policy changes are occurring in Japan’s power sector, centrally reforms to
the regulation of competition, and the management of the integration of new sourcesof renewable energy. The Japanese government is implementing a series of reforms
designed to increase efficiency in the power sector, while attempting to manage thefiscal and regulatory issues that have emerged as a result of the introduction of large
amounts of power generated from renewable energy sources – primarily solar photo­voltaics – to the grid. As in other countries, these policy changes have important distributional effects, making them inherently political in nature.116,117
I argue in this chapter that the changes implemented in order to drive greater
efficiency in the power sector, and promote decarbonization through the introductionof renewable energy, imply a transformation of the regulations governing Japan’s power
sector. I also suggest that the negotiation of market redesign occurs through existing
regulatory institutions, leading to important areas of continuity, as is the case across
many national electricity markets.118 Japan is thus engaged in a process of what I haveterm “radical incrementalism,” defined as a substantial reordering of the policies used
to achieve public policy goals, but with important areas of path dependence because of
institutional constraints and the longevity of capital-intensive assets that are central to thepower sector.119

Changing Approaches to Power Market Governance
For more than two decades, policymakers have negotiated a transformation ofJapan’s power market from a vertically-integrated monopoly to a system that identifies
transmission and distribution as natural monopolies, but otherwise assumes competitivemarkets can more efficiently allocate capital, while enabling energy security and environmental goals to be met.
Efforts to transform Japan’s power market reflect lessons learned from Europeanand some U.S. power markets competitive principles into previously vertically integrated

116
Hughes, Ll., and Lipscy, P.Y. “The politics of energy,” Annual Review of Political Science, 16, 2013, pp.449469.
117
Kominers, S.D., Teytelboym, A. and Crawford, V.P. “An invitation to market design,” Oxford Review of Economic Policy, 33(4), 2017, pp.541-571.
118
Nepal, R., Menezes, F. and Jamasb, T. “Network regulation and regulatory institutional reform: Revisiting thecase of Australia,” Energy Policy, 73, 2014, pp.259-268.
119
Hughes, Ll. “Japan’s Radical Incrementalism in Energy,” In East Asia Forum (Vol. 25), 2013.

60JAPAN’S ENERGY CONUNDRUM

monopoly systems.120 A key feature of Japanese markets is the continued existence ofprivate companies – and not State Owned Enterprises (SOEs) – in delivering electricity. Reforming the power market has thus required negotiating with private regulatedmonopolies, in addition to new market entrants to the power market, and other actors.
A second key characteristic of Japan’s power sector is its regional structure. Under
the Electricity Business Law, ten power utilities – including Okinawa – were responsible
for supplying power within designated regions, with limited capacity to supply electricity between these regions (See Figure 1). An additional constraint remains the divide
between Eastern and Western parts of the main island of Honshu, which operate on
different frequencies (50Hz vs. 60 Hz). Once again, there is limited capacity to redirect
power between these regions, standing at 1.2 gigawatts (GW). (For comparison, theTokyo region has over 50 GW of installed generating capacity.) The shift from a regionalmonopoly model of power market governance to a system centered on a national market enabling competition between suppliers, and between retailers of electricity, thus
faces technical as well as political constraints.

Figure 1: Japan’s Regionalized Power Structure

Source: Takuya Yamazaki, “Japan’s Electricity Market Reform and Beyond,” July 7, 2015, at https://www.iea.org/media/workshops/2015/esapplenaryjuly2015/Yamazaki.pdf

A second feature that requires overhauling is administrative oversight. The supplyof electricity from one supply area to another under the regional monopoly systemoccurred on a bilateral, Over-The-Counter (OTC) basis, rather than through an exchange
incorporating many buyers and sellers. The Ministry of Economy, Trade and Industry’s(METI) Agency for Natural Resources and Energy (ANRE) regulated rates-of-return, with
regional utilities allowed to adjust tariffs in response to changing fuel supply costs byapplying to the regulator (ANRE).
120
Scalise, P.J. “Who Controls Whom? Constraints, Challenges and Rival Policy Images” in Japan’s Post-War
Energy Restructuring. Critical Issues in Contemporary Japan, 2013, pp.92-106.

CHAPTER SIX

61

Initial changes include legal revisions enabling industrial and commercial consumers – representing about 62 percent of the retail market – to select their suppliers overtime, with regulatory limits loosened on non-utility generators entering the market.
Vertically-integrated utilities nevertheless continue to dominate power sales. Calculatedby the amount of electricity supplied, for example, companies other than the power
utilities captured just 4.2 percent of electricity in 2013 prior to the introduction of fullcompetition at the household level, and 1.3 percent of total sales were traded on theJapan Electric Power Exchange (JAPX) wholesale power market.

The Fukushima Disaster as a Driver of Radical Incrementalism
The disaster of March 11, 2011 had important effects on the mix of fuels used tosupply customers, as discussed elsewhere in this volume. In this section, I focus on theeffect of the disaster on the ongoing changes to the power market designed to introduce
competition to the generation and retail segments of the market. I posit that the disasteradvanced the redesign of the power market forward more rapidly than it otherwise
might have been the case in a process of what I term “radical incrementalism.”
If we frame the changes to Japan’s power market in terms of institutional change,
the market retains substantial elements of continuity despite the effects of the Fukushimadisaster on the role of nuclear power in electricity generation. This is consistent with
Dr. Eleanor Westney’s analysis, in which she finds important continuities in institutions
adopted in post-Meiji Restoration across different public policy areas, despite theextraordinary upheavals of the era.121 The changes are consistent with a theoreticalframework that understands institutions have distributional effects that advantage someactors, whilst imposing costs on others.122 Institutional stability thus requires the ongoinginvestment of resources by actors that benefit from their maintenance. In the case of
the Fukushima disaster, the governing Liberal Democratic Party no longer had a strong
incentive to favor a status-quo benefitting the incumbent power utilities.
The upshot was a series of changes to the Electricity Business Law that are progressively changing the rules governing competition in the power sector (Figure 2). A threephased program first transferred greater responsibility to the regulator for managing
electricity flows among Japan’s regionalized power grids. This occurred through thecreation of a new regulatory body – the Organization for Cross-regional Coordinationof Transmission Operators (OCCTO). OCCTO was created in April 2015, partly in recognition of the problems faced in wheeling electricity across utility service areas in thewake of the Fukushima disaster, and is made up of personnel from the Electricity and
Gas Group within METI, along with secondees from the utilities. (By convention, utility
secondees do not work on interconnection decisions from their own utilities’ service
area.) OCCTO has the mission of monitoring and enhancing energy security by reviewing the supply-demand forecasts of the utility transmission operators, and planning for
grid investments in order to maintain and enhance grid stability. This represents an
expansion of the concept of energy security beyond securing the supply chain for fuelWestney, D. E. Imitation and innovation. Cambridge: Harvard University Press, 1986.
Mahoney, J. and Thelen, K. eds. Explaining institutional change: ambiguity, agency, and power. Cambridge
University Press, 2009.
121
122

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JAPAN’S ENERGY CONUNDRUM

inputs, which previously dominated Japan’s approach to energy security.123 It is a key
change because it removes responsibility for some components of network operationfrom the vertically integrated utilities, and gives OCCTO some role in determining thecosts for new generators to connect to the grid.

Figure 2: Phased Reform of Power Market Regulation

Source: Takuya Yamazaki, “Japan’s Electricity Market Reform and Beyond,” July 7, 2015, https://www.iea.org/media/
workshops/2015/esapplenaryjuly2015/Yamazaki.pdf

An example of the effect of the creation of OCCTO on the power sector is the newprocess established for sharing the costs of connecting generators to the transmission
grid in the Tohoku region. An important issue for Japan given its geography is that there
is distance between locations with commercially attractive volumes of wind and solar
resources, and the major demand centers of the Tokyo and Kansai regions. The Northern
Tohoku and Hokkaido regions, in particular, have substantial wind resources, estimatedto be in excess of demand within the Tohoku region itself.
It is OCCTO that has taken responsibility for developing rules governing the dis­tribution of costs between generators in the Tohoku region wishing to newly connect tothe high voltage line in Northern Tohoku. This stands in contrast to the previous system,
in which negotiations over grid interconnection were carried out bilaterally between
new market entrants and the relevant utility, as the network operator. The government
designed the system to enable new market entrants to share the costs of building out
network capacity enabling connection to the main high-voltage transmission line servicing the Tohoku region. While there remains some uncertainty with the process, theapproach nevertheless represents a reduction in barriers to market entry as it implies
that fixed investment costs will fall for individual developers as they pool the costs ofHughes, Ll. Globalizing Oil: Firms and Oil Market Governance in France, Japan, and the United States. New
York: Cambridge University Press, 2014.

123

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63

interconnection, relative to what would have occurred in bilateral negotiations with theutility.
The third, and arguably most crucial, stage of the reform process scheduled for
implementation in 2020 will see the unbundling of transmission and distribution fromthe generation and retail segments of the power market. While details are yet to benegotiated within Japan’s committee system, material from ANRE strongly suggest thatthe new legal structure will allow utilities to retain a holding company structure. A holding company structure is one in which network operations are managed by a company
established as subsidiary to a company that participates in the competitive segments ofgeneration and retail in the power market.
In preparation for this stage, Tokyo Electric Power Company (TEPCO) – which
remains majority owned by the government in the wake of the Fukushima disaster –has already reorganized itself into a holding company structure made up of TEPCO
Fuel and Power (generation and fuel procurement), TEPCO Power Grid (transmission
and distribution), and TEPCO Energy Partner (retail). Interestingly, TEPCO is using thechanging rules governing the power market within Japan as an opportunity as well
as a risk, building an international strategy focused on the purchase and operation ofgenerating assets outside Japan. TEPCO Fuel and Power also created JERA – a joint
venture with Chubu Electric Power – to procure fuel, and President Toshihiro Sano hassignaled an interest in integrating the thermal power operations of the two companies.124
The important remaining question is the extent to which these changes undermine theproblem of market power that continues to beleaguer the Japanese power market.

Challenges of Renewable Energy
As with reforms to the rules of competition in the power market, the Fukushimadisaster accelerated change in the mix of energy sources used within the domestic
market. The transfer of power to the Democratic Party of Japan (DPJ) between 2009 and2012 also helped ensure the passing of a new subsidy – the Feed-in-Tariff (FIT) – modelled on Germany, to give Independent Power Producers (IPPs) an incentive to develop
renewable energy projects. The FIT had a particularly powerful effect on promoting
investments in solar photovoltaics, which made up the bulk of registered projects under
the scheme.
The power mix among nuclear, thermal (coal and gas), and renewable energy is
projected in the Basic Energy Plan (BEP; enerugii kihon keikaku), which is calculated
through a model-plant assessment of different generation sources, incorporating thecosts of fuel, operating, capital, subsidies, and other factors to 2030, and released as theLong-term Supply Demand Projection (enerugii choki jukyu mitoshi). The government
included these projections – and the implied Greenhouse Gas (GHG) emissions – inJapan’s submission to the United Nations Framework Convention on Climate Change(UNFCCC) Paris Conference of the Parties (COP), as part of Japan’s Intended Nationally
Determined Contribution (INDC). The BEP is thus a crucial document that both reflects
the current state of policy debate, and charts the contours of future policy change.
According to the April 2015 assessment used as the basis for the BEP, renewableenergy is projected to double in terms of electricity generated, from 12 percent in JFY
124

TEPCO. Annual Report 2016 (Year ended March 31, 2016). Tokyo: TEPCO.

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JAPAN’S ENERGY CONUNDRUM

2013 to 22-24 percent in JFY 2030. The assessment projects that increased investment inrenewable energy will make up for one wedge of the power lost because of the retirement of a significant number of older nuclear power plants. Within renewable energy,hydropower is expected to retain the bulk of electricity generated within the category of
renewable energy, followed by solar PV, and then biomass. It projects wind power, incontrast to markets outside Japan, will retain a modest share of electricity generated, at
1.7 percent, although some experts contest this figure as overly conservative.
The increase in renewable electricity generation is another sign of radical incre­
mentalism at work in the Japanese power market. Growth in capacity, and generated
power, was anemic under the Renewable Portfolio Standard (RPS) that was the previous centerpiece of the government’s efforts to promote renewable energy, with amean annual growth rate in capacity of approximately five percent across all sources ofrenewable energy (solar PV, wind power, small-scale hydro, geothermal, and biomass)
between JFY 2003 and JFY 2008. This increased to approximately nine percent between
JFY 2009 and JFY 2012 with the introduction of net metering that allowed renewableenergy producers to sell unused power to the utilities. Between JFY 2012 and JFY 2013,
in contrast, there was a 32 percent increase in renewables generating capacity.125 It
also led to an increase in generated electricity, although renewable energy generated
continues to represent a small share of Japan’s overall electricity supply. Across JFY
2016, renewable energy excluding pumped hydro generated a mean of 56.78 terawatt
hours (TWh) of electricity per quarter (JFY 2016 total renewable generation of 227 TWh),against 73.75 TWh/quarter for coal (JFY 2016: 295 TWh), and 100.5 TWh/quarter fornatural gas (JFY 2016: 402 TWh).126
These changes in fiscal incentives increased investment in renewable energy capacity, and generated electricity. Continued growth of renewable energy is dependent, however, on the successful management of a series of secondary policy issues, specifically:•	Rebalancing the composition of renewable energy investment;•	Managing interconnection of large numbers of renewable energy capacity, andthe allocation of the costs of upgrading transmission lines to manage new load;and• Reducing the rising burden of the FIT on household electricity costs.
Central is the revision of the FIT that came into force on April 1, 2017. The bias ofinvestments in renewable energy types has been identified as a central problem in thecurrent design of the FIT; a large share of registered projects are solar photovoltaic (PV)projects, and many of these have not moved to the development stage, despite being
registered under the FIT. A review within ANRE determined that a key reason for this lay
in the relatively undemanding standards required for registering projects under the FIT,
meaning projects were registered (and thus value created) that had little hope of ultimately reaching interconnection and generating electricity. In addition, the majority ofregistered projects were in large-scale solar PV, with other areas of potential investmentcomparatively neglected (Figure 3).

125
126

See http://www.meti.go.jp/committee/sougouenergy/shoene_shinene/shin_ene/pdf/001_03_00.pdf.
REI, based on METI/ANRE “Monthly Report on Electricity Statistics.”

CHAPTER SIX

65

Figure 3: Solar PV as Share of Total Renewables Investment as of March 2014

Source: http://www.enecho.meti.go.jp/category/saving_and_new/saiene/kaitori/dl/kaisei/0628tokyo.pdf

In response, ANRE negotiated a revision to the system for registering under the FIT,
newly requiring an interconnection agreement to be in place with the network operator
as part of the FIT registration process. This set a higher hurdle on developers hoping
to gain registration under the FIT. Existing projects were given a grace period before
also being required to meet the standards required of new developers. ANRE has alsochanged the rules to ensure registered projects are more likely to be developed, andprojects deemed to have a low likelihood of being developed have been deregistered.
ANRE has also shifted the financial incentives in support of non-solar PV projects,
in recognition of barriers that increased uncertainty for developers. Theoretically, theFIT should provide a rate of return sufficient to encourage investment, with incentives
reduced as system costs fall due to scale economics, and other factors. A key issue has
emerged, however, because of the comparatively long lead times required for certain
renewable generation sources, in part because they are required to go through an environmental permitting process.
In response, revisions established a multi-year FIT, providing greater certainty fordevelopers of wind power, biomass, geothermal, and small-scale hydropower. In contrast, the FIT has continued to fall annually for solar PV projects. Offshore wind power
was also newly included in the FIT scheme. Taken together, the goal is to improve thequantity and quality of the financial incentives for renewable energy sources other thansolar photovoltaics.

66

JAPAN’S ENERGY CONUNDRUM

Figure 4: Multi-year Feed-in-Tariff Rates

Source: METIThe government also faced a difficult problem in that the number of projects registered under the FIT far exceeded load within the former utility service areas. Indeed,in 2015 Kyushu Electric unilaterally began refusing to accept applications for interconnection because of the size of the implied renewables capacity within its service
area.127 In order to manage this problem, ANRE developed rules governing curtailment,
and developed a process for calculating the maximum theoretical capacity able to beconnected in each of the utilities’ former service areas. The most recent version of rules
enable curtailment orders for wind and solar PV generators of up to 720 hours for wind,and 360 hours per year for solar PV, without compensation, and requiring developers
to attach equipment enabling curtailment order to be carried out as a condition for gridinterconnection.
A final important concern with the FIT is the burden that it is placing on households.
Because it is financed in part by costs being transferred to consumers, the FIT is afinancial transfer from consumers of electricity to investors in renewable energy. The
government assesses that the FIT has already cost ¥2.3 trillion, implying a financial
burden on households of an average of ¥675/month. The government projects the fiscal
burden of the FIT will almost double by 2030, ¥3.7 and ¥4 trillion.
One response to this dilemma has been to adopt a reverse auction process forlarge-scale solar facilities, defined as those with a capacity of over 2MW. ANRE designed
the reverse auction process to lower costs by giving qualified auction participants an
incentive to win access to funds provided by the FIT through bidding lower costs into
the auction. The first auction for 500MW, completed under the reverse auction process
in November 2017, yielded a price by the successful bidder substantially lower thanprevious prices, with the lowest bid coming in at ¥17.2/kWh, almost 30 percent lower
127

See https://spectrum.ieee.org/energywise/green-tech/solar/japan-crimps-solar-juggernaut.

CHAPTER SIX

67than the FIT rate offered in the previous fiscal year although still far in excess of prices
achieved in other markets.128 A key issue is nevertheless that successful bids under theauction reached 140MW under the first bid, short of the 500MW initially anticipated.
Further, a large number of the solar PV companies that competed successfully in theaction were affiliates of non-Japanese firms, such as Canadian Solar and Hanwa Q-Cells.
The complex policy issues of rebalancing renewable energy sources, managing
interconnection, and reducing the fiscal costs of renewables promotion emerged asa direct result of the success of the FIT in inducing increased investment into Japan’s
power system. While their resolution continues to be negotiated among policymakers in
the LDP and Komeito parties, Japan’s ministries and agencies, the incumbent power utilities, and new market entrants, the direction of change – in favor of greater competition
and an increased share of renewable energy in the power mix – is fixed. The outcomeof debate over the management of the nuclear fleet is a central, and additional, issue
that will determine the pace of this change due to its implications for the particular mix
of fuels used to generate power, capacity constraints in the transmission and distribution
network, and the implications of the resolution of the nuclear issue for Japan’s inter­national climate commitments.

128
Publicover, B. “Japan’s METI awards 140 MW in first PV auction — report,” PV Magazine. November
22, 2017. Available at: https://www.pv-magazine.com/2017/11/22/japans-meti-awards-140-mw-in-first-pvauction-report/.

68JAPAN’S ENERGY CONUNDRUM

CHAPTER SEVEN

69

Chapter Seven
Nuclear Energy – Light Water Reactors at a Crossroad
Nobuo TANAKA
Chairman, Sasakawa Peace Foundation

Introduction
Japan has a long history of using nuclear energy to enhance its energy security andfuel its EƵĐůĞĂƌƉůĂŶƚĐŽŶƐƚƌƵĐƟŽŶƐƚĂƌƚƐĂĐĐĞůĞƌĂƚĞĚĚƵƌŝŶŐƚŚĞϭϵϲϬƐĂŶĚƉĞĂŬĞĚĂŌĞƌƚŚĞŽŝůƉƌŝĐĞ
economic growth. There is also a long history of U.S.-Japan bilateral collaboration onƐŚŽĐŬŽĨϭϵϳϯͲϭϵϳϰ;&ŝŐƵƌĞϭϬ͘ϭͿ͘ƵƌŝŶŐƚŚĂƚƟŵĞ͕ƵƌŽƉĞĂŶĚƚŚĞhŶŝƚĞĚ^ƚĂƚĞƐĂĐĐŽƵŶƚĞĚĨŽƌ
nuclear energy. The tragic accident at Fukushima after the Great Eastern Japan
Earthquake and Tsunami March 11, 2011 brought the use of nuclear power into question.
ƚŚĞŵĂũŽƌŝƚǇŽĨŶĞǁŶƵĐůĞĂƌďƵŝůĚƐ͘dŚĞŶƵĐůĞĂƌŝŶĚƵƐƚƌǇĞŶƚĞƌĞĚĂĚŽǁŶƚƵƌŶŝŶƚŚĞůĂƚĞϭϵϳϬƐAt the same time, global changes in the nuclear power industry are taking place amid
broaderďĞĐĂƵƐĞŽĨƐůŽǁŝŶŐĞůĞĐƚƌŝĐŝƚǇĚĞŵĂŶĚŐƌŽǁƚŚĂŶĚ͕ŝŶƚŚĞhŶŝƚĞĚ^ƚĂƚĞƐ͕ƌĞŐƵůĂƚŽƌǇĐŚĂŶŐĞƐdevelopments in energy markets. This chapter looks at the role nuclear energy
might playin light of all these developments and suggests a path forward.
;ŵŽƟǀĂƚĞĚďǇƐĂĨĞƚǇĐŽŶĐĞƌŶƐͿƚŚĂƚůĞĚƚŽƉƌŽũĞĐƚĚĞůĂǇƐĂŶĚŚŝŐŚĞƌĐŽŶƐƚƌƵĐƟŽŶĐŽƐƚƐ͘dŚĞ

12ĂĐĐŝĚĞŶƚĂƚdŚƌĞĞDŝůĞ/ƐůĂŶĚŝŶƚŚĞhŶŝƚĞĚ^ƚĂƚĞƐŝŶϭϵϳϵŚĞŝŐŚƚĞŶĞĚƉƵďůŝĐŽƉƉŽƐŝƟŽŶƚŽ
3
Rise of the Light Water ReactorŶƵĐůĞĂƌƉŽǁĞƌĂŶĚĨƵƌƚŚĞƌƐůŽǁĞĚůŝĐĞŶĐĞĂƉƉƌŽǀĂůƐĂƌŽƵŶĚƚŚĞǁŽƌůĚ͕ƌĞŝŶĨŽƌĐŝŶŐƚŚŝƐƚƌĞŶĚ͘
U.S. President Dwight Eisenhower made nuclear fission technology, originallyŽŶƐƚƌƵĐƟŽŶƐƚĂƌƚƐĨĞůůƐŚĂƌƉůǇĂŶĚŵĂŶǇƉƌŽũĞĐƚƐǁĞƌĞƐƵƐƉĞŶĚĞĚŽƌĐĂŶĐĞůůĞĚ͕ƚŚŽƵŐŚŝŶƐƚĂůůĞĚdeveloped
for bombs, available for commercial purposes in 1953 through his “AtomsϰŶƵĐůĞĂƌĐĂƉĂĐŝƚǇĂŶĚŽƵƚƉƵƚĐŽŶƟŶƵĞĚƚŽŝŶĐƌĞĂƐĞĂƐĐŽŵƉůĞƚĞĚƉůĂŶƚƐĐĂŵĞŝŶƚŽŽƉĞƌĂƟŽŶ͘for Peace”
initiative. Since then, countries, including Japan, rushed to build commercial
nucleardŚĞĂĐĐŝĚĞŶƚĂƚŚĞƌŶŽďǇůŝŶhŬƌĂŝŶĞŝŶϭϵϴϲĨƵƌƚŚĞƌĚĞƉƌĞƐƐĞĚĂĐƟǀŝƚǇ͕ĞƐƉĞĐŝĂůůǇŝŶƵƌŽƉĞ͘
reactors during the 1960s and 1970s, construction reaching a peak after the first5

oil crisis in 1973 (Figure 1).

GW

Figure 1:
ReactorStarts and Timeline
oftimeline
Events of events
Figure10.1Construction‫ ٲ‬Reactor construction
starts and
35
30

35% ConstrucƟon starts*:
Fukushima
Daiichi
Non-OECD
30%OECDFirst electricity produced
by a nuclear reactor

25

Oil price shockof 1973-1974

Three Mile Island
Chernobyl

25%

10

Share of total electricity
generaƟon** (right axis):
20%
OECD
World
15%
Non-OECD
10%

5

5%

20

First nuclear plantconnected to grid

15

1950

1960

1970

1980

1990

2000

2010

ϲ
7
8
9
10
10

Source: International Energy Agency, World Energy Outlook (WEO) 2014ΎdŚĞĚĂƚĂĚŽŶŽƚŝŶĐůƵĚĞĐŽŶƐƚƌƵĐƚŝŽŶƐƚĂƌƚƐĨŽƌƵŶŝƚƐƚŚĂƚǁĞƌĞůĂƚĞƌĐĂŶĐĞůůĞĚ͘^ŽŵĞƌĞĂĐƚŽƌƐƚŚĂƚĂƌĞĐƵƌƌĞŶƚůǇƵŶĚĞƌĐŽŶƐƚƌƵĐƚŝŽŶ͕ŚŽǁĞǀĞƌ͕ŵĂǇǇĞƚďĞĐĂŶĐĞůůĞĚ͘ΎΎĂƚĂĂƌĞĂǀĂŝůĂďůĞĨƌŽŵϭϵϳϭ͘^ŽƵƌĐĞƐ͗/ŶƚĞƌŶĂƚŝŽŶĂůƚŽŵŝĐŶĞƌŐǇŐĞŶĐǇ;/ͿWŽǁĞƌZĞĂĐƚŽƌ/ŶĨŽƌŵĂƚŝŽŶ^ǇƐƚĞŵ͖/ĚĂƚĂďĂƐĞƐ͘dŚĞ ϭϵϵϬƐ ĂŶĚ ĞĂƌůǇ ϮϬϬϬƐ ƐĂǁ ǀĞƌǇ ůŝƩůĞ ŶĞǁ ŶƵĐůĞĂƌ ĐŽŶƐƚƌƵĐƟŽŶ ŽƵƚƐŝĚĞ ŽĨ :ĂƉĂŶ͕<ŽƌĞĂĂŶĚŚŝŶĂ͘'ĂƐĂŶĚĞůĞĐƚƌŝĐŝƚǇŵĂƌŬĞƚƐŝŶŵĂŶǇKĐŽƵŶƚƌŝĞƐǁĞƌĞĚĞƌĞŐƵůĂƚĞĚ

12
13
13

70

JAPAN’S ENERGY CONUNDRUM

There are 434 reactors operating in the world with a capacity of 392 gigawatts(GW), with an additional 76 GW under construction in 2013. They generated 2,478 terawatt hours (TWh) and accounted for approximately 11 percent of total electric power
generation in 2013. This share of electricity production increased to 13 percent in 2016
according to the IEA’s 2017 World Energy Outlook (WEO-2017). Light Water Reactors(LWRs) cooled and moderated with ordinary water account for almost 90 percent ofcapacity in operation. There are two types of LWRs: Pressurized Water Reactors (PWRs)
that account for two thirds of installed nuclear capacity and Boiling Water Reactors(BWRs) that account for one-fifth (Figure 2).

Figure 2: Overview of Basic Nuclear Reactor Technologies

Source: IEA WEO-2014, using data from IAEA PRIS and IEA analysis

PWRs are the most prevalent type of commercial reactor. The United States originallydeveloped PWRs for submarines. Admiral Hyman Rickover (1900-1986) was the fatherof the U.S. Navy’s nuclear submarine fleet. He successfully established the necessary
technology for nuclear submarines and the necessary discipline for the personnel operating them. He himself recruited and trained staff to maintain the safety of the reactors.
He ejected staff who did not meet his standards right away. His relentless determination
eventually resulted in the safest and most efficient nuclear submarine fleet in the world.
Vendors, power plants and regulators recruited retired submarine staffers to help design,build, operate and regulate commercial nuclear power plants.129
The safety culture nurtured in the military spun off to civil nuclear engineering.
Using regular water as coolant and moderator enables submarine applications to bepassively safe. Using steam generators for heat exchange for PWRs enables control of
129
Rear Admiral Dave Oliver’s book “Against the Tide” published in 2014 by the Naval Press describes Admiral
Rickover’s tremendous efforts.

CHAPTER SEVEN

71

radioactive contamination. The spinoff of military technologies and experience enabledcommercial LWRs, especially PWRs, to enjoy a reputation as a source of cheap, secured
and safe electricity (Figure 3).

Figure 3: Reactor Types as Percent of Global Nuclear Capacity 1954-2016

Source: Environmental Progress Tracker, 2017

Safety Risk of Reactors
The Three Mile Island (TMI) accident in Pennsylvania in 1979 was the first serious
nuclear power plant safety accident. It triggered public opposition to nuclear power,
and construction starts fell sharply. (See Figure 1.) Mechanical and human operational
errors creating a shortage of cooling water caused the TMI accident, which resulted in
the partial meltdown of the reactor core of Unit 2 and release of radioactive gases. It wasa PWR reactor. A shortage of water is the critical safety risk for LWR reactors. A further
slowdown of nuclear power occurred after the tragic accident in 1986 at the Chernobyl
reactor in the Ukraine. The Chernobyl reactor is a Soviet designed RBMK-1000, a graphite moderated light water reactor. The accident happened because of a serious reactor
design flaw, inadequately trained personnel, and the lack of safety culture in the Soviet
nuclear community. Even though this reactor type is very different from LWRs, many
European countries decreased nuclear deployment after the Chernobyl accident. At thesame time, Japan, Korea and China continued building new nuclear power plants. China
especially has kept a very ambitious plan for deploying nuclear energy, mainly PWRs.
On March 11, 2011, the Great Eastern Japan Earthquake hit Japan’s northeast coast.
Forty minutes later gigantic tsunami waves hit Japan’s Pacific shores. All operating reactors in the region shut down automatically when the earthquake occurred. However, thetsunami affected nuclear power plant sites very differently. Figure 4 shows the location

72

JAPAN’S ENERGY CONUNDRUM

of the nuclear power plants on the northeast coast and the heights reached by thetsunami. Tokyo Electric Power Company’s (TEPCO) Fukushima Daiichi (First) Nuclear
Power Plant (1FNPP) experienced a total blackout as the quake cut all external powerlines and the high tsunami wave destroyed the emergency diesel generators. The reactor
at 1FNPP was a Boiling Water Reactor (BWR). As one type of LWR, it needs water forcooling. The 1FNPP plant lost the water supply essential for its cooling reactor cores dueto the lack of power. The operators could not stop the meltdown of reactor cores at Units
1, 2 and 3. The designers had not foreseen the height of such a tsunami at the time of
construction: a “Beyond Design (Souteigai)” situation happened. However, other power
plants prevented accidents even though the tsunami also hit them. Onagawa Nuclear
Power Plant of Tohoku Electric Power Company is located closer to the epicenter ofthe quake and experienced by even higher tsunami waves than Fukushima. However,Tohoku Electric saved the plant because it had built the reactors 10 meters higher thanoriginally proposed. Tohoku Electric Power Company considered a risk of tsunami much
more seriously than TEPCO. Moreover, nearby residents used the Onagawa plant site
as a shelter at the time of the disaster. Fukushima Daini (Second) Nuclear Power Plant(2FNPP) of TEPCO, located 10 kilometers south of 1FNPP, escaped a similar accident.
Because it had emergency diesel generators more robustly housed, some survived. Tokai
Daini of Japan Atomic Power Company (JAPC) in Ibaraki prefecture avoided a similar
accident just in time; they had increased the height and improved the water tightnessof the walls surrounding the seawater pumps prior to the tsunami. The Governor of
Ibaraki had demanded that JAPC raise the height of the wall so construction was alreadyunderway. These cases reveal that the real reason for the accident at TEPCO’s 1FNPP
was not the tsunami. The tsunami triggered the accident but if TEPCO had been sufficiently prepared, it could have avoided the catastrophic accident. The real reason for theaccident was the lack of preparedness — human error.

Figure 4: Tsunami and Location of Nuclear Power Plants

Source: IAEA, “Fukushima Daiichi Accident Technical Volume 1,” 2015.

The Japanese Diet established the independent Nuclear Regulatory Authority (NRA)in 2012 and it has developed and implemented the world’s most stringent safety rules.

CHAPTER SEVEN73

It took a rather long time for the utilities to meet the standards for restarting reactors
shut down one after another for maintenance. As of March 2018, only six reactors wererunning out of the 48 operable reactors in Japan.
Even before the Fukushima accident, Japanese NPPs had very low capacity utilization rates compared to other countries. Japan’s rate was about 70 percent while therate was more than 90 percent in Korea and 85 percent in the United States. The reason
provided is that Japanese regulations, due to cautious safety management, require more
frequent checkups. In a sense, Japan had enforced higher standard safety rules relative
to other countries. Then, how could an accident such as 1FNPP have happened? This
has long been a mystery for me. Many investigatory reports on the accident revealed alack of safety culture and the existence of a “myth of safety” or the “trap of the safety
myth.” It means that, since TEPCO believed its safety standard had been proven byits past performance, TEPCO, other utilities, vendors and regulators and the nuclear
community as a whole did not think it necessity to prepare and make serious emergency
rescue plans for an unthinkable situation like a total plant blackout.
There were missed opportunities that might have helped avoid the accident. Afterthe September 11, 2001 terrorist attacks in the United States, the U.S. Nuclear Regulatory
Commission (NRC) in 2002 ordered all nuclear licensees to prepare for a terrorist attack
using aircraft. Section B.5.b of the Order demands a “defense in depth” approach forthe specific risks. The NRC defines defense in depth as “an approach to designing andoperating nuclear facilities that prevents and mitigates accidents that release radiationor hazardous materials. The key is creating multiple independent and redundant layersof defense to compensate for potential human and mechanical failures so that no single
layer, no matter how robust, is exclusively relied upon. Defense in depth includes theuse of access controls, physical barriers, redundant and diverse key safety functions,and emergency response measures.”130 The NRC is said to have recommended a similar
approach to the Japanese regulator but it declined saying there would be no terrorist
attacks in Japan and total plant blackouts were unthinkable. Taiwanese and Korean
regulators accepted similar advice. If it had accepted the advice, Japan might haveavoided the accident. Hence, the regulator made a human error.
TEPCO management also made mistakes allocating resources between two of its
nuclear power plants, Fukushima and Niigata. TEPCO’s largest and newest NPP is locatedin Kashiwazaki-Kariha in Niigata Prefecture. Restarting that plant after the Chuetsuoki
earthquake in 2007 was an urgent matter for TEPCO’s management. Their efforts consequently concentrated on measures to protect against future earthquakes in Niigata andthey did not consider seriously the risk of a tsunami at Fukushima. TEPCO did everything
to restart Kashiwazaki-Kariha while it operated Fukushima as a cash cow, compensating
for the loss of revenue from Niigata. This, in fact, traded the ANSHIN (emotional security)of Niigata with the ANZEN (technical safety) of Fukushima. Politicians often cite ANSHIN
and ANZEN together to emphasize complete safety and credibility. However, they arevery different concepts and their treatment should be different. In order to raise the
ANZEN (technical safety) level by additional measures in order to increase the ANSHIN(emotional security) level often results in unnecessary cost increases. For example, Governor of Niigata has not agreed to restart Kashiwazaki-Kariha because TEPCO cannot
130
U.S. Nuclear Regulatory Commission. Glossary, https://www.nrc.gov/reading-rm/basic-ref/glossary/defensein-depth.html.

74JAPAN’S ENERGY CONUNDRUM

obtain the ANSHIN of people in Niigata. If TEPCO should sell Kashiwazaki-Kariha, forexample, to Kansai Electric Power Company (KEPCO), the Governor would agree torestart it. The NPP’s ANZEN will not change by this sale but ANSHIN of the people
would increase. TEPCO is no longer credible as a nuclear operator and can only survive
by becoming a power transmission company in all of Japan and by giving up power
generation. The establishment of JERA, the joint thermal power company by TEPCO and
Chubu Electric Power Company, is the first step.

