by Julian Spector
October 27, 2016

We write a lot here at GTM about energy storage in the U.S. and Germany, and we recently covered Australia's small but booming market for storage-plus solutions. Japan is a major storage market that hasn't gotten much ink here recently -- so this week we're turning to that country.

Japan ranks in the top five countries for deployed storage, and that alone makes it significant. Moreover, Japan hosts many of the biggest and best-capitalized storage producers -- long-time electronics giants that branched into batteries. Many of these companies have since launched U.S. outposts for their battery divisions, becoming major players in the American market. 

As for the electricity markets, Japan grapples with the challenges of being an island. The grid stops at the shore, precluding exchange of electricity with other markets, and relies on imported oil and gas for the bulk of its generation. That makes for very expensive retail electricity. Similar to Hawaii, then, the island utilities have faced a more rapid acceleration of solar deployment and are struggling to keep up with its effects. That dilemma elevates the value of energy storage to smooth out the integration of renewables and build in more localized self-sufficiency.

These dynamics combine with factors specific to Japan, like the fallout from the 2011 Fukushima nuclear meltdown and a government that's not afraid to put a lot of public funding behind new clean energy technologies. The result is a market in desperate need of more storage on the grid scale and at the household scale, with resources to dispatch for that purpose.

Between a rock and the ocean

Japan used to get almost all its electricity from imported hydrocarbons, plus 27 percent from nuclear power. When the tsunami hit in 2011 and the Fukushima nuclear plant suffered meltdowns, the government shuttered all remaining nuclear reactors. A few have since come back on-line after meeting new safety standards, but the goal is to greatly reduce dependence on this source of energy.

That triggered a search for replacement generation, which traditionally meant paying more for electricity from imported fuels. Japan ranks in the top three importers of oil, coal and liquefied natural gas, according to the Energy Information Administration.

The nuclear setback did not lead to an uptake in fossil fuels alone, though. Solar burst onto the scene in a big way to fill the gap, especially in the sunny southern regions. As with Hawaii, the economics of solar on an island that imports its fuels can go positive years ahead of similar markets onshore (hence the "Postcards from the Future" moniker). The government sweetened the deal further with a strong feed-in tariff to buy back surplus solar put onto the grid.

Japan has since deployed the third-highest cumulative solar capacity, approaching 40 gigawatts. 

"The Japanese market is a really good case study for successful policy implementation," said Benjamin Attia, global solar markets research associate at GTM Research.

Perhaps a bit too successful. As Bill Capp, an American energy storage consultant who works with Japanese company NGK, described the tariff, "It was so successful that the utilities, especially in the southern end where there's lots of sunlight, said 'Hey, we can’t keep doing this.'"

The sun sets on the tariff

Now that the feed-in tariff (FIT) has worked to the point of overwhelming the grid with variable generation, the government is scaling it back. The tariff will decline over time to be replaced eventually with competitive auctions.

But this is a storage column, after all, and when selling storage, nothing is better than a market full of deployed solar with rapidly falling compensation for it. That combination of factors is propelling Australia's storage market to 37-fold growth in the next five years.

The large-scale solar tariff came down from 40 JPY per kilowatt-hour in 2012 ($0.38 at the current exchange rate) to 24 JPY this year, and will continue stepping down toward competitive auctions. Rooftop solar's tariff dropped from 42 JPY per kilowatt-hour in 2012 to around 31 JPY this year, and will also continue stepping down.

Again, the point of the FIT program is to get solar to price parity with the grid, and that looks attainable for the solar industry. It's just less lucrative for them to sell solar back now, making it relatively more valuable to store it.

The markets open up

Solar is feeling some heat economically, too. Large utility-scale projects have become more difficult to pull off, thanks to high land prices, high labor costs and and the permitting challenges that come with large land use. The developer also needs to find an offtaker, which has been limited to one of the 11 regulated utilities.

That's starting to change. Japan launched a major electricity market liberalization plan that should open up more space for independent power producers and new companies to compete in electricity markets by 2020. The first step, this year, was expanding retail choice for consumers. 

That will be good for the energy storage industry, too, wrote Hiro Ezawa, chairman of NEC Energy Solutions, in an email Tuesday. He identified the tightly regulated electricity market as "the largest obstacle we face in Japan."

"Once the market [is] deregulated, meaning current utility companies would be separated into PowerGen, Distribution & Commercial, then we will see next challenges against the storage market, which we do not know now," he said.

As new retailers enter the market, they could embrace energy storage as a way to differentiate themselves, said Philip Keogan, senior vice president for Asia-Pacific and Japan at Sunverge. He added that early signs of deeper market segmentation and customization are already appearing.

Market reform is expected to create new business opportunities and reduce power prices in the long run, but it won't save the solar market from free fall in the next few years. GTM Research is reducing its forecast for this year by 700 megawatts in the last quarter. "This is probably the highest it’ll be for several years," Attia said.

The utility sector is seeing only 1 gigawatt of demand this year and is expected to fall to 26 megawatts in five years, rendering it "pretty much dead," Attia noted.

Commercial and industrial remains the strongest, at around 6.5 gigawatts this year, but it is also expected to fall below 1 gigawatt in the next five years.

