Yoshiki Tsurumaki and Richard Shi connect across Tokyo and Perth. The two talk about the energy transition in Japan, from the impact of the devastating nuclear accident in Fukushima Daiichi to opportunities for foreign investors to partner with local companies. Read or listen to their takeaways.
Towards the end of 2024, our Japan office produced a report giving their expert lens on the challenges (like an ageing power grid) and opportunities (including offshore wind) as the island nation targets net zero by 2050. You can find the report here.
Tokyo-based partner Yoshiki Tsurumaki met (virtually) with Perth-based energy and resources senior associate Richard Shi to talk about highlights from the report. You can listen to their discussion on the report page or via Spotify or Apple. They delve into Japan’s unique challenges and the strategic opportunities in renewable energy and hydrogen technology. Key takeaways include insights on regulatory support, investment tips and the evolving corporate behaviour in response to carbon markets, finishing with four trends that will shape the decade to come.
Read on for the transcript!
Richard Shi (RS): I hope you don’t mind, but I’d like to start with the difficult side of the transition ledger. What are the most pressing challenges Japan faces in its energy transition, and how do they differ from challenges in other leading economies who are similarly embarking on the journey to net zero?
Yoshiki Tsurumaki (YT): Japan’s energy transition faces some unique challenges, shaped by its geographic and historical context. Unlike other leading economies, Japan is limited by its steep shorelines and mountainous terrain, which restrict large-scale wind and solar farm development. Additionally, Japan’s energy grid is both aging and designed around stable, centralised energy sources, which creates integration challenges with renewable sources that are more variable and decentralised. Beyond these geographic and infrastructure constraints, Japan also deals with significant regulatory and social challenges. For instance, strict land-use regulations, such as Forest Act, Act on the Regulation of the Creation of Residential Land, and a complex Environmental Impact Assessment process often delay renewable projects. In particular, rural and coastal communities often raise concerns about environmental, tourism, and other social impacts.
The impact of Fukushima on energy policies (and reassessing nuclear)
RS: It’s interesting that you mention local communities. The local lens is important in Japan – not only because those local and regional efforts are needed to meet net zero goals, but because they feed into the wider perspective. There’s one local incident in particular that I wanted to talk about. We’re all familiar with the unfortunate tragedy that occurred in 2011, when a 15-metre tsunami caused a nuclear accident at Fukushima Daiichi. What impact has this had on Japan’s energy policies and public trust in nuclear energy?
YT: The 2011 Fukushima nuclear accident further complicated Japan’s energy policy and public trust in nuclear energy. This tragic event led to a major shift, with Japan increasing its reliance on fossil fuels to make up for the cutback in nuclear power. By May 5, 2012, all reactors were offline. To fill the gap, thermal power generation increased, leading to a surge in oil and LNG imports, which even caused a trade deficit for the first time in 31 years in 2011. In response, Japan has since prioritised renewable energy and hydrogen technology, aiming for carbon neutrality by 2050, as outlined in the Basic Energy Plan.
RS: Do you see this as a long-term shift?
YT: While Japan initially moved away from nuclear power post-Fukushima, recent energy security concerns, especially from the Ukraine crisis, have led to a re-evaluation. The government now aims to balance renewable expansion and feed in premium/ feed in tariff incentives– better known as FIP/FIT incentives – with a reconsideration of nuclear as a stable energy source, including safe restarts of certain plants. So, although renewable energy and storage technologies remain priorities, Japan’s path may also include cautious reliance on nuclear power to meet both environmental and security goals.
Identifying growth opportunities in renewable energy
RS: So it’s complex. That’s a challenging environment – but if it’s anything like Australia’s settings, they’re challenges that come with opportunities. Where are the growth opportunities in Japan?
YT: Japan’s energy sector is ripe with growth opportunities, particularly in renewable energy and hydrogen technology. Japan has an urgent need to decarbonise, especially with its geographic constraints limiting large-scale wind and solar energy development. This scenario creates demand for technologies that can work around these limitations and modernise Japan’s aging energy grid. Companies can take advantage of renewable energy projects supported by systems like FIT and FIP, both of which offer favourable returns and foster investment.
