Policy recommendations

Japan’s policy framework combines ambitious long‑term climate targets with extensive technology‑specific support across the innovation chain. While this has accelerated progress in priority areas such as hydrogen, ammonia, batteries, zero‑energy buildings and next‑generation renewables, the strong reliance on targeted subsidies and bespoke support schemes at the commercial deployment stage risks creating uneven incentives across technologies. In several sectors, including power generation, industrial decarbonisation and end‑use electrification, support is tied to predetermined technology pathways rather than performance or cost‑effectiveness. This can weaken competition, slow the adoption of emerging low‑cost solutions, and reduce the system’s ability to adapt as technologies and market conditions evolve.

To address these challenges, Japan could expand the use of technology‑neutral, competitive mechanisms that allow a broad set of low‑emission solutions to compete on equal terms. For example, the rules of Japan’s low‑carbon capacity auctions could be modified so that various technologies providing firm, flexible or dispatchable capacity would compete based on cost and emissions performance. Another example is technology‑neutral industrial decarbonisation pathways that would support emissions reductions at least cost rather than through predetermined fuels or processes. Strengthening carbon‑intensity and performance‑based requirements in public support schemes, and ensuring that pricing instruments – such as Emissions Trading System design, incentives and auctions – are neutral between eligible technologies, will further encourage efficient outcomes. These tools can coexist with targeted R&D support, but deployment‑stage instruments should increasingly rely on open competition.

A more technology‑neutral approach would improve cost efficiency, minimise the risk of over‑compensation and avoid premature lock‑in to higher cost pathways. It would enhance investor confidence by providing stable, predictable mechanisms insulated from shifts in specific technology preferences, and ultimately help protect consumers by ensuring that scarce public resources are allocated where they deliver the greatest emissions reductions per yen spent. By strengthening competition and focusing support on performance rather than prescribed technology choices, Japan can accelerate its transition while maintaining affordability and policy stability.

Japan has long been a global leader in energy and industrial innovation, underpinned by substantial public investment; strong corporate R&D capacity; and a dense network of universities, research institutes and technology platforms. As the scope and complexity of the energy transition expand – encompassing digitalisation, electrification, hydrogen, carbon capture and storage, advanced materials and system integration – ensuring strong alignment across the innovation ecosystem becomes increasingly important to sustain momentum and maximise impact.

Building on its existing strengths, Japan could further enhance co-ordination and information‑sharing across ministries, agencies and programmes, with a view to strengthening continuity along the full innovation chain, from basic research and applied R&D to demonstration, early deployment and market formation. Strengthening strategic oversight of energy‑related R&D funding and clarifying linkages between large public funding instruments, such as the Green Innovation Fund, sectoral Green Transformation initiatives and longer term industrial strategies, would help reinforce predictable development pathways and crowd in private investment.

Encouraging interdisciplinary and cross‑sector collaboration – bringing together engineering, digital technologies, system integration and social sciences – would further support the development of integrated solutions suited to future energy systems. Deepening structured dialogue between public authorities and private actors, including established firms and emerging innovators, can help ensure that innovation priorities remain responsive to technological progress and market developments.

A more closely aligned and collaborative innovation ecosystem would support the timely commercialisation of strategic technologies, strengthen public-private partnerships and enhance Japan’s ability to deploy competitive low‑carbon solutions domestically while contributing to global decarbonisation through international markets and standards.

Japan’s electricity system is undergoing a profound transformation as renewable energy expands, electricity demand rises with electrification and digitalisation, and thermal generation operates with declining utilisation rates. Meeting the ambitions of the 7th Strategic Energy Plan will require substantial new investment in clean sources of electricity, long‑duration storage, system flexibility and transmission infrastructure. Frequently adjusting market rules reflects the system’s rapid evolution, but can make long‑term revenue expectations more complex for investors. Overlapping support schemes and some constraints on price formation are additional factors that reduce the predictability of costs and revenues, which can discourage capital‑intensive projects and slow the replacement of ageing assets.

