IEEJ e-NEWSLETTER
No. 212(Based on Japanese No. 214)

Published: July 19, 2021
The Institute of Energy Economics, Japan(As of July 20, 2021)

Sources:(1) DOE-EIA(2) Investing.com

Sources:(1) Ministry of Finance "Japan Trade Statistics"(2) Ministry of Economy, Trade and Industry (arrival month basis)(3) Estimated by World Bank (Netherland Title Transfer Facility)(4) DOE-EIA, NYMEX (Front-month Futures)

Source: x-rates.com

Sources:(1) Finance. Yahoo.com(2) Investing.com

Contents
Summary【Energy Market and Policy Trends】
1. Energy Policies
2. Developments in Nuclear Energy
3. Recent Developments in the Oil and LNG Markets
4. Update on Policies Related to Climate Change
5. Update on Renewable Energies

Summary【Energy Market and Policy Trends】
1. Energy Policies
Discussions on formulating the Sixth Strategic Energy Plan continue, headed toward
finalization around summer. Realistic solutions that are “difficult but not impossible” will besought.
2. Developments in Nuclear Energy
Kansai Electric’s Mihama Unit 3 restarted after a 10-year shutdown, becoming the first plant
to restart among the four plants given a 20-year license extension by the NRA. Having
undergone measures to address aging, its operations deserve attention.
3. Recent Developments in the Oil and LNG Markets
Oil prices are expected to be steady in the second half of 2021 amid tight demand and supply,
although the anticipated US monetary tightening may put downward pressure
4. Update on Policies Related to Climate Change
At the Special Meeting of ASEAN Ministers on Energy and the Minister of Economy, Tradeand Industry of Japan, Japan announced a wide range of supports for energy transitions in
ASEAN. Efforts by ASEAN countries and supports from Japan must be watched.
5. Update on Renewable Energies
Offshore wind initiatives under the New Offshore Use Act for Offshore Wind Projects are
firming up. How will the government and industry achieve healthy development while reducing
costs and promoting related industries?

1. Energy Policies

Shigeru Suehiro, Senior Economist, Manager
Econometric and Statistical Analysis Group
Energy Data and Modelling Center

Discussions on formulating the Sixth Strategic Energy Plan continue, headed toward
finalization around summer. The revision process this time is quite different from previous
times: Prime Minister Suga announced Japan’s GHG reduction targets without waiting fordiscussions in the country. He unveiled Japan’s 2050 carbon neutrality goal in his first policy
speech in October last year, then promised a 46% emissions reduction by 2030 from 2013 levels
at the Leaders Summit on Climate on April 22. Behind these moves lie international
decarbonization efforts to address climate change, which are accelerating. In addition to Europe
which made a head start, China’s announcement of its 2060 carbon neutrality goal and thelaunch of the environment-focused Biden administration are important contributors. One of the
major aims of a series of announcements by Prime Minister Suga was to show the international
community that Japan is strategically committed to keeping pace with others.
The Strategic Policy Committee that formulates the Strategic Plan welcomed the carbon
neutral declaration. Japan will need to do everything in its power to achieve the goal, promoting
energy conservation and electrification on the demand side while implementing thoroughdecarbonization on the supply side, and covering any shortfalls with carbon recycling and other
innovative technologies. The target, however, is currently defined as “aiming toward” rather
than “achieving” a goal due to the high uncertainties regarding technological development andother factors, and multiple scenarios are to be analyzed. A particularly important point for
discussion is the limitations of implementing renewable energy. Although renewables are
surely a major means for decarbonization, if they involve technological or economic limitations,then nuclear power and hydrogen/ammonia will have a larger role to play. Whilehydrogen/ammonia still has technological barriers, the use of nuclear energy is a policy decision.
The need for nuclear has also been mentioned by many members of the Strategic Policy
Committee. To meet the 2050 deadline, the course of policies for nuclear new builds andreplacement must be decided immediately. It will be interesting to see what kind of nuclear
policies are incorporated into the revised Strategic Plan.
Realistic discussions will be essential if the 2030 target is to be attained. This means
accumulating as much renewable capacity as possible and then determining the right balance
between renewable and nuclear electricity in light of the path to 2050 carbon neutrality. The
initial plan was to gather proven scientific, numerical evidence to decide how far the current
reduction target of 26% could be raised. However, before that could happen, an ambitious 46%
reduction target, almost double the original, was decided. There are fears that the overall pictureis unrealistic and distorted, despite the necessity of discussion on how to attain this ambitious
goal. The idea of abolishing or reducing nuclear power mooted by some members is unrealistic
in terms of both energy security and energy cost reduction. Some consider that the current
targets may be maintained assuming that nuclear power plants will be restarted, and that solar
PV capacity, which has a short lead-time, will be expanded until the reduction target is met. If
this happens, the additional cost burden will become a major issue.
Qualitative discussions have mostly been completed. Discussions will now move on to
analyzing multiple scenarios for 2050 and the energy mix figures to support the 2030 reduction
target of 46%. The basic stance of the current Plan is to set the 2030 reduction target at levels
that are certainly achievable while drafting multiple ambitious scenarios for the 2050 target.
However, under the revised Plan, challenging targets will be set for 2030 as well. Realistic
solutions that are “difficult but not impossible” for both 2030 and 2050 will need to be found.