Japan’s ambitious targets for reducing greenhouse gas emissions and setting up at least 100 Decarbonisation Leading Areas by 2030 highlight opportunities for companies to engage in regionally focused renewable energy initiatives.
Positioning for success in hydrogen technology (and innovative projects)
RS: You’ve mentioned hydrogen technology. We saw how ambitious Japan was to lead in the space in the Tokyo Olympic Games in 2020. We saw hydrogen fuelling buses and sedans that drove athletes around the site. Even the torch flame was hydrogen-fuelled. Given Japan’s ambition to lead in hydrogen technology, how can companies position themselves to take part?
YT: Beyond renewables, Japan’s drive to lead in hydrogen technology opens up valuable opportunities for companies in this emerging sector. The government has earmarked over 6.6 billion yen to support the hydrogen supply chain, offering subsidies for infrastructure development, including fuel cell vehicles and hydrogen stations. Companies should be mindful of regulatory requirements under frameworks like the High-Pressure Gas Safety Act, which governs hydrogen technology. By aligning with these policies and collaborating with agencies like NEDO (the R&D non-profit, New Energy and Industrial Technology Development), companies can establish themselves as key players in Japan’s hydrogen-driven future.
RS: Have you seen any standout examples?
YT: Notable examples include Kawasaki Heavy Industries, which is progressing in large-scale hydrogen transport technology and building liquefied hydrogen carriers, and ENEOS, which is rapidly expanding hydrogen stations to build a national hydrogen supply network. Additionally, Chiyoda Corporation is advancing technology to transport hydrogen as organic hydrides, which supports the development of a large-scale hydrogen supply chain.
On the regulatory environment supporting clean energy investments
RS: It sounds very technical! And like it would require quite solid investment backing it. As lawyers, we know investments need more than a prosperous idea and a decent return – they need the right environment. How supportive is the regulatory environment when it comes to clean energy investment, particularly in light of the additional technical and commercial hurdles that those investments face?
YT: Japan’s regulatory landscape has progressively evolved to encourage clean energy investments, reflecting the nation’s ambitious goal of achieving carbon neutrality by 2050. The government has introduced several key policies and frameworks designed to attract investments in renewable energy and related technologies. FIT system, introduced in 2012, guarantees fixed purchase prices for renewable energy, providing investors with reliable returns. Then, in 2022, Japan launched the Feed-in Premium (FIP) system, which adds payments above market prices, encouraging renewable energy producers to respond to market dynamics and helping stabilise the grid. The 2020 Green Growth Strategy further supports clean energy by outlining measures for 14 priority sectors, including offshore wind, hydrogen, and energy storage. This strategy includes tax incentives, financial support, and regulatory reforms to foster innovation and attract investment in clean energy technologies.
Navigating Japan’s clean energy market as a foreign investor
RS: Increasingly attractive to investors, by the sound of it. Of course, I have to ask, as I sit here in Australia – how about foreign investors? How can they effectively navigate this landscape to maximise their impact?
YT: For foreign investors, navigating Japan’s clean energy market effectively involves working closely with local stakeholders and developing a solid understanding of the regulatory environment. Partnering with Japanese companies can provide essential insights into market dynamics and regulatory specifics. Resources from expert organisations like law firms or Japan External Trade Organisation – known as JETRO – can also be helpful for understanding licensing and permitting requirements and for finding strategic business partners. Staying updated on policy developments and engaging in industry associations will empower investors to anticipate regulatory changes and adjust strategies accordingly.
By aligning investment plans with Japan’s policy goals and taking advantage of available incentives, foreign investors can significantly impact Japan’s clean energy transition.
Corporate behaviour and carbon markets: a new era
RS: JETRO sounds a lot like AusTrade in Australia. But back to companies in Japan – I’m keen to hear your thoughts on the impact of carbon markets. Our Australian experts in the topic are seeing quite a dramatic influence here. How is corporate behaviour changing in Japan with the newly established carbon credit market and an emissions trading scheme on its way?