Economics of LWRs
Large scale LWRs are an economic base-load power source. Operators achieve an
economy of scale by increasing the size of the reactors and their generation capacity.
Reactors started out with 250 megawatts (MWe) in 1960s and then increased to 1,000
MWe in 1970s. Third Generation Advanced BWRs reached 1,350 MWe in 1990s. Westinghouse’s Advanced PWR is 1,200-1,400 MWe while the European PWR (EPR) in Finland is
1,700 MWe. By introducing larger reactors, power companies theoretically could reduce
the unit cost of electricity generation. The overnight construction cost of a new nuclear
power plant today varies widely from $2,000/kW for Generation II model in China to$7,000/kW for new European Generation III models according to the IEA’s 2004 World
Energy Outlook. However, generally speaking, overnight costs are rising due to more
and more stringent safety rules. China’s overnight cost (the cost of a project as if nointerest were incurred during its construction) has risen from $2,000 level to over $3,000/
kW according to recent research by the Japan Electric Power Information Center, Inc.
(JEPIC).
In March 2017, Westinghouse Electric Company filed for the Chapter 11 bankruptcy
protection due to the enormous cost overruns in construction of its AP1000 reactors
in Georgia and South Carolina. The U.S. Government is providing $8.3 billion of loan
guarantees, but the construction costs would end up over $10 billion for these reactors.
The overnight costs of construction can be contained if reactors are deployed in amore standardized manner with limited models and designs. Historical data compiledby the IEA provides a clear comparison between the United States and France (Figure5). While unit overnight costs in the United States have been rising quickly, France
succeeded in suppressing overnight cost increases for years by limiting the reactor models and designs under a single operator, AREVA. The high cost of new French EPRs is
because they are first-of-a-kind Generation III reactors. Korea, China and Russia also are
successfully containing construction cost increases through standardized deployment.
Japan as well as the United States did the opposite.
It is possible to group Japanese utilities by their reactor type. The PWR group is
Kansai, Kyushu, Shikoku and Hokkaido. The BWR group is Tokyo, Chubu, Tohoku,
Hokuriku and Chugoku. Japan Atomic Power operates both types. Even in the samegroup, detailed designs are each slightly different even by the same vendor. Deploying
two different designs, PWRs and BWRs, also might have increased system costs andrisks.
Developers of small modular reactors (SMRs) seek cost reduction through standardized fabrication in spite of possible higher unit costs incurred by giving up the
economies of scale of large reactors. SMR developers also seek to reduce licensing costs

CHAPTER SEVEN

75

by speeding up the licensing process by standardized designs. Will the SMR economic
model work and by how much? We have to wait and see but whether it is automobiles
or cameras, mass-produced and standardized designed goods have proven their safety,
cost effectiveness and higher quality.

Figure 5: Trends in Overnight Construction Costs for U.S. and French Nuclear Power Plants

Source: IEA, WEO-2014

Overnight cost is an important element in determining the total financial cost of
power plants. However, there are many other elements to consider. The levelized costof electricity generation (LCOE) calculates the cost of generation for the total lifetimeof a newly built plant. Nuclear power tends to face more stringent regulatory processes
and political difficulties that result in a longer planning and construction period. Thus,
the pay-off period needs to be longer to cover costs. The capacity utilization of power
plants is another important factor that can shorten or lengthen the pay-off period. A
lengthy process of licensing new technologies can increase costs and uncertainty. Afterthe 9.11 terrorist attack and the Fukushima accident, regulatory authorities around theworld established severer safety standards and licensing procedures. Japanese regulatory
authorities set very stringent safety standards and even did not allow reactors shut down
for maintenance to restart until they passed the new standards. Some other countries
criticized these standards as too stringent and costly to implement relative to the global
standards set by the International Atomic Energy Agency (IAEA). After the Fukushima
accident, building new reactors faces much political uncertainty. LCOEs also have risen
significantly. In addition, it is more and more evident that building large LWRs will bevery difficult if not impossible in liberalized power markets.
The IEA compared different cost factors and analyzed their sensitivity to the total
costs. The average generating cost for the base case is set at $90/MWh in 2014 (Figure
6). Cost of capital and overnight cost play relatively more important roles due to thelong-term nature of the investment. On the other hand, decommissioning cost is smaller.

76JAPAN’S ENERGY CONUNDRUM

In the following sections, let me compare the cost of nuclear power with gas and coal,and then with renewables.

Figure 6: Sensitivity of Nuclear Generation Costs

Source: IEA WEO-2014

Challenge of the Shale Gas Revolution
In the United States, there are many nuclear plants closing early before the endof their lifetimes because of very inexpensive natural gas. The “Shale Gas Revolution”
in the United States in recent years created a very cost competitive environment for
Combined Cycle Gas Turbines (CCGTs). The unit generation cost of existing nuclear
plants in the United States is about $40-50/MWh and that of new nuclear plants is over
$100/MWh. At the same time, CCGTs cost about $40-60/MWh. (See Figure 7.) New
CCGT plants are the most competitive and, as a result, some existing costlier nuclear
power plants are shutting down. In Japan, the natural gas price is at least double the U.S.
price because Japan imports its natural gas as LNG and must pay the added liquefaction
and transportation costs. Consequently, the existing Japanese nuclear power plants may
still be competitive as a base-load power source when compared to gas thermal power.
In China and Europe, the competitiveness of nuclear plants depends on coal and gas
prices. In China, if coal is less than $90/ton, coal power without carbon capture andstorage (CCS) is more competitive. In Europe, if gas is less than $13/MBtu (million
British thermal units), CCGT is more competitive (Figure 8-1).

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Figure 7: LCOE Generation Cost in the United States

Source: Clearpath

Figure 8-1: Electricity Price Sensitivity to Fuel Prices

Source: IEA WEO-2014
Note: IEA assumptions: U.S. Gas High (H) $10/MBtu, Medium (M) $7, Low (L) $4; U.S. Coal H $90/ton, M $60/ton, L $30/
ton; EU Gas H $15/MBtu, M $12, L $9; EU Coal H $140/ton, M $110, L $80; China Gas H $14/MBtu, M $11, L $8; China Coal
H $120/ton, M $90, L $60.

Carbon pricing is another important element to include in discussing the future competitiveness of different types of electricity generation. Global warming and sustainability
awareness will gradually force countries to implement either explicit or implicit carbon
pricing mechanisms. Nuclear and renewables are carbon free energy sources. Figure
8-2 shows IEA analysis of the effect of CO2 pricing on the relative cost of nuclear togas and coal. Even with a carbon price of $60/ton of CO2, U.S. nuclear cannot compete

78JAPAN’S ENERGY CONUNDRUM

with natural gas. New York and Illinois decided to provide support for nuclear power.
Without significant support measures such as exist for renewables, nuclear power in
the United States cannot compete with fossil fuels. On the other hand, nuclear could becompetitive against coal and gas in Europe and China with carbon price levels estimatedin the EU as $50/ton and in China as $25/ton. Governments can create a level playing
field for nuclear power if they so wish.

Figure 8-2: Sensitivity to CO2 Prices

Source: IEA WEO-2014
Note: IEA Assumptions: U.S. High (H) $60/ton, Medium (M) $30, Low (L) $0; EU H $65, M $35, L $5; China H $50, M $25, L $0.

Challenge of the Renewables — the Solar Revolution
Challenges from renewables are getting tougher. One reason is that renewables
benefit from clean energy support measures like feed-in-tariffs, renewable portfolio
standards, etc. In addition, solar PV and wind technologies have progressed very rapidly
driving down costs so that auctions for solar and wind power in some countries areyielding surprisingly inexpensive costs.
The IEA says in its World Energy Outlook 2017 that solar PV is on track to be thecheapest source of new electricity in many countries. Electrification will advance withelectric vehicles (EVs) and the digitalization of economies resulting in radical structuralchange in the power sector.
In 2016, renewable power capacity additions exceeded that of all fossil fuels. This isa turning point for the power sector. Renewables will account for 60 percent of global
capacity additions until 2040 in the New Policies Scenario in the IEA’s WEO-2017. Solaris the clear winner among all energy sources (Figure 9). The IEA says that renewables
are a global phenomenon and will represent the majority of capacity additions up to2040 in most regions of the world. How then can nuclear power compete or co-exist
with renewables?
The IEA’s Energy Technology Perspective (ETP) 2017 says that by 2016, almost 70
countries employed auction/tender schemes to determine support levels for renewables,
compared with fewer than 20 in 2010. In Chile and the United Arab Emirates in 2016,

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solar PV developers signed contracts for projects at below $30/MWh, a global record
low. In Mexico’s energy auctions, winning bids ranged from $28/MWh to $55/MWhfor both solar PV and onshore wind (Figure 10). In 2016, the global weighted average
capital cost of solar PV fell by 20 percent, compared with 2015. Solar cost is changing
day-to-day; a recent auction in the Middle East turned out to be less than $20/MWh. The
solar revolution may change the game totally and globally. Cost of batteries and otherpower storage technologies also are likely to decline further, enabling renewables to bea base-load power in the near future. On the other hand, if LWR’s LCOE is over $100/
MWh and rises higher, it is very likely that LWRs can no longer compete with renewables
without substantial public support. The IEA WEO-2014 says the United Kingdom’s Hinkley Point C NPP (which would be the first new unit constructed since 1995) required
government support called a “contract for difference” which guarantees a price of GBP£92.5/MWh ($145/MWh) for the electricity the plant produces over a period of 35 years.
If subsidies have to expand further in the future, it could be politically very difficult tosustain the support.

Figure 9: Global Installed Power Capacity Additions by Type in the New Policies Scenario

Source: IEA WEO-2017

Figure 10: Solar PV LCOE and Contract Prices

Source: IEA ETP-2017

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The IEA WEO-2017 predicts that nuclear capacity will grow from 413 GW in 2016 to
520 GW in 2040. Figure 11 shows that, while the nuclear capacity addition looks much
more modest than other sources, it will be an additional 10 GW of capacity added every
year until 2040.

Figure 11: Global Annual Addition and Reduction ofPower Capacities in New Policies Scenario

Source: IEA WEO-2017

The EU currently leads globally in nuclear capacity followed by the United States.
The IEA’s new policies scenario (the likely scenario), tells us that by 2030 China will
triple its capacity and become the leader, India will be the fourth and OECD countries
stagnate. The EU will lose a third of its capacity by 2040 due to policy changes inGermany, Belgium, France and Switzerland. The United States will stay at second butwith much reduced capacity. Japan gradually will restart some of its shutdown reactors
but can only recover to 30 GW, more than a third below the level prior to the Fukushima
accident (Figure 12).

Figure 12: Top Five regions of Installed Nuclear Power Capacity in New Policies Scenario

Source: IEA WEO-2017

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As part of its 13th Five Year Plan, China has an ambitious goal to expand nuclear
power from 34 GW in 2016 to 58 GW by 2020, and plans for up to 150 GW by 2030.
China continues to complete its plants currently under construction but nuclear power
seems to be getting less competitive even in China. WEO-2017, in fact, expects thatinvestment in nuclear power will increase until 2030 but gradually decline thereafter.
How long can China maintain its ambitious plan?

Challenge of the Sustainable Development Goals (SDGs): the Energy Revolution
In order to achieve a sustainable future, the world needs revolutionary changes inthe energy sector. Globally, electrification will progress further and clean energy willgrow much faster. The Sustainable Development Scenario of the IEA WEO-2017 tells
us that to achieve two degree Celsius atmospheric temperature rise containment, lessair pollution and universal energy access, we need to double today’s energy efficiency,
build more than 3,250 GW of solar power and put 875 million electric vehicles (EVs) onroad by 2040. This means that 60 percent of electricity generation needs to come fromrenewables and 40 percent of car stock in 2040 is electric. Batteries on EVs will stabilize
volatile renewables by providing a secondary storage system for electricity. (See theChina case described in the next section.) Decentralized power systems will enable amuch more efficient and effective role for renewables. Coal and oil demand will peak in
2020s.
As for nuclear, the IEA sets a challenging assumption: we need to increase thenuclear share of electricity generation from 13 percent in 2016 to 23 percent by 2040,
reaching 655 GW, about a quarter more than in its New Policies Scenario (Figure 13).
This means countries must build an additional 20 GW of nuclear power every year. In
1960s and 1970s, we did build more than twenty reactors a year. However, after the
major accidents at TMI, Chernobyl and Fukushima, it will be very difficult to get public
acceptance to build enough LWRs in OECD countries even to replace retiring reactors.
The IEA calculated that globally 200 out of the 434 reactors could be retired by 2040.
Retirements will happen mainly in Europe, the United States, Russia and Japan.
There are many questions to address before the Japanese public accepts such afuture for nuclear power. After the Fukushima accident, safety is the primary concern ofthe public. However, passive safety features are not yet operational in LWRs. Operating
LWRs are producing radioactive spent fuels but disposal sites are not yet determined inmany countries. Addressing back-end issues of the nuclear fuel cycle such as decommissioning old reactors, including the destroyed Fukushima reactors, and how and whereto dispose radioactive toxic waste is essential to recover the public confidence. Nuclear
should also fit into an increasingly decentralized/distributed power supply. In order toachieve the IEA targets, we quickly need to make a paradigm change to Generation IV
reactors in order to have “Sustainable Nuclear Power.”

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Figure 13: Power Generation and Capacity Share in the Sustainable Development Scenario

Source: IEA WEO-2017

Challenge of Electrification and Global Competition
Electrification will continue. The IEA’s New Policies Scenario posits that electricity
demand will grow 60 percent by 2040 and that over 85 percent of global demand growth
will be in developing economies. India will add as much electricity consumption as total
current European demand and China will add as much as total current U.S. demand(Figure 14). Digitalization, service sector-led growth, cooling for housing and EVs will
drive the demand.
China is the game changer for the “Energy Revolution.” Battery storage, particularly
EV batteries, can play a role in China’s electricity future as costs decline. For example in
China, IEA’s WEO-2017 New Policies Scenario says that, with annual sales of light-duty
EVs projected to rapidly rise from 1.8 million in 2020 to 9.5 million by 2040, 35 GW ofbattery capacity could be available for grid applications by 2030 alone, and almost 70
GW by 2040. If the Sustainable Development Scenario happens, the number of EVs in
China in 2040 would be 200 million.

Figure 14: Total Electricity Generation in 2016 and Growth to 2040 in New Policies Scenario

Source: IEA WEO-2017

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Therefore, it is imperative for countries to have inexpensive electricity to survive
global industrial competition. What matters is the total cost of electricity rather than
the individual cost of different energy sources. Competition will drive high cost powersources out of the power mix. For example, in China, new coal and gas-fired power
plants cost will increase due to fuel, labor and CO2 costs. The IEA’s WEO-2017 saysthat the average LCOE from utility scale solar PV currently is over $100/MWh and notcost-competitive without subsidies. However, due to falling costs, the average solar PV
project will become less expensive than both new and existing gas-fired power plants
by 2020, and new coal-fired capacity and onshore wind by 2030. By 2040, solar PV willbe the cheapest form of electricity generation in China.
There are significant differences in power generation costs across regions. Russia,
Canada, China and the United States are at the lower end, while Japan, the EU and Korea
are at the higher end because they are energy importers. The latter group’s competitiveness may suffer in coming years if electricity costs continue to be higher. Europe seems
to be withdrawing from nuclear. Can nuclear power survive in Japan or Korea? Howabout in China? (See Figure 15.)

Figure 15: Average Power Generation Costs by Region

Source: IEA WEO-2017

Collective Energy Security and Sustainability
While the power mix is highly diverse country by country, the EU overall enjoys
a self-sufficiency rate of 50 percent (Figure 16). Those countries without fossil fuels or
many renewables such as France, Slovakia and Belgium use nuclear power. By connecting power lines and gas pipelines, the EU can achieve collective energy security andsustainability. The largest beneficiary is Germany as it located in the middle of Europe.
After the Fukushima accident, the German government decided promptly to phase out
nuclear power by 2022. However, Germany can import electricity generated by nuclear
power from France and trade renewables with the neighboring countries to help reduce
generation cost. Germany’s geographic advantage enables it to phase out nuclear power
and use more renewables. Japan and Korea do not have this advantage, as their electricity grids do not connect with neighbors. Nuclear therefore has a more important role to
play.

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JAPAN’S ENERGY CONUNDRUM

Figure 16: Ranking of Countries by Energy Sufficiency by Fuels in 2013

Source: IEA

Japan’s situation is even more serious because grid connectivity between her two
power systems is very weak. Japan for all practical purposes is separated into two
frequency zones, 50 hertz in the east and 60 hertz in the west (Figure 17). The IEA haslong recommended Japan unify the frequency zones and strengthen connectivity for thesake of both security and sustainability. However, the government has not followed that
advice, which contributed to the Fukushima blackout. There was enough extra capacity
in western Japan but those utilities could not transmit to the east where the accident
occurred due to the weak connection. In addition, the lack of connectivity hampers the
expansion of renewables. Japan introduced the ambitious feed-in-tariffs and the numberof new solar PV projects has grown rapidly. Yet, actual solar generation has been limited
because of the lack of physical connectivity as well as the unwillingness of utilities to use
renewables. The unification of frequency zones has never happened because of powercompany opposition. The power companies, established as regional monopolies, did
not want the tougher competition that would result from connecting with each other andfrom new market entrants. It remains to be seen how this issue plays out with Japan’sderegulation of its electricity market.
After the Fukushima accident, Japan’s energy market is undergoing revolutionarychanges. The nuclear shutdown continues, compensated for by high cost imported gas
and oil. A very favorable feed-in-tariff is encouraging renewables. Globally, the cost of
renewables is declining rapidly. Japan nationalized its largest power company, TEPCO.
Power market reform “unbundling transmission and generation” has occurred.

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Figure 17: Lack of Grid Connectivity in Japan

Source: METI’s Agency for Natural Resources and Energy, the Federation of Electric Power Companies of Japan, the ElectricPower System Council of Japan, the International Energy Agency

The power system must still undergo further transformation. A window of opportunity for strengthening international connectivity exists. Several proposals to connect
Japan’s power grids with its neighbors have appeared. Among them, the proposals of
Masayoshi Son of Softbank and Liu Zhenya of China’s State Grid of China are worth
mentioning. They respectively are the “Asia Super Ring” and the “Global Energy Interconnection.” Softbank, State Grid, KEPCO of Korea and Rosseti of Russia established ajoint venture that did a feasibility study on how to connect Japan with Russia-China-Korea by 2 GW high-voltage direct-current (HVDC) power lines and how to import solar
generated electricity from Mongolia. Russian President Putin endorsed the project atthe 2016 Vladivostok Far Eastern Economic Summit. Mr. Son declared that power lines
should be connected by 2020. If it happens, it will be the first step towards “Collective
Security and Sustainability in Asia” similar to the European model. If Japanese utilities
have to compete in such large market, they may become much more competitive just as
European utilities did under the new framework of European Energy Union.

Does Nuclear Matter?
I suggest that yes, it does. Operating nuclear power plants does have risks associated with severe accidents such as radioactive contamination and resulting public healthproblems. However, the zero nuclear option also has risks.
First, if we use fossil fuels for power generation instead of nuclear, there will be
more CO2, aggravating global climate change. Moreover, pollutants from some fossil
sources carry public health risks, causing millions of deaths. Coal is the most dangerous energy source due to air pollution that causes premature deaths from respiratory

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illnesses. On the other hand, renewables with effective storage technologies can also
play a role similar to nuclear creating a cleaner environment less expensively. However,until there can be full utilization of energy storage technologies, nuclear continues tobe important. The effective stabilization of the power supply necessitates diversified
sources and connectivity. The real question is what are the costs and benefits that would
legitimize nuclear power?
Second, for countries such as Japan or Korea who are major importers of fossil fuelsfrom the Middle East, the zero nuclear options put at risk a stable energy supply due
to possible disruptions by geopolitical events and by natural disasters. Figure 18 shows
oil and gas import dependency by country. The United States likely will achieve energy
independence through the shale revolution. The IEA WEO-2017 says the United States
will be a net exporter of oil by the end of the 2020s and the largest exporter of LNG by
the middle of the 2020s. On the other hand, Japan and Korea are now and continue tobe 100 percent import dependent for oil and gas. Therefore, it is suicidal for Japan and
Korea to phase out nuclear power quickly. Nuclear power contributes to the diversity ofenergy supply and hence both countries’ energy security. Restarting shutdown nuclear
plants in Japan also is important to save significant imported fuel costs: the shutdown ofreactors after the Fukushima accident cost Japan on average more than one trillion yen,
about ten billion U.S. dollars, a year for additional fossil fuel imports.
Nuclear is certainly a quasi-indigenous source but renewables are indigenous. Japan
can also import electricity and diversify by connecting grids. The question should be thecost and benefit of energy security provided by nuclear power.

Figure 18: Oil and Gas Import Dependency by Countries

Source: IEA

Third, China, India and other emerging countries will continue building new reactors whether or not Japan shuts down its nuclear power. Possible accidents in China or

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87

Korea could send radioactive plumes over Japan. Japan’s experience and the lessons ofFukushima will help safer operation in these countries. Rather than giving up nuclear
power, Japan should improve the safety of its operations as well as ensure proper regulation. It also should keep advising nuclear newcomers as a global model of the peacefuland safe use of nuclear power. There are valid arguments in favor of maintaining LWRs
in Japan as long as China or Korea continue the LWR paradigm.
Fourth, nuclear power has national security implications. Joseph Nye and Richard
Armitage mentioned their serious concern that a nuclear-free Japan will drift toward
being a tier-two nation with a negative affect on the U.S.-Japan alliance:131“For such an alliance to exist, the United States and Japan will need tocome to it from the perspective, and as the embodiment, of tier-one
nations. In our view, tier-one nations have significant economic weight,
capable military forces, global vision, and demonstrated leadership oninternational concerns. Although there are areas in which the UnitedStates can better support the alliance, we have no doubt of the UnitedStates’ continuing tier-one status. For Japan, however, there is a decision to be made. Does Japan desire to continue to be a tier-one nation,or is she content to drift into tier-two status?
“While the people of Japan have demonstrated remarkable national
unity in reducing energy consumption and setting the world’s highest
standards for energy efficiency, a lack of nuclear energy in the nearterm will have serious repercussions for Japan.
“The 3-11 tragedy should not become the basis for a greater economicand environmental decline. Safe, clean, responsibly developed andutilized nuclear power constitutes an essential element in Japan’s comprehensive security. In this regard, U.S.-Japan cooperation on nuclear
research and development is essential.”
After the Fukushima accident and the rapid deployment of inexpensive renewables,some may no longer consider LWRs a safe, clean and cheap electric power source. Yet,given recent geopolitical developments in Northeast Asia, eliminating Japan’s nuclear
capability could be very unwise. If so, whether and how we should maintain Japan’s
nuclear capability needs to include the national security perspective as part of a serious
public discussion. Japan will never ever build nuclear weapons, and yet being suspectedof doing so by some of its neighbors, is probably the strongest national security reason
for Japan to continue to use nuclear power.

Small Modular Reactors: the Sustainable Nuclear Power Paradigm
Small Modular Generation IV Reactors might be the alternative answer to LWRs.
Since they built identically in factories, regulators could provide a single license for all
reactors built in the same series. Reduced licensing transaction costs may offset theirsmaller economies of scale derived from their smaller sizes. Reduced financial burdens
may facilitate smaller utilities, small localities and emerging countries to use standardized
131
Joseph Nye and Richard Armitage. The U.S.-Japan Alliance Report, presentation at Center for Strategic andInternational Studies (CSIS), August 10, 2012.

88JAPAN’S ENERGY CONUNDRUM

SMRs in cases where they would not consider a LWR. Standardization is the key forhigher safety and lower costs. SMRs may provide another valuable trait by enabling
frequent changes in their load factor leading to a friendly co-existence with volatilerenewables. SMRs also may offer a new paradigm of decentralized (distributed) nuclear
power. A large reactor with high initial costs must operate as base-load power source. It
is most efficient connected to, and supplying, a large grid, which was the LWR paradigm
prior to Generation III reactors. China and India may continue this paradigm due torelatively lower construction costs and rapidly growing demand for carbon and pollutant
free electricity by their urban areas. Nevertheless, it is time for OECD nations to moveinto a Generation IV advanced reactor paradigm.
Generation IV reactors have a variety of technologies but with common featuresof passive safety, modularity, proliferation resistance, easy management and less needfor frequent replacement of spent fuels. (See Figure 19.) There are also many small
venture companies in the pipeline developing various advanced Generation IV nuclear
technologies varying in coolant, fuel type and modularity as depicted in Figure 20.

Figure 19: Generations of Nuclear Energy

Source: Generation IV International ForumThe biggest hurdle for these new technologies is the licensing process. Predictable
licensing is therefore the first issue to be resolved. The process should be shortened andoperate as an “enabling regulation” such as that which Canada is trying to implement.
Many SMR nuclear venture companies are seeking a Canadian license, hoping for fasterapproval that could lead to demonstrations and perhaps facilitate faster licensing in othercountries.

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Figure 20: State of Play Among Nuclear Fission Innovators

Source: Clearpath

Conclusion
Dr. Takashi Nagai was a Professor at Nagasaki University in 1945 when the atomic
bomb fell. He exemplifies the Japanese people’s resilience, courage, and belief in science. Despite suffering a severed temporal artery from the bomb, he went to help othervictims even before going home. Once he got home, he found his house destroyed andhis wife dead. He spent weeks in the hospital where he nearly died from his injuries.
However, just months after the atom bomb dropped, he said:132“Everything was finished. Our mother land was defeated. Our university
had collapsed and classrooms were reduced to ashes. We, one by one,were wounded and fell. The houses we lived in were burned down,
the clothes we wore were blown up, and our families were either deador injured. What are we going to say? We only wish to never repeat
this tragedy with the human race. We should utilize the principle of theatomic bomb. Go forward in the research of atomic energy contributing
to the progress of civilization. Devil will then be transformed to fortune(Wazawai tenjite Fukutonasu). The world civilization will change withthe utilization of atomic energy. If a new and fortunate world can bemade, the souls of so many victims will rest in peace.”
The Fukushima accident was a huge tragedy. The nuclear community and the Japanese government lost the public’s trust. Japan lost the world’s trust in her technological

Quotation from Dr. Yoichi Fujii-e, Tokyo Institute of Technology, in Nuclear Fission Energy Systems to be
explored for the Future, February 17, 2016 at https://www.jaea.go.jp/news/symposium/RRW2016/shiryo/e02.
pdf.

132

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capability. Yet, if we solve the remaining problems of the Fukushima by building a
Generation IV Reactor as outlined in the special proposal found just after this chapter,I believe we may regain that trust and transform the devil to fortune just as Dr. Takashi
Nagai said after the tragedy of Nagasaki.

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A Special Proposal for U.S.-Japan Nuclear Cooperation
Nobuo TANAKA
Chairman, Sasakawa Peace Foundation

The Integral Fast Reactor
I propose we build a small Integral Fast Reactor (IFR) at the Fukushima Daini(Second) Nuclear Power Plant (NPP) located 10 kilometers south of the Fukushima
Daiichi (First) NPP for experimental use to solve the debris issue. The Sasakawa Peace
Foundation did a detailed feasibility study of this idea in 2016.133 Total cost of construction of an IFR would be $2 to $3 billion and would reduce the transuranium (TRU) in
the debris by a third in 25 years. How would this work?
The U.S. Department of Energy’s Argonne National Laboratory developed a Generation IV technology called the Integral Fast Reactor (IFR). A commercial version is the
S-PRISM of GE-Hitachi Nuclear Energy. The IFR is a fast reactor with a sodium coolant
and metal fuel. Argonne National Laboratory built the prototype, the EBR-II in 1964.134
Argonne also successfully used pyroprocessing to treat, recover and recycle uranium
and plutonium to EBR-II.
The IFR features include an inexhaustible energy supply, inherent passive safety, along-term waste management solution, proliferation resistance and economic fuel cycle
closure. Scientists proved its passive safety in a 1986 experiment that had conditions
very similar to the Fukushima accident, namely total plant blackout. Figure 1 depicts thetest result. The reactor core temperature rose quickly at first but gradually came down
without human intervention.

Figure 1: Loss-of-flow without Scram Test in EBR-II

Source: Argonne National Laboratory

This process could reduce the radio toxicity of high-level spent fuel waste to thelevel of natural uranium level within 300 years compared to 300,000 years it would
133
Sasakawa Peace Foundation. Technical Feasibility of an Integral Fast Reactor (IFR) as a Future Option
for Fast Reactor Cycles – Integrate a Small Metal-Fueled Fast Reactor and Pyroprocessing Facilities, November
30, 2106 at https://spfusa.org/research/technical-feasibility-integral-fast-reactor-ifr-future-option-fast-reactor-­cycles/.
134
More on the history of the EBR-II is at http://www.ne.anl.gov/About/reactors/EBR2-NN-2004-2-2.pdf.

92JAPAN’S ENERGY CONUNDRUM

take using pyroprocessing technology. Removal of uranium, plutonium and transuranics(Minor Actinides or MA) for burning in the fast reactor makes a 300,000-year problem
a 300-year problem. Politically it is much easier to find a high-level waste disposal orstorage site for 300 years rather than 300,000 years. (See Figure 2.)

Figure 2: High Level Waste Disposal Issue

Source: Hitachi

Figure 3 shows an image of this impressive technology. As the IFR is a closed system, plutonium will not have to move from the site. This also reduces the risk of seizure
by a terrorist. In addition, pyroprocessing separates the MA and plutonium from otherfission products. MA’s high radio toxicity is more proliferation resistant than products
from PUREX chemical plutonium separation technology, another separation technology
used by all current reprocessing plants. Figure 4 shows the commercial version of IFR,
the S-PRISM.

Figure 3: Image of Integral Fast Reactor

Source: Argonne National Laboratory

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Figure 4: GE-Hitachi Nuclear Energy’s S-PRISM

Source: GE-Hitachi

Argonne National Laboratory calculated the cost of building the pyroprocessing unit
as one-fifth the cost of an aqueous reprocessing unit such as PUREX. Japan’s Rokkasho
Reprocessing plant used PUREX technology imported from France. Utilities spent tens ofbillions of dollars to build the facility but it is not yet completed.
Another advantage of IFR is its possible application to Fukushima decommissioning.
With current technology, workers must remove the melted down debris from the siterather than processing it on-site. No prefectures will accept the debris, so it must betreated in Fukushima. Pyroprocessing is the most promising technology to separate
plutonium, uranium and MA from the debris. Then a small fast reactor will burn them tomake 300-year waste. Figure 5 depicts the possible debris reduction scheme.
Successfully accomplishing this small IFR experiment in Fukushima would provide amodel of sustainable nuclear power for Japan and the United States. In Japanese nuclear
power plants, spent fuels accumulate in the cooling pools at reactor sites or in the drycasks waiting for disposal or reprocessing. The IFR would burn plutonium and MA fromthe spent fuels and reduce radio toxicity to 300 years at the nuclear sites. The concept isan “atomic incinerator.” It burns the radioactive waste, and results in safer residuals andgenerates power.
The Japanese public will not easily accept the restart of shutdown LWRs without aclearly defined solution for the decommissioning and decontamination of Fukushima
Daiichi Nuclear Power Plant and a real sustainable alternative to the LWR paradigm
proposed. The IFR experiment in Fukushima would be the first step.
As the United States developed the IFR, we need to organize an international collaborative project between Japan and the United States. The U.S. Navy helped Japanafter the Great Eastern Japan Earthquake and Tsunami through Operation “Tomodachi(Friendship).” We could call this project Operation “Tomodachi Part 2.” The U.S.-Japan
Nuclear 123 Agreement will come to the end of its original term in July 2018. Bothgovernments have agreed to extend it automatically. U.S.-Japan cooperation on an IFR

94JAPAN’S ENERGY CONUNDRUM

under the extended 123 Agreement would provide a great opportunity to showcase a
new model for sustainable nuclear power. The Republic of Korea also is researchingan advanced reactor using this technology. Korea is undertaking joint research with
the United States to be completed in 2020 at the U.S. Department of Energy’s Idaho
National Laboratory, opening the possibility that eventually the bilateral IFR project
could be trilateral. As the IFR has strong nuclear proliferation resistant characteristics,
this coalition may open the gate for nuclear newcomers who wish to be peaceful andsustainable users of the nuclear power.

Figure 5: Debris Processing Scheme and TRU Reductions

Source: Sasakawa Peace Foundation, Technical Feasibility of an Integral Fast Reactor (IFR) as a Future Option for Fast Reactor
Cycles -Integrate a Small Metal-Fueled Fast Reactor and Pyroprocessing Facilities, November 30, 2106.

PART 3:

INFLUENCE OF DEMAND
AND PRODUCTIVITY

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CHAPTER EIGHT

97

Chapter Eight
The Rise of Energy Efficiency
Yukari Niwa YAMASHITA
Board Member,The Institute of Energy Economics, Japan

Introduction
Japan has developed its energy efficiency and conservation135 policies over time
to one of the most advanced levels in the world. Even so, the quest for better andmore effective energy efficiency policies and measures continues for Japan. Expected
contribution from energy efficiency improvement to achieve the Paris Agreement target(i.e. Intended Nationally Determined Contribution or INDC) for Japan is as big as what
was achieved during the post Oil Crises period; it is not an easy target. This chapter
provides an overview of the development of Japan’s energy efficiency and conservation
policies. It also explores some of the implications for Japan-U.S. collaboration towards a
low-carbon society.

Pre-History of Japan’s Energy Conservation Act
Japan is known as the world’s energy efficiency front-runner. The reason for thisstatus is rather simple; the country is not well endowed with domestic energy resources.
Consequently, it must watch its energy use because most of it must be imported fromabroad.
The history of energy efficiency and conservation (shortened to “energy saving”
in the rest of this chapter) goes back to the World War I (WWI) period. Thus, it has acentury of history in Japan. Because of a coal price hike in the late 1910s, the shortage ofdomestic coal supply encouraged boiler experts to start a movement to share know-how
on “heat management” in the Osaka area. The objective was not only to improve boilers’
efficiencies to save coal use, but also to reduce or prevent particulate emissions, asmany of the factories were located near downtown Osaka (a big commercial city that isJapan’s second largest urban city, even now). There was a recognition that the air quality
was deteriorating. This century old situation is very similar to the issues facing today’s
emerging and newly industrialized countries, such as China, Indonesia and India.
The sharing of know-how included several activities that are still suitable today forthe development of good energy management practices in the manufacturing industries.
For example, study groups formed to share experiences and good practices, the Osaka
local government founded and financed a public research institute on industrial efficiency, and officials conducted a thorough data survey to provide a solid database foranalyses. The database covered boiler ownership, stock efficiencies and documentationon the sources of lower efficiencies. They discovered that a variety of factors caused
lower efficiencies (or insufficient burning). These groups identified the factors for each135
In this chapter, “energy saving” is frequently used to represent concepts such as “energy efficiency,” “energy
efficiency and conservation” and” energy efficiency improvement.”

98JAPAN’S ENERGY CONUNDRUM

category of industries and size of boilers. These factors included the following: too shortlength of chimneys, under capacity of burning facilities and equipment, unskilled labor,
and malfunction of boilers. The unskilled laborers were recognized as the biggest factor
contributing to inefficiencies.
The Osaka-furitsu Sangyou Nouritsu Kenkyuusho (Osaka Public Research Instituteof Industrial Efficiency) spread the boiler management movement to other parts of Japan,
mainly in urban areas similar to Osaka, through the dispatch of lecturers. Tokyo and
Yokohama soon also were actively involved in the movement. As it sought to address
the shortage of coal during WWI, the level of activities was limited to a certain extent
and it did not yet reach as far as the management of steam or waste heat. On the other
hand, the energy saving movement induced the rapid deployment of meters (such as
Orsat gas analysis meter, CO2 meters, thermometers and ventilation meters) and theintroduction of newer models of boilers. It also created an atmosphere of collaboration
within each factory and among local associations; it induced the creation of regional
expert groups and introduced an award scheme to recognize skilled experts.
In 1920, the Ministry of Agriculture and Commerce founded a national research institute on fuel. In 1932, certification systems for boiler experts were introduced in Osakaand Tokyo, and scholars have identified at least 40 such individual groups in industrial
journals. Many kinds of seminars, lectures, site visits and expositions took place during
the period from 1931 to 1937.136
Thus far, the industrial need for the efficient use of coal and for better air quality inurban areas induced the energy saving movement. We cannot ignore the fact that conditions resulting from WWI and later WWII also heavily influenced it. The most crucial
reason for the rapid spread of the energy saving movement has been (and remains) thelack of sufficient domestic energy resources. With the accelerated transition from solid
to liquid fuels and without any domestic oil resources, Japan encountered even bigger
challenges to save energy.
In 1937, a newly established Department of Fuel in the Ministry of Commerce andManufacturing started a national fuel coaching activity. The conflict between Japan and
China also began in 1937 and continued into early 1940s. By the time Japan was engaged
in WWII, it was already suffering economic damage and was facing serious shortages ofboth coal and oil. Therefore, some scholars consider the energy shortage to be one of
the main reasons Japan confronted and invaded energy rich colonial states in Southeast
Asia. It is a bitter reminder for all countries never to underestimate the need for energy
security.