2. Developments in Nuclear Energy
Tomoko Murakami, Senior Economist, Manager
Nuclear Energy Group, Strategy Research Unit
On June 10, Belarus’ first commercial nuclear power plant, Ostrovets Unit 1 (Russian PWR,
1,194 MW), started commercial operation. The plant had been in test operation after starting totransmit electricity in November 2020. Deputy Prime Minister Yuri Nazarov stressed thebenefits of nuclear power for the country, stating that the start of commercial operation of its
first commercial nuclear power plant was crucial, not only for the economy but also forenhancing Belarus’ competences. The country’s energy minister commented that the plant
would bring the latest technologies and new jobs to many industries leading to higher qualityof life for people, and is hopeful that Unit 2 will start operations in 2022 as scheduled.
On June 18, the mission of the International Atomic Energy Agency (IAEA) team of experts,
who have been in Ostrovets-1 since the start of commercial operation to confirm its safety, wascompleted. Neighboring Lithuania and other EU countries have expressed serious concerns
over the start of operation of Belarus’ first plant, but they have no grounds to interfere now that
Belarus has accepted the IAEA mission as other member states do and has received a clean billof health.
America’s largest nuclear operator, Exelon, is struggling to continue operating its plants amid
the harsh power market environment. The company had said its Byron and Dresden nuclear
power plants will have to be retired this year unless a bill promising support for nuclear poweris passed in Illinois, home to several of its plants, by the end of May 2021. As such a bill had
not been passed by June 15, the company announced that Byron Units 1 and 2 would close in
September and Dresden Units 2 and 3 in November.
All of Exelon’s plants in Illinois have an excellent record of operation. According to an IAEA
database, Dresden Unit 3 had an average 10-year capacity factor of 98.3% (the highest in theUS), Dresden Unit 2 97.5% (second), Byron Unit 1 96.2% (tenth), and Byron Unit 2 95.8%(12th). Their performance could not have been better, but the reality is that the nuclear businessis not economically sustainable in states with deregulated electricity markets without state
government support.
There are many other nuclear plants with excellent operational records in US states with
deregulated electricity markets. Will those plants meet the same fate? Responses by state
governments and the federal government must be watched.
Kansai Electric’s Mihama Unit 3 started its reactor on June 23 and began power control
operation on the 29th followed by the full-power operation on July 4th. It became the first plant
to restart among the four plants given a 20-year license extension by the Nuclear Regulation
Authority. During the 10-year outage period since May 2011, Mihama Unit 3 has been taking
measures to address aging degradation, including replacing and repairing key facilities andstrengthening their seismic resistance, and installing flame-retardant cables. There are highhopes for the continued operation of plants older than 40 years and their contribution to stable,
long-term electricity supply.

