Japan’s transition to a net zero economy by 2050 offers a $6.7tn investment opportunity, according to the New Energy Outlook: Japan report from BloombergNEF (BNEF).

The analysis details two scenarios for the country’s energy system – the base case Economic Transition Scenario (ETS) which describes an economics-led transition, consistent with a global temperature rise of 2.6°C by 2100; and the Net Zero Scenario (NZS), which is consistent with net zero emissions by 2050 with no overshoot or reliance on unproven technologies.

Power generation is the largest source of emissions in Japan. The country lags behind its G7 peers on clean power generation due to a slowdown in renewable capacity additions, as well as delays in restarting nuclear power plants. BNEF’s analysis finds that maximising deployment of solar and wind, supplemented by additions of energy storage and carbon capture and storage (CCS) for thermal power plants, along with restart of existing nuclear power plants, is the cheapest way for Japan to decarbonise its power supply. Japan can also tap into its abundant geothermal potential.

Under the NZS, which charts a pathway for Japan to reach net zero by 2050 while keeping global temperature rise well below 2°C, the total installed capacity of wind and solar power reaches 689 GW by 2050, more than eight times the 81 GW as of 2021. Wind and solar generation together account for 79% of electricity supplied under NZS in 2050, while nuclear provides 11%. The rest of demand is met by hydro, geothermal and thermal power plants equipped with CCS.

Even under the ETS, BNEF’s baseline scenario, least-cost power system modelling shows solar and wind still become the dominant source of electricity supply, accounting for 62% of electricity generated in 2050.

Under the ETS, investment in energy supply and demand reaches $3.2tn over 2022–2050, or an annual average of $115bn. To stay on track for net zero, according to BNEF’s NZS, Japan would need to more than double the rate of investment during the same period, for an annual average of $239bn, or about 3.8% of expected gross domestic product. Total investment in fossil-fuel power drops from $609bn in the ETS to $359bn in the NZS. To abate emissions from the remaining use of fossil fuels in the NZS, Japan needs $315bn in investment for CCS. Electric vehicle (EV) sales account for the largest share of investment for energy demand in both scenarios. In the NZS, $3.8tn is spent deploying EVs.

Reducing emissions while strengthening energy security
‘Japan spent $1.8tn on fossil fuel imports over 2010–2022, equivalent to an annual average spending of more than 3% of GDP,’ comments David Kang, Head of Japan and Korea Research at BNEF. ‘If Japan can redirect some of this expenditure toward deployment of mature clean technologies such as solar, wind and electric vehicles, it would create more domestic economic opportunities while reducing emissions and strengthening its energy security.’

Accelerating the energy transition
To accelerate its energy transition, Japan needs to reduce the hurdles renewable developers face by increasing the transparency of grid connection processes, as well as shortening and simplifying permitting processes, according to the report. Deployment of renewables can also be accelerated by organising local government-led reverse auctions with guaranteed access to land (or the seabed in the case offshore wind) and grid connections.

‘Fossil-fuel power generation accounts for more than 70% of Japan’s electricity generation today,’ notes Isshu Kikuma, Japan Senior Associate at BNEF. ‘Instead of pursuing costly unproven approaches such as retrofitting existing coal power plants for co-firing with ammonia, Japan would be better served accelerating the deployment of geothermal, solar and wind.’

Japan’s past hydrogen policies have provided generous subsidies for applications such as fuel cell passenger vehicles, as well as residential fuel cell co-generation systems. However, there are cheaper and more effective ways to decarbonise passenger vehicles as well as residential buildings, suggests the study. While the Japanese government’s 2050 target calls for annual hydrogen demand of 20mn tonnes, BNEF’s NZS requires just over 7mn tonnes of hydrogen.

‘As Japan’s supply of clean hydrogen will be limited due to its geography, the government should prioritise sectors where clean hydrogen will be the most effective decarbonisation pathway,’ comments Toshiya Shinagawa, Japan Associate at BNEF. ‘Japan will likely need to rely more on CCS compared to hydrogen for heavy-industry decarbonisation, but its current carbon tax on fossil fuels – ¥289 ($2) per tonne of CO₂ – is too low to attract investment in CCS.’