Japan's Feed-in Tariff Program: First Year's Impact 2/2

The earlier post introduced the basic concept and scheme of Japan's feed-in tariff (FIT) program for renewable energy, along with the level of renewable energy deployment after the program launch in 2012. This blog post now takes a closer look at the program's impact on fuel mix for electricity generation, grid stability, the economy, and program's future.

National Fuel Mix

The data presented in the earlier post reveals that the FIT program triggered a massive investment in renewable energy, mostly on utility-scale PV (solar). The impact on the national fuel mix for electricity generation was however minimal in the first year. The below figure shows that the share of renewable energy (excluding large-scale hydropower) increased only by 0.2% in FY 2012 relative to the previous year, from 1.4% to 1.6%. Such level of increase can be easily offset by the restart of one mid-size nuclear reactor, so the FIT program overall seems to have produced little impact on Japan's fuel mix.

(Source: Federation of Electric Power Companies in Japan)

There are two likely causes for the contradictory result: the commissioning timing and the capacity factor of renewable energy. A graph in the earlier post shows that more than 10GW worth of renewable energy was authorized after the program launch, but most facilities were still under construction or in design process at the end of FY 2012 (Mar 2013). This implicates that despite the small impact in the first year, the impact this year could be substantially larger.

The capacity factor, a ratio of its actual output over a period of time (e.g. kWh) to its potential output (e.g. kW), is however a more fundamental problem. Since the output of solar and wind is dependent on weather conditions, the capacity factor of solar and wind is much lower than traditional electricity generation facilities such as hydropower and thermal plants fueled by natural gas, coal, geothermal, biomass, etc. For example, a study by the Cabinet Office of Japan over the lifecycle costs of electricity generation assumes the average capacity factor to be 12% for PV plants and 80% for thermal plants. This means that on average, a 100MW PV plant can generate only 12MWh of electricity in one hour, while a thermal plant fueled by biomass with the same scale would generate 80MWh. This capacity factor problem caused the disparity between the investment level (installed capacity) and actual contribution to the fuel mix, and it will continue to be a matter of concern for a foreseeable future.

Grid Stability

The impact on the grid stability is also a concern for electric utilities. Weather-dependent energy sources cannot always produce electricity when needed, and overproduction is also a threat to the grid stability from power frequency perspective. For this reason, the current grid system can take a limited amount of variable energy sources such as solar and wind.

This problem surfaced this spring in Hokkaido, a northern island in Japan with 5.5 million residents (roughly equal to Finland). Hokkaido Electric Power Company, a sole electric utility covering the entire region, recently announced that it will accept only 400MW of utility-scale PV to prevent potential collapse of its power supply system. 2GW worth of utility-scale PV plants are planned in Hokkaido at this moment, so roughly 75% of them is likely to be rejected from the grid.

Grid System in Hokkaido

(Source: Hokkaido Electric Power Company)

There are of course various mitigation measures proposed to solve this problem. Increasing flexible energy sources such as natural gas and hydropower and demand management strategies including smart grid can improve utilities' ability to respond to a sudden change in weather conditions. Having energy storage technology such as utility-scale battery and pumped hydropower can also help utility absorb such shock. These solutions however are either costly and/or yet-to-be proven to work, and it would take some time for cash-strapped utilities to adopt these measures.

Economy

The impact on the economy is controversial. On one hand, it arguably improves the trade balance through the reduction in fossil fuel import and creates construction and manufacturing jobs related to renewable energy investment. On the other hand, it could compromise economic competitiveness through increased electricity prices, particularly in energy-intensive sectors such as the steel industry.

The reported costs of the FIT program amount to 130 billion yen (US$1.3 billion) for FY 2012, and the anticipated costs for FY 2013 amount to 480 billion yen (US$4.8 billion). When subtracting the reduced costs of fossil fuel, the added costs for the average household is estimated to be only about 120 yen per month (US$1.2). This is probably not a meaningful figure for average household, but as more renewable energy is deployed, the economic burden will certainly increase, and some energy-intensive industries may not be able to absorb the added costs and adversely affect their output level.

