Written by: Fatima Younes
Japan's energy transition is entering a new phase, as the focus shifts from mere political ambitions and climate commitments to the necessity of achieving commercial viability for projects. Following Japan's commitment to reach net-zero emissions by 2050, regulatory rules have begun to shape an economic reality that imposes new challenges on developers and investors.
Offshore wind challenges and tender rule adjustments
The offshore wind sector has seen a notable shift in operational mechanisms, as the withdrawal of a winning consortium in a previous round of tenders due to rising costs—which made the projects unprofitable—led to changes in government tender rules. The new rules aim to focus on the projects' execution capabilities, construction and operation plans, and supply chain resilience, rather than focusing solely on price or speed of development.
Developers face challenges related to seabed usage rights, environmental impact assessments, and coordination with the fishing industry, in addition to grid connection and port infrastructure development. Despite these obstacles, some projects have already begun entering the implementation phase, such as the first floating offshore wind farm in Goto City, Nagasaki Prefecture.
Hydrogen and ammonia support toward bankable projects
Hydrogen and ammonia are key pillars in Japan's plans to clean up power generation and heavy industries. The government has already begun granting the first subsidies under the Hydrogen Society Promotion Act, with seven projects receiving price-differential subsidies, including industrial hydrogen and ammonia import projects.
However, projects in this field still face difficulty in securing bank financing compared to solar and wind energy, due to their lack of a long-term operating record and revenue certainty. It requires building multiple layers of support, including strategic sponsors, government support, and long-term purchase agreements, to ensure lenders can bear the risks.
Carbon capture and emissions trading system
The carbon capture and storage (CCS) sector is on a similar path, as the Carbon Capture Business Act has entered into force, with detailed monitoring rules established for carbon dioxide storage projects. Commercial-scale storage operations are expected to begin in the early 2030s.
In a related context, the GX emissions trading system is preparing to start full-scale trading in 2027. Companies are currently working to manage emissions data, understand how future carbon costs will impact investment and procurement decisions, and review power purchase agreements and fuel supply contracts to determine which party will bear future carbon costs.
