Issues Facing the Japanese Economy in 2012 (January 2012)

The First Year of Renewable Energy

OHASHI Hiroshi
Faculty Fellow, RIETI

2012 as a turning point for postwar systems

In 2011, postwar social and economic systems were considerably destabilized both inside and outside Japan. Overseas, the Arab Spring movement, which began with rioting in Tunisia, has continued to spread, while the euro crisis triggered by the Greek credit uncertainty is still under way. In Japan, the accident at Tokyo Electric Power Company's Fukushima Daiichi nuclear power plant caused by the Great East Japan Earthquake, one of the largest earthquakes recorded in Japan, raised the question about the country's postwar energy supply structure. Will the tattered postwar social and economic systems be required to make more drastic changes? Or will they be restored and returned to their former states? 2012 might become a turning point in thinking about the future of the 21st century social and economic systems.

Since the March 11 disaster, it appears that the Japanese economy has been swayed by the rising yen's value and the country's energy policy in disarray. For the energy policy in particular, with procedures for resuming nuclear power plant operations still uncertain, the government on December 1 began its appeal to the public to reduce electricity consumption. Numerical goals have been set in the areas where power supply and demand are particularly tight. Especially, Kansai Electric Power Company has set a tough target of a 10% reduction on a year-to-year basis in light of the fact that 10 out of its 11 nuclear reactors have been shut down. Some power companies have introduced a system to offer discounts for company users according to the percentage of power savings. However, given that there is only a small difference in power consumption between peak and off-peak hours during winter, electricity savings might mean production drops for companies. Thus, it is worried that corporate activities and employment might be affected considerably. In this situation, along with independent power generation, renewable energy sources are expected to be new power sources.

The first year of renewable energy

With the feed-in tariff (FIT) system scheduled to be implemented in Japan in July 2012, renewable energy has attracted attention from many companies. As for solar power generation, a system to purchase surplus electricity has already been introduced in the country. The scope of the system will be extended to other practicable renewable energy sources under the FIT system, and electric power companies will be obliged to purchase the entire electricity generated by such energy sources. Like the existing surplus electricity purchase system, costs required for purchasing will be added to electricity charges in the form of surcharges, which will be borne by electricity users, such as households and companies. The minister of Economy, Trade and Industry will announce a purchase period and the purchase price (hereafter collectively "purchase conditions") after hearing opinions from ministers concerned and respecting the opinions of the Purchase Price Calculation Committee, a neutral third-party panel to be established with the consent of the Diet. Since purchase conditions are an important policy variable in the promotion of renewable energy use, domestic and overseas companies are anxiously waiting for the purchase conditions to be announced. Certainly, 2012 will become the first year of renewable energy for Japan.

After the establishment of Purchase Price Calculation Committee expected in early 2012, purchase conditions are expected to be determined. The committee will be required to present the conditions that will help promote renewable energy use in a cost-effective and efficient manner, by minimizing the public burden that will be imposed by higher electricity prices. I wish to discuss below two policy issues related to the purchase conditions.

How should the purchase price be determined?

It is obvious that the longer the purchase period and the higher the purchase price, the more that renewable energy use would be promoted. What should be done from a policy viewpoint is to design a way for the purchase conditions to promote renewable energy use in an efficient manner, while minimizing the public burden. In view of the cost-effective promotion of renewable energy use, it would be advisable to use market mechanisms effectively. Specifically, purchase conditions should be established to ensure the competitive introduction of various energy sources by form, type, and size of installation.

If there are no dynamic effects that are expected to continue in the future, such as the learning-by-doing effect or inter-temporal scale economies, it is desirable that purchase conditions are the same for different energy sources. This would facilitate the introduction giving priority to the most efficient energy source. In reality, however, even if generation costs are high at present, such costs are expected to drop sharply in the future due to learning by doing. Thus, it would be appropriate to adjust purchase conditions for each energy source according to the degree of the learning-by-doing effect. Purchase conditions should be elaborated by reviewing the extent to which the learning-by-doing effect has worked in the past and taking into account the magnitude of future cost reductions.

When designing purchase conditions, the report released by the National Policy Unit on December 19, 2011, will serve as a helpful reference. The report discusses in detail the estimated future generation costs for each electricity source, including the premises of the calculations. However, it appears that the generation costs calculations in the report need close examination in several aspects, even insofar as renewable energy sources are concerned. For instance, looking at solar power generation, which is expected to play a core role in the FIT system, between 2010 and 2030 power generation costs are estimated to drop by 47%-70% and 42%-60% for residential solar power systems and mega solar systems, respectively. These estimates are largely based on the assumption that the progress rate of learning effect would be 80%. However, it should be verified whether this assumption was correct in Japan in the past. As far as my analysis shows1, power generation costs of residential solar systems were estimated to have dropped by only 30% during the 10 years from 1997 to 2007, after taking into account profit margins. If learning effect continues to work on solar power generation, the rate of drop in power generation costs by 2030 must be less than this figure2. In order to avoid misjudging the direction of policy, it is hoped that discussions will be held based on past data during public participation verification work planned in the future.

Remember to think from an international perspective

As for the Feed-in Tariff Act, both houses of the Diet passed a supplementary provision, providing for "With regard to renewable energy power generation facilities, (omission) quality assurance must be provided, maintenance contracts must be made, and other strict standards must be adopted." A certain level of quality assurance will be essential from the perspective of consumer protection. However, excessively strict standards would be undesirable to reduce the public burden. Moreover, such standards may act as a hindrance to Japanese companies entering overseas markets. In light of the intense competition for solar power generation in overseas markets, it is understandable that some experts argue that certain actions should be taken to protect the domestic market. In order to revitalize Japanese industries using the feed-in tariff system as a trigger, however, it would be desirable to establish quality-related standards that meet international standards with a view to attracting overseas markets. How should differentiation be promoted to be accepted by overseas markets without degrading renewable energies to commodities traded on the market? We should not get carried away at the beginning of the first year of renewable energy.

December 28, 2011
  1. See "Wagakuni ni okeru zenryo kaitori seido no kadai—Taiyoko hatsuden ni chumoku shite (Issues with systems for purchasing the full amount of power generated by renewable energy sources in Japan—Focusing on solar power generation)," Kankyo Keizai Seisaku Kenkyu (Environmental Economics and Policy Studies), Vol. 4, No. 1, pp. 60-63, 2011.
  2. Of course, there may be discussion that the degree of learning effect varies by technology, such as polycrystalline and thin film systems. Although prices are expected to drop considerably due to competition with foreign companies, that cannot be called a learning effect without drops in generation costs.

December 28, 2011