FIT's Future

The future of the FIT program is yet to be determined. The program is currently authorized for three years, ending in FY 2014, and there will be political obstacles for extension, primarily coming from electric utilities and manufacturing sectors. The FIT program will certainly play a crucial role in deploying renewable energy in Japan for the time being, but it is important to note that FIT is not the only policy option to promote renewable energy, and other policy options such as CO2 emission standard for power plants and an increase in carbon tax should be revisited upon extension.

Japan's Feed-in Tariff Program: First Year's Impact 1/2

Japan introduced a feed-in tariff (FIT) program for renewable energy in July 2012. The program is aimed at stimulating renewable energy development through government-backed long-term contracts with a predetermined purchase price (tariff). If successful, it should enable Japan to reduce the reliance on nuclear energy and greenhouse gas emissions at the same time, which are two major goals of the national energy policy today.

Official Mascots for Japan's FIT Program

(Source: Agency for Natural Resources and Energy) 

Scheme

The tariff rates (fixed purchase price) were determined by an independent expert panel, which  reviews them every year and if necessary revises them. Based on the technology type and facility scale, the tariff rates are varied to expedite the investment on all kinds of renewable energy. The figure below shows the rates and contract duration for FY 2012 and FY 2013 (Japan's fiscal year begins in April).
 

(Source: Agency for Natural Resources and Energy)

Due to the urgent needs for new power plants amid a moratorium on the restart of nuclear power plants, the expert panel gave very favorable rates to various renewable energy sources for FY 2012. The rates were however lowered for FY 2013 as many critics argued the 2012 rates would result in the extraordinary return on investment when the investors are protected from financial risks through guaranteed long-term contracts.

Impact

Japan's Agency for Natural Resources and Energy publishes the monthly statistics on renewable energy development, and the figure below summarizes the cumulative renewable energy development, including authorized projects under construction, as of Feb 2013. The below statistics shows that the introduction of the FIT program triggered an explosive growth of utility-scale solar (PV), when other energy sources are yet to gain traction.

(Source: Agency for Natural Resources and Energy)

The likely factors of the concentrated investment on utility-scale solar are (1) favorable purchase price, (2) environmental assessment waiver, and (3) siting advantage. The tariff rate was determined based on a national study over the life cycle costs of electricity generation in 2011, but the costs of solar panel has dropped sharply since then, which enabled the investors to exploit the price differentials between the actual costs and the tariff rate. The second factor also favors utility-scale solar, as the lengthy environmental assessment process, which normally takes at least three years, is not required for PV projects if the project area is 50 ha or less and does not cause adverse impact on land use. Utility-scale solar also has siting advantage as it can also be build anywhere, while most wind, geothermal, and biomass power plants usually have to be situated in remote areas with little transmission infrastructure to major energy consumption centers. These factors gave utility-scale solar competitive advantage over other renewable energy, causing the overconcentration of investment on a single energy source, at least for now.

The next blog will discuss the impact on national and regional fuel mix for electricity generation and future of the FIT program.

Electric Vehicle: Status and Future

Overview

Transportation sector account for roughly 25% of greenhouse gas (GHG) emissions worldwide (IEA),  and automobile is the dominant source of the emissions in this sector. Electric vehicles (EV) could play a major part in reducing the emissions, especially when powered by clean electricity. In fact, according the study by Japan Automobile Research Institute, EVs' well-to-wheel GHG emissions, which accounts for both tailpipe emissions and emissions associated with the power source such as electricity generation and fuel extraction, is only about a third of conventional gasoline-based cars (ICEV).

Well-to-Wheel GHG Emissions by Vehicle Type
(Source: Japan Automobile Research Institute)

Many nations have high expectations of EVs in curbing their emissions and energy use, and Japan's government in particular has ambitious goal to make EVs' share in new LDV vehicle sales roughly half by 2030. Combined with other vehicles such as hybrid and fuel cell vehicles, the introduction of EVs is expected to cut the GHG emissions in Japan's transportation sector by 35% in 2030, and by 57% in 2050 relative to the 2010 levels.

