By Katya Golubkova, Yuka Obayashi and Sudarshan Varadhan
TOKYO (Reuters) -Investors are pouring billions of dollars into Japan’s nascent electricity storage market as power demand is growing after a long decline, but changes proposed to smooth the flow of energy onto the grid and to lower prices threaten to curb returns.
Japan, which relies on imported fossil fuels for around 70% of its electricity, has been expanding renewables to improve energy security, but has faced frequent power curtailments on its fragmented transmission grid system, especially in the northern region of Tohoku and Kyushu in the south.
That is creating surging interest in battery energy storage systems (BESS) to smooth mismatches in supply and demand.
Since December 2023, companies have announced investments of at least $2.6 billion in Japanese battery storage projects, according to calculations by Reuters. That includes $677 million in spending by Japanese real estate firm Hulic announced in January and $1.3 billion by trading house Sumitomo last year.
“If Japan is to meet its renewable energy targets, it will need to address the issue of curtailment, and energy storage is an obvious solution,” said Franck Bernard, managing director for energy storage and flexibility at Singapore-based Gurin Energy.
Next year, his company plans to start building a 1 gigawatt-hour (GWh) storage battery capable of providing 240 megawatts (MW) of power for four hours in Fukushima prefecture.
Gurin has partnered with TotalEnergies’ Saft unit for the 91 billion yen ($618 million) project.
The project will consist of around 200 stand-alone installations resembling shipping containers and start up in 2028, with room to double capacity.
Companies planning battery storage projects requested to connect to the transmission grid 113 GW of capacity in the fiscal year ending in March, according to data from the Ministry of Energy, Trade and Industry (METI).
Though the requests are only indications of interest and not actual promises of power delivery, that was nearly triple from the prior year period, with most of the interest coming from Tohoku, Tokyo, Kyushu and the Chugoku region in the west where curtailments are also frequent.
“Tohoku and Kyushu regions have a lot of renewables, which makes these regions very attractive for battery projects, and that’s why there is a lot of contracted and considered projects there already,” said Uranulzii Batbayar, a Tokyo-based analyst with Rystad Energy.
Rystad forecasts Japan’s battery storage capacity could reach about 4 GW based on projects under construction, planned and awarded, which would require $6 billion in investment.
Story continues
Japan’s low base of grid-connected BESS allows for growth, Batbayar said, with the recent setback to Japan’s offshore wind market expansion from Mitsubishi’s withdrawal unlikely to hinder development of battery projects.
As of March, Japan had 0.23 GW of grid-connected BESS, according to METI.
By comparison, China has 75 GW and the U.S. has installed nearly 26 GW of battery storage capacity, according to the Energy Institute.
AUCTION CHANGES
Still, planned changes to the government’s long-term decarbonised capacity auctions (LTDA), which guarantee project revenue for up to 20 years once new power generation facilities come online, could threaten the attractiveness of battery storage.
First introduced in 2023, the LTDA was meant to encourage more renewable energy projects but the government has expanded the use of fossil fuel and nuclear generation sources in the auctions.
METI plans to only offer 800 MW of battery storage capacity for its next auction, down from 1.7 GW awarded in the last round.
Natural gas-fired capacity for the next auction will be raised to 3 GW, from 1.3 GW previously awarded, and 1.5 GW for nuclear plants.
METI also plans to increase the BESS duration requirement to at least six hours from between three to six hours previously.
METI documents from May said the change is needed so longer-operating batteries can respond to the additions of more intermittent renewable energy and reduce curtailments, which will smooth out the flow of power to the grid and help lower prices for end-users.
Battery companies favour shorter-duration batteries that enable them to cash-in on lucrative peak demand hours.
Requiring six hours of power flow would mean battery operators planning systems with only three hours of discharge could need more land for units and new connection permits if they are relocated, said Kentaro Ono, Managing Director for Japan at Eku Energy, a battery storage developer building a site in Kyushu for start up next year.
That would make short-term compliance difficult and pose the risk companies will miss the October registration deadline for the next LTDA auction after the changes were only proposed in May and June, he said.
Analysts are also concerned the changes undermine the decarbonisation goals the LTDA are supposed to address.
“Rather than replacing old capacity with new, it may end up preserving existing power sources,” Mika Kudo, a principal researcher at Japan’s Renewable Energy Institute (REI), said in a note.
Mahdi Behrangrad, head of energy storage system and virtual power plant department at Pacifico Energy, an early participant in Japan’s battery storage sector, with projects in Kyushu and Hokkaido, agrees the LTDA changes support existing power generation assets rather than storage and could harm additional battery investments in Japan.
“We should keep in mind that the investment is global, investors have many markets to choose from and we must convince them to be here … we are having a harder time to explain: are we the best place to be?”
($1 = 147.3300 yen)
(Reporting by Katya Golubkova, Yuka Obayashi in Tokyo and Sudarshan Varadhan in Singapore; Editing by Tony Munroe and Christian Schmollinger)
AloJapan.com