Germany and Japan Are Transforming the Electricity Mix

Many countries are confronted with the challenge of de-carbonizing their power sectors, but Germany and Japan stand out in their approach. These two global economic powers and major export economies are undertaking a dramatic transformation of their electricity portfolios, characterized most prominently by moving away from nuclear energy and toward the large-scale deployment of renewable energy. The Energy Security Initiative (ESI) has recently completed a research effort examining each country in a new policy brief released today.

Commonalities in the Electricity Market

In our discussions with stakeholders in both countries, four common themes emerged.

• First, Germany and Japan use the feed-in-tariff (FIT) at the national level as their primary policy instrument to promote renewable energy. Stakeholders in both countries argue that the FIT is superior to quotas or short-term financial incentives, and is the most effective tool in providing a guaranteed long-term revenue stream, stimulating more widespread deployment and bringing costs down.
• Second, both countries are confronted with grid-related challenges in integrating larger shares of renewable energy. These include building more transmission capacity and associated cost and planning requirements.
• Third, the increasing penetration of renewables is posing a challenge for existing electricity markets and for the profitability and existing business model of incumbent utilities. In addition, there is concern in some quarters that rapid transition to renewables is threatening broader economic competitiveness through rising electricity costs.
• Finally, there is criticism that the shutdown of nuclear generating capacity in Germany and Japan is leading to growing use of fossil fuels, increasing CO2 emissions and creating complications for meeting longer-term climate policy goals.

Renewable Energy Challenges

There are also significant differences between the two countries. Japan’s reliance on energy imports in the electricity sector is far greater than Germany’s, and there is currently much more debate and uncertainty in Japan over setting objectives and implementing overall energy policy, specifically the future role of nuclear power. In addition, Germany is a completely unbundled electricity sector with robust wholesale and retail markets, extensive competition and interconnections with neighboring systems and regional markets. In fact, one challenge unique to Germany, relative to Japan, is that of coordination with neighboring systems and integration with the broader European electricity market.

Japan has a regulated market dominated by vertically-integrated, monopolistic utilities, limited interconnections among the utilities’ service territories (owing to an electricity system based on two frequencies), absence of interconnections with neighboring countries’ markets and geographic constraints (limited suitable land area) that all make a transition to higher levels of variable renewable energy very challenging. To address this situation, the Japanese government is targeting much higher levels of renewable energy and has introduced an ambitious plan to restructure dramatically the electricity sector.

ESI’s discussions with stakeholders in Germany and Japan revealed that these policy, market design, regulatory, technical and infrastructure-related issues need to be addressed early and in a cohesive, ongoing manner in order to integrate high levels of renewable capacity. Both the German and Japanese experiences illustrate just how challenging these issues are, but Germany also demonstrates that they can be addressed in a manner allowing renewable energy to play a much larger role in the electricity portfolio of the future.