3. Recent Developments in the Oil and LNG Markets
Tetsuo Morikawa, PhD
Senior Economist, Manager
Oil Group
Fossil energies & International Cooperation Unit
O Oil prices rose sharply in June. On the 23rd, Brent marked $75.19 and WTI $73.11, thehighest in 2 years and 9 months since October 2018. The International Energy Agency
maintained its 2021 oil demand forecast at 96.40 mb/d in its Oil Market Report dated June 11
and predicts that the demand will return to 100 mb/d in Q3 of 2022. The OPEC Plus joint
production cut has eased since April but still has an extremely high compliance rate of 114%
as of May. With hardliner Ebrahim Raisi becoming Iran’s new president, the nuclear deal islikely to take longer to be agreed and Iran’s production will not recover soon. Meanwhile, theUS output is at a standstill at around 11 mb/d and the US Energy Information Administration
believes it will grow only by 400,000 b/d by the end of 2021. The industry stocks of OECD
countries fell below the five-year average in April 2021, and the excess stocks built up during
the pandemic have thus been resolved. In addition to the tightening supply-demand balance, theexcess money arising from global monetary easing is pouring into the futures market, though
to a lesser extent than the stock market. However, the US FRB mentioned on June 16 that it
would lift its zero-interest policy in 2023, which should put some downward pressure on prices.
The current situation of low stock level and limited production growth in the US is favorable
for OPEC Plus. They are likely to try to stay in control of the global supply by tweaking thejoint production cut levels, while weighing such factors as the course of the pandemic, theprogress of Iran’s nuclear talks, the degree of US production increase, and the US monetary
policy. Oil prices are expected to be steady in the second half of 2021 especially with theabsence of US production growth. However, factors for lower prices, including the possibilityof progress in Iran’s nuclear talks and its consequent return to the oil market, as well as US
monetary policy, must be watched.
The spot LNG price in Asia was high in June at around $10–12. Japan’s average import price,which is largely oil-indexed (60–70% of imports), is currently expected to trail the spot price
but will be more likely to exceed it if oil prices keep rising. The spot price is being supported
by vigorous demand and the shutdown of some liquefaction plants. The growth in demand isparticularly striking in China, which imported 33.23 million tonnes in January–May 2021, up
30% year-on-year and slightly more than Japan’s imports for the same period. The full-year
imports of both Japan and China are estimated to be around 80 million tonnes in 2021 but China
could become the world’s largest LNG importer for the first time. At the Special Meeting of
ASEAN Ministers on Energy and the METI Minister of Japan held on June 21, Japanannounced it would provide $10 billion to support LNG, renewable energy, energy efficiency,
and other projects for ASEAN countries. It is hoped that this initiative will assist the energy
transition in ASEAN countries while boosting the presence of Japanese companies in the LNG
market.

4. Update on Policies Related to Climate Change
Takahiko Tagami, Senior Coordinator, Manager
Climate Change Group
Climate Change and Energy Efficiency Unit

On May 20, an executive order was issued in the United States requiring the Financial
Stability Oversight Council to assess the climate-related risk to the stability of the US financial
system and to report to the President within 180 days, including on the necessity of enhancing
climate-related disclosures. The fact that the United States has begun to address climate-related
financial risk marks a milestone. Meanwhile, the Biden administration is up against a wall inboth the judiciary and the legislature. On June 15, the U.S. district court for the western districtof Louisiana issued an injunction that blocks the Biden administration’s pause on new oil andgas leasing on public lands (see the April edition of this Newsletter). The federal government
has not revealed how it will respond to this ruling. Furthermore, on June 24, President Bidenand a bipartisan group agreed on the infrastructure bill, which was cut back drastically,
including the removal from the original plan of the clean electricity standard (CES), a focus for
the Biden administration that would have set requirements on the percentage of renewable
power sources and others. The President is now expected to include CES in the “budget
reconciliation bill” which can be passed with a simple Senate majority, but seems to havedifficulty getting political support from moderate Democrats such as Joe Manchin from West
Virginia.
On May 26, China’s leaders group for the works of carbon peaking and carbon neutrality
convened its first plenary meeting. This is the first climate-related major group to be launchedsince the one on climate change and energy conservation in 2007. On the same day, Liu Youbin,spokesperson for the Ministry of Ecology and Environment, said at a press conference that thetrading system of the national emissions trading scheme will be launched at the end of June asscheduled.
On June 17, the meetings of the Subsidiary Bodies of the UNFCCC, which had been held
online since May 31 in preparation for COP26, closed. While topics such as rules forinternational credit trading, common tabular formats for ex-post review of the progress of eachcountry (transparency), and common target years beyond 2030 (common time frame) werediscussed, developing countries refused to move forward with the discussions citing a lack ofwillingness among developed countries to provide finance, and thus the discussions ended
without finding a middle ground for COP26 in November. A ministerial meeting will be heldin late July for discussions, including on support for developing countries.
On June 21, a Special Meeting of ASEAN Ministers on Energy and the Minister of Economy,
Trade and Industry of Japan was convened. The joint statement “Enhancing Partnership in
Realising Energy Transitions in ASEAN” noted the unique energy policies of each country,
which address energy security, economic competitiveness and environmental sustainability
based on each country’s circumstances, and welcomed Japan’s “Asia Energy Transition
Initiative (AETI),” which includes $10 billion financing support for renewable energy, energy
efficiency, LNG and other projects.
At the meeting, the Economic Research Institute for ASEAN and East Asia (ERIA)
reportedly outlined the results of a model analysis for the case where ASEAN countries reachnet-zero emissions between 2050 and 2070. The results showed that even assuming that
ASEAN countries decarbonize by 2070, the amount of additional investment over the baseline
would be 4.8% of GDP in 2070 and electricity tariffs would triple. Thus, reaching net-zeroemissions even by 2070 will be a daunting challenge for ASEAN. The efforts of ASEAN
nations themselves and the supports of Japan will be tested in controlling the cost of measuresand pursuing decarbonization in a realistic manner.

