Japan's Power Market News 2022/W42

METI considers capacity market reform to encourage decarbonization.?

METI is keen to redesign Japan’s capacity market to balance its original purpose of ensuring long-term supply security with increasingly urgent decarbonization goals, and in June, it published a summary of possible regulatory changes.

The current system focuses purely on supply security, with a single set of renewable, nuclear, and fossil-based power generation rules. Apart from some constraints targeting low-efficiency coal plants, there are no criteria to encourage decarbonization in the long-term power mix.?

METI is considering the introduction of separate categories for all renewable sources, nuclear and battery storage – as well as LNG and other fossil fuel plants that can mix some hydrogen/ammonia in their fuel. While this may enable favorable rules for lower carbon technologies, intermittent forms of renewable generation are likely to require battery backup or be limited in scale to ensure the power is there when the capacity market demands it.?

Changes are also proposed for qualifying duration. In the current capacity market, generators bid yearly and, if successful, qualify to participate (and receive subsidies) four years later for one year. Under the new proposals, generators would bid once and, if successful, qualify for 20 years. The time between the successful bid and the first payment would vary depending on the generation type. For example, a solar plant under development would receive payment five years later (three years if the development phase is completed), while a nuclear plant - which takes far longer to construct - would receive payment 17 years later (12 if development is completed).

The new market mechanisms are still in the discussion phase at METI, with a final decision on rules and implementation schedule still needing to be made. But in METI’s latest report published this month, the possible market changes are discussed in more detail, as are the roles of the TSOs and OCCTO. The new system could significantly impact Japan’s future energy mix and bring it closer to METI’s targets published in the 6th basic energy plan.

Sources:?METI report (June 2022) , METI report (October 2022)

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