To strengthen predictability and improve investment conditions, Japan should streamline co-ordination across the capacity, spot and balancing markets and ensure these mechanisms send consistent, technology‑neutral signals for new resources. This includes expanding market access for storage, demand response and other flexibility providers, and reducing distortions by allowing a more complete expression of scarcity pricing, such as increasing the upper limit on spot market bid prices and enabling negative prices. These changes, together with stable long‑term market design and transparent timelines for reforms, would help investors assess revenue streams more confidently and manage project risk more effectively.

Greater policy stability and a clearer investment framework would support continued deployment of clean and flexible resources, support cost‑efficient achievement of the 7th Strategic Energy Plan’s goals and reduce the long‑term cost of capital for essential power sector infrastructure. Over time, this would strengthen system reliability; lower consumer costs; and allow nuclear, renewables and storage projects to scale at the pace required to achieve Japan’s energy security and decarbonisation objectives.

Japan’s power system is entering a period of growth driven by electrification, data centre expansion and the scaling up of renewable energy. However, long lead times for grid upgrades, limited regional interconnection and protracted grid connection approval processes risk slowing the integration of wind, solar PV and battery storage. Existing grid assets remain heavily constrained and operational practices continue to evolve to better support the flexibility needs of a system with significantly higher shares of variable renewables. Without clearer investment signals and faster connection procedures, transmission bottlenecks and curtailment risks will likely increase, raising system costs and undermining the reliability and economic efficiency of the energy transition.

This can be addressed by strengthening incentives for transmission and distribution operators to modernise existing assets and expand grid capacity where it delivers the greatest system value. Performance‑based regulation and targeted investment frameworks can help accelerate reinforcement projects, digitalisation and grid modernisation, covering next-generation equipment replacement as well as data‑driven asset utilisation and operational optimisation. At the same time, streamlining grid connection procedures for new large loads (such as semiconductor facilities and data centres) and new sources of electricity and storage will be essential. Establishing clearer timelines, more transparent processes and strengthened co‑ordination with the Organization for Cross-regional Coordination of Transmission Operators (OCCTO) can significantly reduce delays and increase grid connection certainty.

The combination of these measures would bolster electricity security, lower integration costs and support the faster deployment of renewables and storage. A more modern, agile grid will also improve affordability for consumers by reducing congestion, curtailment and unnecessary investment, and will provide the backbone for Japan’s broader decarbonisation and economic growth ambitions.

Nuclear power plays a vital role in Japan’s energy transition, as the country retains deep industrial and regulatory expertise across the nuclear value chain. Japan has made important progress recently in restarting reactors after rigorous safety reviews. The IEA praises the government for its efforts to engage local stakeholders and raise public awareness and acceptance of nuclear power. Ensuring continued progress on reactor restarts remains critical, provided that all safety requirements and local community engagement processes are fully met.

In addition to restarts, Japan’s electricity system will require new nuclear projects to meet growing demand (including round‑the‑clock supply for data centres and energy‑intensive industries), replace nuclear reactors that are eventually retired and ensure system reliability. However, long project lead times and uncertainties surrounding the extensive licensing process for each reactor, including design approval, create uncertainty for investors and limit the potential contribution of nuclear energy. To address these challenges, Japan should establish clear and transparent timelines for licensing milestones and the deployment of large‑scale reactors and emerging SMR technologies. Strengthening policies to support innovative financing models, nuclear workforce development and domestic supply chain resilience, including nuclear fuel security, can further reduce project risks and improve deliverability.

Greater clarity on nuclear deployment timelines would facilitate timely investment decisions and improve long‑term system planning. This would support the delivery of the new nuclear capacity needed to complement renewable energy, meet growing electricity demand and ensure the availability of 24/7 low‑carbon power. Over time, it would help Japan maintain industrial leadership, strengthen energy security and provide reliable foundations for an electrified, digitalised economy.

