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Distributed Power and Incentives in Post-Fukushima Japan via Japan Focus

Andrew DeWit
This paper documents the fact that distributed power is a rapidly expanding and quickly evolving market with important implications for Japanese and global energy futures. It also shows that Japan has an excellent opportunity to grow a robust and sustainable business area that includes primary, secondary and tertiary industries. Distributed power can improve equity, local resilience, and build a more competitive export sector. But Japan may be handicapped by Galapagos features as well as the capacity of vested interests to block progress in power deregulation and other aspects that favour the diffusion of distributed power and efficiency. These handicaps may become even more pronounced after the December 16 general election, which is shaping up to be – at least in part – a contest over whether to stick with centralized power in the hands of Tepco and other giant utilities or accelerate the distribution of opportunities. The election seems likely to bring on even worse political confusion and gridlock than Japan endures at present, which will almost certainly advantage the status quo.
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As for the size of the distributed power market, we see in Figure 2 that its cumulative value to 2030 was assessed as ¥3100 trillion by Nikkei BP. This assessment, compiled in early 2010, was based on extrapolations from a survey of 100 of 300-400 smart city projects then underway. The assessment centres on the energy storage opportunities that are a critical element of balancing supply and demand in power systems. Given the spread of smart and distributed power to a wider range of communities than was the case just two years ago, the assessment is quite likely to be a significant underestimate.
In any event, to get an appreciation of the scale of those growth numbers, consider that the Japanese economy’s annual GDP is roughly ¥500 trillion. That means the cumulative smart market, as projected by Nikkei BP, is at least six times the economic size of Japan. To establish a significant presence in that market means not just jobs for technicians, big firms, and the usual suspects, but rather a widely distributed array of interests. We have already seen this distribution of opportunity unfold in Germany, Denmark, and other locales.2
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These distributed power initiatives were greatly amplified by the July 1 introduction of the feed-in tariff, or FIT. As we see in the figure below, the feed-in tariff is a mechanism whereby the extra cost of producing renewable power is paid by customers of the utilities. It is important to emphasize that (except in a very few cases, such as the now defunct Korean feed-in tariff) the public sector does not transfer money to renewable producers. Even many experts misunderstand this fact.8 Rather, the public sector sets a premium price for renewable power depending on the generation type, assumed costs, and other factors. The government thenobliges the utility topurchase renewable power from properly designated renewable producers, including households, and mandates the utility to pass the extra cost on to consumers through their electricity bill.

Fig 4.
At present, Japan has some of the highest renewable tariffs in the world, especially for solar projects. These prices are guaranteed for 20 years for megasolar, wind and small-hydro, and for 10 to 15 years for other projects such as household solar and geothermal.9 What this feed-in tariff structure does is guarantee a stable market and a stable price for what is, in general, currently more expensive power than conventional forms of power generation.
Naturally, there has been a flood of rhetoric from vested power interests and their allies in the business community about the costs of this feed-in tariff. But Japan’s Agency for Natural Resources calculates the additional costs as likely to be ¥70 to ¥100 per month for the average household.10
The feed-in tariff not only encourages the diffusion of renewable power capacity through guaranteed markets and prices. A properly designed feed-in tariff also includes scheduled declines in tariff prices, called degression rates. These are meant to encourage reductions in cost, and they work as we see from the following comparison of solar costs and diffusion in German, Japan and the US.
Though some observers express doubts about the wisdom of deploying the feed-in tariff, it has incentivized the German power economy to move from just under 8% renewables in 2002 to over 25.97% in the first half of this year. The country’s current targets for renewable power are 35% by 2020 and 80% by 2050.
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There is, at the same time, a great deal of bad news. One item is the likely fruits of the election on December 16, which seems almost certain to bring more political confusion and allow the monopoly utilities and their allies in government and the bureaucracy to revive the pre-Fukushima energy plan. This plan, which aimed at over 50% nuclear in the power mix by 2030, actually remains the de jure law.
It is impossible to project what will happen in the wake of the election. As of this writing, it even remains unclear how many parties will contest it, as the official start of the campaign is not until December 4. But it does not appear that Japan will find itself with a majority government, particularly a government willing to take on vested interests in the power sector as the three leading parties have all backtracked from earlier plans for closing the nuclear power sector. Quite the contrary. Yet Japan desperately needs good governance to, among other items related to distributed power, decide on feed-in tariff digression rates as well as deregulation of the power sector. It seems unlikely to get it.

Read more at Distributed Power and Incentives in Post-Fukushima Japan

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