136
S. Kobori (2007). Japan’s Heat Management Movement and Heat Management Policies during and after theWorld War (Japanese only), Osaka University Knowledge Archive. https://ir.library.osaka-u.ac.jp/repo/ouka/
all/16325/oep056_2_040.pdf.

CHAPTER EIGHT99

Oil Crises in the 1970s and the Establishment of the Energy Conservation Act137
After WWII and in the course of Japan’s economic recovery, the Ministry of Commerceand Manufacturing established the “Heat Management Rule” in 1947; it became the HeatManagement Act in 1951. The Heat Management Act succeeded all the fundamental
schemes and systems developed through the boiler management movements. After thetwo oil crises, the Ministry of International Trade and Industry (MITI)138 established theEnergy Conservation Act in 1979 to succeed the Heat Management Act which, in fact,
was the legacy of the boiler management activities that started almost 70 years earlier as
a local activity in the Osaka region.
In addition to the energy management schemes that began in Japan as early as the
1910s, quality control and industrial engineering also found their way into the Japanesemanufacturing in the 1950s. Just like energy management schemes, and typically throughgroup activities, companies incorporated these production management methods andtechniques into the manufacturing process to improve productivity while maintaining
the required quality of products. While first introduced to the manufacturing sector, they
then spread to the commercial sector, such as offices and hospitals. The basic concept
was first developed and exercised in U.S. industries as early as the 1910s, starting at theFord Motor Company. Because of the requirement for energy saving in Japan, group
activities continue and have been taken up by both energy and production management
as they work closely with each other on manufacturing and on factory floors.
The Energy Conservation Act first targeted large-scale manufacturing139 factories and,over time, slowly widened its coverage to the commercial, transport and residential
sectors. The Act has two distinctive approaches: energy management and efficiency
improvement of appliances and materials. Figure 1 shows the evolution of the Act
as coverage widened from 1979 to 2008. Continuing from these changes, there wererevisions in 2010, 2013 and then almost every year ever since. For example, every year
the government summons together a working group to discuss the details of energy
management revision, targeting a further widening of the coverage in the commercial
sector (e.g. the building sector).
The spirit behind the energy management part of the Act is to help industries andbuilding owners to identify efficiency improvement potential and systematically realize
such potential. Thus, experts actively utilize the energy management scheme to promote
data collection to address wasteful energy use and to prioritize those suitable for financial
support.140 Based on the historical development of boiler and heat management, energy
management in Japan took the bottom-up form, with group activities for productivity
improvement as well as the collection and dissemination of data and best practices for
an industrial level approach to improve each industry’s average energy efficiency. Overtime, the government broadened the coverage of the Act both in terms of the numberof designated entities and in terms of the energy types. The most recent revision goesas far as distinguishing peak electricity demand from the total electricity consumption.
The Act on the Rational Use of Energy (commonly referred to in English as the “Energy Conservation Act”).
In 1947, the Ministry of Commerce and Manufacturing changed to the Ministry of International Trade andIndustry (MITI). MITI, then, changed to the Ministry of Economy, Trade and Industry (METI) in 2001.
139
Japan’s energy statistics and balance tables define manufacturing sector to include energy-intensive industries as well as other manufacturing sectors such as assembling, food, printing, etc.
140
Many forms of financial support are available under the energy management scheme including financial
subsidies, tax reduction, interest support and free energy saving advice.
137
138

100

JAPAN’S ENERGY CONUNDRUM

This way it is possible to recognize the performance of individual companies in meeting
electricity saving requirements under power shortage situations such as that related to
the Fukushima incident.

Figure 1: Transition of the Energy Conservation Act in Japan (1973-2008)
1947 Thermal Management Act

Residential
Commercial

Industry

Transportation

1979 Establishment

Designated Energy Management Factories
Guidance for Buildings and Appliances

1983 Amendment
Licensed energy manager system
1993 Amendment
Periodical reporting
1998 Amendment

Expand coverage of factories•Heat Management
à Heat & Power Management•Industry à Commercial à Transport•Energy Management
à Appliances & Vehicles

1998 Amendment
Top Runner Program

2005 Amendment

2002 Amendment
Energy Management of
Office Buildings

2008 Amendment

2008 Amendment :Data

Integration of Heat and Power
ControlCompany based rather than plant based
regulation, cooperative energy conservation,
introduction of Bench Marking.

2005 Amendment
Reporting System on
Energy by Carriers

sharing with tenants by building
owners, coverage broaden to include
franchised chains, introduction of
Bench Marking.

2

2

Source: Compiled by the author based on information from METI’s Agency for Natural Resources and Energy.141

Industrial associations contributed greatly to the improvement of energy efficiency
for appliances as well as fuel economy for vehicles. The “Top Runner” program, thevery renowned appliance efficiency scheme, would not have been as successful without
the detailed technical data collected via such associations and collaboration from theirmember companies. The “Top Runner” program is a unique initiative where policymakers and industries explore together and mutually agree to higher efficiency improvementtargets. The meeting participants arrive at future efficiency standards through a seriesof meetings held over a period often exceeding twelve months and they ground theirdecisions on technical data. If manufacturers negotiate for lower target levels or longer
adjustment periods, the meeting participants invite them to explain their technical difficulties to achieve a higher efficiency target.

141
See for example Agency for Natural Resources and Energy. About Revision of Energy Conservation Act(“Shou Enerugi Hou no Kaisei ni tsuiste”), April 2014, http://www.enecho.meti.go.jp/category/saving_and_new/saving/summary/pdf/140401_syouenehoukaisei.pdf. (Japanese only) and ANRE (2015), documents for“Long-term Energy Outlook Sub Committee,” 10th Session (1st June 2015). http://www.meti.go.jp/english/press/2015/0716_01.html.

CHAPTER EIGHT101

In the energy management scheme, the Act requires all the designated industries
to report on their annual intensity improvement as well as on their 5-year investment
plans for energy savings. The government provides financial incentives to encourage
investment in more efficient machinery. Because of widely utilized energy management
planning, energy intensities drastically improved during and after the two oil crises,
especially in energy intensive industries such as iron and steel, chemical, cement, andpaper and pulp.142 Figure 2 shows such achievement over the two decades following thefirst oil crisis. On average, the energy intensity of the manufacturing sector improved byalmost 50 percent over these periods.143

Figure 2: Manufacturing Average and Major Industries’ Energy
Intensity Improvement in Japan (1973-1990)
120.0

Manufacturing
Iron & Steel

110.0

Chemicals
Ceramics & Cement

100.0

Paper & Pulp

90.0

80.0

70.0

60.0

91

90

89

88

87

86

85

84

83

82

81

80

79

78

77

76

75

74

73

72

71

40.0

1970

50.0

Source: IEEJ, Energy Saving in Manufacturing Sector in Japan: Examples from Oil Crises Period, (2005).

During the first decade of the Act that followed the two oil crises, investments inenergy efficiency increased rapidly in the manufacturing sector. With the support offinancial schemes, investment continued to remain robust until the late 1980s. After the
first round of robust investments, industries enjoyed a much lower energy bill from themid-1980s to the 1990s. The investment trend slowed eventually, in part due to lower
energy prices.

142
See The Institute of Energy Economics, Japan. Energy Saving in Manufacturing Sector in Japan: Examples
from Oil Crises Period, April 2005.
143
To estimate an average of overall manufacturing sector intensity, we used IIP (i.e. Index of Industrial Production) as a devisor for the Figure 2. On the other hand, for energy intensive industries, physical production(tons of paper & pulp, ethylene, steel and cement production) is the devisor. Thus, Figure 2 sets the year 1973at 100 for the comparison. Therefore, Figure 2 only compares the historical improvement of intensity for eachindividual category.

102

JAPAN’S ENERGY CONUNDRUM

Figure 3: Manufacturing Sector’s Energy Efficiency Investment in Japan (1979-1990)(Installation and construction base, million yen)
500,000

400,000

300,000

200,000

100,000

89

88

87

86

85

90
19

19

19

19

19

83

82

81

80

84

19

19

19

19

19

19

19

79

0

Source: IEEJ, Energy Saving in Manufacturing Sector in Japan: Examples from Oil Crises Period, (2005)

For the period of 1980 to 1990, the estimated outcome of energy efficiency investment
in achieving energy intensity improvements is 30 percent of the overall improvementof 35.6 percent. The other portion of improvement (i.e. 5.6 percent) came mainly fromstructural change. This means that the structural change of the manufacturing sector,
itself, had some effect on energy intensity improvement but the energy savings efforts
accounted for the majority of the improvement.

Figure 4: Estimated Impact of Energy Efficiency Improvement(Manufacturing Sector, 1980-1990)

Actual5.6%

No EE Investment after 1980
No tech innovation, constant operation
rate, constant energy consumption

30%

5.6%

Source: IEEJ, Energy Saving in Manufacturing Sector in Japan: Examples from Oil Crises Period, (2005)

CHAPTER EIGHT103

By 2010, designated factories in the manufacturing sector started struggling to meet
the annual one percent intensity improvement target, especially energy intensive industries such as iron and steel, petrochemicals, cement, and paper and pulp. The struggles
were because either their energy efficiency improvement was reaching its theoreticallimit, or their business model had to shift towards higher value-added products facing
international competition, with more energy use. The government introduced a few
changes to address such challenges in order for the manufacturing sector to keep contributing to energy efficiency improvement for the country as a whole.
The first change made was with regard to the designated base unit. The base unitchanged from by factory to by company. This change meant not only factory floor but
also the office spaces of manufacturing companies were covered. The second change
was to designate the headquarters of franchise chains (such as convenience stores andrestaurants) as a participant. This change meant that even if each store or restaurant does
not consume the threshold level of energy consumption required for designation, thewhole chain of shops or restaurants was required to follow their headquarters’ policy toimprove energy efficiency. The expected result is that eventually massive improvementsof the energy intensity as a group (i.e. franchise chain) would occur while also improving the coverage of the Act.
The third change was to introduce a “benchmark” system to the manufacturing sector. The system defines the boundary of operation and sets a universal energy intensity
indicator for each sub-sector. Universally defined common intensity indicators enabledcomparison among different companies within the same sub-sector. Those companies(and factories) which face a technological limit of efficiency improvement can provethe difference from others with indicators. The coverage of the benchmark system firstwas limited to energy intensive manufacturing industries and then gradually widened tocover the commercial sector’s sub-sector, namely convenience stores, in 2016. Discussions on widening coverage to additional industries continue.
The coverage of office buildings and convenience stores as well as restaurant chains(which are categorised into the commercial sector under Japan’s Energy ConservationAct) widened tremendously. As a result, the commercial sector coverage of the Act after
the 2010 revision widened from 30 percent to 50 percent of the total energy consumption for the sector.
The appliance energy efficiency standard scheme now covers 28 products144
including building materials (e.g., insulation and windows). The government typicallyestablishes the efficiency target for appliances for a future target year and sets it at alevel slightly higher than the currently available best products. For existing products, thetarget year established is usually for 5 years in the future. For newly targeted products,
the first target year for efficiency improvement is very often set for 10 years in the future,taking into consideration the time required to adjust product lines, etc.
Because of the way the efficiency standard target is set for the future, this scheme iscalled the “Top Runner Program.” All the manufacturers will eventually meet the higher
144
Products designated under the Top Runner Program as of 2017 are: air conditioners, lighting, LED lamps,
TVs, copying machines, computer, magnetic discs, passenger cars, freight cars, video tape recorders, refrigerators, freezers, stoves, gas cookers, gas water heaters, oil water heaters, electric toilet seat heaters, vending
machines, transformer, rice cookers, microwaves, DVD recorders, routing equipment, switching equipment,
MFPs, printers, electric water heaters (heat-pumps) and AC motors.

104JAPAN’S ENERGY CONUNDRUM

efficiency of the “top-runner” by the target year and thus all the designated products will
eventually catch up with “Top Runner” products.

Figure 5: Fuel Efficiency Improvement Trend (Shipment Base, 1980-90)
19
18

KM/L 10.15mode, Gasoline-Powered Passenger car

New Target

17

Achieved Target
ahead of schedule

16
15
14

22.8%UP

13

1999
Top Runne r

12
11
10

1975

80

85

90

95

2000

05

10

15

Source: Energy Saving in Manufacturing Sector in Japan: Examples from Oil Crises Period, The Institute of Energy Economics,
Japan (2005)

Because of the fierce competition among manufacturers, the Top Runner Programoften achieves its targets earlier than anticipated. For example, as Figure 5 shows, companies achieved the Top Runner fuel efficiency standard, introduced in April 1999 withthe target year of JFY 2010, six years ahead of time. Approximately 80 percent (shipmentbase) of gasoline passenger vehicles achieved the 2010 standard by 2004.
Combined with the labeling scheme and the retail shop recognition award, Japan’s
Top Runner Program has been proven effective in improving the stock efficiency of
appliances widely in the country. Thus, it has silently but steadily changed the way
electricity is used.

Role of Energy Saving after Fukushima
The actions taken during and after the two Oil Crises included not only energy
management but also “energy conservation.” Society uses terminology such as “energy
efficiency,” “energy conservation,” and “energy saving” rather freely and loosely. A
consensus among energy policymakers is as follows: “energy efficiency” refers to thephysical improvement of efficiency in machines, processes, appliances, and so on, and“energy conservation” mainly refers to actions that achieve reductions in energy use,
including the introduction of regulations, energy management systems, or changes
in human behaviour. Energy conservation is achieved through changing life-styles or
through people’s efforts to use less energy while possibly sacrificing some of their
comfort. “Energy saving” is used in a more relaxed way to refer to all the above.
Thus, during and immediately after the two oil crises, “energy conservation” wasvery much relevant to Japan because the country desperately had to look for and find

CHAPTER EIGHT

105

ways to save energy, as quickly as possible and as much as possible. The government
and experts informed the citizens of Japan of the seriousness of the Oil Crises andrequested them to cooperate in daily activities at home, in offices, factories, public
transport systems, shops, schools, hospitals, etc. The government issued “energy conservation advice” about most of the required activities. Some activities also had an amplified
impact due to how the information reached the public – the so-called “announcement
effect.” For example, many of us still recall that TV programs finished early and thatcommercial and business areas became dark with roof top advertisements and neonlights shutting off by midnight. These actions made us aware of the severity of thesituation.
Society never expected, though, that 35 years later the country would face a similar
situation that required us to undertake and achieve similar energy saving efforts. This
time the actions were more to save electricity than oil. Success required more information sharing with the consumers as the campaign specifically targeted the saving
during “peak” demand of electricity, “in a hurry.”145 These actions were required to avoid
huge and sudden blackouts during the period immediately after the Great Eastern Japan
Earthquake and Tsunami and in the following summer.
After the Fukushima incident, the immediate challenge in the Kanto and Tohoku
areas was to share enough information on how to reduce very quickly peak electricity
demand throughout the different clusters of customers. The government requested relevant parties to make contingency plans for “rolling blackouts,” in parallel, in order toavoid a sudden big-scale blackout caused by a power supply shortage. For example,
officials divided TEPCO’s entire service area into five groups and asked each group to
be ready for scheduled three-hour blackouts. The government scheduled such rolling
blackouts to start as early as 6:20 a.m. on Monday, March 14, 2011, three days after theGreat Eastern Japan Earthquake.
On Monday morning March 14th, office workers left their homes earlier than usualand still faced tough situations as trains either were not on schedule, not coming at allor coming already fully packed with passengers. While train operators might have felt
the potential chaos of miss-located trains ahead of time, commuters did not. The chaos
continued until mid-afternoon that day. Companies and industries quickly chose theoption of refraining from coming to the office. The effort, time and cost required toprepare for the “rolling blackout” exercise was enormous, but it took place only a few
times and for a limited number of groups. TEPCO and related parties did their best to
avoid this exercise as they considered it as a last option planned only for emergencies.146
Yet the exercises caused a lot of confusion and incurred extra costs that would nothave occurred without a plan for rolling blackouts. A very tough call for the utility andauthorities back then, though.
Taskforce teams arose to tackle every challenge. Nobody had ever experienced
or prepared for the big challenge of addressing the potential of shortages of electricity
supply in Tokyo, one of the biggest cities in the world. Figure 6 shows the summer

145
Yamashita, Y. “Japan 2011,” in Comparative Case Studies for Saving Electricity in a Hurry: Update (IEA, June2011) https://www.iea.org/publications/freepublications/publication/Saving_Electricity.pdf.
146
On April 8, 2011, policymakers decided that a basic rule is not to use rolling blackouts.

106JAPAN’S ENERGY CONUNDRUM

peak-cut target of 15 percent for TEPCO’s service area.147 It also shows that they met
the target and shaved 19 percent of the peak through efforts made by every sector. This
achievement would not have occurred if there had been no information sharing andappropriate advertisements. The most challenging part of this target was that it was aboutpeak demand and ordinary consumers of households, commercial sectors or small andmedium-sized enterprises (SMEs) were not accustomed to energy management basedon their own load curve data. They were not even aware of the magnitude and timingof their peak demand.

Figure 6: Electricity Saving Target for the TEPCO Area (Peak Demand, Summer 2011)◆Power demand at14:00（TEPCO's service area）
104kW
万kW

7000

2010

Maximum
Demand in 2010
60,000MW

2011

6000

5380万
53,800MW
5100万
51,000MW

5000

Target 15％ cut
Maximum Demand in
2010： 60,000MW
Prospect of Supply
Capability：53,800MW

4000

Necessary reduction
ratio of Demand：

3000

2000

16% average
down than
2010

Planned Blackouts
1000→大震災以降From March 11

10.3％

19% down
duringJuly-August→需要対策開始
From Elec. Saving
2011/8/30

2011/8/23

2011/8/9

2011/8/16

2011/8/2

2011/7/26

2011/7/19

2011/7/5

2011/7/12

2011/6/28

2011/6/21

2011/6/7

2011/6/14

2011/5/31

2011/5/24

2 0 1 1/ 5 / 1 7

2011/5/3

2 0 1 1 / 5/ 1 0

2011/4/26

2011/4/19

2011/4/5

2011/4/12

2011/3/29

2011/3/22

2011/3/8

2011/3/15

2011/3/1

0

Source）Made by IEEJ with Tokyo Electric Power Company (TEPCO) briefing paper data

Source: Compiled by IEEJ and TEPCO

The areas neighboring Tokyo and within the TEPCO service region include industrial districts with large-scale manufacturing industries. Those industries possess a huge
cumulative experience of energy management with experienced skilled engineers andare equipped with sophisticated “on-time” energy management data systems. On theother hand, in the downtown Tokyo area, the main large-scale customers are officebuildings and the remaining customers are small and medium-sized enterprises (SMEs),
the commercial sector and finally ordinary households. The challenge was to guide thelatter group to save their peak electricity demand.
One of the taskforce teams was responsible for estimating the different daily load
curves for each category of TEPCO’s customers. The purpose of such an estimation
was to identify the peak demand for each category of business and household type,147
Tohoku Electric Power Company and Kansai Electric Power Company also had electricity saving targets for
Summer 2011. The targets were for 15 percent and 10 percent cuts, respectively. The TEPCO area target of
15 percent was set to cover the minimum required saving of 10.3 percent and additional room to address any
happening such as an aftershock or risks of stoppage of old thermal power plants which were operated underurgent circumstances.

CHAPTER EIGHT

107

and prepare a list of prioritized actions to cut peak demand based on data. Officials
expected such up-to-date advice would supply enough information on the electricity
peak demand reduction of each category thus providing a clearer view of how mucheach should do under the national emergency electricity saving action plan. A series ofseminars took place in every part of the service area targeting the different categories
of business types (e.g., small-scale manufacturing factories, offices, shops, restaurants,
other services). The Energy Conservation Center, Japan (ECCJ) prepared lists of prioritized electricity saving actions for the different sectors and shared power saving potential
based on the load curves estimated by the Institute of Energy Economics, Japan underguidance from METI’s Agency for Natural Resources and Energy (ANRE) and the data
supplied by TEPCO.
Information service providers supplied daily and hourly power supply-demand balances via their websites as well as data displays installed in public spaces including train
stations, commercial buildings and shopping malls. TEPCO announced the daily power
balance forecast and informed their customers of the level of power saving actions
required for the following day.
All these efforts combined148 resulted in the achievement of the 2011 summer target
and the targets for winters and summers of the following seasons until 2013. Starting
2013, no target was set but requests for electricity peak-demand saving continued. The
Government of Japan reformed its Electricity Supply-Demand Emergency Response
Headquarters149 into the Study Group on the Power Supply and Demand. Ministers continued to meet twice a year to analyze the electricity supply-demand situations ahead ofsummer peak and winter peak seasons. In 2016, the government did not issue a request
for summer electricity saving exercises for the first time since the 2011 earthquake. It has
not issued winter and summer electricity saving requests since then.
METI released its revised Basic Energy Strategy in 2014 and the supporting Longterm Energy Demand and Supply Outlook in 2015. Because Japan is heavily dependenton imported energy, the revised Strategy re-emphasized the importance of balancing
the three Es (i.e. Energy Security, Economic Efficiency and Environment) with “Safety”(i.e. safe use of nuclear energy) as its basis. Three concrete policy targets were set:
1) improve self-sufficiency from 20 percent (before the earthquake) to 25 percent by
2030; 2) lower electricity cost from the current level; and 3) set a GHG reduction target
which is compatible with those of the United States and the European Union. With thesethree policy goals in mind, the Strategy set the 2030 target for power generation mix(the so-called “energy mix”) with the aim to balance the sources of power generation forJapan (at 20-22 percent from nuclear, 22-24 percent from renewables (solar, wind, etc.)
and the remaining 56 percent from fossil fuels).
An important basic assumption in the above mentioned “energy mix” is a huge electricity and energy saving. The Strategy assumes a 35 percent improvement of the energy
intensity (i.e. final energy consumption/real GDP). As the dotted red line in Figure 7
148
The energy management scheme of the Energy Conservation Act also has been amended to introduce arule where designated companies will gain scores if they introduce schemes to reduce peak consumption ofelectricity. Energy Conservation Award is a new prize for electricity saving.
149
The first meeting of the Electricity Supply-Demand Emergency Response Headquarters took place on 13
March 2011 in the evening followed by the second meeting which took place on 14 March in the morning.
It consisted of all Cabinet members. Because of the expected 10 GW of power supply shortage at that stage,
TEPCO decided to exercise a rolling blackout as early as March 13.

108JAPAN’S ENERGY CONUNDRUM

shows, the anticipated improvement is very similar to the energy saving achieved during
the period of oil crises (blue line). Without a doubt, achieving this target will be a hugechallenge for Japan.

Figure 7: Comparison of Energy Efficiency Improvement (Final Demand/Real GDP)

35%
Improvement

Source: Documents discussed at the “Long-term Energy Outlook Sub Committee,” 10th Session (June 1, 2015).

Related committees and working groups resumed their discussions to revise existing
regulations while new working groups started to introduce additional new policies andmeasures under the Energy Conservation Act. The two major areas newly targeted arebuildings and the commercial sector. For buildings, the Ministry of Land, Infrastructure
and Transport and METI collaborate in introducing energy efficiency standards to thebuilding code. New buildings must now comply with the energy efficiency standards
when applying for a building permit. As for the commercial sector, convenience stores(2017), hotels and department stores (2018) have already introduced or are scheduled
to introduce benchmarks while supermarkets, shopping centers and office buildings are
currently discussing how energy efficiency improvement could be assessed equally andeffectively.

Towards Low Carbon Society
Japan will keep striving to widen the coverage of the Energy Conservation Act andstrengthen the effectiveness of its energy saving policies and measures. Since Japan is
actively involved in relevant international or regional cooperation groups such as theEnergy Efficiency Working Party (EEWP) of the International Energy Agency (IEA) andthe Expert Group on Energy Efficiency and Conservation (EGEEC) under the Asia-Pacific
Economic Cooperation Forum (APEC), it can contribute to promoting energy efficiency
technologies worldwide by actively sharing its expertise with other countries.

CHAPTER EIGHT109

The latest world IEEJ Outlook150 estimates the emission reduction potential for theyear 2050 with robust climate change policies and advanced technologies at 14.4 gigatons (Gt) of CO2. The analysis attributes about half of the CO2 emission reduction toenergy efficiency improvements and energy conservation. The IEA recognizes “energy
efficiency” as a “hidden fuel” or the “first fuel” of the global energy system nowadays.151
Energy efficiency improvement has become an essential target of opportunity in many
countries’ policy making because saving energy feels like a new form of energy that
requires less net investment and fewer costs. Energy saving policies and measures are
introduced to address different national issues and are not limited to combating climatechange. For energy importing countries, energy security is one of the main purposes
while for emerging countries with rapidly growing urban cities and related issues, air
pollution is becoming the main issue.
Recognizing such needs, governments established the first international collaboration framework beyond the OECD or APEC in 2009. The International Partnership for
Energy Efficiency Cooperation (IPEEC) is a framework to connect countries in order toshare best practices and foster development of policies and measures to improve energy
efficiency in participating countries.152 It is also a forum for IEA member and non-member economies to share information about various bilateral and multilateral initiatives.
The Clean Energy Ministerial (CEM) is a forum that combines the leadership ofenergy ministers and the engagement from the private sector and other international
partners with year-round initiatives and campaigns to drive faster deployment of clean
energy policies and technologies worldwide. The U.S. Government launched the CEM
in 2010 and hosted the first meeting of Ministers. CEM’s objective is to address climatechange through a rapid dissemination of clean energy technologies including those forenergy efficiency improvement. Currently, CEM consists of 24 member countries and theEuropean Commission. The IEA hosts the CEM secretariat at its Paris headquarters.
The G7 (or G8) and the G20 often highlight energy efficiency as a part of theirenergy and climate policy agenda. The Gleneagles Plan of Action153 (2005) and Action
Plan for Voluntary Collaboration on Energy Efficiency (2014)154 are good examples. In
2016, the G20 adopted the Energy Efficiency Leading Programme that is the G20’s firstlong-term plan for energy efficiency.
Furthermore, energy saving is widely recognized as an essential tool for sustainable
development, addressing both energy poverty and environmental issues. The United
Nations’ global 17 Sustainable Development Goals include several energy-related goals
and Goal 12 (Responsible Consumption and Production) refers to energy saving as one
effective means to reduce ecological footprints.
150
The Institute of Energy Economics, Japan. IEEJ Outlook 2018, October 2017, http://eneken.ieej.or.jp/en/
whatsnew/427.html.
151
See International Energy Agency. Energy Efficiency Market Report 2013, https://www.iea.org/publications/
freepublications/publication/EEMR2013_free.pdf; IEA. Energy Efficiency Market Report 2016, https://www.iea.
org/eemr16/files/medium-term-energy-efficiency-2016_WEB.PDF.
152
IPEEC was founded in 2009 by the G8 (Group of 8) to serve the world’s major economies. It now includes
17 of the 20 members of the G20 (Group of 20), covering both developed and emerging economies. Among its
founding members are Brazil, Canada, China, France, Germany, Italy, Japan, Korea, Mexico, Russia, the United
Kingdom, and the United States. Since its creation, Argentina, Australia, the European Union, India, and South
Africa have also become members of IPEEC. Turkey is currently in the process of joining the partnership.
153
The G8 Summit issued a plan addressing climate change called “Gleneagles Plan of Action” on July 8, 2005.
154
The G20 tasked IPEEC to coordinate the voluntary implementation of the G20 Energy Efficiency Action Plan
in 2015.

110JAPAN’S ENERGY CONUNDRUM

Japan participates in all such major initiatives both regionally and internationally.
Japan’s longstanding experience in energy efficiency and conservation has put it at theforefront of this policy area and, as such, Japan considers joining the global efforts asessential. With increasing recognition of the effectiveness of energy saving, more andmore countries are starting to introduce energy efficiency policies and measures including energy-rich countries such as Russia and Saudi Arabia. Some countries introduced
energy efficiency policies primarily as an important part of climate change or of local
environmental measures while others do so for energy security reasons. As the coverageof policies widen, new and different policies and measures are developing. These newpolicies and measures include such things as white certificates (tradable documents
certifying attainment of a certain reduction of energy consumption), demand side management, benchmarking schemes, and energy saving certificates trading schemes (e.g.
India’s ESCerts).
Countries share new schemes and studies on technical details through internationalor regional cooperation as well as bilateral cooperation. Many countries have now introduced a similar variety of energy efficiency and conservation regulations and measures
as those of Japan. Unfortunately, the level of implementation and enforcement vary, andthus there is wide difference in achievement among even similar policies. Therefore,
there is still a lot to do in these countries. Learning from those that have been successful
is an effective shortcut to successful implementation.
Shortly before COP21, the Paris Agreement entered into force with ratification
announcements by the United States and China that brought the agreement over thethreshold (55 countries representing 55 percent of the world’s greenhouse gas emissions)needed to take effect. It is an epoch-making agreement because over 190 countries areon board together to address climate change for the first time. On the other hand, there
is still a big gap in the estimated sum of the national pledges155 and the required level ofemission reduction (mitigation) in meeting the 2°C target.
New and innovative technologies are essential and further cost reductions ofadvanced technologies are required for deeper emissions reductions. Even more importantly, energy efficiency improvement remains essential for all the countries in the world
and there are still many low hanging fruits to harvest. If we are to introduce more intermittent renewables into our power transmission systems while avoiding astronomical
investment requirements, reducing the total requirement for electricity will remain an
effective and economic tactic. International, regional and bilateral cooperation accelerate
the dissemination of existing energy efficiency technologies and the development anddiffusion of new technologies. Japan and the United States are leaders among countries
with such technologies, including those within their private sectors.
The United States consists of 50 states, all with different characteristics in energy.
Some are coal/oil/gas rich traditional energy producers. California is well known for
its aggressive energy and environment policies. Some states are connected with otherstates and neighboring countries by pipelines or power grids. The electricity market insome states has been deregulated while in others it is not. The United States offers rich155
As each country makes its national pledge keeping in consideration its own national priorities, target years
and target-setting methods vary greatly. Thus, estimates are necessary to understand the magnitude and scopeof the global total of these pledges.

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111

examples from which others can learn because of the large variety of new businessmodels and new policy frameworks, and the way in which they are introduced.
Both state level and federal level experiences in the United States are informative
and useful for the rest of the world, including for Japan. After the Fukushima incident, Japan learnt a lot from the U.S. experience on how to save electricity in a hurry.
The Californian experience taught Japan the importance of public relations activities
designed to share information with the public. Japan also learned a lot from the UnitedStates on nuclear safety regulations and from the experience of the utilities that, throughindependent safety schemes, it is possible to re-construct self-confidence and regain the
public trust, both essential for the efficient operation of nuclear power stations.
Japan’s cumulative knowledge and experiences in the area of energy efficiency
improvement combined with the United States’ advanced expertise in energy saving andthe incorporation of variable/intermittent renewable electricity, form an ideal blend toenhance the advancement of clean energy diffusion in the world. As members of themany international, regional and bilateral collaboration schemes and as long-standing
partners in the international arena, Japan and the United States have a lot to contributeindividually and by acting together.
Moreover, it is important that both Japan and the United States highly value energy
security as one of the basic building blocks of energy and climate change policy. While
the recent uncertainties surrounding the geopolitical situation in the Middle East andNorth Africa (MENA) region may not catch the full attention of many climate change
activists and environmentalists, Japan and the United States fully understand energy
security is a very important key issue for the world. With cost-effective and soundapproaches and a variety of expertise, Japan and the United States can work together togreatly contribute to the advancement of a global low-carbon society.

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JAPAN’S ENERGY CONUNDRUM

CHAPTER NINE

113

Chapter Nine
Transforming Transportation
Dr. Michael SMITKA
Professor of Economics, Washington and Lee University

Introduction
Visitors to Tokyo encounter roads jammed with vehicles, many of which are SUVs
or minivans. The buildings they enter are air conditioned and adorned with neon lights.
It does not feel like a society that places a high priority on energy efficiency.
Cars have long been central for rural residents, but in suburban Japan, they are now
also part of daily life. For those living outside of central Tokyo, the neighborhood streets
lined with mom-and-pop stores are gone, replaced by malls located as often as not on
former industrial sites. Instead of daily trips on foot or by bicycle to pick up fish andvegetables for dinner, there is now the weekend trip to get food to stock the freezer forthe coming week.
Energy data reflect this new reality even as overall domestic energy consumption
remained flat. In 2015 total consumption was roughly at the level of 1990 and only 20
percent greater than in 1973. However, that hides structural change in energy use. Since
1973 demand by the transport sector rose 70 percent and that by the household sector 90
percent. Together they now account for one-third of energy consumption. Half of that,or one-sixth of Japan’s total energy usage, is used to power vehicles.
Much of this book focuses on energy supply and energy policy, domestic and international. In contrast, this chapter looks at energy demand for transportation. It is not that
other sectors are unimportant. For example, energy use by commerce, rose 2.4x during
1973-2015. On the flip side, industry’s share dropped by 20 percentage points, from 64
percent to 43 percent. In contrast to commerce, which ranges from retail to hospitals,
transport is less diverse, which facilitates analysis. While it uses only 42 percent ofimported hydrocarbons, the auto industry is almost unique in its salience to consumers
and to policymakers. A case study is thus useful.156

156
Sources for Statistics in Chapter Nine: Data on sales and registrations are from the Japan Automobile Manufacturers Association, Motor Industry of Japan (annual) and the 自動車統計月報 (Monthly Automotive Statistics). Data on energy utilization are drawn from the 2017 Institute of Energy Economics, Japan, EDMC Handbook of Japan’s and World Energy Economic Statistics. Its data are drawn from standard Japanese government
sources, but are available in long time series. Other economic data are drawn from the 75th Edition (2017/18)
of the Yano Foundation’s statistics compendium Nihon Kokusei Zue（矢野恒太記念会, 日本国勢図会、第７５版). Fuel efficiency data are from https://e-nenpi.com/enenpi/. See the Japanese-language Wikipedia on
Tokyo ring roads (entries on 首都高速中央環状線 and 東京外郭環状道路), for the Chinese EV market see thepresentation by Tomasso Pardi at the June 2017 GERPISA conference in Paris, and for data on battery costs see
the post by John Anderson, SeekingAlpha.com, February 14, 2018.

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JAPAN’S ENERGY CONUNDRUM

Changes in Vehicle Ownership
Numbers
Most domestic auto production in Japan ended in 1936, and it took two decades– 1957 – for output to recover. Vehicles meant trucks, and often very small ones – in
1960 a third of those on the road were three-wheelers. For personal transport, the otheroption was a scooter or (for deliveries) a small motorbike. In 1965, over half of all
motorized vehicles were 3-wheelers or scooters. The market expanded rapidly in the
1960s, but only in 1969 did the sales of new cars exceed that of trucks. It was not until
1970 that Japan registered more cars than trucks, and only in 1992 that the number ofcars exceeded that of scooters, motorbikes, buses and trucks.
Sales surged in the late 1980s, during the ascending phase of Japan’s real estate
bubble. At the same time both agriculture and the textile industry declined, and that cut
into the demand for small trucks. By 1990, sales of cars were almost double those oftrucks. Similarly, the number of registered scooters and motorbikes peaked in 1986. The
number of trucks on the road peaked in 1991 at 21.3 million, and since 2008 cars outsell
trucks by 5:1.

