On the Publication of the Draft 7th Strategic Energy Plan  

On December 17, the Ministry of Economy, Trade, and Industry (METI) of Japan released the draft of the 7th Strategic Energy Plan (*1). This plan outlines the Japanese government's medium- to long-term energy policy and is reviewed approximately every three years.

The projected energy mix for FY2040 (*2) is expected to be 40-50% renewable energy, 30-40% thermal power, and approximately 20% nuclear power. The breakdown of renewables includes solar (22-29%), wind (4-8%), hydro (8-10%), geothermal (1-2%), and biomass (5-6%). By comparison, in FY2023, the actual energy mix was 23% renewable energy, 69% thermal power, and 9% nuclear power, indicating a significant expected increase in non-fossil fuel power generation.

Several key changes from the 6th Strategic Energy Plan include:

1. Electricity demand projections: While electricity demand has been declining due to population reduction and energy efficiency improvements, it is now expected to increase by up to 20% due to the growing needs of data centers for digital transformation (DX) and green transformation (GX).

2. Nuclear power policy shift: The phrase "reduce reliance on nuclear power as much as possible" has been removed, and the plan now explicitly mentions "replacing existing reactors with next-generation innovative reactors."

3. Renewable energy as a primary source: The plan reaffirms the goal of "maximizing the introduction of renewable energy as a main power source."

Additionally, the draft emphasizes that expanding decarbonized energy sources is critical for Japan’s economic growth and industrial competitiveness. The plan states that employment stability and wage increases will be difficult to achieve without decarbonization efforts, stressing the need to maximize the use of both renewable energy and nuclear power, rather than framing the issue as a binary choice.

At Cadira Capital Management, we recognize the government's commitment to flexibly pursuing various options to expand decarbonized power and achieve carbon neutrality by 2050. We will continue to assess the impact on different industries and individual businesses. Additionally, while solar power has been the primary driver of renewable energy expansion in Japan, challenges such as limited suitable sites for mega solar projects and rising infrastructure costs have begun to slow its deployment. Given this, we believe that cost reduction efforts, floating offshore wind power, geothermal energy, and advancements in new technologies such as perovskite solar cells will play an increasingly vital role. We are actively researching these areas.

Finally, as renewables become a dominant power source, the increasing intermittency of renewable energy generation is expected to drive a sharp rise in power system balancing costs. We are closely monitoring developments in localized energy production and consumption, grid infrastructure improvements, and large-scale battery storage deployment.

(*1) Draft Strategic Energy Plan
https://www.enecho.meti.go.jp/committee/council/basicpolicysubcommittee/opinion/data/2024_01.pdf

(*2) FY2040 Energy Supply and Demand Outlook
https://www.enecho.meti.go.jp/committee/council/basicpolicysubcommittee/opinion/data/2024_02.pdf