A review of METI’s GX Energy Plan

Background and Context

Japan is facing a dilemma. Fifteen years ago, when Japan was the world’s greatest proponent of safe nuclear energy, Japan led the world with increasingly ambitious emission reduction targets long before the Paris Climate Accords pushed countries to achieve net zero carbon emissions by 2050¹. Scarcely more than a year following that commitment, however, expansion of nuclear power, and with it Japan’s most viable carbon neutral energy source, was taken off the table. After years of various investments and fears of grid instability, Japan’s renewable mix is still flagging behind other developed nations. But changes to power infrastructure are not a quick fix – to meet 2050 goals Japan needs to make targeted investments now. These investments are funded by the newly issued sovereign GX Transition Bonds scheme and shaped by the comprehensive GX energy plan outlined by METI. Innovative renewables, a return to safe nuclear, and massive grid and storage infrastructure development will be paid for through a phasing in of mandatory carbon pricing.

Japan’s energy history has been one of a struggle for reliable supply. Certain factions in Japan will even claim Japan’s participation in WWII and the bombing of Pearl Harbor were out of a desperate demand for oil. In the modern, post-war era Japan thought they had found the solution to the problem that had long plagued their development – nuclear power plants. Finally, Japan could secure their energy supply through domestic production suitable to meet their demands. Everything changed when a massive earthquake triggered a devastating tsunami and subsequent failure of the Fukushima nuclear plant 1 which came to be known as the 3/11 natural disaster. Japan quickly pivoted from nuclear-fueled power to tried-and-true thermal generation fueled by oil and coal. Immediate need supplanted any thought of future emission goals. But even as immediate need was sufficiently met, Japan continued along the path set following the disaster. For long-term reliability, Japan pioneered much of the emerging LNG society.

Renewable energy sources such as solar and wind were treated as supplementary to the vast majority of energy being derived from fossil fuel thermo-generation. While a system to guarantee the purchase price (feed in tariffs, FIT) of low-carbon energy was put in place, then extended, to encourage the installation of solar and renewable energies, the amount of generated energy that could be sold back to the grid was capped to protect overall grid stability. Rather than use the challenge as an opportunity to pioneer a truly “smart” grid integrating renewables to their maximum capabilities, Japan favored the safety and security of a fossil fuel-derived base load supplemented by renewable energy. As such, 13 years after the disaster, Japan remains 41st, behind countries like Pakistan, Czechia, and China, in terms of percentage of energy demand from renewable sources.² The ranking falls even farther if controversial bioenergy and hydropower are removed. Far from making significant progress towards their decarbonization goal, Japan has found themselves in a state where only 11% of their energy demand is self-sufficient.

Now, 13 years after the 3/11 disaster that left a large swath of Fukushima prefecture wrestling with nuclear contamination, global geopolitical shifts have made energy self-sufficiency a top priority. When Russia invaded Ukraine in the midst of the Covid pandemic, Japan became brutally aware of the fragility of its own energy supply chain – and the troubling rumblings coming from some of its neighbors. In response, the Japanese government has shifted their messaging. In addition to supporting the development and deployment of innovative renewables like offshore wind and flexible solar, Japan is shifting their stance from nuclear avoidance to nuclear acclaim – with the caveat that it be done safely.

Overview of the GX plan

Renewable energy supply growth is spurred not only by national carbon neutrality pledges, but also by demand from the public and private sector to reduce the cost and carbon intensity of public energy supply. Power supply, however, is a complex balance between supply and demand. Renewable energy experiences natural variations during the course of a day depending upon the light or wind intensity. For many years, the fear of this variability disrupting the overall power grid led to a reluctance to rely upon renewable electricity beyond a certain threshold. To mitigate the variability, METI is investing in both storage and transport, the hydrogen ecosystem and the power grid.

Analyzing Key Components

Plans have been announced for a massive power grid overhaul to manage the increasingly diversified power supply. Hokkaido, as a planned major renewable hub, will be connected to the main island power grid through a massive underwater cable. Incentives for optimizing energy use during times of high supply will be provided through demand-response infrastructure and pricing systems. Overall, these enhancements are budgeted for 7 trillion yen and planned to be completed by 2050.

Grid Advancements Planned for 2050 (Figure 2)

Source: 広域系統長期方針（広域連系系統のマスタープラン）

In addition to investing in the transport and usage side in terms of the power grid, Japan will be investing in storage options. Japan is particularly focused on emerging energy storage in the form of hydrogen and hydrogen carrier fuels such as ammonia and e-methane. While many technical and logistical challenges remain, hydrogen and other carrier fuels provide a low-carbon intensity alternative for both energy storage and the high-quality heat demands of hard to decarbonize industries like steel. The dual applicability makes it an area of extreme interest for a heavily industrialized economy like Japan.

All in all, these investments will be made through issuance of 20 Trillion in GX Bonds issued by the Japanese government starting in February of this year. This level of financing is intended to spur the private sector to invest a total of 150 trillion yen in similarly targeted green investments. METI plans to further incentivize the investments, and repay their own debt issuances, through phasing in carbon pricing. The voluntary emissions trading scheme (ETS) started in April of 2023 to refine and develop the logistical methodology. Participation in the voluntary scheme will contribute to companies being able to access some of the financing from the GX Bonds. In 2028 the scheme will evolve from voluntary to mandatory for the fossil fuel sector. Taxes on carbon emission potential will drive the need to reduce reliance upon such highly emitting sources. In 2033, the trading will be expanded to all sectors.

Carbon Pricing to Repay Bonds (Figure 3)

Source: Japan Climate Transition Framework

In our upcoming insights articles, we will look into the GX Bond issuances and how companies can access these targeted investments.

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Key Terminologies

• GX: Green Transformation. A common acronym used by the Japanese government to describe a shift toward clean energy sources and away from fossil fuels.
• GX Transition Bonds: Japanese government bonds issued by the Japanese government as a means of financing decarbonization activities.
• Flexible Solar (Flexible perovskite): Emerging solar panel technology manufactured using extremely flexible materials.
• Energy mix: A combination of energy sources used by a particular region or country to supply energy.
• Demand-response: Matching the quantity of electricity demanded to the quantity supplied. The aim is to reduce waste of resources by keeping the supply constant and reducing waste to the amount of electricity generated.
• Hydrogen carrier fuels: A means of transporting hydrogen more easily by hydrating a chemical compound at the site of production and then dehydriding it either at the point of delivery or once it is in a fuel cell vehicle. Common examples include ammonia, e-methane, and liquid organic hydrogen compounds (LOHCs).

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1. https://japan.kantei.go.jp/hatoyama/statement/200909/ehat_0922_e.html ↩︎
2. Data source: Energy Institute – Statistical Review of World Energy (2023) (Note: Renewables include hydropower, solar, wind, geothermal, wave, tidal, and bioenergy, but not traditional biofuels.) ↩︎