5. Update on Renewable Energies
Yoshiaki Shibata, Senior Economist, Manager
New and Renewable Energy GroupElectric Power Industry & New and Renewable Energy Unit

Offshore wind initiatives under the New Offshore Use Act for Offshore Wind Projects
enacted in April 2019 are gradually firming up. The operator for the offshore wind project off
the coast of Goto City, Nagasaki Prefecture, was selected in June after a year-long public
selection process. Under the Act, the area has been designated as a promotion zone for thedevelopment of marine renewable power plants. There was just one applicant (a consortium)
and the power plant is small at just 17 MW, but Japan’s first floating offshore wind project isstill remarkable. Furthermore, the public call for applications for Japan’s first fixed-foundation
wind power project that began in November last year for four offshore promotion zones in Akita
and Chiba Prefectures was closed at the end of May. Operators are due to be selected in theautumn. A total grid capacity of about 1.5 GW has been secured for these zones. These newdevelopment projects are of great significance considering that Japan’s cumulative installed
offshore wind capacity is just 65 MW, or 54 MW excluding the Fukushima floating wind power
plant which is scheduled to be dismantled.
Expectations are rising for offshore wind power as a means to reach carbon neutrality by
2050 due to the lack of suitable land for new commercial solar PV and onshore wind power
plants, as is being discussed in government councils. The government seeks to attract
investments by committing to designating promotion zones for 1 GW of offshore wind powereach year, creating projects for 10 GW by 2030 and 30–45 GW by 2040. The keys are reducing
costs and fostering related domestic industries.
Regarding costs, the purchase price is set at 36 yen/kWh for the Goto City offshore project
and to a maximum of 29 yen/kWh for the other four projects. Though the purchase prices will
not be final until operators are selected, they are still far from those in Europe where purchaseprices for many projects are less than 10 yen/kWh. Japan’s offshore wind development has only
just started and it is difficult to assess the possibility of future cost reductions. We must closely
watch how the initiatives are carried out to lower onshore wind power costs to 8–9 yen/kWh by
2030–2035, a target set by the Public-Private Council on Enhancement of Industrial
Competitiveness for Offshore Wind Power Generation.
In terms of fostering related domestic industries, factors such as enhancing thecompetitiveness of related industries, building clusters of related industries, and upgrading
infrastructure and the environment have long been considered crucial for the economicallyrational growth of offshore wind power. The Council has set a target based on that of the UK
Offshore Wind Sector Deal, which aims to raise the domestic procurement ratio to 60% by 2040
by promoting domestic related industries. There are some good signs, including the recent news
on JFE Engineering opening a factory in Japan for building foundations (monopiles) for fixedfoundation offshore wind power plants, and Toshiba Energy Systems’ alliance with US General
Electric to manufacture nacelles in Japan.
Japan’s solar PV started out with generous purchase prices but with inadequate industrial
policies, eventually lost competitiveness, and faced a barrage of Chinese and other foreign
products. Consequently, the percentage of domestic products in domestic shipment fell fromaround 60% at the launch of the FIT system to 16% in fiscal 2020. It is not clear whether Japan
can develop a healthy offshore wind power sector by learning from the experience of solar PV
and setting an expansion target that is accompanied by lowering costs and promoting relatedindustries.
7

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