Forecasted New LDV Sales by Vehicle Type

(Source: Japan's Ministry of the Environment)

Obstacle

There is a number of obstacles to large-scale deployment of EVs, however. EVs’ primary disadvantage is its limited ranges. Despite the fact that Nissan Leaf's range is sufficient to cover daily vehicle distance traveled by most drivers, the perceived reduction in mobility compared to ICEVs creates a psychological obstacle to widespread adoption. 

At the same time, while Nissan made a major price cut for Leaf this spring, its costs remains high relative to similar ICEVs. While the savings in fuel costs should cover the price differences, average consumers are much more sensitive the one-time initial costs than day-to-day running costs. Infrastructure is also noted as a major issue, but when considering EVs are mostly recharged at home and office, the issue may not be as important as it seems.

Sales Trend

So, how many EVs have been actually sold so far? Major media outlets report that EVs are nearly doomed as the sales targets set by the manufactures are far from being met. As of Dec 2012, 28,000 EVs were sold in Japan since July 2009, but they account for less than 1% in new LDV market sales.

Despite these facts, I would argue that it is too early to conclude that EVs are complete failure and automakers should move on to other types of vehicles such as fuel cell vehicles (FCV). When comparing the sales of Toyota Prius and Nissan Leaf in Japan, it is apparent that Leaf is closely trailing the Prius's sales pattern after the initial roll-out, as shown below.

Prius and Leaf Sales in Japan

(Source: Japan Automotive Products Association and Toyota Motors)

Looking at the global sales, Leaf has also outperformed Prius on most months since its roll-out, and plug-in electric hybrid vehicles (PHEV) have shown similar performance. These instances suggest that while it is true that EVs have been unable to meet the high expectations, the sales trend has been robust relative to Prius, and it's entirely possible for EVs to duplicate the success of hybrid vehicles in 5 to 10 years.

Prius and EVs Sales Worldwide

(Source: Scientific American)

Momentum for a Carbon Tax in the US?

(I've been extraordinarily busy both professionally and personally, so I apologize for not being able to update the blog for the past few months)

A carbon tax has been discussed on this blog several times, once about the introduction in Japan  and another about my publication work. Since then, the interest levels seem to have risen over a carbon tax in the US, both nationally and locally.

At federal level, POLITICO reports that debate is growing over a carbon tax, which is drawing push back by the coal and oil industry and manufacturing businesses. This push back is predictable given the expected financial burden on them, but the fact that they have issued a report to reaffirm their opposition may be a sign that a carbon tax may become a major topic of Congress in the coming several years.

The Obama administration has been silent about the issue, but my take is that it is focusing on regulatory approaches such as EPA's new GHG standards on power plants first, and therefore trying not to make extra noise on other issues at this point. Nevertheless, the idea on a carbon tax has been tossed around Congress with the ongoing debate to find a new revenue source to reduce budget deficit, so Congress may be able to introduce a carbon tax as a part of fiscal deal, not a part of comprehensive climate bills as the advocates have envisions.

(Source: Northwest Economic Research Center)

Meanwhile, a carbon tax is becoming a hot topic at state level in the West Coast. In Washington state, it became one of the major topics of discussion in its long-range energy vision called the Washington State Energy Strategy in 2011, and the Northwest Economic Research Center (NERC) evaluated and analyzed a potential carbon tax in Oregon (I've participated in both studies).

Furthermore, Washington State Governor Inslee recently signed into a comprehensive climate study bill, which will evaluate various ideas including a carbon tax according to my sources, and an advocacy group led by U of Washington Professor Bauman has launched a champagne to put a carbon tax bill on a ballot measure in the state. Oregon is also moving forward with several bills being tossed around the legislatures such as HB 2792 and HB 2874.

These movements yet to overcome a series of political hurdles and push back, but in a time with little hope for passing comprehensive climate legislation at Congress, this could be one of the few effective and realistic options left to curb GHG emissions in the US. 