YT: Japan’s private sector is undergoing a major transformation in response to the establishment of the carbon credit market and the anticipated emissions trading scheme. Companies are now more focused on integrating carbon reduction strategies into their operations, recognising the environmental importance and the economic advantages of these efforts. The Tokyo Stock Exchange’s launch of the carbon credit market in October 2023 has created a structured platform for businesses to trade carbon credits, incentivising emission reductions and promoting sustainable practices.
Private sector’s role in driving energy transition
RS: Fascinating development to watch. We’ll have to stay in touch on that one! It’s especially interesting because it really taps into the role of companies in this shift. Taking a wider lens, what opportunities does the private sector have to drive Japan’s energy transition?
YT: This evolving landscape offers many opportunities for the private sector to drive Japan’s energy transition. By investing in renewable energy projects, companies can lower their carbon footprint while benefiting from government incentives to promote clean energy. For instance, FIT and FIP systems offer attractive returns for renewable energy investments, making them favourable options for corporate engagement.
Overcoming barriers to renewable energy projects
RS: I’m liking this positive train of thought, but let’s add a dose of reality. What are the most significant barriers to implementing renewable energy projects in Japan?
YT: Implementing renewable energy projects in Japan is challenging. Strict land-use regulations and a rigorous Environmental Impact Assessment (EIA) process often lead to project delays. Additionally, Japan’s mountainous terrain and limited land availability create logistical challenges for large-scale renewable installations.
RS: What would you consider as some practical tips for investors and developers in overcoming these challenges?
YT: To overcome these hurdles, early engagement with local communities and stakeholders can help address social concerns and build project support. Partnering with experienced local firms provides valuable regulatory insights, and staying informed about policy developments helps investors anticipate changes and adapt strategies. By aligning investment plans with Japan’s objectives and using support mechanisms, foreign investors can make a strong impact in Japan’s clean energy sector.
Four trends that will shape the transition
RS: We see the critical role that local expertise plays across the region. Before we wrap up, I’d like to invite you to do a little crystal-ball-gazing. Looking ahead, what key trends do you anticipate will shape Japan’s energy transition over the next five to ten years?
YT: Looking ahead, several key trends are likely to shape Japan’s energy transition over the next five to ten years.
- First, we can expect steady growth in renewable energy, especially as Japan aims to meet its target of sourcing 36-38% of its electricity from renewables by 2030. This will drive investments in solar, offshore wind, and biomass, supported by government incentives like FIT and FIP systems.
- Hydrogen development is also a major focus. With a national budget of over 6.6 billion yen dedicated to building the hydrogen supply chain, Japan aims to lead globally in hydrogen technology through innovations in production, transport, and storage. In the pursuit of decarbonisation, hydrogen is increasingly seen as a solution to the limitations of renewable energy, which, despite growth in solar and wind power, faces cost challenges and scalability issues.
- One promising area is zero-emission thermal power generation, particularly hydrogen-fired power plants. Unlike fossil fuels, hydrogen combustion does not produce CO2, as hydrogen contains no carbon. Although the current cost of hydrogen production is high, continued investment in hydrogen infrastructure is expected to make it more competitive in the future.
- The emerging carbon credit market and the expected emissions trading scheme (ETS) in 2026 will also play key roles, as we discussed earlier. This market-based approach is expected to drive corporate behaviour toward more sustainable practices.
RS: So, you’re seeing renewables growth driving investment, evolving hydrogen infrastructure including this interesting no-emission thermal power you’ve mentioned that we’ll all have to learn more about, and corporate behaviour driven by carbon trading. I don’t want to be a damp squib, but what’s the flip side?
YT: Despite these promising developments, Japan still faces considerable challenges, particularly with grid constraints and strict land-use regulations, which can delay renewable projects. Moving forward, strategies to address these issues—like enhancing grid integration for renewable sources and streamlining regulatory processes—will be essential for Japan to make meaningful progress in its energy transition.
Richard Shi recorded this conversation on Whadjuk country. We acknowledge the traditional custodians of that incredible land, the Whadjuk Noongar people, and pay deep respects to their elders, past and present.