The Steep Path for Global Warming Countermeasures: Do not disregard the cost of renewable energy

OHASHI Hiroshi
Program director / Faculty Fellow, RIETI

Under the Paris Agreement, the new international framework for global warming countermeasures, Japan is to submit its long-term strategic vision by the year 2020. This strategy is expected to set Japan's CO2 emission reduction goals for 2050. Given that Japan will host the G20 Summit Meeting in June 2019, many expect Japan to indicate a bold vision towards "reducing greenhouse gas emissions by 80% by 2050," which it indicated in the Global Warming Prevention Plan, announced in 2016.

What will this "low-carbon society" with 80% less CO2 emission look like? The common assumption made by the research institutions in their calculations is that unless we implement innovations in the three areas of (1) electrification, (2) decarbonization of electrical power and (3) energy saving, those reduction goals will be unattainable.

In particular the structure of national power supply systems production, which accounts for more than 40% of the emissions, hold the key. According to estimates by the Japan Science and Technology Agency (JST) Center for Low Carbon Society Strategy (LCS), in order to achieve the reduction rate of 80%, the ratio of renewable energy to total power generation will need to be raised to over 60%. These are extraordinarily high figures, when we consider the fact that despite taking numerous measures, the current ratio of renewable energy is around 15%.

In achieving a low-carbon society, expectations are high for solar photovoltaics (PV) power generation, which accounts for a major part of renewable energy in Japan. In this article, I will discuss the issues which need to be solved by Japan in promoting anti-global warming measures for a low-carbon society, by focusing on solar PV power generation.

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There are two points to keep in mind when considering PV power generation. One is its characteristic of fluctuating power generation due to the weather. Thanks to this characteristic, if the sun is out during the times of climbing demand such as mid-summer, it will contribute to controlling peak demand. On the other hand, if output and demand do not match, blackouts will occur, and in order to make up for this difference in output and demand, an adjustable regulated power source such as thermal power generation or pumped-storage power generation will be needed.

Despite the fact that the storage capacities of batteries remain low, many of the adjustable regulated power sources require several hours to generate power, and thus it is necessary to start generators in advance and to be on standby for sudden changes in the weather and errors in the weather forecasts. This increase in standby power consumption in conjunction with the increase in the installed capacity of PV power generation have become the hidden costs for the widespread use of PV power generation.

The second point is the existence of the system for purchasing electricity. Under Japan's Feed-In Tariff (FIT) System, which commenced in 2012, electric utilities are obligated to purchase electricity at a given price. The cost of purchasing this electricity is borne by the end-users such as households and entities in the form of a surcharge. The total amount of the surcharge has currently increased beyond expectations at the time the system was adopted to over ¥2 trillion, which is equivalent to the tax revenue expected from a 1% consumption-tax increase.

Furthermore, from the fall of 2019, as the purchasing period for some PV generated power facilities comes to an end, there is increasing concern that PV panels will be abandoned and illegally dumped. In addition, there are other examples of improprieties surrounding the purchasing price including non-operating problems, in which operators who have received FIT certification continue to retain option rights without installing panels for years.

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Taking into account these characteristics of PV power generation, I would like to point out three perspectives required by Japan going forward in its anti-global warming measures. The first is the perspective of cost-effectiveness. While there are various methods which can be used in anti-global warming measures such as electrification and energy saving, the most efficient method with the least economic burden on the Japanese people would be to preferentially undertake initiatives that marginally reduce carbon by the most cost-efficient methods.

Meanwhile, under the FIT system, which awards subsidies to operators that do not emit carbon, the cost of reducing CO2 emissions per ton of PV power generation calculated based on this year's purchase price of ¥26 is approximately ¥31,000, which is far more expensive than the market price (around ¥2,000) of emissions trading. Furthermore, areas suited for renewable energy production for business purposes have, in many cases, insufficient electrical infrastructure, and if panels and wind power plants were to be installed in such areas, additional costs would be incurred in reinforcing the electrical infrastructure.

Such costs will be borne by the Japanese people. Although further adoption of renewable energy may be preferable as part of anti-global warming measures, the question of to what extent should the people bear the burden must be discussed from the perspective of cost-effectiveness. The duration of a PV power generation project is around 20 years, while electrical systems may be maintained for 50 to 100 years. Therefore, future generations may end up paying dearly if we were to increase and reinforce networks without a long-term perspective. Initiatives meant to cut back costs such as the introduction of bidding systems have commenced but measures with an awareness of cost-effectiveness are required at the same time as the willingness to take on the challenge of enhancing the operation of networks using such technology as IoT.

The second is the perspective of maintaining consistency with market mechanisms. The power system reforms which have been promoted since the Great East Japan Earthquake entered the stage of full retail market liberalization in 2016. Market liquidity is increasing, as the handling volume on the wholesale market reaches 20% of the electricity demand. The issue has become how renewable energy, which is supported by subsidies in the form of FIT, can coexist fairly with market mechanisms.

This point became evident during the regulation of renewable energy output which occurred several times in October and November in the Kyushu area. The diagram shows the market price and auction volume on October 21, the day on which the highest output regulations were implemented. There are two interesting points: The first point is that during the renewable energy output regulation period in which the supply surplus occurred, the area price marked a positive price of ¥3. In order to resolve a surplus, a negative price is preferable so that the power generation operators do not produce a surplus, but the Japanese market has been designed so that negative prices do not occur. This system clearly needs to be revised.

Diagram: Power Market at the Time of Renewable Energy Output Regulation in the Kyushu Area
Diagram: Power Market at the Time of Renewable Energy Output Regulation in the Kyushu Area
Note: Prepared by the author based on information from the websites of Kyushu Electric Power Company and Japan Electric Power Exchange.

The more serious point is that the selling bid volume substantially exceeded the buying bid volume, and there were no prospects for consuming that volume in the area. Currently surpluses are consumed by discharging the excess to areas east of the Chugoku region, but in a low-carbon society it is likely that surpluses will occur around the country at the same time. I believe that in addition to innovation on the demand side to effectively use cheap surplus electricity, fundamental measures need to be considered including reexamining FIT and perhaps replacing it with the introduction of a carbon tax, as a way of spreading renewable energy that is capable of interacting appropriately with market mechanisms..

The third is the perspective of making PV power generation the main power source or an independent power source. The question that was raised after the earthquake in Hokkaido on September 6 was "couldn't the blackouts have been shortened by using the supply capacities of renewable energy such as solar power and wind power?"

The government is currently considering ways of changing the practice of making the stable supply of electricity the sole responsibility of the former General Electricity Utilities (major utilities companies) and making renewable energy one of the main power sources. I believe that the government should take these discussions a step further by deliberating measures that would give preferential treatment to independent renewable energy combined with an adjustable regulated power source such as storage batteries so that there will be no need to depend on the adjustable regulated power sources of former General Electricity Utilities as backup for errors in weather forecasts, etc.

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One of the things that we need to keep in mind in the problem of global warming is that no matter how hard it tries, Japan, which produces only about 4% of the total of global CO2 emissions, cannot stop global warming on its own. Problems dictated by external factors such as global warming are best dealt with through cooperation on a global level.

For example, what if we approach the global community to develop international rules for a system to assess the volume of CO2 reduced overseas as a result of Japanese renewable energy technology as CO2 reduction volume in Japan. I believe that only by utilizing the fruits of the Japanese initiatives in preventing global warming on a global scale will we be able to find a path towards solving global warming.

>> Original text in Japanese

* Translated by RIETI.

November 20, 2018 Nihon Keizai Shimbun

March 18, 2019