New Prime Minister and Energy Policy Overhaul in Japan - Again

The spectacular political drama over post-Fukushima energy policy overhaul in Japan has shown a new development in the past few weeks. On the day after Christmas, Shinzo Abe sworn in as the 7th Prime Minister in 7 years (his second), after the landslide victory by his Liberal Democratic Party (LDP) - actually a conservative party contrary to its name.

Prime Minister Abe (Speaking at Fukushima Daiichi nuclear power plant)

(Source: New York Times)

Since then, his administration quickly moved to repeal the Innovative Strategy for Energy and the Environment, whose primary goal is to phase out all nuclear power plants by sometime in the 2030s. He now calls for new construction of nuclear reactors if they are “completely different from those at the Fukushima Daiichi nuclear power plant.” It is anticipated to face intense oppositions from some anti-nuclear groups and activists, but given the weakening the Democratic Party of Japan (DPJ) who drafted the Innovative Strategy of Energy and the Environment, the rebooting and new construction could take place soon after the Nuclear Safety Commission finalizes the new rule in the coming July.

In the mean time, he decided to drop the commitment to reduce Japan’s GHG emissions by 25% relative to the 2030s, and directed the Minister of the Environment to set a less stringent reduction goal by November. His decision is based on the forecast used for the Innovative Strategy for Energy and the Environment, showing the level of GHG emissions in 2020 will be only 7% lower than the 1990 levels. However, as I wrote on previous posts, when rebooting existing reactors and adding planned reactors as he suggests, the reduction level is likely to be somewhere around 25% in 2020 under low growth scenario. So, in short, the administration’s energy policy overhaul began with contradiction, and it is unclear where the reform is headed.

Expert Panel (Comprehensive Natural Resource and Energy Forum) 

The expert panel is expected to discuss fuel mix for electricity generation, and to a lesser extent, review the energy demand forecast. It is unclear what the level of GHG emissions will be under the new forecast, but it could affect the next round of the international negotiation over the reduction target beyond 2020. So, I plan to continue to monitor the development and critically review the new forecast.

Analysis of Japan's New Energy Strategy 4/4: Policy Implications

The analyses in the past three posts on the Innovative Strategy for Energy and the Environment, - Japan's comprehensive energy policy overhaul in response to the nuclear accident in Fukushima - have shown a variety of the plan's problems such as (1) inconsistency between its goals and measures, (2) technical and economic difficulties of closing all nuclear power plants by the 2030s, and (3) unrealistic energy demand forecast. The plan's policy implications range from economy to energy security, and this post discusses its impact on environmental policy both domestically and internationally.

The forecast for greenhouse gas (GHG) emissions in the energy plan predicts that Japan's emissions can be reduced only by 5% by 2020 relative to 1990 levels. The government originally envisioned much greater level of reduction, but the plan's goals to close nuclear power plants by the 2030s translates into increasing reliance on thermal plants using fossil fuel and therefore more emissions from electric sector. Take for example, the emission factor of electricity generation surged by a large margin in 2011 (which means dirtier electricity), because the government hasn't sanctioned the reboot of reactors (with one exception) after the earthquake (see below). As many reactors continued to operate til mid-year, the full impact on the emission factor is yet to come in 2012 data.

(Source: Agency for Natural Resources and Energy)

Back in 2009, Japan's then Prime Minister Hatoyama announced at the UN general assembly  that his nation is committed to reduce GHG emissions by 25% relative to 1990 levels by 2020. This goal was seen as inspirational and ambitious by many energy policy experts, and in my view it could have been a critical catalyst to produce stringent nation-by-nation GHG reduction target for the second commitment period of the Kyoto Protocol. The new energy plan however indicates that the inspirational goal is now far out of reach for Japan, and some politicians began to loudly call for the goal to be dropped.