Figure 1: Vehicle Stock in Japan

Source: Japan Automobile Manufacturers Association

The mass consumer market for cars faced a dilemma: as long as demand remained
low, retailers and restaurants, and real estate developers provided no parking. By the1970s, as developers turned fields into suburban housing developments, single-family

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115

dwellings came with a parking space, while retailers and suburban restaurants slowly
added parking spaces. With a few rural exceptions, however, shopping malls developed
only after 1994, when the government lifted restrictions on retail entry. Thereafter owning a car gradually became a necessity for dwellers in suburban areas and small towns.
In newer suburbs shopping streets, accessible on foot or by bicycle, never developed.
In smaller cities, they disappeared. For example, in 2015 two-thirds of the retail spacein the once-busy central shopping area in Karatsu in Kyushu, a city of 100,000, were
shuttered and the for-lease signs in the stores that had bothered to put one up were
yellowed. Even in Chiba, a city of just under 1 million that marks the easternmost end of
suburban Tokyo, almost all stores were either immediately adjacent to commuter train
stations, or in shopping malls. Elsewhere rows of shuttered storefronts dominate.

Composition
The accompanying graphs show the change in the composition of vehicles since1970. Two key points are that the total number of vehicles expanded by 50 million
between the first oil crisis of 1973 and 2016, with the increase dominated by the rise inpassenger car ownership. The second is that within the car segment, the composition ofvehicles shifted from compact cars to an almost equal mix of minicars, compact cars andfull-sized cars.
Minicars or “kei” cars correspond to A-class cars in Europe, though the specifications
differ. Their popularity stems from favorable treatment for parking and license plates,
purchase-related taxes and fees and annual taxes. Japan put the basic framework forcars in place in 1949, but few were sold until the rules were amended in 1955 to allow
a 360cc engine. This change was in conjunction with the never-implemented plans for anational champion “people’s car,” seeking to create the Japanese equivalent of the Volkswagen Beetle. The Japanese government raised the ceiling on “kei” engine size to 550cc
in 1976 and 660cc in 1990, with gradual increases in a maximum of 3.4m in length and1.48m in width. To give a sense of this, the Daimler-Benz Smart Fortwo has a 1,000cc
engine and is 1.51m wide, so fails the criteria in terms of both engine displacement andsize. GM’s smallest U.S. offering, the Korean-made Spark, is 3.6m long and 1.6m wideand sports a 1,400cc engine, failing under all three criteria.
Indirect benefits are multiple, from not needing to prove the owner has a parking
spot to lower taxes. For example, the annual “kei” road tax is about ¥15,000 for the firsttwo years, whereas that for a small car runs ¥20,000. The “kei” sales tax was 3 percent
instead of 5 percent, or about ¥20,000 less on a typical car. Insurance costs less, andthe annual use tax is ¥10,800 for a “kei” versus ¥34,500 for a compact car. All of thismeans that a “kei” car costs about ¥45,000 a year or $400 less to own. All of this hashelped increase the share of “kei” vehicles, at the expense of compact cars. Families arestill likely to opt for a regular minivan, which is a full-sized vehicle, and as elsewhere
SUVs and crossovers are highly popular. Even “kei” cars come in wagon versions, nowthat they can be as tall as a regular car. Of course adding weight lowers fuel efficiency;
the top-selling vehicles are boxy van-like models that do no better than fuel-efficient“regular” sedans. The top-10-selling “kei” cars in 2017 averaged 41 miles per gallon, once
weighted by sales. Again weighted for sales, the top 10 regular cars averaged 48 mpg,
inclusive of the Prius, the only hybrid in the list.

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JAPAN’S ENERGY CONUNDRUM

Figure 2: Fuel Efficiency of Top Ten “Kei” Cars
Rank

Firm

Model

Sales
9 months
2017

Rated Fuelefficiency
l/km

eNenpiuser data

miles/gal

1

Honda

N-BOX

157,795

27

15

35.4

2

NissanDayz

113,641

26.8

16

37.8

3

Daihatsu

Tanto

112,696

28

16

37.8

4

Daihatsu

Move105,037

31

18

42.5

5

Suzuki

Wagon R

88,385

33.4

19

44.8

6

Suzuki

Spacia82,208

32

18

42.5

7

Daihatsu

Mira

74,054

35.2

18

42.5

8

SuzukiAlto

71,128

37

21

49.6

9

Honda

N-WGN

60,666

29.4

18

42.5

10

Suzuki

Hustler

58,546

32

19

44.8

924,156

31.18

17.8

42.0

Total / Average

Source: Japan Automobile Manufacturers Association and eNenpi

Figure 3: Fuel Efficiency of Top Ten Regular Cars
Rank

Firm

Model

Sales
6 months
2017

Rated Fuelefficiency
l/km

eNenpiuserdata

miles/gal

1

ToyotaPrius

78,707

40.8

25

59

2

NissanNote

68,441

37.2

20

47

3

ToyotaAqua

62,537

38

23

54

4

ToyotaC-HR

60,627

30.2

21

50

5

Honda

Freed

51,652

27.2

18

42

6

Honda

Fit

48,488

37.2

23

54

7

ToyotaVitz

44,005

34.4

16

38

8

ToyotaSienta42,837

27.2

18

42

9

ToyotaVoxy

39,988

23.8

17

40

10

NissanSerena37,503

17.2

15

35

534,785

31.3

20

46

Total / Average

Source: Japan Automobile Manufacturers Association and eNenpi.

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According to eNenpi survey data, the actual fuel efficiency drivers realize is about
70 percent that of the official test cycle. The average also reflects vehicle age. While theshaken (vehicle inspection system) once meant owners scrapped cars at the end of their
10th year, a simplification of the regulations and the licensing of independent inspection
firms drove down the shaken price. Owners now keep cars (and trucks) much longer. In
1975, the average car was kept in service for only 6.7 years and, once the sales of newcars was factored in, the average car on the road was only 3.3 years old. Twenty years
later those figures rose to 9.4 years and 4.9 years, respectively. In 2016, the levels were
12.8 and 8.4 years. Therefore, even though the average officially rated fuel efficiency of
new vehicles rose from 30 miles per gallon in (fiscal) 2000 to 52 mpg in 2015, the actual
fleet lags current standards. An aggressive policy to improve fuel efficiency that raises
the price of new cars would lead consumers to hold off on purchasing a new vehicle
and hence an even further increase in vehicle age, muting the impact of such policies.

Passenger Miles Traveled
The diffusion of personal vehicles came late in Japan’s urbanization process. By thetime ownership became widespread, commuter rail and subway systems were already inplace. On the opposite side, the lack of a workable eminent domain process and, until
the late 1990s, the comparatively high price of land meant that key pieces of the middle
and outer ring road system around Tokyo will only be completed in 2018. Expressways
remain two lanes even in urban areas. They have maximum speed limits of 100 km/hour(60 miles per hour) which are enforced often enough that drivers watch their speed.
Most limited access roads charge tolls; in rural Niigata, where I lived in 1997, they werehigh enough that truck drivers stuck to the congested 2-lane national road rather thantaking the expressway that paralleled it. In urban centers many roads remain one-laneand one-way. Parking is scarce and in city centers expensive. In other words, movingaround by car is time consuming, and for those who work in city centers, commuting by
car is out of the question.

Figure 4: Total Vehicle Stock in Japan

Source: Japan Automobile Manufacturers Association

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JAPAN’S ENERGY CONUNDRUM

Fuel prices add to the calculation of the mode of travel. Taxes are comparatively
high, at ¥53.8 per liter plus the 8 percent consumption tax. As a result, the after-tax priceof unleaded gasoline in Japan in September 2017 averaged $5.09, high enough to encourage buying fuel-efficient vehicles. At the same time, it reinforces the disadvantages ofdriving. Outside of rural areas, where service has been cut back due to demographics, itis thus standard to take a bus from a housing development or condominium complex toa suburban train station, and then transfer to a subway before the “last mile” of walking
a few minutes to one’s final destination. Most trains are air conditioned in summer andheated in winter, which was not the case 40 years ago, and while those during peak rushhour are crowded, cell phones (and internet connectivity on many trains) have madethe time less unpleasant. Furthermore, a standard “perk” for full-time employees is amonthly rail pass. Those driving receive no such subsidy.
As a consequence, average vehicle miles traveled (VMT) in Japan averaged 3,900
kilometers (2,440 miles) per capita in Japan versus 13,000 km (8,100 miles) in the UnitedStates in 2007, over a three-fold differential. In Japan 36 percent of the population uses
public transport, but only 15 percent in the United States. Between fewer miles traveled
and more efficient vehicles, per capita fuel consumption is less than 1/3rd that of theUnited States. Public transport dominates: in 2014, in Japan total kilometers traveled
averaged 72,579 for vehicles, 413,970 for trains, and 86,763 for air transport (apparently
including international flights).
This also applies to freight. Despite the omnipresence of “Black Cat” small package delivery trucks handling internet shopping on Rakuten and Amazon, total freightshipments are falling. Total vehicular kilometer-metric tons of freight peaked in 1990 at
5.9 billion, and since fell 27 percent to 4.4 billion. Bus and taxi ridership is also down,from 101 billion passenger-kilometers in 1970 to 70 billion in 2016, a 30 percent drop.
Meanwhile trains and subways accounted for 427 billion passenger-kilometers, six-foldmore than automotive transport. Furthermore, that level of train ridership is 10 percent
above the level of 1990, and 6 percent above that of 2012. The shift of the economy
away from manufacturing and agriculture, and towards densely settled urban services,
has shifted the average commute away from vehicles and towards trains.
That hints at another key issue: Japan’s labor force is falling as its baby boomers
retire, and the overall population is shrinking, down 2 percent from a peak of 128
million in 2007 to 125 million in April 2017. While that may not affect the role of energy
in proportion to the economy, it will lead to declines in absolute levels of consumption,
independent of changes in fuel efficiency and the mix of transportation. Retirement
however does not mean inactivity. While in Japan it becomes increasingly difficult tomaintain a driver’s license after age 70, rural residential densities are low and rural areas
are older than cities. (While the total number of licensed drivers rose 3.3 million during
2007-2016, that was entirely due to a rise in the number of women with licenses, as thenumber of men with licenses actually fell.)That retirees no longer commute does not eliminate the need for shopping, but
direct expenditures on transportation fall by 50 percent. However, older Japanese do
consume transportation indirectly through the national old age care system (kaigo
hoken, which complements the national health care system). Under it, for example,
older residents may qualify for twice-daily visits to get in and out of bed, or daily trips
to a senior center. In addition, relative to working households expenditures on utilities,

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119

particularly heating and cooling, rise by about 30 percent, albeit from a base well belowthat of transportation. On net, an aging society will lower energy consumption, but thepatchwork of data do not allow even a back-of-the-envelope calculation.

PolicyThree avenues are open to lessen the consumption of imported energy by the transportation sector. One is to shift utilization even further towards public transport. The
60 percent of personal travel in cars accounted for 87 percent of energy consumption,
while the 28 percent on trains accounted for just 3.6 percent. Even more skewed was
freight: 52 percent moved by truck, but that consumed 86 percent of all energy. Any
policy that moves people and goods off trucks and onto trains, buses and (for freight)
ships improves energy efficiency. To my knowledge, there are no major initiatives inJapan that specifically seek to shift the mix of transportation. If anything, the financial
difficulties of regional rail operators are pushing in the opposite direction of cutbacks inservice.
The second avenue is to move towards use of renewables. Diesel vehicles comprisea small share of the Japanese vehicle “parque,” at about 1.5 percent of cars and 27
percent of trucks. Research continues on biodiesel, but it is less important for Japan than
Europe or the United States. It also is not politically salient – there is no equivalent of the
U.S. corn lobby that can push for an ethanol mandate. Should cellulose-based processes
develop, the climate of western Japan might make the growth of fast-maturing trees
and other sources commercially attractive. That however would be more likely in anenvironment of expensive petroleum. (Other chapters of this book examine solar, windand nuclear sources.)
The third is to make vehicles more efficient. That is technically challenging. First,
while policymakers focus on battery electric vehicles (BEVs), the commercial case is atpresent non-existent: consumers do not buy BEVs without subsidies so large that they
will not be fiscally viable at a large level of sales. Here China provides a good base
case: even with a national subsidy of approximately $8,000 per vehicle, in 2016 sales
were under 5,000 units in 19 of the country’s 30 provinces and provincial-level cities forwhich data were available. In contrast, 70 percent of BEV sales (but only 30 percent ofcar sales) were in the eight provinces and cities that topped off the national subsidy withadditional local ones. Japan is no different: despite favorable taxes and much publicity
for Nissan’s Leaf, there were only 15,000 on the road at the end of 2016. Indeed, evenhybrids sell poorly. In 2016, there were 1.275 million on the road. Almost all are Toyota
Priuses. As a car it was a hit; as cars hybrids other than the Prius are not. As long as consumers face a significant price premium, they shun electric vehicles and even hybrids.
One narrow challenge for BEVs is that electricity prices are high. In 2014, household
electricity cost about ¥27 per kilowatt-hour while in the United States, the cost is about¥13/kWh, albeit with wide regional variation. Commercial rates vary even more, at ¥20/
kWh in Japan versus ¥7/kWh in the United States. High rates encourage users in general
to economize, but relative energy costs do not favor BEVs over vehicles powered by gasoline internal combustion engines (ICEs). In the past several years, BEVs have benefited
from excess capacity. That arose due to investment during the Great Recession, whena wave of enthusiasm over BEVs led to the expansion of capacity for making cathode120

JAPAN’S ENERGY CONUNDRUM

and anode powders and for the assembly of cells and packs. That capacity overhang
is ending, and supplies of cobalt in particular are tight, with prices rising $8 per kWhduring 2017, or $600 per car for the Tesla Model 3. In the interim, none of the potential
breakthroughs in battery chemistry have made it past test-of-concept. Experience suggests that it will be at least 10 years before learning curve cost reduction can make any
such processes commercially viable, and another 5 years to add capacity commensurate
to the scale of global automotive production. Capacity and cost constraints will limit
BEVs to a small slice of the market at least into the mid-2020s. The cost penalty forfuel cell vehicles (FCVs) and the costs for fueling infrastructure are even greater. FCVs
are potentially a good mesh for buses and other fixed-base vehicles where compact
packaging is not a constraint and there is shared infrastructure. Making public transit
more fuel-efficient has little effect on overall fuel consumption. Fuel cell use as the main
power source for passenger vehicles lies in the distant future.
The second challenge is that in Japan the share of renewables in electricity generation remains low. Increasing the use of BEVs may shrink imports of petroleum but will
increase those of coal and LNG. That is useful if the goal of policy is to diversify thesources of energy away from petroleum, but will do little to the overall cost of energy
imports. To the extent that incremental power comes from coal, it is likely worse forJapan’s GHG emissions than powering cars with gasoline. The production of batteries
is energy intensive, while recycling them is technically challenging, so overall BEVs are
not particularly good for Japan’s environmental footprint.
Nighttime charging can improve grid efficiency as it evens out demand over thecourse of a day. Such off-peak charging also lessens the bottleneck of local grid capacity.
While the U.S. Department of Energy has test studies, those studies need verification in
the context of Japan’s electricity market. Such indirect benefits are premised on homecharging. BEVs make less sense with daytime recharging at a public station, both fromthe perspective of the opportunity cost of time and the relative expense of supply power
during periods of peak demand. While many car owners have parking at their residence,a greater share of the population in Japan lives in apartment complexes and condominiums than in the United States, in older neighborhoods owners must use commercial
parking lots some distance from their residence. Infrastructure costs will thus be higher
than in the United States, where garages are the norm.
BEVs face one final obstacle: the steady improvement of the efficiency of ICEs. The
biggest gains are from the lightweighting of vehicle architectures and the reduction in
the weight of engines and transmissions. The former, of course, also benefits BEVs, but
the biggest gains have come from the replacement of large engines (V-8s in the UnitedStates) with smaller ones (V-4s and for compact cars, I-3s). Electric motors are replacing
hydraulic and chain/belt driven accessories, cutting parasitic losses for water pumps,
and enabling more efficient transmissions. Light electrification from start-stop systems
and power-boost alternator-generators come at a low cost increment. Modest hybrid
systems, such as using electric motors to provide on-demand four-wheel drive but notprimary motive power, come next in expense. Full hybrids follow, and then plug-in
hybrid electric vehicles. The fuel efficiency ratings in Figure 5 give a sense of how muchis possible with ICEs. To be a good consumer proposition, battery costs not only haveto fall, they have to fall much faster than the cost of these alternatives. For at least theCHAPTER NINE

121

next decade, policy should focus as much on improving ICEs as on developing better
batteries.

Figure 5: Fuel Efficiency – Top Ten Regular Cars
Rank

Firm

Model

Sales 6months 2017

Rated fuelefficiency
l/km

eNenpiuserdata

miles/gal

1

ToyotaPrius

78,707

40.8

25

59

2

NissanNote

68,441

37.2

20

47

3

ToyotaAqua

62,537

38

23

54

4

ToyotaC-HR

60,627

30.2

21

50

5

Honda

Freed

51,652

27.2

18

42

6

Honda

Fit

48,488

37.2

23

54

7

ToyotaVitz

44,005

34.4

16

38

8

ToyotaSienta42,837

27.2

18

42

9

ToyotaVoxy

39,988

23.8

17

40

10

NissanSerena37,503

17.2

15

35

534,785

31.3

20

46

Total / Average
Source: Japan Automobile Manufacturers’ Association

The Japanese government has nevertheless put forth a wide array of tax breaks andother policies aimed at encouraging greater fuel efficiency in transportation. Rather thanlist those here, interested readers should refer to the extended coverage (11+ pages) in
JAMA’s annual Motor Industry of Japan Yearbook. These include stair-step tax reductions
for meeting various emissions and fuel-efficiency thresholds, as well as tax reductions
for vehicles using specific technologies. It is too soon to evaluate whether significant
numbers of vehicles will qualify for any of these measures.

Conclusion
Automotive transport is a large end-user of energy, which in Japan means imported
petroleum. Thanks to high energy taxes, the cars and trucks on the road are alreadysmaller and more fuel efficient than those in the United States. Technology alreadyin early commercialization will lead to further improvement. Despite the hype overthe efficiency of battery electric vehicles (BEVs), in Japan electric power is generatedusing imported fuels, while their efficiency is less once power-plant-to-battery losses are
considered. A wholesale move away from the internal combustion engine (ICE) would
barely move the needle on energy imports. Bigger benefits would instead come fromencouraging consumers to choose public over private transport, and small vehicles over

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JAPAN’S ENERGY CONUNDRUM

large. The trend for both though is in the opposite direction. Unless policy is willingto push back against these two trends, for example by taxing gasoline more heavily
and using that to subsidize public transport, per capita fuel consumption will be little
different.

CHAPTER TEN

123

Chapter Ten
Demand-Side Management in Japan: Moving Beyond Gaman and Pilot Programs
Dr. Ken HAIG
Research Associate, Graduate School of Public Policy, Hokkaido University

Introduction
In the aftermath of the March 11, 2011 (3.11) Great Eastern Japan Earthquake andsubsequent tsunami and nuclear disaster, the Tokyo Electric Power Company (TEPCO)
was forced to shutter several of its larger nuclear and thermal power stations for an
extended period. Especially given heating needs during the colder mid-March weather
when the earthquake struck, electricity supply suddenly fell short of demand. TEPCO
responded by implementing rolling blackouts, dividing its service area into five sections
and cutting power for a few hours per day across each section. While TEPCO tried
to put in place a reliable schedule for the planned blackouts, these rarely occurred at
designated hours or for predictable lengths of time, creating uncertainty and disruption
in industry, the economy, and transportation services.157 Voluntary energy-saving measures eventually replaced forced outages, but these measures never developed into a
dependable mechanism for encouraging energy users to flexibly adjust consumption—apractice known as “demand-side management,” or DSM—in lieu of having to increase
supply.
Japan’s electric power system has long prioritized reliability over flexibility. Throughout the post-World War II period, government and industry struck an implicit bargain
with Japanese electric power companies,158 granting regional monopolies in exchange
for ensuring a consistently reliable, stable supply of electricity.159 The consequence of
this implicit bargain was that, in addition to under-investing in inter-regional transmission links—which proved to be a problem after 3.11, when different frequencies used
across the eastern and western halves of Japan meant that available power in westernJapan could not be transmitted to the east, due to the limited number of inter-regionalfrequency conversion facilities—Japanese utilities also over-invested in generation

157
Murakoshi, Chiharu, Hidetoshi Nakagami, and Sho Hirayama (2012). Electricity Crisis and Behavior Change
in the Residential Sector: Tokyo Before and After the Great East Japan Earthquake. Washington, D.C.: American
Council for an Energy-Efficient Economy.
158
Throughout much of the early post-WWII period there were nine vertically integrated electric power companies with regional monopolies, though this number increased to ten with the addition of Okinawa ElectricPower Company after the reversion of Okinawa to Japan in 1971.
159
This was particularly true of power to the industrial and commercial sectors, the largest consumers of electricity in Japan and the key drivers of post-WWII economic growth, but also to the residential sector, fromwhom Japanese utilities derived the bulk of their revenue, and upon whom political parties were dependent
for votes. See Samuels, Richard J. (1987), The Business of the Japanese State: Energy Markets in Comparativeand Historical Perspective, Ithaca: Cornell University Press.

124JAPAN’S ENERGY CONUNDRUM

capacity.160 For much of the post-WWII period, essentially free from cost constraints
and guaranteed a rate of return on just about anything they built under their regionalmonopolies, Japan’s electric power companies historically built capacity to meet thehighest peak demand.161 In other words, Japan’s electric power system was set up insuch a way that it incentivized the generation of excess power year-round, just to servea relatively small number of peak demand hours during the hottest summer and coldest
winter months.
Building Japan’s baseload power supply to support maximum peak demand meantthat Japan’s electric power system was well over capacity for much of the rest of theyear. This accounts in part for Japan’s higher electricity rates relative to other OECD
countries.162 Nevertheless, this was considered an acceptable trade-off as part of the
post-WWII implicit bargain with Japanese utilities: regional monopolies meant higher
costs for consumers, but also more localized accountability and dependability in electric power delivery.163 While economically inefficient, localized monopolies did proveremarkably successful in ensuring reliability. One anecdotal measure of this success was
the fact that many Tokyo-area residents experienced blackouts for the first time in theirlives on 3.11, something unimaginable in many other parts of the developed world.164
From what began as temporary/emergency measures in the immediate aftermathof 3.11, policymakers are now considering how to make DSM a permanent part ofJapan’s energy mix. So far, however, the focus has been more on promoting adoption ofparticular DSM-enabling technologies than on market design to encourage acceptanceof DSM as an energy resource. Systematic changes are required to realign utilities’ andconsumers’ incentives to look beyond Japan’s traditional supply-side-centric approachand take DSM from an exercise in “gaman” (suffering stoically through hardship, as inpost-3.11 Japan) to a marketable, flexible and reliable energy resource going forward.

Defining Demand-Side Management
DSM represents a change in the traditional energy delivery model. In Japan as wellas the rest of the world, investment in supply-side resources and increased power supply
historically provided the means by which utilities and their shareholders were able toearn a steady rate of return from ratepayers. Energy providers thus traditionally havebeen incentivized to generate power in excess, rather than attempt to flexibly adjust
demand. Utilities built peaking power plants, which can be ramped up quickly to provide
additional power on top of baseload generation to meet short-term spikes in demand,
160
The amount of electricity that can be sent to eastern Japan is limited to 1 GW because of a difference inelectrical frequencies between regions. Japan is one of the few industrialized countries with essentially two
separate power grids—one that runs at 50 Hz in eastern Japan, with another that runs at 60 Hz in westernJapan. This was the result of Tokyo’s adopting German-manufactured generators in the initial days of electrification, while Osaka adopted U.S. equipment. See Kikkawa, Takeo (2004). Nihon Denryokugyo Hatten no
Dainamizumu [The Dynamism of Development in the Japanese Electric Power Industry]. Nagoya: Nagoya
University Press.
161
See Takeuchi, Keiji (2013). Denryoku no Shakai-shi: Nani ga Tokyo Denryoku wo Unda no ka [A Social
History of Electricity: What Gave Rise to TEPCO], Tokyo: Asahi Shimbun Shuppan.
162
OECD (2015). “Electricity Prices by International Comparison,” in OECD Economic Surveys. Paris: OECD
Publishing.
163
Kikkawa, Takeo (2013). Nihon-no Enerugi Mondai [Japan’s Energy Problem]. Tokyo: NTT Shuppan.
164
Yagita, Yoshie, Yumiko Iwafune, Miyuki Ogiwara, and Goshi Fujimoto (2012). “Household Electricity Saving
Behavior after the Great East Japan Earthquake.” Journal of Japan Society of Energy and Resources. Vol. 33, No.
4, pp. 7-10.

CHAPTER TEN

125

while they met predicted long-term growth in demand through the construction of more
power generation and transmission infrastructure, and/or upgrades to existing infrastructure. DSM turns this traditional supply-side logic on its head, encouraging investment inways to use already available power more flexibly and efficiently, rather than increasing
supply.
When scaled effectively, energy savings from DSM programs can replace retiring
power plants, or displace or defer the need for new generation and transmission investments altogether.165 In Japan in particular, where imported fossil fuels accounted fornearly 90 percent of the electricity supply after 3.11, policymakers increasingly recognizethat DSM would reduce dependence on imported fuel, reduce Japan’s negative balanceof payments, and increase economic competitiveness.166
In many countries, DSM plays a central part in efforts to reduce greenhouse gas
emissions associated energy production and consumption. Whether by promoting longer-term improvements in energy efficiency, or by making more power available when
supply is constrained through shorter-term “demand response” programs, fostering markets for DSM can also have widespread economic benefits, including job creation andinvestment in innovative new clean technologies and services.167
Across much of the advanced industrialized world (outside of Japan), DSM is considered an energy resource unto itself, one that competes effectively with other supply-side
resources in energy and power markets.168 One good example of this is how DSM
is treated within the PJM Interconnection, the regional transmission organization thatoversees grid operations and the electric transmission system across much of the eastern
United States. Delivering power to over 60 million people across 14 U.S. states, PJM
operates one of the world’s largest competitive wholesale electricity markets. Power
is purchased based on auctions of various types, including payments for “capacity,”or commitments to provide enough power to meet future demand. The idea here is to
direct investment a few years ahead of delivery, creating an ongoing, flexible market for
whatever resources will best meet future energy needs.
Since there is no functional difference between a megawatt of power from a power
plant and a megawatt of power saved (avoided capacity) in PJM’s capacity auctions, theauctions encourage investment in—and create long-term price signals for—a wide variety of energy resources. Whether generated power (supply-side resources) or demandside resources like energy efficiency or demand response, every resource bids into
the auction at its total cost of operation (capital costs plus operational costs). Bids are165
See Billingsley, Megan A., Ian M. Hoffman, Elizabeth Stuart, Steven R. Schiller, Charles A. Goldman, and Kristina LaCommare (2014). The Program Administrator Cost of Saved Energy for Utility Customer-Funded Energy
Efficiency Programs. Berkeley, CA: Ernest Orlando Lawrence Berkeley National Laboratory/U.S. ­Departmentof Energy Office of Electricity Delivery and Energy Reliability.
166
After 3.11, the increased use of thermal plants to make up for the loss of nuclear generation caused higher
fuel import costs, borne by Japanese consumers and industries, which led to Japan’s first trade deficit since1980 (Kikkawa 2013, p. 9).
167
In the United States, for example, the American Council for an Energy Efficient Economy (ACEEE) forecaststhat by 2030, in addition to 600 million tons of CO2 savings, the market for DSM will yield USD 47 billion in
new investment, 610,000 new jobs, and a $95 billion reduction in household energy expenditures—savings
that can be reinvested in other parts of the economy. See Hayes, Sara, Garrett Herndon, James P. Barrett,­Joanna Mauer, Maggie Molina, Max Neubauer, Daniel Trombley, and Lowell Ungar (2014). Change Is in the
Air: How States Can Harness Energy Efficiency to Strengthen the Economy and Reduce Pollution. Washington,
DC; American Council for an Energy Efficient Economy.
168
Molina, Maggie (2014). The Best Value for America’s Energy Dollar: A National Review of the Cost of Utility
Energy Efficiency Programs. Washington, DC; American Council for an Energy Efficient Economy.

126

JAPAN’S ENERGY CONUNDRUM

collected from lowest to highest cost, until enough capacity has been acquired to meetdemand.169
Compare this to Japan’s Basic Energy Plan, last updated in 2014, which does notcount DSM as an energy resource, even while upholding supply-side resource targets thatare clearly out of step with what is feasible in post-3.11 Japan.170 For example, the Basic
Energy Plan describes an energy mix in 2030 in which nuclear power will account for 20
to 22 percent of the country’s electricity, as well as the development of an additional 27
GW of new coal capacity.171 Market predictions, however, are increasingly at odds withthis vision. With respect to nuclear power, more stringent stress tests—in addition to therequirement that local governments must approve the restart of each of Japan’s idled
nuclear reactors (a high hurdle, given strong continued public opposition due to concerns over nuclear safety) and the more than two dozen lawsuits against nuclear restarts
still making their way through Japanese courts—have all made nuclear restarts moredifficult than hoped for by Japanese utilities, who have faced a heavy financial burden
from having to import fuel to run thermal power plants in place of their nuclear reactors.
Of the 26 nuclear power plants targeted for restarts, only six had actually come backonline by March 2018. Analysts argue that at this rate, the assumption that nuclear power
will account for more than 10 percent of Japan’s electricity output by 2030 is highly
improbable.172 Calls for more coal-fired power plants are similarly impractical, given thathigh costs and competition from other forms of generation capacity with lower marginal
costs and greenhouse gas emissions (e.g. natural gas and renewables) ensure that any
new coal generation infrastructure will quickly become stranded assets.173
3.11 showed the need to restructure Japan’s power sector—including the need tocreate incentives for adjusting demand rather than relying on an overabundance of­supply—even as it highlighted the challenges in shifting a system set up to promote fixed
and reliable electric power supply towards accommodating more flexible approaches.174

169
The most expensive capacity commitments (those that do not meet the clearing price) are rejected. At 2016’s
auction (at which payments for 2019–2020 capacity commitments amounted to $6.9 billion), over 10 gigawatts(GW) of demand response cleared the auction, in addition to 1.5 GW of energy efficiency. At the same time,
2,600 MW of coal commitments and 1,500 MW of nuclear commitments failed to clear the auction, with a number of aging coal-fired and nuclear power plants now likely to be shut down as a result. For more details, see
http://www.pjm.com/~/media/markets-ops/rpm/rpm-auction-info/2019-2020-base-residual-auction-report.
ashx.
170
See Duffield, John S., and Brian Woodall (2011). “Japan’s New Basic Energy Plan.” Energy Policy. 39(6), pp.
3741–3749.
171
For more details, see http://www.enecho.meti.go.jp/en/category/brochures/pdf/energy_plan_2015.pdf.
172
BNEF (2014). Japan’s Approach to Demand-Side Management. Bloomberg New Energy Finance, October
26, 2014.
173
Caldecott, Ben, Gerard Dericks, Daniel J. Tulloch, Lucas Kruitwagen, Irem Kok (2016). “Stranded Assets
and Thermal Coal in Japan: An Analysis of Environment-Related Risk Exposure.” Oxford: Stranded Assets Programme, SSEE, University of Oxford, 2016.
174
See, for example, Wolak, Frank (2012). “Restructuring the Japanese Electricity Supply Industry in the Aftermath of Fukushima,” in One Year After Japan’s 3/11 Disaster: Reforming Japan’s Energy Sector, Governance,and Economy (Stanford, CA: Walter H. Shorenstein Asia- Pacific Research Center, 2012).

ディマンドリスポンスの必要性①
Significanceof the Demand-Response Program Since the Great East Japan Earthquake hit, the tight demand-supply balance of electricity at peak hours in Japan has become
obvious.
CHAPTERTEN
Currently, Japan is getting through such tightness by measures including utilities’ acceleration of operation of thermal power plants andconsumers’ voluntary energy-saving efforts.

127

Figure1: METI/ANRE
Demand Response
Programs
after
3.11
 Against
the backdrop to thisVisionsituation, iffor
the demand-response
program succeeds
in cutting demandduringpeak periods, the program willcontribute to relieving the supply-demand tightness as well as eliminate the need for inefficient, accelerated operation of thermal power
plants, leading to the establishment of efficient electricity systems in the mid- to long-term perspective.

【 Chart of the supply-demand balance before theGreat East Japan Earthquake 】【Chart of the supply-demand balance after
the Great East Japan Earthquake】
Electricity demand (kW) Accelerated operation ofElectricity demand (kW)thermal power plants

Supply capability

Supply capability

Energy saving
The peak cutting program to control
demand in a smart manner will be
an important element.

Morning

Day

Night

Morning

Day

Night

Source: Ministry of Economy, Trade & Industry (METI)/Agency for Natural Resources & Energy (ANRE), Policy Planning
Division, Energy Conservation and Renewable Energy Department

Japan’s Post-3.11 Turn Towards DSM
After 3.11, in addition to waiving the normal approval process for restarting mothballed thermal generators, officials at the Cabinet Office and the Ministry of Economy,
Trade & Industry’s (METI) Agency for Natural Resources & Energy (ANRE) sought toimplement a sustainable energy-saving strategy before peak consumption during thehottest summer months outstripped available electricity supply. This time, in order toensure better demand forecasting and avoid the difficulties that arose from TEPCO’srolling blackouts after 3.11, a group of researchers, government officials, and utility
employees convened to estimate sector-specific load curves and energy-saving potential,
as well as to develop specific recommendations for saving electricity for each sector.175
The result was calls for mandatory rationing by large commercial and industrial cus­
tomers (utility customers with contracts of at least 500kW), and voluntary savings aided
by information campaigns and technical energy-saving assistance for all others.
On the commercial and industrial side, METI invoked Article 27 of the Electricity
Business Act (for the first time in more than 40 years, since the Oil Shocks of the early
1970s), requiring customers with contracts of at least 500kW to reduce their demandduring weekdays by 15 percent relative to the previous year’s consumption.176 Japanese utilities also eased the requirements for large end-users to enter “adjusted supply
and demand” contracts, under which end-users receive discounted rates during normal
conditions in exchange for the obligation to reduce usage when electricity supply isconstrained. Time-of-use (TOU) rates—which offer a cheaper tariff for off-peak consumption and a higher charge for peak usage—also were recommended for residential
175
Demand forecast estimates were made for eight commercial subsectors, including office buildings, wholesale and retail outlets, supermarkets, hospitals/clinics, hotels, restaurants, schools, and factories. Estimates also
were made for the residential sector using assumptions about occupancy, electronics / appliance diffusion, andhousehold usage. See Yagita et al (2012).
176
Kushida, Kenji E. (2012). “Japan’s Fukushima Nuclear Disaster: Narrative, Analysis, and Recommendations.”
Shorenstein APARC Working Paper.

128JAPAN’S ENERGY CONUNDRUM

customers, though adoption remained low, in part because there was no mechanism fortimely feedback on consumption data without widespread smart meter deployment.177
Smaller commercial and industrial as well as residential customers (those with
contracts under 500kW) also were encouraged to reach 15 percent savings throughvoluntary measures. The government promoted a “Super Cool Biz” campaign, asking
businesses to adopt a relaxed dress code (open collars and short-sleeved shirts, in lieu
of suits) during the summer months, and to set thermostats above 26 degrees Celsius.178
Forecasts of supply and demand were updated hourly via multiple communication platforms: on television, via government Twitter feeds and Websites, and on displays at train
and subway stations. Trains slowed, and billboards called upon citizens to save energy
for the sake of the nation.179 METI/ANRE publicized electricity-saving tips, establishedenergy-saving contests, and offered rewards to residential and commercial customers formeeting or exceeding voluntary targets.
Commercial and industry groups responded with various voluntary initiatives of
their own. After environmental and noise regulations were relaxed during the summer
months, factories shifted operations to nights and weekends where they could, andretailers and commercial building operators adjusted operating hours, reduced lighting,and decreased the number of elevators and escalators in operation. Employers extended
summer holidays, and tried to create incentives for employees to take vacation during
the summer months.
Ultimately, voluntary curtailment resulted in 18 percent savings during the summer
months of 2011.180 While the summer of 2011 was milder than expected, this was still an
impressive achievement. But Japanese policymakers struggled with how to make these
temporary/emergency measures permanent, especially as disaster fatigue set in. What
was needed was a shift in emphasis from energy conservation—which carried with it theimage of gaman, or suffering stoically through hardship, especially as calls to conservecame during the hottest summer months—to an emphasis on ongoing investment inenergy efficiency, or efforts to cut waste where it makes sense to do so, without negatively
impacting workplace productivity or lifestyle comfort.181 Much as had happened withmaking the Top Runner program for electronic appliances the centerpiece of residential
energy efficiency efforts in the late 1990s, METI/ANRE took a hardware-based approachto towards enabling DSM initiatives, beginning with promoting the standardization andwidespread deployment of smart meters.

