FEATURE: Japan strides for decarbonizing 120 GW fossil-fuel power supply

Japan has taken a major step towards decarbonizing 120 GW of fossil fuel-based power generation sources accounting for nearly two-thirds of its installed capacity, with the first wave of 9.766 GW of decarbonized power auctions as it moves towards its net zero and carbon neutrality goals.

The long-term decarbonization power supply auction, which was operated by the Organization for Cross-regional Coordination of Transmission Operators (OCCTO) -- comprising of all power companies in Japan -- comes on the need of decarbonizing power sources for 2050 carbon neutrality.

The latest power supply auction comes at a time when Japan sees a need for investment in decarbonizing power sources and bolsters its supply capability as the country's power demand is rising from building new semiconductor plants and data centers, marking a shift in trend for the first time in about two decades.

Japan's power demand is expected to grow at an annual rate of 0.4% from 805.6 TWh in fiscal year 2024-25 (April-March) to 834.5 TWh in FY 2033-34, according to a survey of major power utilities by the OCCTO.

Japanese companies have 20 years left for investment decision, considering the lead time for construction, should they opt to displace all of the 120 GW capacity, which accounts for 70% of the country's power generation capacity, with decarbonized power sources.

With this displacement equating the need of introducing an annual average of about 6 GW of decarbonized power sources, the OCCTO started with a small-scale 4 GW of decarbonized power sources in its first long-term decarbonization power supply auction.

The power supply auction also included a total of 6 GW LNG thermal power capacity sought by the end of March 2026 in another auction for new builds and replacements with an assumption of being decarbonized by 2050.

The OCCTO awarded a total of 9.766 GW comprising 4.01 GW of decarbonization power sources, and 5.756 GW of gas-fired power capacity in its long-term decarbonization power supply auction with results released April 26.

"This auction is about covering the cost of retrofit. It won't cover the increased fuel prices, and these are expected to be covered by the larger production support scheme in Japan," Anri Nakamura, principal research analyst at S&P Global Commodity Insights said.

"There is a get-out clause that [says] if [this] production support [for hydrogen and ammonia] doesn't materialize within three years, they [power plants] can withdraw."

Auction results

The long-term decarbonization power supply auction is introduced as part of the OCCTO's "capacity market" auction -- both of which aim to ensure the country's stable electricity supply in different time frames.

The decarbonization power supply auction aims to stabilize revenue for companies investing in decarbonization power supply capacity for about 20 years under capacity assurance contracts between the OCCTO and the companies, which cover running fixed costs from capacity fees collected from retail electricity companies.

The awarded 4.01 GW of decarbonization power sources included 825.582 MW of ammonia, hydrogen co-firing capacity and 1.66 GW of battery storage and hydropower sources -- both of which were included in OCCTO's auction for the first time.

Of the awarded 825.582 MW capacity, the OCCTO received 100% bids for its offered combined 770 MW ammonia for 20% co-firing and 55 MW hydrogen for 10% co-firing capacities, according to the OCCTO.

The ammonia co-firing capacities were awarded to JERA's 1 GW No. 4 and No. 5 Hekinan coal-fired units, having been respectively awarded the 187.334 MW and 187.315 MW capacities.

Hokkaido Electric's 700 MW No. 4 Tomato-Atsuma coal-fired unit was also awarded a 132.200 MW capacity, as well as awarding Kobelco Power Kobe's 700 MW No. 1 and No. 2 coal-fired units a 131.433 MW and 132 MW capacity each.

CEFH2's Miike power plant was the only unit awarded with a 55.30 MW capacity.

Chugoku Electric's No. 3 Shimane reactor was also awarded the 1.315707 GW capacity as part of the decarbonization power capacity.

Capacity market

While nearly a full capacity of LNG thermal power capacity was awarded, a policy meeting at the Ministry of Economy Trade and Industry has started looking at securing additional gas-fired capacity in light of the need of the capacity for transition as well as for the security of supply in the face of power demand growth outlook.

The METI policy meeting has also started discussing the need for seeking a greater capacity in the long-term decarbonization power supply auction than the initial 4 GW capacity to gather pace for decarbonizing the country's power sources.

In the OCCTO's "capacity market" introduced in FY 2020-21, Japan has secured 1,676.9 TW of supply capacity from existing power sources for FY2024-25 under the market that secures a power supply capacity necessary to ensure stable supply four years ahead.

Since the launch of the "capacity market," Japan has secured the necessary power supply capacity every year until FY2027-28, when the country will have 1,674.5 TW of the supply capacity, according to the OCCTO.

Hydrogen subsidy

To support the use of hydrogen and ammonia in the country, Japan's House of Councillors in the Diet passed a bill May 17, which paves the way for introducing the cost-for-difference subsidy framework for low carbon hydrogen use.

METI plans to invite the first sets of applications for the cost-for-difference subsidy in the summer, aiming to award "by the end of the year or by the end of the fiscal year [ending March 31, 2025]," according to a METI source.

The subsidy will cover the cost of difference from procuring hydrogen and ammonia over the CIF LNG or coal import prices respectively for co-firing for 15 years, the source said.

METI intends to prioritize subsidy applications from domestic projects for energy security, as well as the projects needed to help boost the competitiveness of industries for green transformation (GX), the source said.

"We will not look at [applications] just for power generation," said the source adding that projects should be combined with such hard-to-abate sectors as steel.