Under such circumstances, Japan's delegation remained silent about its own GHG reduction target at the recent UN's Climate Change Conference (COP 18) in Doha. Furthermore, Japan decided not to participate in the second commitment period running from 2012 to 2020 (to reduce GHG emissions within the Kyoto Protocol), which helped some other nations such as Russia and New Zealand to do the same. For the record, Japan had been reluctant in participating in the second commitment prior to the adoption of the energy plan due largely to the lack of participation by the US and China, but the energy plan seems to have played the critical role in finalizing the decision. In this way, COP 18 produced "negative" progress toward global GHG reductions, at least in the short to medium run. The energy plan is certainly not the only cause of the failure of COP 18, but it did negatively contributed the atmosphere of negotiation and encouraged several other nations to abandon their legally-binding commitments.

(Source: UNFCCC)

Once again, the plan's GHG emissions forecast is deeply flawed, and in my view it is misleading the public that the inspirational target was a product of pure idealism and far out of reach for Japan. However, the actual levels of GHG emissions are likely to be far lower than the plan's forecast due to a variety of factors such as (1) unlikely scenarios over nuclear power, (2) bloated energy demand forecast, (3) recently implemented policy measures not considered in the plan such as a carbon tax, and (4) robust and lasting nationwide efforts to reduce electricity consumption.

In conclusion, the Innovative Strategy for Energy and the Environment, after political twist and turns, ended up having many defects ranging from the incoherent goal to close all nuclear power plants by the 2030s to the overestimated GHG emissions, and for this reason, I wish the world to take extreme cautions when examining the energy plan and its implications.

Analysis of Japan's New Energy Strategy 3/4: Demand Forecast

The previous two posts of the analysis on Japan' new energy plan - the Innovative Strategy for Energy and the Environment - focused on the supply side of the planned energy system. Now the focus shifts to the demand side, especially on the energy demand forecast used in the plan. It is imperative to thoroughly analyze the demand forecast because it determines how much supply, ranging from fossil fuel to renewable energy, will be needed in the long run, and ultimately affects what strategies will be needed to secure resources, maintain economic competitiveness, and protect the environment. In this post, I will argue that the energy demand forecast in the plan overestimates future energy demand by assuming unrealistic economic growth and neglecting demographic, industrial, and lifestyle changes that Japan has been experiencing.

Economic Outlook

The changes in energy demand have traditionally been driven by economic growth. For this reason, the first order of business in forecasting energy demand is to predict the future economic growth. It is obviously not an easy task to forecast economic growth up to 2030 - the plan's target year. The government originally prepared two different scenarios for economic growth: (1) Safe Scenario and (2) Growth Scenario. The below table summarizes the assumed average annual growth rates for real GDP in Japan. They seem fairly low even in Growth Scenario, but many critiques argue that they are still too high for a nation with declining population, particularly a rapid decrease in working age population. In response to the criticisms, a new scenario called Low Growth Scenario was added to reflect the actual growth rate per working age population in the past decade.

Real GDP Annual Growth Rate Assumptions (Source: National Policy Unit)

	2011-2020	2021-2030	Note
Growth Scenario	1.8%	1.2%	Assumption in Rebirth of Japan: A Comprehensive Strategy
Safe Scenario	1.1%	0.8%	Assumption in Fiscal Management Strategy
Low Growth Scenario	0.2%	0.4%	Continuation of the average growth rate per working age population in the past decade

These growth rates are one of the most critical determinants of future energy demand. The figure below suggests that the energy demand in 2030 can be substantially lower under Low Growth Scenario. The difference between Growth Scenario and Low Growth Scenario in 2030 is about 20% of the energy demand in Growth Scenario in 2030.

Figure: Energy Demand Forecast (Source: National Policy Unit)

This indicates that the amount of power plants needed to meet the energy demand should be significantly different under the three scenarios. For example, if the electricity demand is substantially lower than today as in Low Growth Scenario, it is possible to shut down most coal-fired power plants to curb greenhouse gas emissions, or alternatively, shut down most nuclear power plants as about half of the public desires nowadays without compromising reliability of electric grid. The fuel mix for electricity generation in this way can be altered under different growth assumptions. The plan however only focuses a single fixed fuel mix for the three growth scenarios, which further undermines the plan's cohesiveness and feasibility in my view.