OpCit. BNEF (2014).
See Tanabe, Shinichi, Yuko Iwahashi, Sayana Tsushima and Naoe Nishihara (2013). “Thermal Comfort andProductivity in Offices under Mandatory Electricity Savings after the Great East Japan Earthquake.” Architectural Science Review. Volume 56, Issue 1, 2013.
179
Public awareness campaigns tended to emphasize kizuna, or “connections” to the disaster-affected areas,and phrases like minna de ganbarou, or “we’re all in this together.”
180
OpCit. Murakoshi, Chiharu, Hidetoshi Nakagami, and Sho Hirayama (2012), pg. 38.
181
OpCit. See Tanabe, Shinichi, Yuko Iwahashi, Sayana Tsushima and Naoe Nishihara (2013).
177
178

CHAPTER TEN

129

Smart Meter Deployment and DSM Pilot Programs
Whereas traditional (analogue) electricity meters require in-person manual meterreads, “smart” meters automatically record electricity consumption data and send thisinformation wirelessly back to the energy provider in regular intervals. Energy providers
thus tend to see the value of smart meters in terms of operational savings (i.e. lower
costs associated with meter reads due to automation). But there greater is value to
end-use customers in the DSM-enabling capabilities of smart meters. For example, smart
meters make it possible for consumers to choose the tariff that best suits their usage
profile from a menu of time-of-use (TOU) rates, as well as to take part in paid demand
response programs. Smart meters also can be connected to in-home monitors to display
energy consumption in real time, or to IOT-enabled homes or building energy management systems (HEMS/BEMS) and smart thermostats that can automatically adjust room
temperature and appliance settings, supporting automated demand response (ADR)
programs.
U.S. and European utilities already had started large-scale deployment of smart
meters before 2011, but Japanese utilities (with the exception of Kansai Electric Power
Company, which got an early start) were only conducting limited smart meter demonstration projects before 3.11. At the time, smart grid investment in Japan—exemplified by
the launch of four smart community projects in 2010—was primarily focused on developing energy-management technologies for export, rather than testing DSM solutions forwidespread adoption in Japan.
All of this changed after 2011, when poor demand forecasting and shifts in Japaneseutilities’ political fortunes after 3.11 stirred METI/ANRE to induce utilities to both speed
up nation-wide smart meter deployments and conduct competitive tenders to lower
procurement costs (rather than pursue the traditional sole-sourced, preferred-vendor
contracting approach).182 In addition, the government used its effective majority control
over TEPCO (via the Nuclear Damage Compensation and Decommissioning Facilitation
Corporation) to use TEPCO as a model for smart meter deployment and use. Also on the
hardware front, METI provided subsidies for lithium-ion batteries for energy storage bysmaller-scale commercial and industrial (C&I) and residential customers, as well as forthe installation of HEMS/BEMS, and construction of “smart” and “zero-emission” houses
and buildings (ZEH/ZEB).
Unlike the Feed-in-Tariff (FIT) program for renewable energy a few years earlier,rather than move quickly to create long-term regulatory or market incentives for utilities
to employ DSM programs, METI/ANRE started first by using their budgetary discretion tofund new grant and subsidy programs as well as tests of markets for DSM technologies.
METI/ANRE supported three waves of new pilot programs: 1) a direct-to-consumer
residential DSM model, 2) an aggregator-led C&I DSM model, and 3) the virtual power
plant model.

182
All smart meter equipment in Japan must comply with the ECHONET Lite standard as the common consumer application interface and an ECHONET Lite compliant “B route” to facilitate communication between
electric devices/home appliances and HEMS/BEMS and access by third parties, such as demand response
providers, further down the road.

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JAPAN’S ENERGY CONUNDRUM

Direct-to-Consumer Residential DSM: Testing the Efficacy of
Behavioral Approaches and Demand-Based Pricing
In 2010, the then-DPJ-led government approved a New Growth Strategy emphasizing green innovation. This included funding for “smart communities” that would serve
as a showcase and export platform for Japanese smart technologies, from mobility andhealthcare services to ICT-enabled DSM and renewable energy integration.183 Under thisprogram, four regions across Japan—Yokohama City, Toyota City, Kitakyushu City, andKeihanna Science City (an unincorporated city located in the border region between
Kyoto, Osaka, and Nara Prefectures)—were selected as smart city demonstration sites.
Funded and administered by METI/ANRE in collaboration with the private sector, after
3.11 these smart cities became test sites for demand response programs in HEMSinstalled households and BEMS-installed buildings.
In contrast to the C&I sectors, where the bottom-line value of energy efficiency (interms of operational cost savings) is clear, and where employment of full-time professional energy managers is common, ordinary households have fewer incentives andface higher hurdles to managing energy consumption.184 Researchers working in Japan’ssmart city demonstration sites set out to test whether using HEMS/BEMS as a platform
for demand-based pricing would motivate residential customers to reduce peak demand.
The thought was that, by charging higher rates when demand spikes (similar to “surge
pricing” for ride-hailing services), demand-based pricing would send price signals significant enough to motivate residential customers to either reduce usage outright during
peak demand periods (e.g. by turning down the air conditioning) or shift usage to
off-peak hours (e.g. waiting to run the dishwasher or washing machine until after-peakhours).185
Demand-based pricing in these smart city experiments, conducted from JFY 2011
to JFY 2015, yielded an average of 10-20 percent savings in residential peak demand.186
While noting challenges to the generalizability of these findings (including the small
sample sizes, opt-in program design, and selection bias associated with inclusion of
HEMS-enabled households only), researchers on these projects have conducted cost-benefit simulations to evaluate—and advocate—the nationwide expansion of demand-based
pricing as an effective means of enlisting residential and smaller commercial and industrial end-users in DSM programs.187
Despite this research-supported effort, widespread use of institutionalized demandbased pricing seems unlikely for the foreseeable future in Japan. Uptake of the TOU
rates already offered by Japanese utilities remains low, and Japanese policymakers are
not about to take the step that places like the U.S. State of California have, mandating a
183
DeWit, Andrew (2014). “Japan’s Resilient, Decarbonizing and Democratic Smart Communities.” The Asia-­
Pacific Journal. Volume 12, Issue 50, Number 3. December 2014.
184
These include higher transaction costs associated with lack of access to information, as well as lack of­financing for DSM technologies and services.
185
For example, in Kitakyushu City, electricity was supplied at ¥15/kWh during normal hours and ¥6/kWh
during night/off-peak hours (more attractive than average Japanese electricity rates, which were around ¥23/kWh), while peak pricing rose to a maximum of ¥150/kWh, depending on forecasting for the following day’s
demand (BNEF 2016).
186
BNEF (2016). Economics of Residential Demand Response in Japan. Bloomberg New Energy Finance, February 29, 2016.
187
See, for example, Ito, Koichiro, Takanori Ida, and Makoto Tanaka (2015). “The Persistence of Moral Suasion and Economic Incentives: Field Experimental Evidence from Energy Demand.” NBER Working Paper No.
20910. January 2015.

CHAPTER TEN

131transition to demand-based pricing as the default offering for all electricity customers.188
Moreover, current proposals for expanding demand-based pricing as a mechanism forresidential DSM tend assume universal adoption of HEMS as a platform for sharing
real-time feedback on usage and cost. While Japanese homebuilders have continued
to promote HEMS-installed smart homes as a part of their tech-enabled home branding
strategies, these still comprise only a very small percentage of new home sales, especially after the conclusion of METI’s HEMS subsidy program in 2013.189
The value of residential DSM in terms of grid management is in the aggregation ofrelatively small individual household energy savings. However, reaching out to millions
of households individually—let alone installing HEMS in every home—is cost prohibitive. As a result, proponents of residential DSM in Japan have increasingly looked toincentivize the cooperation of energy providers as the quickest route to scaling up
residential DSM programs. The logic here is that recruiting utilities and energy retailers—
who already have trusted relationships with, data on, and communications channels
reaching every household—significantly reduces the costs and logistical challenges
associated with promoting residential DSM.190
The first major test of this approach was a pilot program run by METI/ANRE in 20152016, which for the first time enlisted utilities’ cooperation in sending and measuring
the impact of personalized energy efficiency communications across their residential
customer base. In this pilot, 20,000 households in Hokuriku Electric Power Company’s
service territory were sent paper home energy reports (HERs) employing “nudge”-based
communication strategies, such as comparing and ranking each household’s energy
consumption relative to that of nearby similar homes, throughout the winter of 20152016.191 In addition to being Japan’s largest residential DSM pilot program to that point,
this was also Japan’s first “no price, no device,” or 100 percent “behavioral energy efficiency” program—described as such for the fact that it used behavioral science-inspired
approaches to encourage consumers to adopt more energy-efficient behaviors, without
the use of any new hardware or price signals.192
In contrast to METI/ANRE’s previous pilot programs, this HER pilot was not limited
to households with smart devices, increasing the potential for scalability.193 Given therelatively small per-household impact of HER programs, scalability is crucial to ensure
meaningful aggregate savings. After two HERs, the Hokuriku pilot yielded an averageof 1.2 percent energy savings (treatment vs control) per household. While this sounds
small, the METI/ANRE report from this pilot estimates that, if HER programs were scaled

See, for example: http://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201320140SB1090.
OpCit. BNEF (2014), pg. 10.
190This logic also forms the basis for utility-led residential energy efficiency programs in the United States aswell. See, for example, https://www4.eere.energy.gov/seeaction/system/files/documents/ratepayer_efficiency_customersatisfaction.pdf.
191
For more on this pilot program, see METI’s project report here: http://www.meti.go.jp/meti_lib/report/
2016fy/000233.pdf.
192
http://web.iss.u-tokyo.ac.jp/cjg/lecture/2016/06/untapped-potential-results-and-policy-implications-fromjapans-first-large-scale-behavioral-energy-e.html.
193
http://www.meti.go.jp/meti_lib/report/2016fy/000233.pdf. Indeed, the personalized HERs generated andsent to each recipient in this case used no HEMS or smart meter data; monthly meter read data were usedinstead, enabling communications with all of Hokuriku Electric’s residential customers.
188
189

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JAPAN’S ENERGY CONUNDRUM

to reach all Japanese households, it would yield the equivalent of most of Japan’s HEMS/
BEMS-enabled DSM targets for 2030 in just one year.194
Another key difference was the randomized control trial (RCT) and opt-out program design, which ensured a high degree of confidence in the research findings andtheir generalizability.195 This has become progressively more important as Japanesepolicymakers have increasingly turned their attention to evidence-based policymaking
to justify public spending, and the need for precise measurement to employ DSM as areliable energy resource.196
Based on these findings, METI/ANRE has since used the Hokuriku pilot results as
the basis for new guidelines for energy providers to encourage efficiency-promoting
communications.197 Also, as part of the government’s goal of reducing residential-sector
greenhouse gas (GHG) emissions by 40 percent by 2030 (relative to 2013 levels) as per
Japan’s Paris Agreement commitments, the Ministry of Environment (MOE) has since
supported the expansion of utility-led behavioral energy efficiency programs across allof Japan with a five-year (JFY 2017-JFY 2022) nation-wide HER pilot program.198
While these efforts do not yet go as far in requiring utilities to promote residential
DSM programs as the Energy Efficiency Resource Standards (EERSs) seen in many of theworld’s advanced industrial economies,199 they are an indication of Japanese policymakers’ understanding that creating scalable and cost-effective residential DSM programs
requires reaching residential consumers through their energy providers.

Aggregator-Led Commercial and Industrial (C&I) DSM: Negawatt Trading
By contrast, the vision for DSM for large C&I end-users in Japan is one enabledby aggregators, who act as intermediaries in getting C&I customers to reduce energy
consumption in response to requests from power companies. Aggregators bundle andare paid for this unused power, and compensate participating end-users according to
the amount by which they reduce their demand. METI/ANRE first tested this model ina demand response pilot with C&I customers that ran initially from December 2013 toMarch 2015, and then was extended from August 2015 to January 2016.
194
Ibid. Note: projections from the Hokuriku pilot show an expected impact in the 2-3 percent range after a
year-plus of HER treatment, the global average for Opower HER programs at the time.
195
Both the 20,000 households receiving HERs in this case - the treatment group- and the similarly sized control group (those not receiving communications from the utility, against whom monthly usage of those in thetreatment group was compared before and after receiving HERs) were randomly selected. This, combined withthe fact that the treatment group received HERs on opt-out basis (i.e. no sign-up, purchase, or prior interest
was required), helped ensure that the results of this pilot were reasonably representative of what could be
expected from the average Hokuriku Electric residential customer.
196
Scrutiny of Japan’s traditional behavioral energy efficiency approaches, such as MOE’s “Cool Choice” and“Cool Biz” programs, has increased in the absence of evidence of precise measurement of program impact.
For more on this, see the Japanese government’s Behavioral Sciences Team (BEST) Website: http://www.env.
go.jp/earth/ondanka/nudge.html.
197
See proceedings of METI/ANRE’s Energy Efficiency Guidelines Working Group: http://www.meti.go.jp/
report/whitepaper/data/pdf/20170331002.pdf.
198
For more, see http://www.env.go.jp/earth/ondanka/nudge/renrakukai01/mat02.pdf, http://www.env.go.jp/
press/104736.html.
199
See IEA (2017), Market-Based Instruments for Energy Efficiency: Policy Choice and Design. Paris: OECD/
International Energy Agency. https://www.iea.org/publications/insights/insightpublications/MarketBased_
Instruments_for_Energy_Efficiency.pdf. An EERS is a performance-based policy mechanism that obliges energy
providers to reach a certain percentage of energy savings over a specific timeframe (usually relative to theprevious year’s total energy sales), and compensates providers for these efforts via a regulator-approved tariff.
EERSs are similar conceptually to renewable portfolio standards (which require utilities to purchase a certain
percentage of power from renewable energy sources, to support market development), only applied to thedemand side.

CHAPTER TEN

133

In this pilot project, utilities in three regions, Tokyo (TEPCO), Kansai (KEPCO), andChubu (CEPCO), called three different types of demand response events: day-ahead,
one-hour, and 10-minute advanced notifications, in mornings and evenings during
the peak winter and summer months, and afternoons during the fall. About 2,000 C&I
customers participated; based on their predetermined contracted capacity versus thecapacity supplied, it was determined that C&I demand response had the potential foralmost 14 GW of peak load reduction (or about 9 percent of national peak load) during
the summer, as well as steady demand response potential in the winter and fall.200
Based on these results, METI/ANRE drew up guidelines for Japan’s version of C&I
demand response, including baseline calculation standards, and started a market in April
2017 for “negawatt trading” in which aggregators pay consumers to curb their electricity
use, and then sell the resulting spare capacity back to the grid. Japan’s fledgling negawattmarket cleared 1 GW of bids upon completion of its first auction in December 2017, in
the Kyushu Electric Power Company service territory in addition to the TEPCO, KEPCO,
and CEPCO service territories already covered in the initial pilot program.201
Japan’s negawatt trading market works as follows: utilities pay an annual rate of¥3,000-5,000 per kilowatt of power saving to negawatt aggregators, who use a portion of
the revenue to pay rewards to factories and offices for the amount of usage they commit
to curb on hot summer days and other peak-demand periods.202 Through negawatt
trading, the Japanese government aims to reduce peak demand by 6 percent by 2030.203• Currently
twobe waysforto getresponse
paid: 1)
aggregatedandThe assumption
is that utilities will
willing to
payDR
for demandbecausethey
would save considerable
sums
of money (Resource
by forgoing capital
investments tounder
maintaincontract toancillary
services1’) provided
surplus power-generating capacities.

Challenge 3: Demand Response as a

• DR
accounted
88%Tradingof awards and 73% of MW awarde
Figure 2: Diagramof Japan’sMarket forfor
Negawatt
DR sold as energy resource into JEPXUS•Type 1-2: Retailers - other customers

Generator

JEPX

＄

MW

Retailer A
MW＄

Customer

＄
MW

MW

MW
＄

＄

Aggregator＄

Retailer X•

Payment in red is”adjustment charge”(調整金) tocompensate retailer
for lost sales••

DR as ancillary services resource

Source: Ministry of Economy, Trade & Industry (METI)/Agency for Natural Resources & Energy (ANRE)
200

Ja
•

(Resource
1')
For Octobermore details,2016
see theTenderJFY 2014Results
final report:
http://www.nepc.or.jp/topics/2016/0330_1.html.
10-minuteadvanced notification
provided incentives
6,500/kW peryear and JPY20/kWh,notifiTohoku
Tokyo of JPY
Chubu
KansaiKyushu one-hour aheadTotal
cation provided JPY 5,000/kW per year and JPY 20/kWh; and day-ahead notification provided JPY 30/kWh.
201
For more, see http://www.meti.go.jp/press/2016/12/20161228004/20161228004-1.pdf.
# MW # MW # MW # MW # MW #
%
MW
202
Ibid.
-- 91 -590 -- 192-- 170 -- 284 --- 1,327
203
Ibid.Target

Offers
Gen
DR

2
1
1

93 12
91 1
2 11

677 14 204
102 --575 14 204%-20 366 15 314 63
1,654
1 163 3 186 6 10%542 33%19 203 12 128 57 90% 1,112 67%

•

134

JAPAN’S ENERGY CONUNDRUM

Moving from Negawatts to Flexiwatts: Flexibility as the
Key to Energy Reliability and Resiliency
American physicist Amory Lovins adopted the term “negawatts,” used to describe
power saved through energy conservation or efficiency measures, as a part of his argument that producing negawatts (rather than more megawatts) was the cleanest and mosteconomical way to meet future power needs.204 Since then, Lovins and the research
institute he heads, the Rocky Mountain Institute, have shifted their focus to “flexiwatts,”
or how to manage power supply variability by adjusting flexibly between supply-side
and demand-side resources—both of which have become progressively more decentralized, and in need of better aggregation—depending on which resource is more plentiful
at different times of the day.205
Imagine if end-use consumers could be tapped as a resource not only for reducing
demand when power supply is short, but also for collectively storing and supplying
power on a community-wide basis. With the appropriate configuration, electric vehicles
and plug-in hybrid automobiles could be used not only as a means for storing energy
to meet individual households’ energy needs, but also for storage in aggregate to help
manage community-wide peak demand. Put together, these would form a “virtual power
plant” (VPP), a collection of distributed energy resources—including both supply-side
and demand-side resources—that could eventually replace centralized generation
altogether.
This is precisely where Japan’s most recent METI/ANRE-funded pilot programs areheaded. Starting with a budget of ¥3 billion (roughly $28.7 million) in subsidies infiscal 2016, METI/ANRE began funding efforts to link together and remotely control
networks of independent batteries (and in some cases, hydrogen storage facilities), solar
panels, and electrical equipment/appliances/building heating and cooling systems via acentralized data center and common software platforms.206 After committing to support
the development of a number of public-private VPP initiatives over the next few years,
METI/ANRE’s aim is to somehow find a means of commercializing these systems by
2020. From there, the thought is that the wider use of VPP systems should enable flexible
supply and demand adjustment, making it easier to integrate and store more distributed
energy resources—both as a means of meeting future energy demand, as well as avoiding another energy crisis of the sort that followed 3.11.

Conclusion: Pinning DSM Hopes on Regulatory and Market Reforms in JapanThe heroic response of Japanese households and businesses to public calls to voluntarily reduce their electricity usage after the March 11, 2011 disaster showed that
DSM resources could contribute effectively to energy management goals in Japan, andthat building new power plants (or restarting/updating older ones) was no longer the204
Lovins (1990): https://www.rmi.org/wp-content/uploads/2017/06/RMI_Negawatt_Revolution_1990.pdf andsee Bronski, Peter, Mark Dyson, Matt Lehrman, James Mandel, Jesse Morris, Titiaan Palazzi, Sam Ramirez, andHerve Touati (2015). The Economics of Demand Flexibility: How “Flexiwatts” Create Quantifiable Value for
Customers and the Grid. CO: Rocky Mountain Institute, August 2015.
205
Dyson et al (2015): https://www.rmi.org/wp-content/uploads/2017/03/RMI-TheEconomicsofDemandFlexibilityFullReport.pdf.
206
For more, see http://www.enecho.meti.go.jp/about/special/johoteikyo/vpp.html.

CHAPTER TEN

135

only way to keep up with society’s shifting energy needs. In addition to diversifying
supply-side resources (e.g. with distributed generation and more renewable energy
options), Japan is increasingly seeking to promote investment in various means ofadjusting demand itself. However, Japan needs smarter policies to harness the potentialof DSM on an ongoing basis, as more than just an emergency resource.
In the United States, widespread DSM programs (both short-term peak demand
response as well as long-term improvements in energy efficiency) gained momentum
after the energy crisis of the 1970s. Demand response in particular started as an emergency
resource, with the spread of interruptible/direct load control (DLC) utility programs. As
the value of DSM as an ongoing, flexibly dispatchable grid resource became clear,
DSM shifted to wholesale markets. This was enabled by the restructuring of regional
wholesale markets and the emergence of capacity markets, as well as Federal Energy
Regulatory Commission (FERC) rulings (e.g. the Energy Policy Act of 2005 and later
Orders 719 and 745) that further removed hurdles to the participation of demand-side
resources alongside supply-side energy resources in wholesale markets.
DSM in Japan appears to be following a similar path. There is a growing consensus
around the idea that DSM could be more than just an emergency resource, one thathelps bolster flexibility and resilience year-round. Nevertheless Japanese policymakers’
focus so far has been on providing grants and subsidies to promote DSM-enabling
technologies, rather than fostering markets where demand-side energy resources cancompete effectively with supply-side resources.
In some respects, Japan’s focus on technology infrastructure has been remarkably
successful. With respect to smart meter deployment, for example, Japan has quickly
gone from being a global laggard to a global leader. Moreover, a nation-wide networkof smart meters provides unprecedented opportunities for Japanese utilities to engage
end-use customers in DSM programs.
However, Japanese utilities’ incentives remain essentially unchanged from before
3.11. Energy providers still are invested in selling more kWh than fewer. Especially as
constraints on electricity supply have diminished since 3.11, Japanese utilities’ incentives
are less aligned with those of policymakers who seek to promote DSM both for its
individual-level benefits (e.g. reduced energy bills for consumers) and its system-wide
benefits (e.g. increased flexibility from shifting energy consumption from peak to nonpeak hours).
While the government has liberalized and opened retail sales of electricity to competition,207 transmission and distribution assets remain the sole property of verticallyintegrated utilities who have historically used this monopoly to block access to the gridand markets for non-utility-generated resources. METI’s planned unbundling of Japaneseutilities (separating the regulated transmission and distribution part of the utility businessfrom competitive generation and retail operations) in 2020 may go some way to address
this. Moreover, the planned creation of a variety of new markets—including “nonfossil value” markets, ancillary services, and capacity markets, also intended to begin by
2020—may yet provide opportunities for new distributed energy resources, including
DSM, to compete. However, starting new markets is no guarantee that they will be open,
207
This began with high-voltage customers (2000kW and above, high-rise buildings, factories, etc.) in 2000,
mid-voltage (50kW ~2000kW, medium-rise buildings, retail/chain stores, etc.) in 2004, and low-voltage (50kW
and below, residential, small businesses, etc.) in 2016.

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JAPAN’S ENERGY CONUNDRUM

liquid, and competitive. The amount of electricity sold on Japan’s wholesale power
market, the Japan Electric Power Exchange (JEPX), is still less than 3 percent of the total
electricity generated, 15 years after its inception.
Outside of Japan, costs of electricity from low-carbon energy sources are declining
faster than expected due to rapid, market-driven technological advances and accelerated
economies of scale. By sticking to politically determined rather than market-determinedenergy targets, Japan risks shackling itself to high-carbon, overly expensive, and ultimately stranded-asset investments that are not in line with global market trends. Japan
could save its citizens money, promote domestic energy innovation, and reduce energy
imports by adopting a market-based approach to integrating DSM resources alongsidesupply-side resources.

PART 4:

COOPERATIONGOING FORWARD

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JAPAN’S ENERGY CONUNDRUM

CHAPTER ELEVEN

139

Chapter Eleven
Japan’s Energy and Climate Quadlemma and U.S.-Japan Cooperation
Jun ARIMA
Professor, GrasPP, Tokyo University

Complexity of Climate Change
Global warming is a global negative externality and, therefore, needs to be addressedat the global level. It would be ideal if a global carbon price were set equalizing marginal
abatement cost across countries. However, in reality, such a policy is inconceivable
politically and economically for the foreseeable future. Therefore, each country needs toaddress global warming issues based on its national circumstances.
In addition, internalizing climate-related externalities is much more complicatedcompared to environmental externalities (e.g., air and water pollution) where the calculation of damages is relatively easy and the benefits of mitigation measures are regional.
On the other hand, Greenhouse Gas (GHG) emissions derive from almost all economic
activities and, ceteris paribus, GHG mitigation measures inevitably results in regional
economic costs while the benefit of GHG mitigation is spread all over the world. In otherwords, GHG mitigation costs occur locally, but mitigation benefits are global, which
inevitably creates incentives for countries to attempt “free riding.” If GHG mitigation
measures did not entail any economic cost, global warming issues would not havebecome as hotly contested and the United Nation’s (UN) negotiations would have beenmuch easier.
Agreeing on international burden sharing under a structure where free riding has
economic rewards is extremely challenging since mitigation costs will affect each country’s international competitiveness, employment and economic growth. This is precisely
the reason why the UN climate negotiations faced rough going. This basic structureis unchanged even after agreement of the Paris Climate Accord at COP21 in 2015.
Ironically, the biggest reason for the success at the COP21 was that the Parties gave
up negotiating national targets, leaving them up to each country’s bottom-up (local)
decision.

Japan’s Energy and Climate Quadlemma
In Japan’s case, it has traditionally addressed the climate change issue as an integral
part of ensuring balance among “3Es,” namely, economic growth or economic efficiency,
energy security and environmental protection. This balance is particularly challenging
for Japan since it does not have domestic fossil resources or international grid/pipeline
connections with neighboring countries.
After the Fukushima Daiichi nuclear accident resulting from the Great Eastern Japan
Earthquake and Tsunami in 2011, all Japanese nuclear power plants stopped operation.
Japan compensated for the loss of nuclear power by increased burning of fossil fuels,
namely, LNG and coal. This resulted in a “quadlemma,” or a four-fold predicament inJapan.

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JAPAN’S ENERGY CONUNDRUM

Figure 1: Japan’s Power Generation Mix

Source: Japanese Ministry of Economy, Trade and Industry (METI)First, Japan’s dependence on imported fossil fuels had been decreasing steadily from76 percent in 1973 to 61 percent in 2010 thanks to the constant energy diversification
efforts after the first oil crisis. However, due to the stoppage of its nuclear power plants,
Japan’s dependence became even higher than it was in 1973.

Figure 2: Dependence on Imported Fossil Fuel in Japan’s Power Sector

Source: METICHAPTER ELEVEN

141

Accordingly, Japan’s energy self-sufficiency dropped from 19.9 percent in 2010 to
6.0 percent in 2014, the 2nd lowest level among OECD (Organization for Economic
Co-operation and Development) countries.

Figure 3: Energy Self-Sufficiency of OECD Countries

Source: METI

Second, due to increased imports of fossil fuels, Japan’s trade balance deterioratedby ¥14.5 trillion between JFY 2010 and JFY 2014, out of which ¥7.0 trillion could be
attributed to increased burning of imported fossil fuels compensating for the loss of
nuclear.
Third, due to surging fossil fuel imports, yen depreciation and feed-in-tariff (FIT)
surcharges, Japanese electricity tariffs (prices) have risen by 25-39 percent since the 2011
Great Eastern Japan Earthquake and Tsunami. These high prices are causing a heavy
burden to people’s daily lives, industrial activity, international competitiveness and themacro economy.
Fourth, Japan’s CO2 emissions increased by 6 percent and by 83 million tons from2010 to 2014. This increase can be attributed entirely to the increased CO2 emissions
caused by the increased consumption of fossil fuels as a substitute for nuclear energy inthe power sector. These four factors indeed constituted an energy and climate “quadlemma,” which no other country has ever experienced. The United States is experiencing
the complete opposite in its energy sector: higher exports, higher self-sufficiency, lower
electricity tariffs and lower CO2 emissions.

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JAPAN’S ENERGY CONUNDRUM

Figure 4: Japan’s Trade Balance

Source: METI

Figure 5: Changes in Electricity Prices

Source: Japan Federation of Electricity Power Companies (FEPC)CHAPTER ELEVEN

143

Figure 6: Japan’s CO2 Emissions

Source: METI

Japan’s Intended Nationally Determined Contribution (INDC)
Japan’s INDC was underpinned by the assumption of a future energy mix based on
three requirements, namely, 1) restoring energy self-sufficiency to around 25 percent
surpassing the pre-Earthquake level, 2) lowering the electricity costs below those of
today, and 3) setting GHG reduction goal comparable with other developed countries.
This energy mix aims to absorb the cost increase caused by the expansion of renewable energy (higher costs seem inevitable due to the feed-in tariff system) with the costsavings from reduced fossil fuel imports due to the restart of nuclear power plants aswell as reductions due to energy conservation and increased use of renewables.

Figure 7: Japan’s New Energy Mix

Source: METI

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JAPAN’S ENERGY CONUNDRUM

Figure 8: Forecast of Electricity Cost

Source: METIIn defining the energy mix, METI also conducted a sensitivity analysis to calculate
the impact on economic cost and CO2 emissions when one percent of the share allocated to nuclear is substituted by coal, LNG or renewables. For example, if all of the
22-20 percent share for nuclear is substituted by renewables, electricity costs will be¥4.8-4.3 trillion ($40-36 billion) higher per annum than the forecast for the INDC. As aresult, instead of fulfilling the second requirement to reduce costs, such a future would
result in even higher electricity costs.

Figure 9: Sensitivity Analysis about the Change of Power Mix

Source: METI

Ambition Level of Japan’s INDC
There has been some criticism of Japan’s INDC and its underpinning energy mix on
the grounds that its percentage figure reduction rate from 1990 or 2005 is lower thanthose of European Union (EU) and the United States. However, what matters is not a

CHAPTER ELEVEN

145

comparison between percentage figures but the comparability of efforts. For example,
levels of GHG emissions per GDP or GHG emissions per capita for the present and for2030 clearly show that Japan’s INDC is sufficiently ambitious compared with the EU andthe United States. The criticism does not take into account the changes in approach on
how best to move forward on climate change that have taken place in the twenty years
since the Kyoto Protocol.

Figure 10: GHG Intensity of Major Countries (Present and 2030)

Source: METI based on IEA and UN Statistics

Figure 11: GHG per Capita of Major Countries (Present and 2030)

Source: METI based on IEA and UN Statistics
Note: The above data is a rough best guess estimate due to the different underlying assumptions (e.g. for GDP growth) acrosscountries and lack of published data (especially for China).

146JAPAN’S ENERGY CONUNDRUM

The Asia/World Energy Outlook 2015 by the Institute of Energy Economics, Japan(IEEJ) (Figure 12) shows that Japan’s INDC is as ambitious as the ATS (Advanced Technology Scenario), which assumes maximum introduction of energy efficiency and low
carbon technologies.208

Figure 12: Comparison of INDC, Reference Case and Advanced Technology Scenario

Source: Institute of Energy Economics of Japan

Recent OECD analysis209 shows that the targets of the United States, EU and Japan
all require large deviations from their historical trends of correlation between GDP
growth and emissions intensity improvement. Among them, it is clear that Japan needs
to achieve a particularly large shift from its 2011 and 2012 performance to put itself on
track for the 26 percent target.

208
209

Japan’s 2020 target does not count nuclear.
See https://www1.oecd.org/publications/climate-change-mitigation-9789264238787-en.htm.

CHAPTER ELEVEN

147

Figure 13: Emission Intensity and GDP Scatter Plots of U.S., EU and Japan

Source: Organization for Economic Co-operation and Development (OECD) “Climate Change Mitigation – Policies and­Progress” (October 2015).

148

JAPAN’S ENERGY CONUNDRUM

Furthermore, according to the Research Institute of Innovative Technology for the
Earth’s (RITE) model analysis,210 Japan’s marginal abatement cost (MAC) is higher thanthose of the United States and the EU. In fact, the Government of Japan could haveconducted a more detailed cost analysis in defining its energy mix. Its MAC seems tohave been dominated by a pre-determined conclusion that Japan’s INDC must be “20percent plus” with a view to presenting comparability with the EU and the United States,
which could be called a “Kyoto era obsession.”

Figure 14: Comparison of Marginal Abatement Cost Curves of Major Countries (2030)

Source: Research Institute of Innovative Technology for the Earth (RITE)

It should be borne in mind that the MAC analysis by RITE assumes the steady restartof nuclear power plants, of which the marginal cost is very low due to the depreciation
to date. The higher level of MAC compared to those of the EU and the United States
mainly derives from the extremely ambitious energy efficiency target. If the restart ofnuclear plants does not proceed as expected and the efficiency and renewable energy
targets are further “enhanced,” the MAC will skyrocket and potentially have a devastating
impact on the Japanese economy.

Risk Scenarios related to 26 Percent Target
As is obvious from the above, the steady reoperation of nuclear power plants is theprerequisite for simultaneously achieving GHG emissions reductions, energy security
and cost reductions.
However, it is still highly uncertain whether a 20-22 percent share of nuclear can beachieved in 2030. In the opinion polls, there is still a strong “nuclear-phobia.” Lacking a
See  http://www.rite.or.jp/Japanese/labo/sysken/about-global-warming/download-data/EEnergymix_INDCs_20150818.pdf.

210

CHAPTER ELEVEN

149

comprehensive perspective on energy security and climate change mitigation, the public
tends to consider that there is no need for nuclear so long as there are no blackouts andno rapid upsurge in electricity tariffs. Stagnant oil and natural gas prices in recent years
have further reduced the sense of urgency.
Since nuclear power is still politically controversial, the ruling Parties tend avert andpostpone difficult debates on nuclear such as the replacement of existing nuclear power
plants after their operational lifetime. However, Japan needs to discuss the nuclear question seriously if it is really committed to long-term GHG mitigation.
The regulatory environment is also far from ideal. The Nuclear Regulatory Authority (NRA) tends to react excessively to “zero-risk” demand, which is scientifically andtechnically impossible. The NRA tends to avoid even close communication with powerindustry based on its erroneous interpretation of “neutrality.” This is a deviation from a
regulator’s original mission, namely, ensuring safe operation of nuclear power plants. In
addition, due to insufficient staffing, there is still a long queue for safety checks, which
is further delaying reoperation.
Lawsuit risk is still rampant. While it is encouraging the Osaka High Court overturned
an injunction issued against the restart of Kansai Electric Power Co.’s No. 3 and No. 4
reactors at its Takahama facility in Fukui Prefecture, the recent ruling of the Hiroshima
High Court ordering the suspension of a nuclear reactor at Shikoku Electric Power Co.’s
Ikata power plant in Ehime Prefecture is a serious blow to the government and utilities
that are aiming to bring more reactors back online.
Furthermore, on-going electricity market liberalization is making the business environment for nuclear more unpredictable. In particular, replacement of existing nuclear
power plants and new construction would be extremely challenging due to the highupfront cost, a difficult financing environment, and regulatory and political uncertainties.
Under such a situation, the possibility of reaching the 26 percent target is also
uncertain as it depends on the prospects for nuclear restart. There are four possible
scenarios going forward.
Scenario 1: The proposed energy mix could be achieved as planned by the steadyreoperation of nuclear power plants and the extension of their lifetimes. While this is
the ideal situation, the big “if” is whether nuclear power restarts can occur as envisioned.
Scenario 2: Due to slow progress in safety checks by the NRA and roadblocks by theanti-nuclear movement, nuclear restarts do not occur as expected. In order to ensure
security of electricity supply, fossil fuels, renewables and energy efficiency will fill the
gap while minimizing the upward impact of electricity tariffs. This could make it difficult
to achieve the 26 percent target.
Scenario 3: Despite slow progress in nuclear restarts (like Scenario 2), the gap inachieving the 26 percent target would be filled by just renewables and energy efficiency.
In this case, electricity tariffs could soar, damaging international competitiveness and theeconomy.
Scenario 4: While sticking to the 26 percent target, this scenario assumes emissions
credits purchased from overseas. Its cost is lower than Scenario 3, but it will cause theoutflow of national wealth for purchasing fossil fuel and “air,” repeating the 1st Kyoto
period when Japan spent ¥600-800 billion purchasing Kyoto credits.

