Environment and Energy Government Initiatives

Environment and Energy Government Initiatives

In this report, we focus on the following five government initiatives in the Environment & Energy industry:

(1)Environment Innovation Strategy

On January 21, 2020, Japan formulated the Environment Innovation Strategy to encourage the development of technologies in environmental and energy fields. The strategy aims to discover innovative technologies to achieve global carbon neutrality and reduce past CO2 emissions (the concept of “Beyond Zero”).

The strategy's "Acceleration Plan" promotes increasing private sector investment in the development of innovative technologies, including through ESG investment (See Figure 4). Moreover, promoting international collaboration and open innovation for technologies related to environment and energy creates conditions conducive for the easy entry of domestic and foreign start-ups.

(Figure4)Deregulation trends in the domestic electricity market

(Figure4)Deregulation trends in the domestic electricity market
Initiative Details
1) Setting up a command tower and promoting it systematically
  • Establishment of the "Green Innovation Strategy Promotion Council" (tentative name) to serve as a cross-ministry command tower
  • The Council will advise on the research activities of the International Joint Research Center for Zero-Emission Technologies and other research centers, introduce life cycle assessment (LCA) methods to assess GHG reduction effects and costs, and so on
2) Bringing together domestic and foreign expertise
  • Establishment of the International Joint Research Center for Zero-Emission Technologies (which will serve as a platform to connect 120,000 G20 researchers), the Next-Generation Energy Platform Research Center (co-created by industry and academia), and the Carbon Recycling Demonstration Research Center
  • Intensive support for promising young researchers (Zero-Emission Creators 500), and the detection and development of technological seeds through pioneering research and the Moonshot R&D programs
  • Development of research and demonstration projects in the Innovation Area and the "Regional Circulation Symbiosis Zone" to be built on the Tokyo Bay coast, leveraging the diverse cluster of industry, government, and academia and the needs of the region
3) Facilitating increased private investment
  • Promotion of VC investment in R&D ventures and promotion of international development in conjunction with institutional reform
  • 30 trillion yen of R&D investment by the public and private sectors over the next 10 years

(2) FIT/FIP systems

FIT are fixed payments under which the government promises to purchase electricity generated from renewable energy sources at a fixed price for a certain amount of time. Under the same system, a portion of the cost of electricity purchased by an electric utility company is secured from electricity users as a renewable energy promotion surcharge. As for the electric utility companies, it is easier to recover the high cost of constructing power generation facilities. This has led to a push in the spread of renewable energy, whose purchase price is set higher than that of electricity produced from fossil fuels.

The Act on Special Measures Concerning Procurement of Electricity from Renewable Energy Sources by Electricity Utilities (REA), which will be renamed the "Act on Special Measures Concerning Promotion of Utilization of Electricity from Renewable Energy Sources" on 1st April 2022, stipulates the revision of the FIT system by the end of FY 2020-21. The most notable amendment is the introduction of a new Feed-in Premium (FIP) system, which will add a certain amount to the market price in addition to the FIT.

The FIP system allows power producers to freely sell their electricity in the market and makes them eligible to receive a premium over and above the market price. As a more market-based system, FIP applies to large-scale solar and wind power generation projects, which are expected to become independent of the system in the future. It is anticipated that many foreign companies that have already established themselves in the Japanese market for both types of power generation will take advantage of this system to further increase their profits.

The details of the above premium are currently under discussion. In addition, it has been decided to establish a nationwide levy to cover a portion of the costs of reinforcing the network necessary to promote the introduction of renewable energy. This system will be designed in line with the current system for renewable energy levy.

(3)Electricity System Reform

The Electricity System Reform promoted by METI has three pillars of reforms, i.e., 1) Expanding the operation of wide-area electrical grids, 2) Fully liberalizing the retail market, and 3) Securing the neutrality of the power transmission/distribution sector through legal unbundling, and is implemented in three stages. In particular, it is expected that fully liberalizing the retail market will increase the number of new entrants in the market, thereby strengthening market competitiveness.

