2021 New Year Message from Masakazu Toyoda, Chairman & CEO of Institute of Energy Economics Japan (IEEJ)

Happy New Year. 2020 was a year of constant battle against COVID-19. Even in terms of energy alone, the year can only be described as overcast at best, with occasional storms. Will we see clear skies in 2021?

The answer will depend on the policies of countries and the will of those concerned. I would like to propose an agenda for the seven areas in which Japan is expected to exert leadership.

First is preparing for the post-COVID world. I will not discuss economic stimulus measures in this message, since the pandemic is an exogenous factor for energy. It is possible that a vaccine will become widely available by spring, heralding better times ahead. What is important is not to confuse new trends such as accelerating digitalization with the structural issue of the stability of energy supplies. Investment in energy is declining quickly. Japan needs to raise its independent development ratio for oil and natural gas, which is currently set at 40 percent, and invest steadily. The demand for energy will eventually start rising again, particularly in Asia. Japan has supply chains spread across Asia. While the country has enough oil stockpiles to cover over 200 days of consumption, India and ASEAN countries have just 10 to 40 days’ worth. Natural gas reserves last only for two to three weeks due to the difficulty of storage. Building joint stockpiles for Asia is a pressing issue.

Second are climate actions that suit Japan. 2020 was the year in which all major countries declared the target of carbon neutrality. Declarations came first from European countries, followed by China, Japan, and South Korea, and perhaps by the United States when Joe Biden becomes president toward the end of January. Can Japan really achieve this target? The answer lies in the decarbonization of fossil fuels. This is done by producing zero-carbon hydrogen and ammonia from fossil fuels using carbon capture and storage (CCS), and through the use of carbon recycling technologies. Renewable energy will naturally become a major power source, while 2030 target level of nuclear power must be maintained as zero-carbon energy. However, both are power sources, and power consumption accounts for barely 30 percent of final energy consumption. Achieving 50 percent of total consumption will be difficult even if electrification makes substantial progress. Thus, we must rely on the decarbonization of fossil fuels for the remainder.

Third is Japan-US collaboration in the energy and environment areas. Japan needs to cooperate with the incoming Biden administration to implement realistic energy and environmental policies. One such policy is the decarbonization of fossil fuels. The US public has high expectations for renewable such as solar PV and wind power, but renewable energy accounted for just 7.8 percent of primary energy as of 2018, no different from Japan’s 7.3 percent, whereas fossil fuels accounted for 82 percent. The US has become one of the world’s major oil and gas producers through the shale revolution and is now a net exporter. It is also one of the top producers and consumers of coal. The country has an abundance of locations suitable for CCS and is interested in carbon recycling technologies. Japan and the US should cooperate with each other and involve other Asian countries in the decarbonization of fossil fuels as part of the Indo-3 Pacific cooperation framework.

Fourth is collaboration between Japan, China and South Korea on climate action. Regrettably, the trilateral summit of the three countries may not go ahead due to differences in understanding of history. However, the three countries rank fifth, first, and eighth in the world in terms of energy related carbon emissions and their net-zero-carbon targets have a similar timeline. If they cannot solve their territorial disputes and the wartime labor issue, the countries should persistently seek a resolution in international courts.

Fifth is achieving stability in the Middle East, which will continue to remain important. Japan depends on the Middle East for over 80 percent of its oil and over 20 percent of its gas supplies. Further, the region has high growth potential once COVID-19 subsides. For several years, former Prime Minister Abe has made great effort toward achieving peace. Japan is the Middle East’s major partner in decarbonizing fossil fuels, and in autumn last year, the IEEJ conducted joint demonstration tests on the mixed and non-mixed combustion of zero-carbon ammonia with Aramco and others. If the US returns to the Iran nuclear deal under the Biden administration, the entire region may become more stable. Japan should continue to be at the forefront of working toward stability in the Middle East.

Sixth are nuclear measures, which are also important in terms of geopolitics. Nuclear power has excellent characteristics in terms of the 3Es of energy security, economic efficiency, environment, but the confidence on safety is still not fully restored after the Fukushima Daiichi accident in 2011. The Nuclear Regulation Authority has steadily conducted reactor safety assessments, and as a result, nine reactors have restarted and four more may restart in 2020. Some of the court rulings should be challenged fairly and properly.

The Atlantic Council issued an insightful geopolitical analysis last month, predicting that without success in Japan’s nuclear policy and without US cooperation, China and Russia are likely to take the lead in forming the global nuclear order.

Last is the response to the Sixth Strategic Energy Plan. The deliberations begun at the Strategic Policy Committee in mid-October last year will be in full swing this year. The world is paying attention to Japan now that it has declared its target of carbon neutrality, which is a change from its previous stance of promising only to do what it can do. Why the change? One reason may be that Japan has gained some confidence in its ability to decarbonize fossil fuels. 2020 was the third year since the launch of Metes’ Hydrogen Ministerial Meeting and the second year of the International Conference on Carbon Recycling.

Regarding hydrogen and ammonia, there are two types of ammonia: green ammonia produced by water electrolysis using renewable electricity, and blue ammonia, which is made with fossil fuels using CCS. Nuclear-based hydrogen will eventually be launched, too. The color is not important; the point is how to secure large amounts at low cost. Low price in particular is the key for emerging and developing countries mainly in Asia. No country can be criticized for putting better education and economic growth before climate action. The role of developed countries is to prepare climate actions at minimum cost through innovation and international cooperation.

Japan is expected to demonstrate leadership in preparing a realistic prescription for the world in the seven areas above. This is the most viable way of creating clear skies in the energy area.

In closing, I would like to wish everyone a prosperous new year.