150JAPAN’S ENERGY CONUNDRUM

These scenarios pose significant challenges as Japan considers its future INDCs.
In particular, the Trump Administration’s announcement to terminate implementationof the U.S. INDC (26-28 percent reduction from 2005 by 2025) completely changes theunderlying assumption used by Japan when it defined its 26 percent target.

Figure 15: World Trading Matrix (2015)

Source: JETRO World Trade and Investment Report 2016

As presented above, 71 percent of Japan’s imports come from the APEC region(including the United States) while 77 percent of Japan’s exports go to the APEC region.
This means policy developments in the APEC region will have significant implications
for Japan’s relative international competitiveness. Accordingly, in considering Japan’s
future course of action in response to the slow restarting of nuclear power plants, suchelements as the crucial status of the United States as Japan’s trading partner, its pursuitof further lower energy costs putting its national interest first, and the implication of thaton Japan’s economy and international competitiveness needs to be carefully taken into
account.

Long-term Goal and Its Implication
The Plan for Global Warming Countermeasures (13 May 2016) defines not only the
mid-term 2030 target but also a long-term goal for 2050:“Based on the Paris Agreement, under a fair and effective internationalframework applicable to all major Parties, Japan leads the international
community so that major emitters undertake emission reduction inaccordance with their capacities, and, aims to reduce greenhouse gas
emissions by 80% by 2050 as its long-term goal, while pursuing the
global warming countermeasures and the economic growth at the sametime. Such a deep cut in emissions is difficult to achieve through theCHAPTER ELEVEN

151

extension of existing measures so far. Therefore, Japan pursues solution
through innovation such as development and deployment of innovativetechnologies which enables drastic emission reductions, and, while
promoting domestic investment, enhancing the international competitiveness, and asking citizens for their opinion, aims to achieve a deep
cut in emissions through long-term, strategic actions, and contributes toglobal GHG emission reductions.”
However, the author has many reservations about 80 percent goal. The figure “80%”originates from the developed countries’ proposal in the UN climate negotiation in 2009
to reduce global GHG emissions by 50 percent by 2050 while developed countries
take the lead by reducing their emissions by 80 percent. In other words, a 50 percent
reduction of global GHG emissions by 2050 and 80 percent reduction in developed
countries formed a package. However, the developing countries have never accepted
this proposal. While developed countries proposed a 40-70 percent reduction of global
GHG emissions by 2050 together with the temperature target of 1.5-2.0 degrees at thetime of COP21, it did not fly. So long as there is no consensus on a global GHG emissions reduction goal, this package deal should be regarded as invalid.
Furthermore, while the proposed global GHG emissions reduction goal of 50 percent
or 40-70 percent derives from a specific level of climate sensitivity (3.0 degrees), there
is a range of views about climate sensitivity that run from 1.5 to 4.5 degrees without any
consensus on which is correct. With a difference of only 0.5 degrees, the shape of global
GHG emissions for achieving 2.0 degrees target greatly changes,211 putting the rational
for “50% globally and 80% for developed countries” into question.

Figure 16: GHG Emissions Paths to 2100 for 2°C Target
with Climate Sensitivity of 3.0 and 2.5°C

Source: RITE

211

See http://www.rite.or.jp/system/latestanalysis/pdf/E-Climatesensitivity_2degrees_INDCs.pdf.

152JAPAN’S ENERGY CONUNDRUM

In addition, U.S. withdrawal from the Paris Agreement means that the preconditionsof the long-term goal, namely, “a fair and effective international framework applicable
to all major Parties” and “major emitters’ undertaking emission reductions in accordancewith their capacities” are not fulfilled.

Japan’s Contribution to Global GHG Emissions Reductions
More fundamentally, the author seriously doubts the current UN approach that justfocuses on production level GHG emissions reductions in each country will work. As
suggested in the Long-Term Climate Change Policy Platform,212 Japan rather should
implement the “three arrows” game changers as countermeasures against global warming: (1) international contribution through dissemination of Japan’s efficient and environmentally friendly technologies to developing countries; (2) global value chain-based
reductions by industries and companies through such technologies as Green IT andhigh-performance steel with a view to reducing GHG emissions at utilization stage; and(3) development of innovative technologies.

Figure 17: Three Arrows Beyond National Border

Source: METI Long-Term Climate Change Policy Platform

212

See http://www.meti.go.jp/english/press/2017/pdf/0414_001a.pdf.

CHAPTER ELEVEN

153

Based on these three-arrows, the government, industries and companies should
all proactively engage in efforts to reduce carbon emissions by an amount greater thanthat emitted by themselves, i.e., eventually carbon neutralizing Japan as a whole while
assisting emission-reduction efforts by other countries.

U.S.-Japan Cooperation
On 1 June 2017, President Trump announced his intention to withdraw from theParis Agreement. It is regrettable that the United States turns its back on the Agreement
given its decisive role in ironing out this historic document. If there are serious concerns
about the previous administration’s announced INDC’s negative impact on U.S. businessand people’s lives, the INDC could be revised downward, which is not legally prohibited
under the Paris Agreement.
Having said that, the author is convinced that the United States and Japan as the­closest of allies can do a lot together to combat climate change. On 4 August 2017,
the U.S. Department of State issued a media note on the U.S. communication to the
UN regarding its intention to withdraw from the Paris Agreement.213 While many had
anticipated the decision announced in the media note, it is encouraging that the UnitedStates will continue to participate in international climate change negotiations including
ongoing ones related to guidance for implementing the Paris Agreement and COP23 toprotect U.S. interests and ensure all future policy options remain open. Such participation will include ongoing negotiations related to guidance for implementing the Paris
Agreement. The effectiveness of the Paris Agreement highly depends on to what extent
we can overcome the dichotomous structure enshrined in the framework to date. It istrue that both developed and developing countries will participate in a common transparency framework under the Paris Agreement, but some developing countries are stillinsisting on institutionally differentiated treatment between developed and developing
countries based on “common but differentiated responsibilities.” Differentiated treatment
would substantially water down the spirit of the Paris Agreement. The United States
and Japan have always been strong advocates of a “common framework” and should
continue to work together. An effectively differentiated framework would make it moredifficult for the United States to reconsider its position on withdrawing from the Paris
Agreement.
Outside the UN arena, there are even greater opportunities for bilateral cooperation
whatever the U.S. course of action on the Paris Agreement. The immediate candidate isnatural gas trade. U.S. liquefied natural gas (LNG) will certainly diversify Japan’s gas procurement, could reduce Japan’s energy costs, and have a positive impact by increasing
flexibilities in the LNG trade not only for Japan but also for all of East Asia.
It is very encouraging that the U.S. Department of State media note mentioned above
clearly confirms the United States’ strong support of “a balanced approach to climate
policy that lowers emissions while promoting economic growth and ensuring energy
security.” It also encouragingly states the United States’ intention to “continue to reduce(our) greenhouse gas emissions through innovation and technology breakthroughs, andwork with other countries to help them access and use fossil fuels more cleanly andefficiently and deploy renewable and other clean energy sources, given the importance213

See https://www.state.gov/r/pa/prs/ps/2017/08/273050.htm

154JAPAN’S ENERGY CONUNDRUM

of energy access and security in many nationally determined contributions.” These
approaches are identical to Japan’s approaches on climate change delineated abovein this chapter despite Japan’s and the United States’ different positions on the Paris
Agreement. These approaches provide ample opportunities for bilateral cooperation.
The ultimate solution to climate change challenges requires disruptive innovation.
As the leading countries on innovation in the field of energy and environment technologies, the United States and Japan should expand existing and explore additional
possible areas for technology collaboration. Developing technologies allowing clean useof fossil fuels including carbon capture and sequestration (CCS) is an obvious choicesince the world, in particular, developing countries, still will use fossil fuels to support
their economic growth. Both countries should also consider collaborative demonstration
projects (e.g. CCS, distributed energy) in third countries. Enabling the clean use of fossil
fuels through innovation also would be beneficial for the United States’ goal of “energy
dominance” through export of its ample energy resources and related technologies.
From this perspective, the author strongly expects that the U.S. energy RD&D budget
will not suffer as deep a cut as first proposed by the current administration. It is encouraging that Congressional discussion appears to support reversing the proposed RD&D
budget cut for the sake of the future competitiveness of the U.S. economy.
Another area for possible cooperation is nuclear energy since both the United States
and Japan are determined to utilize nuclear as part of their road plans for energy security
and climate change. They could exchange their views and experiences as to how toensure competitiveness of existing nuclear power plants and enable new investment inJapan’s liberalized electricity market. They could also cooperate in developing safer andmore advanced nuclear power technologies.

Conclusion
Climate change is a daunting challenge for the entire world. Its unique characteristic,
namely, “mitigation benefit is global, but mitigation cost is local” makes global action
quite challenging and complicated. Japan is experiencing a unique “quadlemma” interms of energy security, energy cost and climate mitigation due to its almost entire
loss of nuclear power. 3E + S (safety) is the crucial guiding principle governing Japan’scourse of action. While Japan and the United States differ in their positions on the
Paris Agreement, there are many commonalities in their approaches on climate change,
namely, strong emphasis on a balanced approach among economic growth, energy
security and climate change mitigation, high priority on technology and innovation,and intention to spread clean environmental technologies to developing countries. This
indeed warrants a closer examination of, and embarking on, these ample opportunities
for U.S.-Japan cooperation.

CHAPTER TWELVE

155

Chapter Twelve
U.S.-Japan Energy Trade and Investment
Tom CUTLER
President, Cutler International LLC

Common Cause
The story of energy trade and investment between Japan and the United States is aclassic case of how two allies can find common cause and collaborate on energy security
and commerce despite the fact that they face significantly different energy trade andinvestment scenarios. In spite of some challenges, going forward there will be expanded
opportunities for U.S.-Japan energy trade and investment as well as for collaboration onenergy in the global arena.
Foreign trade and investment is essential to Japan. Japan faces daunting energy
supply challenges due to its dependence upon imports for over 90 percent of its overall
energy requirements. The sheer magnitude of its requirements as the world’s largest
importer of liquefied natural gas (LNG), 3rd largest coal importer, and 3rd largest net oil
importer, all of which is delivered by ship with LNG and oil coming mostly from theMiddle East, is daunting.214 By comparison, the United States has a deep base of indigenous energy resources that is enabling it to become increasingly self-sufficient in energy.
It also enjoys secure cross-border energy trade and investment linkages, and substantial
over-land energy infrastructure with neighbors Canada and Mexico. Accordingly, investment in energy supply in the United States dwarfs that of Japan by a factor of almost
eight to one. In 2016, there was some $227 billion invested in U.S. energy supply while
the figure for energy supply investment in Japan was only $36 billion.215
By virtue of their strategic relationship, the two allies have been able to navigate
the conundrums of meeting major energy import challenges and alleviating frustrating
non-energy trade imbalances. This relationship provides the basis for the premise thatJapan’s import dependence and the emerging growth in U.S. exports of fossil fuels,
notably oil and gas, has the potential to take the U.S.-Japan economic partnership to a
new level in terms of trade, investment and strategic solidarity.

Close Partners in Commercial Trade and Investment
The United States and Japan are the first and third largest economies in the world,
respectively. Accounting for about 30 percent of global GNP, they are major drivers of
the world economy, generating 29 percent of global outward foreign direct investment

214
See U.S. Energy Information Administration (EIA). Country Analysis of Japan, updated February 2, 2017,https://www.eia.gov/beta/international/analysis.cfm?iso=JPN.
215
See International Energy Agency (IEA). “Energy Investment by Fuel and Region,” Table 1.1, in “World­Energy Investment 2017.”

156

JAPAN’S ENERGY CONUNDRUM(FDI) stock, 21 percent of inward FDI stock, and 16 percent of world trade.216 The twonations also are major partners in trade, investment and commerce.
The United States is Japan’s largest investment partner by several measurements.
It is the largest foreign investor in Japan, accounting for 30 percent of inward direct
investment equivalent to $52 billion in 2015.217 The United States is also the largest destination of overseas Japanese FDI, accounting for 34 percent of outward direct investment
equivalent to $413 billion. From the perspective of cumulative foreign investment into
the United States, Japan ranks second behind only the United Kingdom holding $373
billion of FDI assets through 2014, equivalent to a 13 percent share overall.
Japan was the largest investor into the United States between 2012 and 2014 before
dropping slightly in 2015 to $30 billion.218 This compares to the $280 billion invested
in the U.S. energy sector overall.219 In the same year, 2015, Japanese investment also
reportedly created new 5,029 jobs in the United States, second only to Germany at 6,646
jobs.220 (Exports to Japan support more than 710,000 U.S. jobs while Japan’s foreign
direct investment in the United States accounts for an estimated 719,000 jobs.)221
The United States and Japan also are major trading partners. Japan is the UnitedStates’ fourth largest trading partner, just ahead of Germany and trailing only China, Canada and Mexico. In 2016, Japan accounted for 6.0 percent of U.S. imports, 4.3 percent of
U.S. exports, and 5.4 percent of total U.S. foreign trade.222
Meanwhile, the United States was the top export destination for Japan with a 20
percent share, followed by China and Korea. The United States was the source of 10

216
East-West Center and Sasakawa Peace Foundation. “Japan Matters for America Matters for Japan,” http://
www.asiamattersforamerica.org/sites/default/files/pdfs/Japan%20Matters%20for%20America%202015.pdf.
Also, see “Trade with Japan is Hugely Beneficial to the U.S. and Pennsylvania,” by Dr. Satu Limaye andAdmiral Dennis Blair, Philadelphia Inquirer, October 20, 2016, https://spfusa.org/research/trade-japan-hugely-beneficial-u-s-pennsylvania/.
217“The discrepancy between Japan’s accounting of U.S. foreign direct investment (FDI) into Japan, and U.S.
accounting of that FDI is attributed to methodological differences, especially with regard to indirect investors,
profits generated from reinvested earnings, and differing standards for which companies must report FDI.”
In any scenario, the United States also dominates in terms of Japanese portfolio investment, including debt
and equity securities. See U.S. Department of State. “Investment Climate Statement for 2017 – Japan,” https://www.state.gov/e/eb/rls/othr/ics/investmentclimatestatements/index.htm#wrapper. For example, in 2015, theUnited States accounted for 36 percent of all FDI into Japan at $810 billion, with the next biggest share goingto Singapore at 13 percent. Also see “Japan: Foreign Investment, Santander Trade Portal,” https://en.portal.
santandertrade.com/establish overseas/japan/foreign-investment.
218
See U.S. Department of Commerce, International Trade Administration. “Japan - Market Overview,” JapanCountry Commercial Guide, February 22, 2017, https://www.export.gov/apex/article2?id=Japan-Market-Overview. Please note that another source has Japan ranked fifth in 2015 in terms of “announced” investment
into the United States at $2.8 billion. The difference is probably definitional. (See Ernst & Young. “2016 U.S.
Investment Monitor,” at http://www.ey.com/Publication/vwLUAssets/ey-2016-us-investment-monitor/$FILE/
ey-2016-us-investment-monitor.pdf.
219
See SELECT USA, International Trade Administration, U.S. Department of Commerce. “Energy Industry Spotlight: The Energy Industry of the United States,” https://www.selectusa.gov/energy-industry-united-states.
220
See Ernst & Young. “2016 U.S. Investment Monitor,” at http://www.ey.com/Publication/vwLUAssets/
ey-2016-us-investment-monitor/$FILE/ey-2016-us-investment-monitor.pdf. Also, see “Foreign Direct Investment in the United States 2016 Report,” http://ofii.org/sites/default/files/Foreign%20Direct%20Investment%20
in%20the%20United%20States%202016%20Report.pdf.
221
See “Trade with Japan is Hugely Beneficial to the U.S. and Pennsylvania,” by Dr. Satu Limaye and Adm.
Dennis Blair, Philadelphia Inquirer, October 20, 2016, reproduced by the Sasakawa Peace Foundation USA,https://spfusa.org/research/trade-japan-hugely-beneficial-u-s-pennsylvania.
222
Data is from the U.S. Census Bureau, at https://www.census.gov/foreign-trade/statistics/highlights/top/
top1612yr.html. Please note year-to-date totals are available at https://www.census.gov/foreign-trade/statistics/
highlights/top/top1612yr.html.

CHAPTER TWELVE

157

percent of Japan’s imports.223 In terms of exports to Japan, the United States at $64
billion was second to China’s $152 billion and followed by Australia at $31 billion.
In 2016, the second largest U.S. trade deficit after China was with Japan, estimatedto be $68.9 billion. This amount is considerably less than the deficit with China at $347
billion and just ahead of the U.S. trade deficit with Germany at $64.9 billion. The overall
U.S. trade deficit in 2016 was $734 billion while, according to the U.S. Census Bureau,
Japan had an overall trade surplus of $82 billion.224
The value of U.S. energy exports to Japan, $4.3 billion in 2016, accounted foralmost 7 percent of overall U.S.-Japan trade. About half of the trade in terms of value
falls under categories of “nuclear fuel,” “oil field equipment,” “electric power generatorsand equipment,” and “mining & excavating machinery” as shown in Figure 1. Threefossil fuels (oil, coal and gas) account for the other half.

Figure 1: Composition of U.S. Energy Related Exports to Japan(million dollars)
Item

2014

2015

2016

Amt.

% ShareAmt.

% ShareAmt.

% ShareCoal (mostly
metallurgical)

558

1

470

1

488

1

Oil

2,185

3

1,477

2

2,082

3

Natural Gas

217

nil

103

nil

73

nil

Nuclear Fuel

51

nil

33

nil

37

nil

Electric power
generators &equipment

1,427

2

1,980

3

1,511

2

Oil field
equipment

15

nil

13

nil

16

nil

Mining &excavatingmachinery

136

nil

123

nil

84

nil

Sub-total ofEnergy Trade

4619

7

4199

7

4291

7

Sub-total of Nonenergy Trade62,25793

58,24493

58,97393

Total U.S. Exports
to Japan

66,876100

62,443100

63,264100

Source: Calculated from U.S. Census Bureau statistics at https://www.census.gov/foreign-trade/statistics/product/enduse/
exports/c5880.html. Definitions: Coal includes metallurgical (met) coal, steam coal and other fuels. Coal trade is mostly met
coal. Oil includes crude, fuel oil, other petroleum products and natural gas liquids (NGL).

223
Ibid., see SELECT USA, International Trade Administration, U.S. Department of Commerce. “Energy Industry Spotlight: The Energy Industry of the United States,” https://www.selectusa.gov/energy-industryunited-states. Also, see Ernst & Young. “2016 U.S. Investment Monitor,” http://www.ey.com/Publication/vwLUAssets/ey-2016-us-investment-monitor/$FILE/ey-2016-us-investment-monitor.pdf.
224
Op Cit, the data is from the U.S. Census Bureau for which the link is https://www.census.gov/foreign-trade/statistics/highlights/top/top1612yr.html. Please note year-to-date totals are available at https://www.census.
gov/foreign-trade/statistics/highlights/top/top1612yr.html.

158JAPAN’S ENERGY CONUNDRUM

About one percent of U.S. imports from Japan, $705 million, were energy-related
according to the U.S. Census Bureau, as shown in Figure 2.225 Meanwhile, Japan’s top
export to the United States is automobiles valued at $94 billion.226

Figure 2: U.S. Energy Related Imports from Japan(millions of dollars)
Item

2014

2015

2016

Amt.

% ShareAmt.

% ShareAmt.

% Share

Coal

1

nil

1

nil

1

nil

Oil (almost
all product)

998

1

947

1

703

1

Nuclear fuelmaterials

17

nil

1

nil

1

nil

Sub-total ofEnergy Trade

1016

1

949

1

703

1

Sub-total of
Non-energy
Trade133,48899

130,41599

131,498

99

Total U.S. Imports
from Japan

134, 504100

131,364100

132,201

100

Source: Census Bureau, https://www.census.gov/foreign-trade/statistics/product/enduse/imports/c5880.html. Definitions:
Coal includes related fuels. Oil includes crude, fuel oil, other petroleum products and natural gas liquids (NGL).

Energy accounts for a 20 percent share of Japan’s overall imports. In 2015, Japan
imported $151 billion in mineral fuels, $99 billion in electrical machinery (including $9
million in power generating machines), as well as $64 billion in chemicals.227 Petroleum
and natural gas specifically accounted for the largest share of overall Japanese imports,
valued at $47.3 billion and $40.5 billion, respectively. Price decreases in these commodities provided great savings compared to earlier years. Similarly, the roughly $15
billion in coal imports in 2016 was down 31 percent from the prior year.228
In sum, although Japan is not a currently a major market for U.S. oil, gas and coal,and the United States is not yet a major energy supplier for Japan, the energy traderelationship has great strategic significance. Japanese companies are increasing theirinvestments in the United States to expand U.S. capacity to be a reliable source of thefossil fuels oil, gas and coal as part of Japan’s energy security to diversify its sources ofsupply. By comparison, opportunities for U.S. firms in Japan’s domestic energy sector
225
Calculated from statistics from the Census Bureau. The link is https://www.census.gov/foreign-trade/statistics/product/enduse/exports/c5880.html.
226
See Ernst & Young. “2016 U.S. Investment Monitor.” The link is http://www.ey.com/Publication/vwLUAssets/ey-2016-us-investment-monitor/$FILE/ey-2016-us-investment-monitor.pdf. Also, see Op Cit., MITMedia Lab OEC, Japan, http://atlas.media.mit.edu/en/profile/country/jpn/.
227
See U.S. Department of Commerce, International Trade Administration. “Japan - Market Opportunities,”
Japan Country Commercial Guide, February 22, 2017. The link is https://www.export.gov/apex/article2?id=
Japan-Market-Opportunities.
228
See by Daniel Workman. “Japan’s top 10 imports,” February 8, 2017. The link is http://www.worldstopexports.com/japans-top-10-imports/.

CHAPTER TWELVE

159

are relatively limited by comparison and mostly in the power, energy efficiency andrenewable sectors.229

Conundrums of Energy Security, Trade and Investment
The energy supply gap caused by the Great Eastern Japan Earthquake and Tsunami on March 11, 2011 greatly exacerbated Japan’s reliance upon imported fossil fuels.
According to the U.S. Energy Information Administration (EIA), Japan’s trade balance
flipped from having enjoyed a trade surplus for thirty years that topped $65 billion in2010 to a trade deficit that reached a record $116 billion (¥12.8 trillion) in 2014. The
reversal was due primarily to increased fossil fuel import costs that ballooned by anannual average of $30 billion in the three years after the nuclear accident at Fukushima.
The depreciation of the yen and high oil prices also exacerbated the deficit. The softening in international fossil fuel prices starting in late 2014 helped reduce Japan’s trade
deficit to $22 billion (¥2.8 trillion) in 2015.230 Japan returned to trade surplus in 2016
mainly due to declining oil and gas prices but saw that surplus soften in 2017, down
approximately 25 percent from 2016.
U.S.-origin coal, gas and oil played a key role by partially filling the lost capacity
in Japan’s power generation. These increased imports marked a new phase in the U.S.Japan­relationship, i.e., a new calculus of Japanese energy security relying more closely
upon the United States to play an expanded role as a supplier of fossil fuels.

Growing Potential for Trade in Petroleum
Japan is the world’s third-largest net importer of crude oil and petroleum productswith total net imports of 3.8 million barrels per day (b/d). The United States is not amajor supplier of oil to Japan at this time, accounting for only 8 percent of crude imports
in 2016.231 Inasmuch as oil security is an important issue for Japan, it is significant that
U.S. exports of petroleum products (e.g., natural gas liquids, liquefied petroleum gas andoxygenates) more than doubled from 2010 to 2016. With the lifting of the ban on U.S.
crude oil exports on December 18, 2015 by the U.S. Congress due to booming oil shaleproduction, there is good potential for exports of crude oil and petroleum products to
grow.232 In addition, the expansion of the Panama Canal will facilitate increased exports
by allowing larger ships to transit its locks and reducing the transit time to Japan fromthe U.S. Gulf Coast to 20 days, compared to 31 days via the Suez Canal or 34 daysaround the southern tip of Africa.233

229
See, Op Cit., International Energy Agency. “Energy Investment by Fuel and Region,” Table 1.1, page 22 in“World Energy Investment 2017.
230
Op Cit., EIA Country Analysis of Japan, February 2, 2017 at https:/www.eia.gov/beta/international/analysis.
cfm?iso=japan.
231
Ibid., see EIA Country Analysis of Japan.
232
In 2016, the United States supplied less than 1 percent of Japan’s gasoline imports and just over 1 percent
of naphtha imports. See Petroleum Institute of Japan, Oil Statistics, Oil Product Import by Countries and by
Source (accessed January 2017) (via Japan›s Ministry of Economy, Trade, and Industry data), http://www.paj.
gr.jp/english/statis/.
233
See EIA. “Expanded Panama Canal reduces travel time for shipments of U.S. LNG to Asian Markets,” Today
in Energy, June 30, 2016, at https://www.eia.gov/todayinenergy/detail.php?id=26892.

160

JAPAN’S ENERGY CONUNDRUM

Even though the United States instituted an oil export ban in 1975, Japan was able
to take advantage of a small exception for Alaska crude.234 Thus, during the ban, trade in
crude oil between the United States and Japan was limited to intermittent supplies from
Alaska. But when the ban was lifted in December 2015, trade rebounded with Japan
importing 8,000 b/d of U.S. crude in 2016. In the first ten months of 2017, U.S. crude oil
exports to Japan have ranged from 5,000 to 62,000 b/d on a monthly basis. Meanwhile,
export trade in petroleum products, primarily liquefied petroleum gas (LPG), has been
growing from 54,000 b/d in 2008 to 240,000 b/d in 2016, and in the first five months of2017 ranging up to 452,000 b/d on a monthly basis. Despite this growth, Japan is not
yet a major market for U.S. petroleum exports, accounting for about 2 percent of U.S.
crude exports in 2016, and 5 percent of product exports (including 19 percent of U.S.
exports of propane/LPG in 2016). However, the trend is clearly trending upward withconsiderable growth potential.235

Figure 3: U.S. Oil Exports to Japan(thousand barrels per day)
2014
Item

Amount2015

Japan
Share ofAmount2016

Japan
Share ofAmountJapan
Share of

8

0%

591

1%

Crude Exports to
Japan

0

Total US. Crude
Exports

351

Product exports to
Japan

150

Total U.S. ProductExports

3,824

4%

4,273

4%

4,670

5%

Total U.S. Oil(crude & product)
Exports to Japan

150

0%

166

0%

2505

0%

Total U.S. Oil Exports

4,176

4%

4,738

4%

5,261

5%

0
0%

465

0%

166

242

Source: See series of data tables in EIA, “Petroleum & Other Liquids – Exports by Destination” at https://www.eia.gov/dnav/
pet/pet_move_expc_a_EP00_EEX_mbblpd_a.htm. Totals may not add due to rounding.

The Government of Japan encourages Japanese companies to invest in exploration and production projects overseas as part of its energy security strategy. The Japan
234
Although the United States banned crude oil exports in 1975, President Regan allowed the export of Alaska
Cook Inlet oil in 1985/1986 and ten years later President Clinton made a “national interest determination” in
1996 that authorized exports of Alaskan North Slope crude. Japan was a natural destination being only 12 days
steaming time away by oil tanker. The United States shipped between 1996 and 2000 about 25 million barrelsof Alaskan North Slope crude oil to Japan.
235
See series of data tables in EIA, “Petroleum & Other Liquids – Exports by Destination” accessed in August
2017, https://www.eia.gov/dnav/pet/pet_move_expc_a_EP00_EEX_mbblpd_a.htm. Also, see EIA. “U.S. Exports of Crude Oil and Petroleum Products Have More Than Doubled Since 2010,” Today in Energy, June 27,
2017, https://www.eia.gov/todayinenergy/detail.php?id=31812. Also, see Reuters. “Japan to import U.S. crudein May, second cargo since export ban lifted,” March 16, 2016.

CHAPTER TWELVE

161

Oil, Gas and Metals National Corporation (JOGMEC), an independent governmentalorganization, plays a key role in promoting Japanese investment. With a global oil
and gas budget of $5.2 billion, it provides equity capital and liability guarantees forJapanese special purpose companies (SPCs) to promote oil and gas exploration andproduction as well as mining of nonferrous metals and other minerals. JOGMEC offers
equity investments in the development stage of resource projects, including oil, gas, coaland geothermal energy. In addition, the Japan Bank for International Cooperation (JBIC)
helps secure strategic natural resources overseas for private Japanese business interests
by offering loans at favorable rates.
Because of the pressing need to secure energy supplies following the Great EasternJapan Earthquake and Tsunami of 2011, Japanese companies stepped up the pace of
their investment. By 2014, they were participating in more than 140 oil and gas projects
worldwide.236 These projects included shale oil and oil sands projects in the UnitedStates and Canada involving Japanese firms such as Inpex, Cosmo Oil, Idemitsu Kosan
Company, Japan Energy Development Corporation, Japex, Mitsubishi, Mitsui, Nippon
Oil, and others. Many of these companies are involved in small-scale projects originally
set up by the Japan National Oil Company prior to 2004 or since then by its successor
JOGMEC while other investments are in high-profile overseas upstream projects.237
In one deal, Mitsui & Co. announced in 2016 that it would buy a 20 percent working
interest in four blocks in the Gulf of Mexico owned by Shell estimated to hold 100
million barrels in reserves. On-shore, Tokyo Gas acquired a 25 percent interest in the
Eagle Ford shale gas play in 2016 following-up on the estimated $1 billion each invested
by Mitsui & Co. and Marubeni Corporation in the Eagle Ford basin in 2011-2012. Mitsui& Co. also has investments in over 1,100 wells in the Marcellus shale gas region.238
Of the foreign investors who committed around $112 billion in the U.S. oil and gas
industry between 2008 and 2013, mostly in shale gas ventures, Japan ranked second at$16.4 billion behind Australia at $20.1 billion. This was a win-win scenario. Japanesefunding provided much needed capital to U.S. firms and Japanese investors got a firsthand opportunity to learn about shale gas production techniques.239
In June 2017, the Trump Administration announced its energy policy priority toremove “unnecessary roadblocks that will unleash America’s energy potential” and toachieve “energy dominance” which could lead to more U.S. production.240 This policy,
focused on fossil fuels, aspires to make the United States a major energy exporter to“markets around the world.” Actions taken in 2017 include authorizing languishingpipeline projects, such as the Keystone XL and Dakota Access pipeline projects, and236
See Reuters. “Japan’s JOGMEC says could accelerate investment in oil, gas,” June 19, 2014 and Petroleum
Association of Japan. “Petroleum Industry in Japan 2015,” page 25.
237
See Op Cit, EIA. Country Analysis of Japan, updated February 2, 2017.
238
See Paraskova, Tsvetana. “Japan Continues Acquisition of U.S. Oil and Gas Assets,” Oil Price, December 5,
2016, http://oilprice.com/Latest-Energy-News/World-News/Japan-Continues-Acquisition-Of-US-Oil-And-GasAssets.html.
239
See attributed to Ernst & Young in “Foreign Investors U.S. Power Play,” by Susan Caminiti, special to CNBC.
com at https://www.cnbc.com/2014/03/05/foreign-investors-us-power-play.html.
240
See White House Press Release, “Perry, Zinke and Pruitt: Paving the path to U.S. energy dominance,” June27, 2017, https://www.whitehouse.gov/the-press-office/2017/06/27/perry-zinke-and-pruitt-paving-path-usenergy-dominance, and “Trump Seeks to Project Global Power Through Energy Exports,” Reuters, June 29,
2017, https://www.reuters.com/article/us-usa-trump-energy/trump-seeks-to-project-global-power-throughenergy-exports-idUSKBN19K2VY. Also, see “Trump to Call for U.S. Dominance in World Energy Production,” by Jennifer Dlouhy, Bloomberg Politics, January 25, 2017, https://www.bloomberg.com/news/
articles/2017-06-25/trump-to-call-for-u-s-dominance-in-global-energy-production.

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JAPAN’S ENERGY CONUNDRUM

speeding up approvals of oil production on federal lands by the U.S. Department ofInterior. These and other actions could help enhance the supply of oil the United States
can make available to world markets, including Japan. Of course, even if U.S. oil does
not go directly to Japan, it still has a beneficial impact for Japan in terms of global market
supply availability and price.

Coal Trade Poised for Continued Growth
The United States has the largest coal reserves in the world, including major deposits
in the Powder River Basin in Wyoming and in Montana, while Japan continues to be adriver for the utilization of coal for baseload power generation. The outlook for Japanesedemand for coal imports, which jumped after the 2011 Fukushima-Daiichi accident, isstill robust as Tokyo seeks to diversify and lower the cost of its energy mix. In 2015,
Japanese thermal coal imports hit a record 113 million tons before dropping back to 110
million tons in 2016.241
The United States is a major coal exporter, the fourth largest in the world, and a
growing supplier to Japan. Although Japan has accounted for 5 to 6 percent of U.S. coalexports recently as shown on Figure 4, in the first half of 2017 U.S. coal exports to Japan
more than doubled from whole-year levels in 2016. They rose from 1.8 million short tons
in 2016 to almost 4 million short tons in 2017 through June. In 2017, Japan accounted foralmost nine percent of total U.S. coal exports.242

Figure 4: Total U.S. Coal Exports to Japan(thousand short tons)
2014
Item

AmountU.S. Coal
exports to
Japan

4,898

Total U.S.
Coal exports

97,257

2015

Japan
Share
%

Amount

2016

Japan
Share
%

4,657

5

73,958Amount2017 Jan-June

Japan
Share
%

1,839

6

28,376

Amount

Japan
Share
%

3,993

6

44,1039

Source: Includes both steam and met coal. Coal data is from EIA “Quarterly Coal Report,” August 2016 and October 2, 2017,
as derived from Census Bureau “Monthly Report EM 545.”

