IEEJ：December ©IEEJ 2023
Special Bulletin
A Japanese Perspective on the International Energy Landscape (666)

December 6, 2023

Growing Importance of Security of Electricity Supply
Ken Koyama, PhD
Chief Economist, Senior Managing Director
The Institute of Energy Economics, JapanAs the outbreak of the Ukraine crisis has severely shaken the international energy market,
pushed up energy prices sharply, and caused serious energy supply insecurity, ensuring and enhancing
energy security has come back as a top energy policy priority. The Ukraine crisis can be seen as animportant opportunity to significantly change the world's interest in energy issues, which had been
dominated by the realization of carbon neutrality and the promotion of decarbonization. Since thecrisis, the world has been confronted with the challenge of how to achieve both enhanced energy
security and decarbonization under the international political and geopolitical realities of deepening
global divisions.
While energy security has become the most important challenge, there are many
uncertainties about the future energy situation in Japan and the world, indicating a mountain ofchallenges to be tackled. Since the outbreak of the Ukraine crisis, Western countries have tried to phaseout their dependence on Russia, leading the Middle East to dramatically increase its importance as analternative source of energy supply. In a symbolic case, Japan's rate of dependence on the Middle Eastfor crude oil imports rose to 94% in 2022. As a result, the world has become more dependent on theMiddle East for a stable oil supply, allowing the region’s oil-producing countries to expand theirmarket influence and power. Furthermore, the stabilization of the Middle East has become more
directly linked to the stability of crude oil prices and the international oil market, leading the Gaza
Palestinian crisis since October to become an important factor that could shake the energy situation.
So far, the crisis in Gaza has not affected the oil supply, but future developments will have to be closely
monitored.
In this way, stabilizing the market for and securing a stable supply of oil as the world's largest
international energy trade good has retained high importance so far. From the perspective of energy
security, however, we must recognize that the oil issue is broader and more complicated. In addition
to oil security, natural gas and LNG supply security became a world-shaking issue amidst the Ukraine
crisis last year. Then, Europe was forced to desperately implement energy security measures. Securing
stable natural gas and LNG supply will remain an important global challenge.
Recently, key energy security issues as seen from completely new and broader perspectives
have also come to the attention of the world. As the world has become increasingly fragmented,
concentration in supply chains for clean energy investment targets such as renewable energy, electricvehicles, and batteries has become a global matter of interest from the perspective of emphasizing
economic security, together with concerns about the tighter supply-demand balance and price hikes
for rare earths and other critical minerals and about their limited supply sources. These issues are
significant economic security issues that are related not to energy but to supply chains linked directly
to energy. In this sense, they may be part of widely defined energy security issues. Global interest inthese issues will grow more and more in the future.
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When future energy security issues are considered, however, electricity supply security has
the potential to become the most important challenge. Even at present, it is easy to understand how
dependent we are on electricity when we think about our day-to-day lives and the economy. There is
no doubt about the importance of electricity as an energy source that supports a comfortable, safe,clean, and convenient life.
The importance of electricity will continue to increase in the future. The share of electricity
in final energy consumption (electricity’s share of consumers’ direct energy consumption) is currently
about 20% in Japan and the rest of the world. Even if the world changes in a “business as usual”
manner in the future, however, the share is expected to exceed 30% by 2050. If decarbonization ispromoted to achieve carbon neutrality, the share will increase further. When carbon neutrality isachieved, the share is widely expected to top 50%. The reason for this is that the most efficient
decarbonization method is to increase electricity’s share of energy consumption and zero-emission
electricity sources as much as possible because there are renewable energy, nuclear, and other zeroemission electricity sources that have already been put into practical use, commercialized, and diffused.
In this way, the world will go in the direction of increasing the electricity share significantly, making
stable electricity supply even more important.
Furthermore, another important move for increasing the significance of electricity isattracting global attention. That is the rapid progress in digitalization and informatization that could
significantly boost demand for electricity. Originally, the possibility that the promotion ofdigitalization and informatization will lead to a boost in electricity demand has attracted attention fromthe energy industry. However, recent technological innovations and proliferation, such as the spreadof generative artificial intelligence, are attracting attention to the possibility of pushing up electricity
consumption much more than previously assumed. Electricity consumption may also increase
dramatically in regions or countries that develop the capacity to produce and supply goods related todigitalization and informatization. Attention should be paid to the impact of the construction or
installation of large semiconductor plants and data centers on electricity demand. These changes could
further accelerate the rise in the electricity share for decarbonization.
The energy mix in Japan's current Strategic Energy Plan indicates that Japan's total
electricity generation (considered approximate to electricity consumption) will decline from around
1,024 billion kilowatt-hours in FY2019 to around 934 billion kWh in FY2030. Electricity consumption
is expected to be suppressed as energy efficiency improvement is promoted strongly to achieve the3E’s: economic efficiency, energy security, and environmental protection. Given the social, economic,and energy conditions described above, however, careful consideration may be required even in Japanon how to view future electricity demand. There is no doubt that energy efficiency will continue toimprove. However, it is necessary to assess the impact of digitalization and informatization. In addition,
it is necessary to secure a stable electricity supply that satisfies demand stably and sufficiently.
On the other hand, it is also important to note that various issues and challenges haveemerged in securing a stable electricity supply. If the spread of renewable energy contributing todecarbonization and energy self-sufficiency improvement centers on naturally derived and intermittent
supply sources such as solar photovoltaics and wind power, measures to stabilize the electricity supply
will be required inevitably. Available technological responses to such intermittent electricity supply
include electricity storage systems, adjustments using fossil-fired power generation, and theenhancement of power grids. However, these responses will lead to an increase in electricity costsincluding those for integrating renewable energy electricity into power grids. Furthermore, theseresponses can increase dependence on limited supply sources for strategic commodities such as criticalminerals, as noted above. While sufficient electricity supply capacity, including surplus capacity, is2

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required for stable electricity supply, electricity market liberalization encourages market players toeliminate redundancy, cut costs, and minimize surplus capacity, making it more difficult to secure
investment in supply capacity development. It will be necessary to respond to such difficulties bydesigning a capacity market and other mechanisms. In this respect, how to strike a balance between
electricity market liberalization and stable electricity supply and how to efficiently utilize and expand
zero-emission power sources will become challenges. Inevitably, policies and initiatives to tackle theincreasingly complex challenge of stable electricity supply in Japan and around the world will become
critically important.

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