Industrial Sector

The discussion above shows the lack of interaction between supply and demand scenarios. The next problem to point out is the energy demand itself. There is a variety of indicators used to predict energy demand for each sector, and in this blog post I focus on parameters used to forecast energy use in industrial and transportation sector. As the figure below shows, most drivers of industrial activities shows either upward or steady trend (click the figure to enlarge).

Figure: Industrial Output Trend and Forecast (Source: National Policy Unit)

I would argue that this assumption is unrealistic for two reasons. One reason is that the level of materialistic consumption has been declining due to changing demographics and lifestyle. Take for example, the plan assumes the level of paper production to be steady at a current level until 2030. On the contrary, the population, particularly working age population is on the decline, and the society as a whole is depending more and more on paperless transaction. While the plan assumes the level of paper production will remain steady, paper producers expects their businesses to shrink in coming decades; Oji Paper, a major paper producer in Japan, just announced massive payoffs and factory closings despite increasing profits, primarily to cope with expected decline in paper demand. Another shrinking energy-intensive industry is cement; the most massive infrastructures such as dam, highway, and subway are already built out in Japan, and the aging society along with declining population will obviously curb the appetite for new housings and office buildings. There will of course be demand for maintenance and replacement, but it won't be as much as new development.

The other reason is the structural changes that the Japanese economy is facing today. The level of industrial output has declined steadily through the 2000's for most products as assembly lines continued to move to China and Southeast Asia. In fact, once enjoying enormous trade surplus, Japan is now in red in trade balance due not only to increasing import of fossil fuel but also to declining exports. Japan managed to maintain positive balance of payments through returns on investment abroad, and Japan's economy itself is becoming more service-oriented. Unless this trend is somehow suddenly reversed, for good or bad, industrial activities are likely to continue to decline. For these reasons, while it is understandable for politicians and officials to have a motivation to draw upward trend, the energy demand in industrial sector is likely to be significantly lower than the forecasts due to lower-than-expected production level.

Transportation Sector

The demand for transportation fuels, mostly gasoline and diesel for automobiles, are determined by the distance traveled (VKT: vehicle kilometers traveled) and fuel efficiency. The fuel efficiency is expected to increase significantly thanks to continuous improvement in internal combustion engine and large deployment of hybrid and electric vehicles. There is a variety of predictions and opinions on the level of alternative vehicle penetration, but I would say the plan's assumptions on fuel efficiency are neutral and realistic.

Figure: Total Vehicle Travel Demand Trend and Forecast (Source: National Policy Unit)

There is a problem on the assumed VKT, or distance traveled, however. The above figure shows that vehicle kilometers traveled by passenger vehicles are assumed to decline continuously til 2030. When looking at this figure on per capita basis, it is assumed to be more in 2030 than in 2020. This is an odd assumption in my view, because the amount of driving has been on decline on per capita basis in aging societies (elderlies usually drives less), and it is difficult to come up with an explanation for the sudden change in the trend in 2020. Furthermore, Generation Y'ers - also known as Millennial Generation - tends to drive less and less as they prefer to live close to urban centers and rely on public transportation to get around. For whatever reasons, this is causing automobile travels to decline in most industrial nations. These demographic and lifestyle changes could significantly reduce driving on per capita basis, and the assumed VKT in the plan is likely to overestimate the energy demand from automobile use.

Figure: Vehicle Travel Demand Trend and Forecast (Source: National Policy Unit)

The freight side of vehicle kilometers traveled is more difficult to predict. Yet, I would argue that the demographic change and more service-oriented economy mentioned earlier is likely to curb the demand for traditional bulky goods such as paper and construction materials. The challenging part is to incorporate these social changes into demand forecast, and I don't have a clear solution for it. My point here is that the overall energy demand should be much less than the plan's forecast.

The implication of these forecasts on a variety of topics such as greenhouse gas emissions and fuel mix for electricity generation will be discussed in the next post, which is scheduled to be published in December.