Residential solar offers the one bright spot in the outlook, remaining relatively stable with an average of 2.2 gigawatts per year over the next five years.

The solar industry is facing diminishing returns if something doesn't change, and that something is the ability to store surplus generation for use precisely when it's needed. That means a lot of big conglomerates have a very real stake in expanding the storage market, and so does the government.

The government is here to help

Luckily for the storage industry, the Japanese government is not afraid to take a more hands-on role in subsidizing and promoting new technologies it deems serve the common good. 

This has happened in a big way with hydrogen fuel-cell technology. The Tokyo city government alone is putting $350 million toward widespread adoption of the expensive technology, dwarfing the $46.6 million that the California Energy Commission is investing in a hydrogen superhighway running through Eric Wesoff's backyard.

The Ministry of Economy, Trade and Industry launched a subsidy back in 2012 to pay up to one-third the cost of a stationary lithium-ion system, while ministry covered half of a large-scale battery for integrating renewable energy generation. There are several other subsidies for more particular use cases. More recently, the lithium-ion subsidy involved a more complicated calculation based on a unit price compared to a standard price and a target future price for that kind of system.

The goal in all these cases is to bring products to market in order to eventually drive down the prices.

"They are willing to inject funds to stimulate the market, get these technologies demonstrated and the use cases and business cases worked through, all with a large-scale rollout in mind for that market," Keogan said. "It's not trial for trial’s sake."

The stakes are twofold: Japan needs storage for its own grids, but it is also home to several leading storage companies. If the government can help nurture the advanced storage industry on its own shores, that will mean good things for the national economy.

That's not an idle dream either; METI's 2012 battery strategy called for Japan's share of the global storage market (measured in yen) to grow from about 18 percent to 50 percent by 2020, according to a report by the Institute of Energy Economics.

The support has already helped launch some sizable projects, including the current record-holder for largest battery in the world. NGK built a 50-megawatt/300-megawatt-hour sodium sulfur battery on an existing generating facility in the southern island of Kyushu. It went up in just six months and has been operating since March.

There are a few other megawatt-scale batteries in the works, but the market is still pretty nascent, said Ravi Manghani, director for energy storage at GTM Research. "Most projects are large-scale demonstration projects -- it’s not one of many; it’s a one-off project," he said.

The trick, then, will be whether the current subsidies effectively reduce the cost of producing the batteries, or if they just make them cheaper to buy until the government funding runs out. On the residential side, prices need to come down 30 percent to 50 percent for customers to enjoy financial benefits from purchasing a storage system, Ezawa said.

This is an area where the insularity of the market could prove a hindrance. Perhaps the best way to drive down prices is by introducing some cheap foreign competition to move things along. 

Vibrant ecosystem

Any new entrants would be going up against a crew of heavy-hitters.

Sony kicked off the whole lithium-ion battery craze in Japan back in 1991. That company recently decided to get out of the game, though; it couldn't keep up with the newer entrants that were putting more capital behind scaling their battery manufacturing capacity. 

Japan still hosts many of the world's biggest names in electronics, many of whom also produce advanced energy storage: Hitachi, Mitsubishi, Panasonic, Toshiba, NEC Energy Solutions. Those last three rank in the top seven for global storage deployments on a power basis, challenged only by BYD of China, LG Chem and Samsung SDI from South Korea, and Saft from France.

Japanese company Sharp developed storage management software for solar-plus-storage systems, a model which it then brought over to the U.S. for C&I customers and paired with zero-money-down financing. The 90-year-old inverter company Tabuchi entered the residential solar-plus-storage business, selling "many thousands" of systems in Japan and launching in the U.S. as well. 

Many of these names have started in Japan and expanded out to other markets, but there's reason to suspect that this process won't work in reverse for battery makers in other countries, like the U.S., China or South Korea. The government is explicitly leveraging policy tools to strengthen its home team, for one thing, and those manufacturers have a head start with scale and knowledge of local safety and permitting standards.

So far, the very few American companies to announce a move into Japan are doing so through local partnerships. Green Charge Networks is working with Itochu Corp. to distribute its lithium-ion storage systems, starting with Itochu's own real estate properties. Sunverge, the California startup specializing in residential storage and software for aggregation into virtual power plants, entered into a partnership with one of its Series C investors, Mitsui, to develop virtual power plant products for the Japanese market. The company is working on launching a METI-funded VPP demonstration project by the end of the year.

In Japan, Sunverge's strategy focuses more on the software than selling batteries, at least for now.

"Going toe to toe in that space [batteries] is probably a bit foolhardy, but the government is pretty keen to attract overseas companies into the market, particularly at the level of what we do, at the control level," Keogan said. "We’re going to be sensitive to the market dynamics and play our role where it fits best in that market."

Much of the residential battery deployment to date has happened through housing developer channels, Keogan noted. This creates a retrofit market where Sunverge can supply its more advanced software to aggregate the existing units for grid-scale services. Sunverge will also look for opportunities to package its products with new companies entering the electricity markets as a result of the liberalization.

This offers a model for overseas companies: Find a local partner in Japan, see what value you can add from your experience in other markets and fill in the gaps in the the industry there. If Japan really wants to take half the global storage market share over the next three years, it'll need whatever alliances it can forge.