Following several down years after record high exports in 2012 of 125 million tons(mt), overall U.S. coal exports jumped 58 percent in the first quarter of 2017. Although
there are several export projects proposed for the Pacific Northwest that could enlarge
capacity to ship more coal to Japan, most have stalled.243 Softness in global coal markets
See Reuters Update, January 25, 2017, http://uk.reuters.com/article/energy-japan-imports-idUKL4N1FF1X1.
See EIA, “U.S. Coal Exports,” accessed September 2017, https://www.eia.gov/coal/production/quarterly/
pdf/t7p01p1.pdf.
243
See EIA. “Today in Energy,” July 18, 2017, https://www.eia.gov/todayinenergy/detail.php?id=32092.
241
242

CHAPTER TWELVE

163

and the dominant role played by Australia and Indonesia in supplying coal to Japan constrain the outlook for increased U.S. coal exports to Japan, or for significant additional
investment in export infrastructure in the Pacific Northwest as an outlet for Powder River
Basin coal.
All of Japan’s coal supply is imported. Often times, the imported coal comes frommines developed by Japanese companies. Japan’s coal policy includes government
financial support for overseas exploration through geological surveys and planning newmine infrastructure.244 In addition, Japan is a world leader in developing and deploying
lower-emission coal technologies. It also is developing technologies to facilitate theefficient use of low-quality coal. A key government policy priority is to support exportsof Japanese-origin low-carbon technologies and power plants.
The United States stands as a natural collaborator in the achievement of these policy
goals but the two countries have at times differed in their support for the developmentof coal-fired power plants overseas. For example, official Japanese government support
for investment in coal arose as an issue of financial coal diplomacy during the Obama
Administration. Japan is the largest provider of coal project finance, investing $20 billion
in coal finance between 2007 and 2014.245 However, in 2015 it adjusted its policy inresponse to a request by the United States to modify its policy toward government
funded credit support programs in order to reduce increase greenhouse gas e­ missions
globally from coal-fired power plants.
The United States supported ending public export financing for coal-fired power
plants unless they deployed carbon capture and storage (CCS) technology with limited
exceptions for the poorest countries. Japan’s position was to support the global deployment of the most efficient coal-fired power technologies in countries that will continue
to use coal. In November 2015, Japan and the United States reconciled and agreed toan Organization for Economic Co-operation and Development (OECD) position thatits members limit export credit financing for coal-fired power projects to those withultra-supercritical technologies, supercritical plants in countries facing energy poverty
challenges and small sub-critical plants in poorer, developing nations.246 This decision
led to major Japanese trading houses such as Mitsubishi to sell coal assets and cut their
exposure to thermal coal in a strategic move towards a greener portfolio and to focus on
new priorities such as coking coal and LNG.247

Natural Gas Trade a Key Target for Japanese Investment
The United States is an established supplier of LNG to Japan, averaging over 50,000
million cubic feet (Mcf) of LNG per year from the mid-1970s through 2007 from Alaska.
244
See IEA. Country Review Japan 2016, https://www.iea.org/publications/freepublications/publication/
EnergyPoliciesofIEACountriesJapan2016.pdf.
245
See Samantha Page. “The U.S. and Japan are Close to reaching a Major Agreement on Coal,” https://thinkprogress.org/the-u-s-and-japan-are-close-to-reaching-a-major-agreement-on-coal-4ffa738aa031/.
246
The agreement limited investment in low-efficiency power plants but allows continued investment inhigh-efficiency combustion technologies. More broadly, it intended to align export credit policies with climatechange objectives to achieve lower emissions. See OECD. “Statement from the Participants on the Arrangement on Officially Supported Export Credits,” Paris, November 18, 2015, http://www.oecd.org/newsroom/
statement-from-participants-to-the-arrangement-on-officially-supported-export-credits.htm.
247
See Reuters. “Japan’s Trading Houses Off-Load Thermal Assets Among Climate Concerns,” June 13, 2017,https://www.reuters.com/article/japan-coal-traders/japans-trading-houses-offload-thermal-coal-assets-amidclimate-concerns-idUSL3N1JA36T.

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JAPAN’S ENERGY CONUNDRUM

Trade then dropped off for a few years until the advent of the shale gas revolution.
The emergence of shale-based LNG drove the expansion of U.S. LNG export capacity.
Despite initial uncertainty about the U.S. regulatory process to approve LNG project
proposals to export to non-FTA (free trade agreement) countries, Japanese companies
invested in, and contracted for, U.S. LNG despite Japan not having an FTA with theUnited States.248
Japanese companies such as Inpex, JX Nippon group and Mitsubishi have long
invested in natural gas exploration and production projects overseas tied to export
facilities, including projects in Australia, Southeast Asia and the Middle East. Thus, withthe arrival of the shale gas boom, it was natural for Japanese firms to seek similar
opportunities in North America, particularly the United States. Investors included Japanese utilities, the eventual wholesale customers of the gas, acquiring equity stakes in
upstream projects and LNG export terminals to ensure their access to LNG. JERA, Tokyo
Gas, Mitsui & Company all signed long-term contracts with the U.S. LNG exporters
including the Freeport, Cameron, Cove Point, and Jordan Cove projects.
The issue of access to U.S. LNG is a classic case study of Japanese diplomacy inenergy trade and investment. In February 2013 when Prime Minister Abe met with
President Obama, he asked for approval of LNG exports to Japan. He also announced$11 billion in credit guarantees to fund Japanese investment in U.S. shale gas projects.249
In addition, at that same meeting, perhaps as part of a quid pro quo, the United States
asked, and Japan later agreed, to join negotiations on the Trans-Pacific Partnership(TPP). Later, in July 2013, Prime Minister Abe sent Ministry of Economy and International
Trade (METI) Minister Toshimitsu Motegi to Washington to request access to U.S. LNG
exports and to exempt Japan from the U.S. regulatory requirement that LNG export
customers had to be FTA partners in order to get automatic approval.250
Meanwhile, JOGMEC announced in June 2013 that it would guarantee 75 percentof the bank loans to Japanese companies involved in developing LNG projects that
help reduce Japan’s import fuel cost.251 This action helped Japanese companies become
significant investors in large scale upstream and downstream shale gas projects including
LNG export infrastructure in Texas, Louisiana and Maryland.
Upstream, Mitsubishi and Inpex participated in oil and shale gas ventures in western
Canada. Mitsui and Sumitomo, large Japanese trading companies, are also involvedin large upstream shale gas ventures in the United States.252 Downstream, Japanesetrading companies Mitsubishi and Mitsui jointly acquired a 33 percent equity share in
the Cameron LNG project in 2013, securing two-thirds of the terminal’s export capacity.
248
See Cutler, Tom. “The Trans-Pacific Partnership as a Pathway for U.S. Energy Exports to Japan,” National
Bureau of Asian Research (NBR), January 28, 2015, http://www.nbr.org/downloads/pdfs/eta/ES_essay_cutler_012815.pdf.
249
See “Japan wakes up to the U.S. Shale Revolution” by Emiko Terazono and Guy Chazen, Financial Times,
February 26, 2013, https://www.ft.com/content/20b40574-8007-11e2-96ba-00144feabdc0.
250
See Cutler, Tom. “The Trans-Pacific Partnership as a Pathway for U.S. Energy Exports to Japan,” National
Bureau of Asian Research (NBR), January 28, 2015, http://www.nbr.org/downloads/pdfs/eta/ES_essay_cutler_012815.pdf. Also, see “Impact of Trade Policy on Japanese Trade and Investment” by Roger Farrell in The
Political Economy of Japanese Trade Policy edited by Aurelia George Mulgan, and Masayoshi Honma, Palgrave
Macmillan, 2015, p. 166.
251
See S&P Global Platts. “Jogmec to guarantee 75% of loans to LNG projects that lower Japan’s import costs,”
June 21, 2013, https://www.platts.com/latest-news/natural-gas/tokyo/jogmec-to-guarantee-75-of-loans-to-lngprojects-27108982.
252
See Op Cit, See EIA. Country Analysis of Japan, updated February 2, 2017, https://www.eia.gov/beta/international/analysis.cfm?iso=JPN.

CHAPTER TWELVE

165

At the Cove Point project in Maryland, an arm of Sumitomo bought half of its output
that it then re-sold to Tokyo Gas and Kansai Electric. Osaka Gas and Chubu ElectricPower each invested a reported $600 million for 25 percent equity stakes in the Freeport
LNG project.253 These investments all happened after 2010 when for five straight years
the largest individual capital investment announcements in the United States were for
LNG facilities. In 2015, the six largest projects all were LNG and chemical manufacturing
facilities, many of which use natural gas as a feedstock.254
In December 2016, Japan imported 11,137 Mcf out of the Sabine Pass LNG terminal
whereas in the preceding two years it had received shipments of U.S. LNG only from
Alaska. Japan accounted for 29 percent of total U.S. LNG exports in 2015 but due to anumber of new customers for U.S. LNG, this share dropped to 6 percent in 2016 eventhough the actual volume of Japanese imports grew by one-third. These figures reflect
the rather erratic trend in Japanese imports of U.S. LNG, including re-exports, datingback to 2011 when imports reached a peak of 18,012 Mcf and then eased to 14,379 Mcf
in 2012 before dropping to zero in 2013 and back up to 13, 310 Mcf in 2014 and 8,262
Mcf in 2015.255

Figure 5: U.S. Natural Gas and LNG Exports(billion cubic feet)
2014

2015

2016

Amount

Japan
Share
%

Amount

Japan
Share
%

Amount

Japan
Share
%

U.S. LNG Exports
to Japan

13.3

n/a

8.3

n/a

11.1

n/a

Total U.S. LNG
Exports

16.3

82

28.4

29

186.8

6

Total U.S. Natural
Gas Exports(pipeline;
e-export)

1,514

1

1,784

nil

2,335

nil

Item

Source: Energy Information Agency, “U.S. Natural Gas Exports and Re-Exports by Country,” https://www.eia.gov/dnav/ng/
ng_move_expc_s1_a.htm.

Although a steadier and growing volume of Japanese imports of U.S. LNG can be
expected once the projects Japan has invested in come on line, the global gas market’s
253
As reported in Reuters, “Interview with Chubu Electric,” by Jacob Gronholt-Pedersen, February 28, 2014,
http://uk.reuters.com/article/chubu-lng/interview-japans-u-s-lng-imports-to-reach-10-mln-t-yr-chubu-electricidUKL3N0LW13V20140228.
254
See Ernst & Young. “2016 U.S. Investment Monitor,” http://www.ey.com/Publication/vwLUAssets/
ey-2016-us-investment-monitor/$FILE/ey-2016-us-investment-monitor.pdf.
255
See EIA. “Natural Gas: U.S. LNG Exports and Re-Exports by Point of Exit,” https://www.eia.gov/dnav/ng/
ng_move_poe2_a_EPG0_ENG_Mmcf_a.htm.

166JAPAN’S ENERGY CONUNDRUM

plentiful supply and lower cost brought about by the U.S. shale gas revolution also
makes the option of importing U.S. LNG less commercially compelling. Nevertheless,energy security remains a major driver of the continuing strong interest in access to
U.S. LNG. In the short-term, some Japanese companies are likely to continue to acquireenergy resource assets while others will be more hesitant to invest in new projects aslong as there is a soft LNG market.256

Japanese Investment in Nuclear Power Facing Uncertain Future
Japan was the first country to join President Eisenhower’s “Atoms for Peace” programand signed its first nuclear cooperation agreement with the United States in November
1955.257 This led to decades of close cooperation between government and industry.
It resulted in U.S. companies selling billions of dollars of equipment, technology, andfuel to Japan while Japan made the largest foreign contribution—at least $150 million in
the 1960s— to U.S. nuclear R&D programs and paid substantial license fees to the U.S.
Atomic Energy Commission and its successors for nuclear fuel services. In fact, one of
the biggest, if not the biggest, Japanese energy investment in the United States was in the
nuclear power sector. In 2006, Toshiba outbid Mitsubishi Heavy Industries and General
Electric in a major strategic move to purchase Westinghouse from British Nuclear Fuels
PLC for $5.4 billion.
Since Toshiba built boiling water reactors and it appeared some major markets
such as China preferred Westinghouse pressurized reactors, Toshiba envisioned that thisacquisition would enable it to triple its nuclear business by 2015.258 Meanwhile, in thenext year in June 2007, Hitachi and GE announced a new partnership for commercial
nuclear power.
In 2011, the Great Eastern Japan Earthquake and Tsunami upended the global
outlook for nuclear power especially in Japan, drastically changing the industry’s prospects. Japan shut down all of its nuclear plants pending safety reviews. Then, in March
2017, Westinghouse filed for bankruptcy following billions of dollars in cost overruns at
nuclear power plants it designed and is constructing in Georgia and South Carolina.259
The bankruptcy caused Toshiba significant financial hardship and it has announced its
decision to divest itself of its Westinghouse assets in 2018.260
The enormous upfront cost to build new nuclear reactors combined with the fallout
from the events of 2011 results in an uncertain outlook for nuclear energy in Japan andthe United States. In turn, this uncertainty affects the potential for future bilateral tradeand investment in this sector.
256
See Canadian Trade Commissioner Service. “Mining Sector Overview 2016 – Japan,” http://tradecommissioner.gc.ca/japan-japon/market-reports-etudes-de-marches/0001460.aspx?lang=eng.
257
See Zwigenberg, Ran. “The Coming of a Second Sun: The 1956 Atoms for Peace Exhibit in Hiroshima andJapan’s Embrace of Nuclear Power,” The Asia Pacific Journal, February 4, 2012, http://apjjf.org/2012/10/6/
Ran-Zwigenberg/3685/article.html.
258
See Timmons, Heather. “Toshiba Agrees to Buy Westinghouse for $5.4 Billion,” New York Times, February 6,
2006, http://www.nytimes.com/2006/02/06/business/toshiba-agrees-to-buy-westinghouse-for-54-billion.html?mcubz=0. Also see Wald, Matthew. “GE and Hitachi will Merge their Nuclear Power Units,” New York Times,
November 14, 2006, http://www.nytimes.com/2006/11/14/business/worldbusiness/14nuke.html?mcubz=0.
259
See Mufson, Steven. “Things Go South at Westinghouse,” Washington Post, March 30, 2017, p. A-12. Also
Mufson, Steven. “Work Stops on S.C. Nuclear Reactors,” Washington Post, August 1, 2017, page A-10, andHals, Tom. “Westinghouse Reaches Deal for $800 Million U.S. Bankruptcy Loan,” Reuters, May 23, 2017, http://
www.reuters.com/article/us-toshiba-accounting-westinghouse/westinghouse-reaches-deal-for-800-million-u-sbankruptcy-loan-idUSKBN18J2M2.
260
See Clenfield, Jason et al. “How Toshiba Lost $6 Billion,” Bloomberg, https://www.bloomberg.com/news/
articles/2017-02-17/how-toshiba-lost-6-billion.

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Japan has restarted six nuclear power plants as of March 2018. The Trump Administration has expanded federal financing for the two Westinghouse reactors in Georgia
and is looking favorably upon nuclear energy as a source of baseload power. The
revitalization and expansion of the U.S.-Japan relationship in nuclear power though
likely rests with their ability to successfully commercialize new forms of civil nuclear
energy, such as small modular reactors.

New Opportunities in Renewables and Clean Energy
U.S.-Japan trade and investment in renewable energy is not on a scale sufficient tobe a major feature of their energy/economic relationship. However, Japanese and American corporations are both looking for attractive commercial opportunities bilaterally andoverseas to invest and construct renewable energy projects, including wind, solar andother technologies.261
The U.S. Department of Commerce in 2016 ranked Japan as a top potential market
for renewable energy products because, with the shutdown of Japan’s nuclear fleet
and electricity market deregulation, the Japanese renewable market is growing. U.S.
exporters have the potential to enlarge their renewable energy presence especially insolar, wind and geothermal in the Japanese market in the future, primarily as suppliers
to domestic Japanese producers.262 For example, Goldman Sachs established a portfolio
company, Japan Renewable Energy, to help address Japan’s need for renewable energy
post-Fukushima.263 Japan has been expanding its overseas presence in the renewables
market but has not been particularly active in the U.S. market.
Although difficult to quantify, there also is increasing bilateral investment and tradein other clean energy technologies. Japanese automotive companies have invested heavily in the United States in advanced hybrid and electric vehicles, and related parts andequipment, in addition to their exports to the United States. In terms of joint investment
in clean energy R&D for buildings, one success story is the 2016 partnership between
SUNY Polytechnic Institute in Albany, New York and Japan’s New Energy and Industrial
Development Organization (NEDO). NEDO invested $25 million in the partnership to
add energy-efficient technologies to SUNY Polytechnic Institute’s ZEN building (i.e. Zero
Energy Nanotechnology) which will become the largest zero energy-capable, mixed-use
building in the United States.264 These technologies included lighting, fuel cells and smart
building energy management systems.

261
See Buckley, Tim and Nicholas, Simon. “IEEFA Update: Japan is Investing Heavily in Overseas Renewables,”March 28, 2017, http://ieefa.org/ieefa-update-japan-investing-heavily-overseas-renewables/.
262
U.S. International Trade Administration, “2016 Top Markets Report Renewable Energy, Japan Country Case
Study,” 2016.
263
Goldman Sachs, “Environmental Market Opportunities Clean Energy,” http://www.goldmansachs.com/citizenship/environmental-stewardship/market-opportunities/clean-energy/.
264
See the link for the ZEN building at https://www.eypae.com/client/suny-polytechnic-institute/zen-zero-energy-nanotechnology-building.

168JAPAN’S ENERGY CONUNDRUM

Energy Trade and Investment Central to Japan-U.S. Economic Security
Japan’s lack, and the United States’ wealth, of energy resources create opportunities
for energy trade and direct foreign investment. These opportunities can advance Japan’s
energy security strategy, ameliorate non-energy trade imbalances, and deepen the
U.S.-Japan strategic alliance. However, challenges remain. Thus, close attention needs
to be paid to seizing opportunities and overcoming obstacles to strengthen the bilateralenergy relationship and to enhance cooperation and coordination in multilateral forums.
Starting with President Trump’s action on his first day in office to withdraw fromthe Trans-Pacific Partnership (TPP), trade and investment issues are playing out at thehighest levels in the bilateral relationship. In response to President Trump’s action on
TPP and his expressed concerns over the U.S. trade deficit with Japan, the Japanese government is considering ways to increase energy imports from the United States. Prime
Minister Abe adopted the posture of “not accommodating, not opposing” as part of astrategy to address President Trump’s broader concerns over Japan’s trade surplus. He
has proposed launching job-creating investment programs in U.S. infrastructure as wellas importing more U.S. LNG.265 When he met with President Trump in February 2017 aspart of his golf cart diplomacy, Prime Minister Abe pitched a $450 billion infrastructure
investment plan. These investments would include power plants and U.S. energy export
facilities, and create 700,000 U.S. jobs over a ten-year period.266
It appears that Japanese companies’ longer-term strategic investment into U.S. energy
assets has started to pay off. In December 2016, the Sabine Pass terminal shipped thefirst cargo of LNG to Japan. Overall, Japan’s energy imports from the United States morethan doubled from the previous year.267 Thus, even though the United States accounted
for less than 5 percent of Japan’s total energy imports, this jump in bilateral energy
trade helped the Abe Administration ease the rhetoric of a trade war.
Although the Japanese government cannot dictate from where private sector utility
companies import their energy supplies, it can still exert strong influence. According to
one observer, “pressuring utility companies to import more energy from the U.S. mustalso be a politically easier option than opening up the domestic beef market to U.S. It
will be interesting to see how an increase in energy imports from the U.S. could help
reduce Japan’s trade surplus with the U.S.”268
Trade also was on the agenda when U.S. Vice President Pence travelled to Japanin April 2017. Prime Minister Abe stated the Trans-Pacific Partnership (TPP) without theUnited States would be “meaningless” and that Japan has still not completely given up

265
See Uetake, Tomo and Kubo, Nobuhiro. “Japan Considers Buying More U.S. Energy as Abe Prepares to
Meet Trump,” Reuters, February 2, 2017 at http://www.reuters.com/article/us-usa-trump-japan-lng-exclusive/
exclusive-japan-considers-buying-more-u-s-energy-as-abe-prepares-to-meet-trump-idUSKBN15H0NJ.
266
See Francis, David. “Abe-Trump Meeting Might Yield Clues on Trump’s Trade Vision,” Foreign Policy,
February 10, 2017, http://foreignpolicy.com/2017/02/10/abe-trump-meeting-may-yield-clues-on-trumps-tradevision/. Also, see East Asia Forum. “Mr. Abe Goes to Washington,” February 13, 2017, http://www.eastasiaforum.org/2017/02/13/mr-abe-goes-to-washington/.
267
See Okubo, Takuji. “Japan Doubled Energy Imports from the U.S.,” Japan Macro Advisors, February 20, 2017,https://www.japanmacroadvisors.com/reports/view/breaking-news/japan-doubled-energy-imports-from-us.
268
See Uetake, Tomo and Kubo, Nobuhiro. “Exclusive: Japan Considers Buying More U.S. Energy as Abe
Prepares to Meet Trump,” Reuters, February 2, 2107, https://www.reuters.com/article/us-usa-trump-japanlng-exclusive/exclusive-japan-considers-buying-more-u-s-energy-as-abe-prepares-to-meet-trump-idUSKBN15H0NJ.

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169

on the TPP.269 Since then however, Japan has since moved ahead with the other TPP
countries minus the United States to negotiate and signed in March 2018 a “TPP 11,”
the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).
Nevertheless, despite these entreaties, in May 2017 U.S. Secretary of Commerce
Wilbur Ross stated that the U.S. trade deficit with Japan grew at an “alarming rate” inthe early months of 2017, and that “the United States can no longer sustain this inflatedtrade deficit with our closest trading partners. The Trump Administration is committed torebalancing our trade relationships in order to protect American workers and businesses
from lopsided trade relationships.”270 Thus, speculation remains about the need to codify
opportunities to increase bilateral energy trade.
In reality, Japan and the United States do not need a bilateral FTA for energy tradeand investment to flourish. Given that the United States and Japan are heavily invested
in each other, an energy trade and investment partnership already exists. Markets cantrend to what is the optimal commercial balance with scope remaining for government
policy actions to apply more precision and accelerate activity. Thus, the robust energy
trade and investment connection will remain one of the key foundational links between
the United States.

269
See Fifield, Anna. “U.S. Trade Winds Blowing Toward Japan and South Korea,” Washington Post, April 19,
2017, p. A-12.
270
See U.S. Department of Commerce Press Release, May 4, 2017, https://www.commerce.gov/news/pressreleases/2017/05/trade-deficit-mexico-and-japan-continues-grow-unsustainable-rate.

170JAPAN’S ENERGY CONUNDRUM

CHAPTER THIRTEEN

171

Chapter Thirteen
Considerations for the 2020s and Beyond
Dr. Phyllis Genther Yoshida
Senior Fellow, Sasakawa Peace Foundation USA

Introduction
Japan’s energy conundrum – how to provide an affordable and environmentallyfriendly energy supply resilient to the unexpected – persists. Many countries have thesame conundrum, but Japan is unique because of its size and lack of domestic fossil fuelresources, and because it suffered the extraordinary Great Eastern Japan Earthquake andTsunami on March 11, 2011. Japan must find a new politically achievable solution to
mitigate its energy conundrum that can be achieved at reasonable cost, provides energy
security and promotes economic growth. It is a tall order.
That singular, extraordinary event on March 11, 2011 challenged and necessitateda change in Japan’s prior preferred solution (nuclear energy and demand reduction)
to its energy conundrum. It also silenced opposition to regulatory reform of electricity
and gas markets, and to expansion of renewables. Unlike earlier challenges, the crisis
affected not just the type of supply, like oil in the 1970s, but also the power generationand distribution system itself.
In the short term following the crisis, an activist international policy ensued toencourage a flexible, lower cost liquefied natural gas (LNG) supply. It also sought toexpand the export market for the advanced, highly-efficient, low emission (HELE) coaltechnologies Japan increasingly needed for itself. Policies to constrain energy demand
continued. Most importantly, the crisis created a highly impassioned conversation around
domestic supply—nuclear energy and renewables—that is yet to be settled, and sped up
regulatory reform of the electricity and gas markets.
As a result, Japan faces a major transformation in its energy market in order to maintain its energy security. A question still unanswered is whether the transition to a newenergy market in a quickly evolving world will be rapid and deep enough to maintainJapan’s global economic position and fulfill its social and environmental goals. What will
the transformation entail? This chapter includes recommendations on how Japan canmanage its energy conundrum going forward and how U.S.-Japan cooperation can play
an important role in that process.
Our authors argue that the transformation must introduce competition into the energy
sector, promote decarbonization, lower demand, and build a new stable secure energy
supply to replace the lost nuclear power. The transformed energy system will include
securing supplies of fossil fuels (oil, gas, and coal), developing domestic alternatives(advanced nuclear energy, renewables), and advancing associated technologies (e.g.,energy storage, digital technologies, distributed energy and hydrogen systems). It also
will include lowering demand through enhanced energy management, and international
collaboration. These elements all will be part of a transformed energy market that will

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JAPAN’S ENERGY CONUNDRUM

reflect the deregulation of electricity and natural gas as well as the outcome of thejockeying underway on the energy mix.

A Singular Extraordinary Event
While we tend to model changes in energy markets as incremental and taking
place over several years, singular events as well as breakthrough technologies can have
immediate and long-lasting ramifications. The Great Eastern Japan Earthquake and Tsunami dramatically challenged Japan’s energy security and revealed shortcomings in its
previous approach, as highlighted repeatedly by our authors. It was a challenge that noone expected. It forced Japanese policymakers and energy companies to scramble incrisis mode to find alternatives to nuclear energy, resulting in increased reliance on fossil
fuels and more constraints on energy demand. Japan spent $286 billion on net imports offossil fuels in 2012, more than any other country in the world.271 As Japan’s dependence
on imported fossil fuels ballooned, it pushed Japan’s 32 years of trade surpluses into
deficits that lasted from 2011 until 2016, recovering only with the fall in global energy
prices. In the long-term, the disaster is forcing policymakers to rethink Japan’s energy
mix and the structure of Japan’s energy market. It was just the most recent episode inJapan’s frustratingly persistent and familiar energy conundrum. It also was the most complicated episode to date due to climate concerns, population decline, and flat economic
growth in Japan as well as the global unconventional oil and gas revolution and thegrowth of world energy demand.
The impact of March 11, 2011, goes far beyond the question of nuclear energy.
The Great Eastern Japan Earthquake and Tsunami also revealed Japan’s remarkable
resilience. Japan dealt successfully with the sudden loss of the almost 30 percent of its
electricity supply provided by nuclear energy and with subsequent skyrocketing energy
costs caused by importing expensive alternatives such as LNG. March 11, 2011 added
urgency and accelerated changes already underway needed to maintain and increase
resiliency. These changes included energy market deregulation, the uptake of renewables, diversification of fossil fuel sources, and expansion of energy management targets.
The disaster also added to concerns about Japan’s ability to meet its climate goals, andincreased Japan’s global engagement on energy security issues.

The Nuclear Question
Everyone’s first image of Japan’s latest energy challenge is the devastated Fukushima
Daiichi nuclear power plant. In addition to the tragedy it created for the residents ofFukushima, it upended Japan’s long-term solution for its energy security. Nuclear energy
was the heart of Japan’s answer to energy security after the oil crises of the 1970s. It
enabled Japan to cut back on the imported fossil fuels needed to power economic
growth. Policymakers considered nuclear energy a domestic energy source and felt that
it would contribute even more when and if Japan uses domestically reprocessed nuclear
spent fuel. In Japan’s 2010 Third Energy Plan, nuclear energy was slated to grow from30 percent to 50 percent by 2020 and 70 percent by 2030.

271
McCracken, Ross. The burden Japan is facing in its higher energy costs. Platts Energy Economist, January 24,
2014, http://blogs.platts.com/2014/01/24/japan-energy/.

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In 2014, after the Fukushima catastrophe, Japan’s policymakers scaled back thenuclear energy goal but kept it at a still substantial 22 percent by 2030 and 30 percent
by 2050. They also accelerated plans for grid modernization and deregulation of Japan’s
electricity and gas markets. A new plan, expected in the second half of 2018, likely willretain a sizeable role for nuclear energy given the part it has played in strengthening
energy security since the oil crises of the 1970s and in lowering CO2 emissions. Japan
must first restore social trust in nuclear energy. Nuclear energy will likely play a smallerrole in the longer-term solution to Japan’s energy conundrum in conjunction withrenewable energy, LNG, coal, demand management and a deregulated more competitiveenergy market.
What remains unaddressed is if social trust is rebuilt, can nuclear energy remain amajor domestic energy source? It will likely take a transition to the next generation ofadvanced nuclear power plants for that to happen. If so, will Japan be ready and able
to play a major role in that transition globally? Nobuo Tanaka took up this transition andpresented his special proposal for U.S.-Japan advanced nuclear cooperation. The need
for Japan to maintain a civil nuclear energy industry can be, and is, debated. It is difficult,however, to see how Japan can meet its energy security goals and, as Jun Arima detailed,its goals related to climate change without any nuclear energy. The United States andJapan are the world’s longest-standing partners in the field of civil nuclear energy, andU.S.-Japan cooperation could play a major role in enabling such a discussion.
A second consideration in determining the future of nuclear energy in both Japanand the United States is the critical linkage between national security and nuclear governance. The existence of a strong community of civil nuclear power stakeholder countries
helps ensure international norms, including safety and nonproliferation concerns, arenot compromised.272 Achieving these objectives will be easier and more effective if
countries such as the United States and Japan maintain civil nuclear programs andcontinue active engagement with international partners on technology and regulatory
development.
Japan’s energy mix is changing. With only about a fourth of existing nuclear power
plants likely to come back on line, Japan needs new domestic energy sources including
renewables. Further diversification of types and sources of imported fossil fuels can support Japan’s energy security. Growing domestic energy supplies and continued reductionof energy demand need to complement that diversification. The energy system needs tobecome more competitive. In the midst of this change, the future of nuclear energy inJapan remains clouded. Nuclear energy can be part of a serious answer to Japan’s energy
conundrum and climate needs especially if the country transitions to advanced fast
reactors and small modular reactors that can be more efficient, proliferation-resistant,safe and socially acceptable.

Fossil Fuels Still Rule
Japan remains heavily dependent upon fossil fuels and therefore, for the foreseeable
future, impacted by the geopolitics that surround these fuels. Dennis Blair underscoredenergy supplies come from international markets, and the nature of these energy markets
272
Global Nexus Initiative, Nuclear Power for the Next Century: Addressing Energy, Security and Climate
Challenges, 2017 at https://www.nei.org/CorporateSite/media/filefolder/resources/reports-and-briefs/globalnexus-initiative-nuclear-power-next-generation-2017.pdf.

174JAPAN’S ENERGY CONUNDRUM

heavily influences the geopolitics of energy. He posited the weight of evidence predicts
the future of energy geopolitics in Asia will be more cooperative than confrontational,
and cooperative energy relations have a chance of being shielded from the great power
rivalries of the region. In 2017, China became the world’s largest oil importer, passing
the United States, and the second largest importer of LNG, passing Korea. Anothermajor power in the region, India, is now the third largest energy consumer in the world,
after China and the United States. It is the fourth largest consumer of oil and importerof LNG. In 2015 and 2017 respectively, China and India became Association partnersof the International Energy Agency, an organization created after the 1973 oil crisis
for collective energy security and of which Japan and the United States are founding
members. China and India increasingly share many of the same energy security concerns
as Japan, including clear national and economic interest in preserving access to imported
fossil fuels, diversifying fuels and sources of supply, and increasing energy efficiency.
As always, unexpected developments could upset this prediction of cooperation. The
global energy world has seen more than its share of change in the last decade.
Japan’s oil consumption grew after the events of March 11, 2011. Consumption
peaked in JFY 2015 and continues to decline. However, oil remains 45 percent ofJapan’s total primary energy supply, with the Middle East still the dominant source.
The transportation and industrial sectors remain highly dependent on oil. Ken Koyama
detailed Japan’s continuing dependence on Middle Eastern oil and its energy security
ramifications.
At the same time despite the decline in oil consumption, Japan is no less dependent
on fossil fuels. In fact, Japan’s dependence on imported fossil fuels for its primary energy
supply (90 percent) is now even higher than it was at the time of the first oil crisis in1973 (76 percent). With nuclear energy largely offline and renewable energy production
small, there is a huge reliance on imported natural gas and coal due to Japan’s lackof resources. Japan’s only other potential domestic fossil fuel is deposits of methane
hydrates located deep offshore of its southeast coast that remain impossible to tap safely
and economically, and whose potential use raises climate concerns.
LNG played a particularly strategic role after the Great Eastern Japan Earthquake andTsunami shut down nuclear energy production. It continues to be essential for Japan’s
economy. LNG’s high cost caused Japan to take on an activist leadership role in rewriting
the international rubric of LNG trade, pushing for flexibility by ending oil-linked prices
and restrictive destination clauses. It is essential to note changes in the international
rubic of LNG trade were possible only because new technologies enabled the North
American shale revolution that in turn increased competition in the global energy market
and provided a different pricing model. Koyama noted that as Japan debates the role ofnuclear energy in its future energy mix, Japanese buyers facing uncertainty over future
LNG requirements still regard improved LNG supply flexibility as crucially important. In
addition, several authors argued that compared to its role in energy security and fueldiversification, LNG has in fact been as or more important for achieving Japan’s climate
goals. Therefore, continued use of LNG with its lower CO2 emissions than coal or
petroleum will be important going forward at least in the short- and medium-term withlittle nuclear energy back on-line or much production of renewable energy.
As Tom Cutler discussed, Japan’s lack—and the United States’ wealth—of fossil
energy resources creates opportunities for energy trade and direct foreign investment that

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can advance Japan’s energy security strategy, ameliorate non-energy trade imbalances,and deepen the U.S.-Japan strategic alliance. The United States became the world’s top
producer of natural gas in 2011 and is jockeying with Saudi Arabia and Russia to be the
top oil producer. With the U.S. growth in production, the advent of LNG and oil exports
from the United States to Japan, while still small, represent an opportunity for Japan toincrease its energy security by diversifying its sources of supply. Japanese companies
also are investing in U.S. energy production and infrastructure. For example, the first
shipments from the U.S. Cove Point LNG export terminal in April 2018 went to India’s
gas utility Gail and to a Japanese joint venture of Sumitomo and Tokyo Gas. Both have
20-year contracts.

Figure 1: U.S. LNG Export Trends

Source: U.S. Energy Information Administration

Jane Nakano spoke to the return of coal as a major energy source. She pointed outthat key numerical indicators, such as coal consumption volumes and share in the powermix, reflect coal’s importance in Japan and distinguish Japan from other developed
economies where coal power generation is receding. Between 2010 and 2015, the shareof coal in the nation’s power generation increased from 23 percent to 31 percent, a trendthat has been underreported. What is different from earlier periods is imported coal issubstituting for exhausted domestic coal reserves. Although imported, coal is appealing
as it is less expensive than oil or LNG and contributes to the economic growth “E” inJapan’s three “3Es” plus “S” energy policy. It also contributes to the energy security“E” as it is procured from a diverse group of reliable suppliers including Australia,
Indonesia, Canada and the United States. Many new entrants into Japan’s deregulated
electricity market also favor coal due to its low cost and the ease with which coal power
plants fit into the existing energy system. On the other hand, there is great sensitivity tocoal’s negative impact on the environment due to its higher CO2 emissions. As a result,
Nakano spoke to how coal has become an important factor in Japan’s activist energy

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diplomacy to secure sources of supply, promote exports of HELE coal technologies, andsupport international collaboration in carbon capture and storage (CCS).