After the initiation of full liberalization of the retail market in April 2017, a more diversified power procurement was enabled, leading to an increase in the number of new entrants obtaining retail licenses in the electricity market. Moreover, not only Japanese but foreign companies as well have increasingly started to enter the power generation/retail sector.

In the power generation field, Invenergy Japan G.K. and SB Energy Corp. entered into a partnership in April 2017 to handle everything from the development to operation of large-scale solar power plants. In retail, XOOM Energy Japan G.K. (Now, T-Dash G.K.) has been doing business in Japan since December 2016, leveraging its marketing strengths in collaboration with partner companies.

Furthermore, since the unbundling of the transmission and distribution business from the power generation and retail business will be mandatory after 2020, most of the Japanese electric utilities had to spin off their existing transmission and distribution business into separate entities. Additionally, from a consumer protection perspective, attention is being focused on future efforts to regulate electricity prices to prevent consumers from being forced to pay unreasonably high prices (See Figure 5).

(Figure5)Deregulation trends in the domestic electricity market

(Figure5)Deregulation trends in the domestic electricity market
Date Details
April 2015
  • Establishment of the Organization for Cross-regional Coordination of Transmission Operators (OCCTO)
April 2016
  • Full liberalization of the electricity retail sector
April 2020
  • Legal separation of the electricity transmission and distribution sectors

(4) Gas System Reform

The full liberalization of the approximately 2.2 trillion JPY city gas retail market from April 2017 opened it up from the monopoly of city gas companies. As a result, the total gas market of about 5 trillion JPY (including not only city gas but also

previously liberalized LP gas) is expected to see lower costs and greater convenience for consumers as a result of fierce competition.

However, compared to the liberalization of the electricity retail market, the number of new entrants in the city gas market is limited. In order to enter the newly liberalized market of procurement and import, companies must invest heavily in their own LNG storage terminals (the raw material for city gas) or other facilities with equivalent capacity. Moreover, new entrants to the retail gas business usually pay a fee for the use of existing gas pipelines to supply gas. However, if there is no pipeline in their target area, they will have to build their own pipeline, which also requires a huge investment.

On the other hand, services that significantly lower the barriers to entry have also emerged. For example: "Cloud Space Ship," a cloud-based business and logistics support system for the energy industry, including gas utilities, released by Nichigas in collaboration with TEPCO. With the current lack of competition, an increasing number of companies anticipate that if they can take advantage of these and other services to enter the city gas retail business, it is likely to become a great business opportunity.

(5)Local government Initiatives (Zero-carbon city)

The government plans to actively promote zero-carbon cities, which are municipalities that are aiming to reduce their GHG or CO2 emissions to net-zero by 2050. As of January 2021, more than 200 municipalities with a combined population of over 90 million people have announced their commitment to becoming zero-carbon cities.

These zero-carbon municipalities have implemented pioneering initiatives and formulated regulatory frameworks to reduce GHG emissions throughout the region. For example, the Tokyo Metropolitan region and Nagano prefecture have implemented a solar mapping project to determine the energy potential of solar power generation for buildings to encourage the introduction of renewable energy in the region. In addition, Kanagawa prefecture, Kyoto, and other places are encouraging the installation of cost-effective solar power through the joint purchase of solar power generation equipment.

With renewable energy becoming the major power source, large-scale power sources and distributed power sources are moving towards coexistence. The government is also encouraging a "distributed energy system" that integrates supply and demand in the region. Their aim is to create employment and make it profitable for the area by implementing a commercial system where renewable energy is produced locally for local consumption. As an initiative to sell locally produced renewable energy, in December 2019, a collaboration was signed between Yokohama City and 12 local governments in the Tohoku region, and small and medium enterprises in Yokohama City have begun to purchase electricity from renewable energy sources in Tohoku. As municipalities in urban areas find it challenging to supply renewable energy to meet local energy demand, efforts to achieve net-zero carbon emissions through collaboration between local governments in rural and urban areas are also effective.

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