Japan has adopted a comprehensive and flexible approach to decarbonising transport, pursuing a range of technological pathways including battery electric vehicles (BEVs), hybrids and plug‑in hybrids,fuel cell electric vehicles (FECVs), and the use of low‑ and zero‑carbon fuels. This strategy reflects Japan’s specific circumstances, including energy security considerations, industrial structure and the importance of reducing emissions from the existing vehicle stock, and is intended to mitigate the risks associated with reliance on a single technological solution.

At the same time, the breadth of policy support across multiple vehicle technologies and fuels implies significant and growing demands on public finances and infrastructure development. In this context, it becomes more important to ensure that policy instruments are guided by transparent assessments of life cycle emissions impacts, cost‑effectiveness and system value. Strengthening such assessments would help clarify the respective roles of different pathways over time while preserving flexibility and technological neutrality.

In road transport, Japan’s long‑standing fuel‑efficiency standards and support for hybrid vehicles have delivered substantial reductions in fuel consumption and oil dependence. However, as efficiency gains from conventional and hybrid powertrains approach technical limits, further emissions reductions after 2030 will increasingly depend on a higher uptake of vehicles capable of operating with zero tailpipe emissions and on continued reductions in the carbon intensity of electricity supply. Closer alignment between transport electrification policies and power sector decarbonisation trajectories will, therefore, be essential to maximise the climate benefits of vehicle electrification.

Regulatory and fiscal frameworks that continue to favour compact, efficient vehicles, including Kei cars – and that increasingly differentiate in favour of zero‑emission variants within this segment – can provide a cost‑effective lever to accelerate electrification while maintaining affordability for households. At the same time, the continued roll-out of charging infrastructure will be a critical enabler of transport electrification. Ensuring that charging infrastructure planning and support schemes explicitly take into account local needs will be important to ensure equitable access to electrification and avoid reinforcing regional disparities.

Japan’s strategy for FCEVs and hydrogen infrastructure is explicitly focused on commercial vehicles and geographically concentrated deployment, reflecting infrastructure costs, utilisation challenges and hydrogen supply constraints. Maintaining this targeted approach while regularly reviewing progress against utilisation, cost and emissions benchmarks would help ensure public support is aligned with realistic market development and emissions‑reduction outcomes.

Finally, low fuel taxation and extensive purchase and infrastructure subsidies mean that public support currently plays a significant role in transport decarbonisation, with comparatively less reliance on price-based incentives. Over time, closer alignment between fiscal measures, emissions objectives and technology performance could help gradually rebalance the policy mix, reducing reliance on subsidies while maintaining affordability.

Strengthening evaluation, transparency and sequencing within Japan’s multi‑pathway transport strategy would thus help maximise emissions reductions, contain public costs and support an orderly transition consistent with Japan’s energy security, industrial and climate objectives.

Japan has taken major steps to strengthen efficiency requirements for new buildings, yet the existing building stock (much of it constructed before modern insulation standards) remains far from aligned with the country’s 2035, 2040 and 2050 climate objectives. Renovation rates are currently limited, and heat pump deployment and building automation uptake are progressing more slowly than needed. A long‑term, co‑ordinated strategy would help ensure that efficiency gains in new construction are complemented by steady improvements in the existing building stock.

Developing a clear zero-energy-building‑by‑2050 (ZEB) roadmap would help align regulatory measures, financial incentives, information tools and workforce development, providing predictable signals to households, developers and industry while allowing flexibility in how performance outcomes are achieved. It would provide a structured pathway for progressively raising buildings’ performance requirements and benchmarks at points of sale or lease (including demand-response requirements for appliances and equipment); accelerating deep renovations; and expanding the adoption of high‑efficiency heat pumps, digital controls and other sustainable heating and cooling solutions. The roadmap should define milestones for 2030, 2035 and 2040; outline renovation trigger requirements and workforce training programmes; and integrate financial support for low-income households. Continued strengthening of energy performance disclosure and consumer awareness would also drive demand for high‑performance buildings.