Energy Demand Hurdles
Increasing energy efficiency, i.e. decreasing demand and increasing productivity, isan important element of Japan’s energy security and policy. Japan is a recognized world
leader and an active participant in international energy efficiency efforts. Yukari Niwa
Yamashita discussed how Japan developed its energy efficiency and conservation policies over time to become one of the most efficient countries in the world. Japan became
highly efficient because it had to import much of its energy and increase manufacturing
productivity to compete globally. Energy data reflect this success as overall domesticenergy consumption is flat.
It is ironic Japan’s very success with energy efficiency will make it harder to achieve
reductions in energy demand at the same pace as in the past. There are fewer high value
targets and it is harder to get rid of the next joule, BTU, watt, or therm than it was thefirst. The same is true for the next gram of CO2 and other greenhouse gases. Policies
to reduce energy demand thus remain important but have greater hurdles to overcome
to achieve significant reductions. Japanese efficiency efforts continue to push into moreareas, for example targeting buildings by introducing energy efficiency standards into
the building code and expanding to additional parts of the commercial sector such as
supermarkets and shopping centers.
Japan’s main targets for energy demand reduction are less about oil and more about
electricity in general in the aftermath of the Great Eastern Japan Earthquake and Tsunami. Ken Haig detailed how Japan needs to change how it has approached electricity tomake progress on this target. Japan’s electric power system has long prioritized reliability
over flexibility, granting regional utilities monopolies in exchange for ensuring a consistently stable supply of electricity. This led utilities to opt to focus on increasing supply
within their own regions. The national grid was not improved to handle transfers of
power between regions. As a result, Japan found in 2011 it was unable to move enoughelectricity to where it was needed. It had insufficient inter-regional transmission links
and inter-regional frequency conversion facilities between its two different frequency
areas (50 Herz in eastern Japan and 60 Herz in western Japan). It also had criticallyunderinvested in renewable energy generation, an important domestic energy source
due to perceived cost, local opposition (e.g. hot springs owners to geothermal, fishermen to offshore wind), grid access issues, and the oligopolistic market structure.
The disaster weakened the opposition to energy deregulation, but it remains challenging to change the utility-centric model. Deregulation is starting to open the market
to renewables and expand competition by creating new players. Deregulation also isbringing demand-side management practices that focus on reducing electricity use rather
than increasing national grid flexibility and supply. Japan is undertaking pilot ­projects
in demand supply management (DSM), an area where the United States already ismuch more experienced and where additional U.S.-Japan cooperation and informationexchange is important.
The main target for reducing oil demand in both Japan and the United States is thetransportation sector. Policies promote fuel efficiency and alternative fuels (electricity,

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hydrogen) in Japan and the United States as well as biofuels in the United States. Michael
Smitka pointed out the differences between the two countries. Compared to the UnitedStates, in Japan vehicles are more fuel efficient and smaller, and mass transit more widelyused, especially in dense urban environments. However, personal vehicle ownershipand use is increasing due to lifestyle changes, including increases in suburban livingwith big box stores and a growing number of licensed drivers. He noted that, since 1973,
energy demand by the transport sector rose 70 percent and that by the household sector
90 percent. Together they now account for one-third of energy consumption. Half of
that, or one-sixth of Japan’s total energy usage, is used to power vehicles.
Transportation oil use is also the largest energy security demand issue in the UnitedStates. Increased domestic energy supply and weakening of fuel economy regulations
could slow purchases of more energy efficient vehicles even though oil prices still are set
on an unfree global market and recent low prices are surging upwards. Unless and until
electric (battery and fuel cell) and autonomous vehicles become mainstream throughtechnology advances and/or regulatory policies, and car use starts to decline, it will bedifficult to reduce oil demand in the transportation sector significantly in either country.
Japan’s success in reducing energy demand and in developing solutions to thechallenges it now faces makes it even more important for it to continue to share bestpractices and expertise, and to expand joint research with international partners. For
example, Japan, with the United States, is a founding member of the International Partnership for Energy Efficiency Cooperation (IPEEC)273 established in 2009 to promotecollaboration on energy efficiency. It also is active in energy efficiency projects with theAsia-Pacific Economic Cooperation (APEC) forum and other regional organizations.

The Renewable Energy Option
The escalating interest in renewables post-2011 as a domestic alternative to nuclear
energy deserves special attention. As spelled out by Llewelyn Hughes, there was interestin renewables in Japan pre-2011, particularly after the oil crises of the 1970s. However,apart from investment by the utilities in large conventional hydropower power plants
and by some companies in photovoltaics and related components for solar energy subsidized by the government until 2006, interest was anemic and costs high. Social acceptance was an issue for some types of renewables. This has started to change. For the firsttime, as mentioned by Hughes and other authors, many Japanese see renewables as a
viable alternative to nuclear energy, resulting in the current vibrant debate over Japan’s
energy mix.
Renewables did not fit easily into Japan’s utility-centric and oligopolistic model;
nuclear energy did fit and, as climate issues increased in importance, had the added
advantage of being low carbon. In the International Energy Agency’s 1999 review ofJapan’s energy policies, renewable energy merited only a brief mention under ongoing
research.274 It constituted only 4.4 percent of total primary energy supply and about 10
percent of the electricity supply. In the IEA’s 2016 review, renewable energy merited
its own chapter.275 It had grown to 5.7 percent of total primary energy supply and 16.9
273
IPEEC’s founding members are Brazil, Canada, China, France, Germany, Italy, Japan, Korea, Mexico, Russia,
the United Kingdom, and the United States.
274
International Energy Agency. Energy Policies of IEA Countries, Japan 1999 Review. OECD/IEA, Paris, 1999.
275
International Energy Agency. Energy Policies of IEA Countries, Japan 2016 Review. OECD/IEA, Paris, 2016.

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percent of electricity. Illustrative of the new push for renewables was the change inits mean annual growth rate from 5 percent between JFY 2003 and JFY 2008 before
the Great Eastern Japan Earthquake and Tsunami to a 32 percent growth rate between
JFY 2012 and JFY 2013. Japan’s energy policies became more actively supportive ofrenewables, including the introduction of net metering and a feed-in-tariff. In late 2013,
METI began a “Green Power Project” aimed at creating a new green industry and market
in Japan. METI’s Agency for Industrial Science and Technology (AIST) established for the
first time a research institute dedicated to renewable energy, the Fukushima Renewable
Energy Institute (FREA), in April 2014. It should be noted that dramatic global progress
particularly in the United States and Europe in lowering the cost and increasing theefficiency of renewables, especially wind, solar and geothermal, makes renewables amuch stronger contender in Japan and globally than previously.
Solar, as shown in Figure 2, so far has been the favorite renewable in the energy
mix debate. Offshore wind and geothermal have strong potential and have started totake off since the events of 2011. Much like the opposition to deregulation, opposition
to renewables diminished after the Great Eastern Japan Earthquake and Tsunami. Somelong-standing regulations inhibiting the deployment of renewables have changed or
weakened. For example, Japan has the world’s third largest geothermal reserves thatprior to 2011 were largely untapped. In 2012, the Ministry of Environment relaxed regulations on production in national parks and protected hot springs. Together, with thefeed-in-tariff, new technology with a smaller footprint and new research programs, thisaction spurred renewed interest. The first new geothermal plant since 1999 opened in2014 and METI expects 380-850 MW of newly installed capacity by 2030.

Figure 2: Trends in Japan’s Renewable Energy

Source: International Renewable Energy Agency

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In the aftermath of the events of 2011, renewables became a viable option. Can
renewables play the same role as nuclear energy in lowering Japan’s dependence on
imported fossil fuels? It is unlikely that renewables by themselves will be the answer, butthey can be a large part of it. Indeed, the government itself has not settled yet on thepotential of renewables or the role of nuclear energy, and makes two projections of theenergy mix in 2050, one of which suggests 30 percent nuclear, 40 percent renewables
and 30 percent fossil fuels, and the other 50 percent renewables and 50 percent fossil
fuels. Either will be difficult to meet. The challenges, as discussed by the authors, arerebalancing renewable energy sources, modifying additional unnecessary regulations(e.g. agricultural water use restrictions that inhibit micro-hydro installations), managing
interconnection, overcoming local opposition to projects, and reducing the fiscal costsof renewables promotion.

The Miracles and Beginning of Transformation
Progress toward reaching climate goals suffered after the Great Eastern Japan Earthquake and Tsunami but not as much as expected. Given Japan’s history of coping effectively with energy challenges and its skill at reducing CO2 levels, few other countries,
if any, could do as well. Japan’s “energy miracles” post-Fukushima described by Robert
Feldman were real. The first miracle was the stunning improvement of energy intensity
in GDP, which fell by 2.79%/year–a bit more than CO2 intensity worsened. The second
miracle was that the transformation of energy supply restrained the growth of CO2. This
miracle is primarily due to the greater use of natural gas, which emits about half of theCO2 per unit of energy that petroleum or coal do. For Feldman, the concern is that while
Japan’s energy accomplishments in the wake of the Fukushima accident are praiseworthy, they also raise a difficult and central question for Japan’s energy transformation ofwhether these accomplishments are harbinger or artifact. Will the transformed energy
system be as resilient?
Indeed, the singular extraordinary event of the Great Eastern Japan Earthquake andTsunami portended a profound transformation, bringing with it an expansion of opportunities for U.S.-Japan collaboration. The fact that Japan has proved remarkably resilient
to its latest energy challenge is providing a stable foundation on which the transition to a
new transformed energy system is building. The scale of the transformation, however, iseasy to overlook because the conversation about change is incremental in its approach.
The possibilities, however, are radical.
Hughes characterized and defined change in Japan’s power markets as “radical
incrementalism.” This concept is useful in understanding how the energy policy transformation is occurring. The concept harkens back to a long running debate in the UnitedStates and Japan about the best way to innovate. Is it better to approach innovation
through incremental improvements or through a radical shake-up? In practice, either
can be transformative. The profound transformation of Japan’s energy system is being
implemented through a step by step approach of perfecting policies and adopting newmarket tools and practices while remaining cognizant of existing institutions. It can seem
frustratingly slow. Is a focus on improvements apt to miss an opening to innovate? It is
possible to take the burden of risk aversion so far as to close off new ideas and methods,
a potentially devastating error in an increasingly rapidly changing world. On the other180JAPAN’S ENERGY CONUNDRUM

hand, is a focus on a radical shake-up more likely to fail because of entrenched interests?
Would a radical shake-up dismiss those aspects of the current system such as nuclear
energy and energy management that still might be used to great advantage?
Change in the energy sector globally in the past has been difficult due to the heavy
investments required for upstream production, generation and transmission. The adventof new technologies and practices ranging from the production of unconventional gas
and oil to the decentralized and often off-grid nature of renewables is starting to changethat paradigm. Can Japan change and keep up?
The transformation is playing out most clearly in the deregulation of the electricity
and natural gas markets along with the change in the energy mix. While some of thesechanges had already been under consideration or started, Japan greatly sped them up
after March 11, 2011. More importantly, the crisis silenced the opposition. Deregulation started with the electricity sector and then moved to the natural gas sector. (Note:
Japan deregulated the petroleum market in April 1996.) For electricity, deregulation
has opened the generation and retail markets to competition, eliminating the verticalmonopolies and enabling new entrants as shown in Figure 3. Nakano pointed out thatsince April 2016 when the ¥7.5 trillion electricity retail sector was fully liberalized, about
380 enterprises—including existing gas companies, oil wholesalers and telecommunications companies—have joined 10 existing electric utility companies in the electricity
retail business. New entrants have gained about a 9.2 percent market share. As expected,
new entrants are expressing interest in increasing renewable energy generation, butmany are focusing on coal power plants because of the relatively low cost of imported
coal compared to LNG. Unbundling the transmission and distribution sector will happen
in 2020. The new entrants also are bringing new business practices to the market.
Deregulation, however, is still playing out and it is difficult to overstate the scale andpotential impact of the challenge for existing utilities and new entrants, and challenge of
integrating the two types of players in a manner seamless to ultimate consumers.

Figure 3: Japan’s Electricity Market Structure

Source: Koichiro Ito, Energy Policy Institute, University of Chicago

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As with electricity, gas market reform started as early as 1995 but proceeded slowly.
The events of March 2011 sped it up. In April 2017, Japan deregulated the retail gas
market except for existing regulated tariffs for small users that will phase out if possible.
Greater third party access to LNG import terminals also occurred. The gas pipeline
network will be deregulated (unbundled) in April 2022. This will be difficult as there
is no national gas transmission system in Japan; instead, a rather fragmented regional
structure exists. In addition, the demand for gas could change depending on the successof renewables and/or the number of nuclear restarts. It is hoped deregulation of gas, aswith electricity, will increase competition, lower consumer prices, encourage the development and deployment of new technologies, and increase investment in infrastructure.
As deregulation and reform play out, as the relative roles of renewables and nuclear
are defined, and as the extent of transportation electrification and autonomy are clarified, the magnitude and timing of Japan’s energy transformation will become clearer.
However, the transformation, in reality, has already begun.

Global Leadership and Bilateral Implications
The singular extraordinary event of March 11, 2011 also holds a message for theUnited States and global energy markets. Japan’s experience sounds a note of cautionthat extraordinary singular events can and do happen. Preparation, flexibility, and adiversified portfolio of energy supply and demand options are necessary ingredients tocreate the sufficient underlying resiliency that is needed for a successful response. In the
midst of the dizzying unconventional hydrocarbons revolution, the United States finds it
is easy to be complacent about energy security, but doing so entails risks that a singular
event would uncover. Japan was resilient enough to contain and mitigate the immediate challenge to its physical infrastructure but experienced an immense political andpsychological jolt over the role of nuclear energy, causing its commercial oligopolistic
market tempered by a persistent government presence to change and evolve.
The geopolitics of fossil fuels of course affects not just Japan’s but energy security
globally. For example, U.S. energy security is tied intrinsically to geopolitics despite theUnited States’ large and growing domestic energy supply sources. The United Statesshould become the world’s largest crude oil producer by 2023 according to the International Energy Agency (IEA). However, the United States still relies on the Organization ofPetroleum Exporting Countries (OPEC) for 30 percent of its oil imports. The severity of
the 2017/2018 winter in the northeastern United States increased demand for expensive
fuel oil and brought shortages of natural gas. It even led to imports of Russian LNG
for the first time, partly due to the lack of sufficient pipelines and Jones Act restrictions on coastal shipping (e.g., there are no U.S. flagged LNG carriers). In the coming
years, this situation could repeat with more severe winters and other weather events(hurricanes, floods) predicted in the United States due to climate change. The UnitedStates also expends tremendous military and other resources on preserving its and theworld’s access to fossil fuels to maintain global energy security. Thus, imported fossil
fuel dependence remains the most critical obstacle globally and in both countries’ efforts
to increase energy security.
In addition, fossil fuel dependence contributes to Arima’s “quadlemma”: decreased
energy self-sufficiency, a deteriorating trade balance, high electricity tariffs, and increased

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CO2 emissions. Increased CO2 emissions in particular are a global energy security issue.
Resilience of energy infrastructure to natural events such as tsunamis and increasingly
intense weather phenomena as well as to man-made incidents such as cyber-attacks
are an increasingly integral component of energy security policy that nations should
recognize and address. The authors in this book pointed out that supply and demand
for fossil fuels, increasingly global coal and natural gas markets and climate change are
not the only areas of shared energy security concerns and interests. The future of nuclear
energy, electrification, deregulation of energy markets, and the development of newtechnologies are all also areas of common interest.
Japan’s global leadership has been critical in the past to global energy security
and will be in the future as it navigates its energy transformation and shares what it
has learned. Japan must maintain its international leadership role in developing anddisseminating technologies and methods to increase energy efficiency. Japan also should
continue the international activism it demonstrated with natural gas markets. Its leadership in multilateral fora like the IEA and APEC can continue to contribute to global
and regional energy security and thus that of itself and the United States. Finally, Japan
should actively cooperate with the United States and other like-minded countries in thedevelopment and deployment of the next generation of advanced nuclear reactors.
Greater U.S.-Japan cooperation also can advance both countries’ energy security
strategies, ameliorate non-energy trade imbalances, and deepen the U.S.-Japan strategic
alliance. Japan’s lack, and the United States’ wealth, of energy resources creates opportunities for additional energy trade and direct foreign investment in both directions infossil fuels and renewable energy that should be developed to a greater extent. Joint
research, development, and demonstrations should expand to accelerate technological innovation. This work should include advanced nuclear energy, hydrogen, highly
efficient, low-emission coal technologies, carbon capture and storage, digital technologies, renewable energy, distributed energy, and energy storage systems. The UnitedStates and Japan also must continue to share experiences and lessons learned withenergy deregulation, infrastructure resilience, climate change, intermittent and variable
renewable electricity, and energy demand reduction including DSM with each other andmultilaterally.

Recommendations for Transformation
Japan’s energy transformation offers a plethora of opportunities to increase Japan’s
energy security, strengthen Japan’s global leadership, and expand U.S.-Japan cooperation. Overall, Japan should pursue an “all fuel” and “all technology” approach to energy
policy for energy security and resilience as proposed by the International Energy Agency
Executive Director in February 2018 and elaborated in the IEA’s Energy Policies of IEA
Countries, Japan 2016 Review.276
In addition to the IEA’s recommendations, METI’s Roundtable for Studying theEnergy Situation (エネルギー情勢懇談会) released its report in April 2018.277 The report276
Dr. Fatih Birol, Executive Director of the International Energy Agency, Presentation at The Round Table forStudying Energy Situations, METI, Tokyo, 27 February 2018.
277
METI Roundtable for Studying the Energy Situation, April 25, 2018 Committee Report at http://www.enecho.
meti.go.jp/committee/studygroup/ene_situation/009/pdf/009_006.pdf.

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sets out five policy problem areas and made broad suggestions to address the challenges in each. The five areas are: renewable energy, nuclear power generation, thermal
generation, heat and transportation, and energy conservation and decentralized energy.
In general, the report places a strong emphasis on renewable energy and leaves open
the question of nuclear energy use until the restoration of social trust. It points out animmediate need to strengthen human resources, develop technology and decarbonize.
It also noted the continued use of fossil fuels during the transition, including responding
to geopolitical risks.
Authors in this book pointed out opportunities to pursue an “all fuel” and “all technology” approach and offered recommendations for Japan’s policymakers and people toconsider going forward, the most important of which are highlighted below. The recommendations are consistent with those of the IEA and the METI Roundtable for Studying
the Energy Situation but contain a stronger emphasis on utilizing distributed energy
systems, finding the role for nuclear energy, and ensuring transparency in deregulationand market function. In short, Japan’s successful transformation of its energy system
requires a profound change to ensure an affordable and environmentally friendly energy
system resilient to the unexpected.

Recommendations
1.	Policymakers must ensure electricity and natural gas market deregulation and reform
is transparent, increases competition, and creates opportunities for new Japaneseand international actors, and for new technologies and practices.
2.	Japan must reverse its underinvestment in and underutilization of renewables as amajor source of domestic supply to enhance energy security and environmental sustainability. U.S. and other foreign companies could play a larger role in accelerating
renewables deployment in Japan with sufficient opportunities.
3.	Japan must give special attention to mass transportation in smart-urban and -suburban
environments, vehicle electrification, hydrogen-fuel vehicles, and autonomous-drive
technologies to mitigate oil consumption.
4.	Japan must actively explore the next generation of advanced nuclear reactors todetermine how they can play a role in Japan’s energy future and energy security.
Such reactors could provide carbon-free power with safety features that passively
cool reactor cores and lower cost through mass production with fewer components,
smaller sizes, proliferation resistance technology, and small land footprints.
5.	Adequate system flexibility, especially the expansion of transmission interconnections, must play a role in lowering energy demand and achieving Japan’s goal of
cutting greenhouse gas emissions from 2013 levels by 80 percent by 2050.
6.	Japan must limit investment in the fossil fuel power plants to generators with thehighest operational efficiency to support environmental and climate goals for security, health, and resiliency.
7.	Advances in energy storage systems, digital technologies and hydrogen technologies
have been numerous but Japan must push these technologies considerably harderand faster.
8.	Japan must maintain momentum in energy demand reduction by continuously
expanding coverage of products, sectors, and parts of sectors, such as recent

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JAPAN’S ENERGY CONUNDRUM

expansion of energy efficiency standards for the new buildings. Practices likedemand supply management (DSM) should be widely implemented.
9.	Japan must continue to find and pursue opportunities to collaborate with the UnitedStates and other global partners to support global energy security.

Conclusion
For the imaginable future, Japan’s energy conundrum that developed at the beginning of the last century will continue. Japan’s three “3Es” plus “S” (e.g., energy security,
economic growth, environment, and safety) concept remains valid as an organizing
framework for its energy policy.
Japan’s energy transformation is underway. Greater competition, new investment,
renewable energy growth, international activism, and a low-carbon environment are alltrends that will continue. The challenge of access to imported fossil fuels will remain.
The transportation sector will run on oil until there is success in the mass deploymentof battery electric vehicles and/or fuel cell vehicles. Deregulation will strengthen Japan’s
energy security through increased competition and new entrants, and result in more
efficiency, flexibility, and innovation. Increased domestic production of renewables anda possible new model of nuclear power will strengthen energy security and help Japan
meet its climate goals.
Opportunities will abound in the energy sector for U.S.-Japan collaboration, including
increased trade, investment, research, and cooperation in multilateral forums. Japan andthe United States will have to prepare to be as resilient as possible for those unexpectedsingular extraordinary events that can and will change their paths and internationalenergy markets going forward.
Japan has proven remarkably resilient so far in navigating its energy conundrum.
Challenges remain, including adapting to population aging, lifestyle changes, flat energy
growth, and changing geopolitics – all of which also apply to the United States. Inertia
and existing stakeholders will slow its energy transformation. So far, it is transitioning
with its focus on solutions. Japan cannot escape its energy conundrum in the foreseeable future but can mitigate it through a competitive energy market, diversification offuels and supply sources, close attention to lowering demand, and enhanced U.S.-Japan
cooperation bilaterally and in multilateral fora.

INDEX

185

Index
A
Advanced nuclear reactors, 182, 183
Agency for Natural Resources and Energy(ANRE), 60, 63, 64, 65, 66, 100, 107,
127, 128, 129, 130, 131, 132, 133, 134
Arima, Jun, vi, xi, 139, 173, 181
Armitage, Richard, 87
Asia-Pacific Economic Cooperation
Forum, xiv, 54, 108, 109, 150, 177, 182“Atoms for Peace,” 4, 69, 166
Ausick, Paul, 12Australia, xiii, 5, 14, 16, 51, 54, 59, 109,
157, 161, 163, 164, 175
Autonomous-drive technologies, 183

B
Basic Energy Plan, 3, 63, 126
Belt and Road Initiative See “One Belt
One Road”
Billingsley, Megan A., 125
Biofuels, 7, 177
Birol, Fatih, 182
Blair, Dennis, v, ix, xi, 11, 156, 173
Boiling Water Reactors (BWR), 70, 166
Bronski, Peter, 134
Buckley, Tim, 167
BWR, 70, 72, 74C
Caldecott, Ben, 126
Calder, Kent, ix
Canada, 16, 22, 83, 88, 109, 155, 156,
161, 164, 175, 177
Canadian Trade Commissioner Service,
166
Carbon capture and storage (CCS), 52,
53, 54, 76, 154, 163, 176

Center for Strategic and International
Studies (CSIS), xiii, 87
China, xi, 1, 7, 11, 13, 14, 15, 16, 17, 18,
19, 20, 21, 22, 23, 24, 32, 33, 39, 51,
52, 55, 71, 74, 76, 77, 78, 80, 81, 82,
83, 85, 86, 87, 88, 97, 98, 109, 110,
119, 146, 156, 157, 166, 174, 177
Clemente, Jude, 13
Clenfield, Jason, 166
Climate change policy, xiv, 111
Long-Term Climate Change Policy
Platform, 152
CO2, 14, 25, 26, 27, 28, 29, 33, 42, 53, 56,
57, 77, 78, 83, 85, 98, 109, 125, 141,
143, 144, 173, 174, 175, 176, 179, 182
Coal consumption, 14, 15, 17, 21, 47, 48,
51, 58, 175
Coal industry, 1, 2, 3, 51
COP21, 8, 110, 139, 151
Cove Point, 164, 165, 175
Crawford, V.P., 59
CRIC cycle, 33, 34
Crooks, Ed, 19
Cutler, Tom, vi, xi, 155, 164, 174

D
Demand-Side Management (DSM), vi,
123, 124, 125, 126, 127, 128, 129, 130,131, 132, 134, 135, 136, 176, 182, 184
Deregulation, 6, 8, 41, 51, 58, 84, 167,
172, 173, 176, 178, 180, 181, 182, 183,
184
Electricity market deregulation, 167
Gas market deregulation, 183
Dericks, Gerard, 126
DeWit, Andrew, 130
Downs, Erica, 13Duffield, John S., 126
Dyson, Mark, 134

186JAPAN’S ENERGY CONUNDRUM

E
East-West Center, 156
Electric power generators, 157
Energy consumption, 3, 4, 17, 26, 27, 42,
48, 87, 103, 107, 110, 113, 119, 129,
130, 131, 132, 135, 176, 177
Energy conundrum, i, iii, v, vii, xii, xiv, 1,
9, 171, 172, 173, 184
Energy efficiency, vi, ix, 5, 6, 7, 8, 21, 29,
31, 38, 39, 44, 81, 87, 97, 99, 100, 101,
102, 103, 104, 108, 109, 110, 111, 113,
119, 125, 126, 128, 130, 131, 132, 135,
146, 148, 149, 159, 174, 176, 177, 182,
184
Energy exports, 157, 161, 164
Energy imports, 7, 15, 17, 20, 21, 22, 33,
120, 121, 136, 168
Energy management, 97, 99, 101, 104,
106, 107, 129, 134, 167, 171, 172, 180
Energy Mix, vii, xiv, 4, 5, 7, 8, 9, 37, 42,
44, 56, 107, 124, 126, 143, 144, 148,
149, 162, 172, 173, 174, 177, 178, 179,
180
Energy security, vii, ix, xi, xii, xiii, 3, 4,
6, 7, 8, 9, 11, 12, 15, 16, 17, 19, 21, 22,
24, 42, 47, 59, 61, 62, 69, 83, 86, 98,
107, 109, 110, 111, 139, 148, 149, 153,
154, 155, 158, 159, 160, 166, 168, 171,172, 173, 174, 175, 176, 177, 181, 182,
183, 184
Energy storage, 86, 129, 171, 182, 183
Energy White Paper, 48, 49, 51, 52, 53, 54
Exclusive economic zones (EEZs), 18, 19

F
Feed-in-tariff (FIT), 27, 45, 63, 64, 65, 66,
67, 129, 141, 143
Feldman, Robert, v, xiii, 25, 34, 179
Fifield, Anna, 168
Foreign Direct Investment (FDI), 156

Fossil fuels, v, ix, 4, 7, 8, 9, 11, 12, 21,
22, 27, 37, 38, 42, 44, 47, 78, 83, 85,
86, 107, 125, 139, 140, 141, 149, 153,
154, 155, 157, 158, 159, 161, 171, 172,173, 174, 179, 181, 182, 183, 184
Francis, David, 168
Fuel economy, 100, 177
Fujii-e, Yoichi, 89
Fujimoto, Goshi, 124
Fukushima Daiichi, 8, 47, 72, 91, 93, 172

G
Geopolitics of energy, xiii, 11, 12, 16, 22,174
Geothermal, 5, 7, 64, 65, 161, 167, 176,
178
Gerard Dericks, 126
Global Nexus Initiative, 173
Gloystein, Henning, 17
Goldman, Charles A., 125
Great Eastern Japan Earthquake andTsunami, vii, 8, 38, 93, 105, 139, 171,172, 174, 176, 178, 179
Greenhouse Gas (GHG) emissions, 5, 8,
42, 55, 57, 63, 107, 110, 120, 125, 126,
132, 139, 143, 145, 148-153, 163, 183
GHG, 5, 63, 120, 132, 139, 143, 145, 148,
149, 151, 152
Grid access, 176

H
Hadley, Eleanor, ix
Haig, Ken, vi, xii, 123, 176
Hein, Laura E., 3Henry Hub, 45
Highly-efficient, low emission (HELE)
technology, 52, 53, 54, 55, 58, 171, 176
Hirayama, Sho, 123, 128
Hughes, Llewelyn, xii, 2, 59, 62, 123, 177,
179
Hydraulic fracturing, 12, 18, 22
Hydrogen, 5, 13, 134, 171, 177, 182, 183

INDEXI
India, 11, 14, 15, 16, 20, 21, 22, 24, 32,
33, 54, 80, 82, 86, 88, 97, 109, 110,
174, 175
Indonesia, 14, 16, 20, 39, 51, 97, 163, 175
Institute for Energy Economics, Japan(IEEJ), xiv, 3, 37, 97, 146
International Atomic Energy Agency(IAEA), 75
International Energy Agency (IEA), xi,
xiv, 7, 40, 108, 155, 181
International Partnership for Energy
Efficiency Cooperation (IPEEC), xiv,
109, 177
International Trade Administration, 156,
157, 158, 167
Ito, Koichiro, 130
Iwafune, Yumiko, 124
Iwahashi, Yuko, 128

J
Jamasb, T., 59
Japan Automobile Manufacturers
Association (JAMA), 113, 114, 116,
117, 121
Japan External Trade Organization, xi
Japan Federation of Electricity Power
Companies (FEPC), 85, 142
Japan Oil, Gas and Metals National
Corporation (JOGMEC), 39
Japan’s Atomic Energy Commission(AEC), 4K
Kafura, Craig, 16
Kaya, Yoichi (Kaya Identity), ix, 26, 27
Kikkawa, Takeo, 124
Kiko Network, 58
Kobori, Satoru, 2, 98
Kok, Irem, 126
Kominers, S.D., 59

187

Korea, 11, 13, 14, 21, 22, 52, 71, 73, 74,
83, 85, 86, 87, 94, 109, 156, 169, 174,
177
Koyama, Ken, v, xiii, 37, 174
Krauss, Clifford, 13
Kristina LaCommare, 125
Kruitwagen, Lucas, 126
Kubo, Nobuhiro, 168
Kushida, Kenji E., 127
Kushiro Coal Mine Co., Ltd., 51
Kyoto Protocol, 5, 42, 145

L
LaCommare, Kristina, 125Lander, Mark, 17Lehrman, Matt, 134
Liberal Democratic Party (LDP), 61, 67
Light Water Reactors (LWRs), v, 69, 70,
71, 74, 75, 79, 81, 87, 93
Liquefied natural gas (LNG), xiii, 4, 5, 6,
8, 13, 14, 16, 18, 21, 22, 23, 27, 42, 43,
44, 45, 48, 49, 51, 56, 58, 76, 86, 120,
139, 144, 153, 155, 159, 163, 164, 165,
166, 168, 171, 172, 173, 174, 175, 180,
181

M
Mahoney, J., 61
Mandel, James, 134
March 11, 2011, vii, ix, 5, 15, 44, 61, 69,
71, 123, 134, 159, 171, 172, 174, 180,
181
Mazneva, Elena, 18
McCracken, Ross, 172
Menezes, F., 59
Methane hydrates, 174
Middle East, 2, 12, 16, 22, 23, 24, 37, 39,
40, 42, 79, 86, 111, 155, 164, 174
Ministry of Economy, Trade and Industry(METI), ix, xi, xiv, 3, 15, 38, 48, 50, 51,
52, 53, 54, 57, 60, 99, 140
Ministry of Environment (MOE), 132, 178

188JAPAN’S ENERGY CONUNDRUM

Ministry of Foreign Affairs of Japan, 54
Ministry of International Trade andIndustry (MITI), 5, 38, 99 See also
“METI”
Molina, Maggie, 125
Morris, Jesse, 134
Mufson, Steven, 166
Murakoshi, Chiharu, 123, 128

N
Nakagami, Hidetoshi, 123, 128
Nakano, Jane, v, xiii, 47, 55, 175, 180
Nakayama, Shigeru, 5
Nepal, R., 59
Net metering, 64, 178
New Energy and Industrial Technology
Development Organization (NEDO),
5, 53
Nicholas, Simon, 167
Nishihara, Naoe, 128
Nuclear power, 5, 8, 11, 15, 16, 17, 25,
26, 33, 38, 44, 48, 61, 64, 69, 70, 71,
72, 73, 74, 76, 78, 81, 83, 85, 86, 87,
88, 93, 94, 111, 126, 139, 140, 143,
148, 149, 150, 154, 166, 167, 171, 172,173, 183, 184
Reprocessing, 92, 93
Nuclear Power Plant (NPP), 91
Nuclear proliferation, 16, 94
Nye, Joseph, 87OOgiwara, Miyuki, 124
Oil embargo, 2, 22
Oil policy, 37
Oil refining, 2, 6
Okubo, Takuji, 168
Oliver, Dave, 70“One Belt One Road,” 18
Operation Tomodachi, 93

Organization for Economic Co-operation
and Development (OECD), xi, xiv, 55,
147, 163
Organization of Petroleum ExportingCountries (OPEC), 181

P
Page, Samantha, 163
Palazzi, Titiaan, 134
Paraskova, Tsvetana, 161
Paris Agreement, 17, 57, 97, 110, 132,
150, 152, 153, 154
Patrick, Hugh, ix
Perry, William, 1
Prefecture
Akita, 2
Chiba, xiii, 115
Ehime, 149
Fukui, 149
Fukuoka, 51
Fukushima, 15, 51, 149, 172
Hiroshima, 149, 166
Hokkaido, xii, 51, 53, 62, 74, 123
Ibaraki, 51, 72
Kyoto, 130
Nagasaki, 89, 90
Nara, 130
Niigata, 2, 73, 74, 117
Osaka, 44, 97-99, 124, 130, 149, 165
Tokyo, vii, xi, xii, xiii, xiv, 2, 4, 5, 25,
51, 55, 60, 62, 63, 72, 74, 89, 98,
105, 106, 113, 115, 117, 123, 124,
131, 133, 139, 162, 164, 182
Publicover, B., 67

R
Radical Incrementalism, v, 59, 61
Ramirez, Sam, 134
Real Gross National Product (GDP), 3,
16, 25, 26, 30, 31, 32, 33, 107, 108,
145, 146, 147, 179

INDEX

Reed, Stanley, 13
Renewable energy (renewables), v, 5, 6,
7, 8, 9, 27, 28, 38, 45, 59, 63, 64, 65,
66, 67, 76, 77, 78, 79, 81, 83, 84, 86,
87, 88, 107, 110, 119, 120, 126, 129,
130, 132, 135, 143, 144, 148, 149, 167,
171, 172, 173, 174, 176, 177, 178, 179,
180, 181, 182, 183, 184
Research, Development and Deployment(R&D, RD&D), 33, 52, 53, 154, 166,
167
Rokkasho, 93
Russia, 13, 14, 16, 18, 22, 23, 24, 52, 74,
81, 83, 85, 109, 110, 175, 177

S
Said, Summer, 13
Samuels, Richard, ix
Sasakawa Peace Foundation, iii, iv, vii,
ix, xi, xiv, 1, 11, 69, 91, 94, 156, 171
Saudi Arabia, 13, 16, 22, 23, 24, 110, 175
Scalise, P.J., 60
Schiller, Steven R., 125
Senkakus/Diaoyus, 24
Shale gas, 14, 23, 29, 161, 164, 166
Shear, Michael, 15
Silverstein, Ken, 15
Small Modular Reactors (SMRs), 74, 88
Smart grid, 129
Smitka, Michael, vi, xiii, 113, 177
Social trust, 173, 183
Solar energy, 177
Solomon, Jay, 13South China Sea, 18, 19
Stapczynski, Stephen, 47
Stranges, Anthony N., 2
Strategic Energy Plan, 5, 6, 7, 15, 47, 50,
53, 56Strategic petroleum reserve, 16, 20, 21
Stuart, Elizabeth, 125
Sumitomo, 165, 175

189

T
Takeuchi, Keiji, 124
Tanaka, Nobuo, v, ix, xiv, 69, 91, 173
Teytelboym, A., 59
Three “Es” and “S,” 3, 139, 175–193“S,” 6, 175, 184
Timmons, Heather, 166
Tokyo Electric Power Company (TEPCO),
42, 44, 63, 72, 73, 74, 84, 105, 106,
107, 123, 124, 127, 129, 133
Tokyo Gas, 42, 44, 161, 164, 165, 175
Top Runner Program, 103, 104
Total Primary Energy Supply (TPES), 37
Toyoda, Masakazu, ix, 3Trans-Pacific Partnership (TPP), 164, 168
Tsushima, Sayana, 128
Tulloch, Daniel J., 126

U
Ueno, Yanagi, 55
Uetake, Tomo, 168
United Nations Framework Convention
on Climate Change (UNFCCC), xi, 63
U.S. Department of Commerce, xiv, 156,
157, 158, 167, 169
U.S. Department of Energy, ix, xi, xiii,
xiv, 54, 91, 94, 120, 125
U.S. Energy Information Administration(EIA), 12, 14, 17, 18, 22, 26, 30, 47, 48,
155, 159, 175
U.S.-Japan cooperation, ix, 87, 91
U.S. Nuclear Regulatory Commission(NRC), 73

V
Vehicle electrification, 183

W
Westney, Eleanor, 61Wind power, 6, 7, 17, 62, 64, 65, 66, 78,
79, 83, 107, 119, 167, 176, 178

190JAPAN’S ENERGY CONUNDRUM

Wolak, Frank, 126
Woodall, Brian, 126
Workman, Daniel, 158
World Energy Outlook, 69, 70, 74, 78,
146

Y
Yamashita, Yukari Niwa, vi, xiv, 97, 105,
176
Yoshida, Phyllis Genther, iii, v, vi, ix, xiv,
1, 171Z
Zumwalt, James, v, vii, ix
Zwigenberg, Ran, 1662014 Strategic Energy Plan, 72015 Long-term Supply and Demand
Outlook to 2030, 7

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