This post is sponsored by Swiss Re Corporate Solutions
For decades, Japanese trading houses and energy firms have ventured abroad in search of oil, coal, natural gas and uranium to satisfy domestic demand. In 1973, Japan relied on fossil fuels to fulfill 94% of its energy needs, with 99% of that being sourced from overseas. Today, the picture is not dramatically different – it is still heavily reliant on fossil fuels which are used to generate 85% of its power needs, while renewable energy sources account for only 18.5% of produced power in 2019, up from 9.5% in 2010.
Today, with climate change emerging as the imminent challenge of our time and increasing urgency at COP26 stressing the need to keep warming well below 2C, the Japanese government has pledged to become carbon neutral by 2050. As a first step, it has promised to reduce greenhouse gas emissions by 46% by 2030, a challenging task by any measure given Japan’s persistent reliance on fossil fuel-based power sources. Against the backdrop of ambitious targets, there are three key transition challenges anticipated in Japan’s quest to become net zero (from an energy perspective only), namely: the dynamics of balancing supply and demand in a diversified energy mix, the unique threat of natural catastrophes in terms of physical impacts and transition shocks, and societal attitudes to renewables and nuclear.
- Balancing electricity supply and demand through a diversified energy mix
The increased penetration of intermittent renewables disrupts the traditional methods of balancing electricity supply and demand which was typically achieved through the expansion of generation sources and the use of operating reserves.
Apart from this variability, there also exist a timing mismatch. In other words, energy from renewable sources are not available during peak times.
- Natural catastrophes: physical and transition risk impacts
Japan’s exposure to acute natural catastrophe risk poses unique challenged to its energy transition ambitions. Firstly, the risk of physical damage to renewable and nuclear energy generation infrastructure could make private risk financing difficult due to uncertain returns on investment, as well as the affordability of insurance coverage.
Secondly, while other factors such as geopolitics play a role, climate related natural disasters such as floods and typhoons may prompt a more radical shift in transition timelines. This is because large sections of the populace reeling from more severe events demand more compelling action from policy makers.
- Societal attitudes towards renewables and nuclear
The transition away from fossil-fuel-based power generation means more from renewable sources. However, many people are reluctant to live near solar and wind farms. NIMBY (Not in My Backyard) is and will continue to be a major challenge to Japan’s net zero ambitions.