A comprehensive ZEB roadmap, and its effective implementation, would lower energy bills, reduce peak electricity demand and facilitate the integration of renewable energy. It would give industry, local governments and households the clarity and confidence needed to mobilise investment at scale, supporting Japan’s broader goals for energy security, resilience and carbon neutrality.

Japan has built a robust natural gas supply system with a strong and consistent focus on security of supply, reflecting its near‑total dependence on imported liquefied natural gas (LNG) and exposure to global market and geopolitical risks. Through long‑term contracting, diversified sourcing, extensive LNG terminal infrastructure and strategic buffer arrangements, Japan has demonstrated a high level of resilience, including during recent periods of global gas market tightness. These achievements underscore the central role of security considerations in gas policy and the importance of maintaining measures that may entail additional costs but deliver reliability. Building on this solid foundation, well‑designed transparency and access frameworks can play a complementary role by enabling effective competition and supporting regulatory oversight, provided they are carefully calibrated to Japan’s market structure and security objectives.

Japan has already implemented a legal framework for third-party access for LNG terminals, annual disclosure of spare capacity, and the establishment of a market regulator responsible for oversight and dispute resolution. These measures form a solid legal and institutional foundation. Practical use of the framework has progressed, with the Ministry of Economy, Trade and Industry (METI) reporting a growing number of third-party requests/ applications. It has also concluded wholesale arrangements. However, information disclosure remains constrained in practice, limiting new entrants’ ability to assess available capacity, compare access conditions or optimise LNG procurement. Japan can enhance its framework by extending disclosure requirements and broadening access to information. Targeted transparency, such as more frequent disclosure of spare capacities, terminal-level inventories in low-competition regions, utilisation rates, and overviews of third-party access requests, would lower transaction costs for new entrants and help regulators better monitor markets, spot barriers to entry and co-ordinate during supply stress.

Where access issues persist in regions with limited competition, authorities should enhance third‑party access frameworks so that they operate in a transparent, non‑discriminatory and effective manner while recognising that operational constraints and long‑term contractual arrangements may legitimately limit access in some cases. Greater clarity around access conditions, processes and outcomes can improve confidence in market governance and increase competition without undermining security of supply arrangements. In parallel, introducing reporting obligations for LNG import prices and developing a Japanese LNG price assessment that maintains necessary commercial confidentiality would improve wholesale price transparency.

More effective access to LNG infrastructure could potentially foster greater competition, lower procurement costs and support more efficient use of existing LNG capacity. Over time, as the procurement mix evolves toward more flexible contract structures, improved transparency and access frameworks would enhance Japan’s gas market resilience, provide clearer price signals to market participants and ultimately benefit consumers through a more competitive, efficient and secure gas system. Regular review of disclosure practices and access outcomes can help ensure that they are proportionate and effective, aligned with market realities, and responsive to evolving risks and opportunities. 

Japan has positioned low‑emissions hydrogen, ammonia and hydrogen‑derived fuels as core pillars of its Green Transformation Strategy, reflecting their potential role in decarbonisation and energy security. In the near term, the power sector plays a critical role in creating large‑volume initial demand, enabling first‑of‑a‑kind projects, and supporting the establishment of large‑scale international supply chains and economies of scale. At the same time, the supply of low‑emissions hydrogen or hydrogen-based fuels remains limited and costly, and domestic production potential is constrained, underscoring the importance of carefully sequencing deployment to maximise long‑term decarbonisation impact and cost-effectiveness.

Building on the 7th Strategic Energy Plan, Japan could further clarify the sequencing of hydrogen and ammonia use across sectors, recognising the power sector’s role as an early demand anchor in the near term while ensuring that expanding supply increasingly and measurably supports hard‑to‑abate sectors with limited alternatives, such as steel, chemicals, refining, shipping and aviation. Clear sectoral roadmaps with time‑bound milestones can help distinguish between near‑term scale‑up needs and longer term prioritisation, guide the allocation of public support, and reduce the risk of prolonged reliance on high‑cost applications once alternative decarbonisation options become available. Strengthening demand‑side signals – through price‑gap support, emissions‑intensity requirements, mandates and carbon pricing – will remain essential: it provides offtake certainty and underpins investment across the value chain.

Co-ordinated development of demand hubs and shared infrastructure will continue to be critical to implementing this approach in practice. Co‑location of power generation and industrial users can allow large‑volume demand from the power sector to support early supply chain development while progressively serving hard‑to‑abate industrial applications as markets mature. Early experience under Japan’s contract-for-difference scheme, where certified projects combine ammonia use in power generation with supply to industrial end users, illustrates how such hybrid demand models can accelerate learning, reduce costs and strengthen supply chain resilience. By aligning sectoral prioritisation with sequencing, infrastructure planning and robust governance, Japan can leverage the power sector to build scale while ensuring hydrogen and ammonia deployment remains aligned with long‑term decarbonisation efficiency and system value.

Geothermal development is constrained primarily by high geological uncertainty, long lead times and complex permitting requirements rather than operating costs. Japan has made important progress in addressing these barriers through pre‑competitive drilling surveys led by Japan Organization for Metals and Energy Security (JOGMEC), subsidies for exploration and test drilling, and the use of equity participation and debt guarantees to reduce early‑stage risks. These instruments have supported private developers’ engagement from the exploration phase and helped advance conventional and, to some extent, next‑generation, geothermal projects. To further expand geothermal deployment, Japan should continue evolving from predominantly subsidy‑based support toward clearer, milestone‑linked risk‑sharing arrangements that strengthen incentives for early private participation and learning. This could include scaling cost‑shared exploration and drilling programmes, expanding the use of equity and guarantee instruments in pre‑final investment decisions (FID) phases, and clarifying pathways for the transfer of derisked resources to project developers. Support levels should reflect geological and technological risk and be linked to transparent development milestones to improve bankability and the efficient use of public funds.

International experience shows the effectiveness of differentiated approaches to managing early-stage geothermal risk. In Kenya, Geothermal Development Company leads exploration and resource confirmation with the explicit aim of transferring derisked resources to private developers. In New Zealand, early-stage risks are more structurally shared, with private developers directly engaged in exploration supported by strong public data, faster learning and institutional frameworks. In the United States, the Department of Energy complements these models through cost‑shared funding explicitly targeting the “valley of death” between research and commercial deployment. These experiences show that while public support is essential to managing early-stage geothermal risk, cost- and risk-sharing approaches are effective in mobilising private investment, expanding project pipelines and accelerating development beyond what can typically be achieved through purely public funding models. Japan’s model represents a hybrid approach, combining public risk mitigation with private project leadership, but it could further increase private early‑stage exposure through clearer, cost‑shared investment frameworks.

At the same time, permitting remains a critical bottleneck. Despite improvements under METI’s “one-stop follow-up” framework, geothermal projects still require sequential approvals under multiple laws, resulting in lengthy timelines. Large projects (>10 MW) often exceed ten years for permitting alone, even with JOGMEC support, then approximately an additional decade is required for exploration and resource confirmation. Smaller projects, despite partial exemptions from environmental impact assessments, still typically require four to six years. These timelines are incompatible with Japan’s target of expanding geothermal capacity from 0.6 GW to 1.5 GW by 2030 and risk constraining conventional and next-generation projects. Japan should continue streamlining and co-ordinating permitting procedures, with differentiated requirements by project size and risk, clearer and potentially shorter timelines, and early engagement with local authorities and hot‑spring stakeholders.

Strengthening risk‑sharing mechanisms in parallel with permitting reform would accelerate project pipelines; improve learning effects; and enable geothermal energy to play a greater role as a domestic, dispatchable, low‑carbon energy source.