Listening to Key Persons: Initiatives for the Achievement of Carbon Neutrality ―― The Future Being Unlocked by Power Supply-Demand Scenarios (Chapter 2)

In this series of articles, under the theme of achieving carbon neutrality, we invite experts who are working on energy issues in various fields to engage in a discussion with Tatsuya Yamada—Division General Manager of Hitachi, which is working on policy proposals relating to electric power and energy—and introduce trends in each industry. Through these discussions, we consider carbon neutrality from various angles, such as the formulation of a process and vision for achieving carbon neutrality, initiatives aimed at achieving it, and environmental development.

In our earlier talk, we asked Mr. Kudo about the relationship between energy and climate change issues, the impact of geopolitical risks, and the role of innovative Japanese technologies. He then discussed the concept of greenhouse gas reduction targets and the importance of making carbon neutral initiatives a growth strategy, along with the outlook for the 7th Basic Energy Plan. Then, while focusing on future electricity supply and demand scenarios, they discussed what should be emphasized to achieve carbon neutrality. The key to realization, according to Mr. Kudo, is the motivation of the companies, investors, and workers involved in these measures.

What is the significance of creating electricity supply-demand scenarios?

Yamada: Mr. Kudo, you serve as a member of the Study Group on Future Power Supply-Demand Scenarios being run by the Organization for Cross-regional Coordination of Transmission Operators, Japan (OCCTO). Can you tell us about what kinds of things the study group discusses?

Kudo: The main purpose of this study group is to create various scenarios that will serve as a reference when considering medium- to long-term electricity supply plans. Within that purview, the study group's role is to indicate what risks apply to various uncertainties including decarbonization, and present various pictures that will make it easier for electricity providers to formulate future predictions. That is why the study group is independent from the formulation of the Basic Energy Plan and is solely focused on electric power.

However, with respect to decarbonization, in the industrial and transportation sectors for example, an important perspective is electrification, where energy demand that was previously covered with combustion and heat is being replaced with heat pumps, EVs and so on. When considering power scenarios, the outlook for competition with fuel and other interrelationships are also items we consider.

Yamada: What does the study group currently have under consideration?

Kudo: We are working with key industry figures and experts to verify simulation results produced by separate models maintained by three research or consulting organizations. We are now at the stage of running a series of simulations while incorporating factors that affect the scenario as appropriate.

Of course we have already produced various forecasts, but we are not able to determine which one is correct. As part of that, we are in the process of identifying potential changes that would have a major impact on future electricity supply and demand, in a manner that will help companies with their corporate strategies, and help the national government with policy considerations.

Yamada: The significance in creating electricity supply-demand scenarios lies not in making predictions and guesses about the future, but in offering clues as to what factors need to be recognized as risks.

Kudo: That's quite right. Right now, the study group is exploring the future outlook for demand. For example, things like the increase in data centers due to the advance of digital transformation (DX) is one of the risks. Data centers consume a large amount of electricity, and depending on the extent of their proliferation, could have a significant impact on per-unit energy consumption. To what extent this is considered reasonable is precisely what is on the table for discussion.

The way energy is used also tends to be difficult to quantify. It is hard to predict how much progress will be made with energy savings and efficiency improvements, and how consumer-side initiatives will change by involving regular households and industry to transform their structures and mindsets. But I think that if we identify in advance that if a certain thing happens, it will have a certain degree of impact, and share those risks, then it will be easier to come up with a response should it come to pass.

Challenges in ascertaining total electricity demand

Kudo: And as we work through those discussions, sometimes we find new issues as well. As I touched on briefly earlier, the other day the study group took up the topic of private consumption through roof-mounted solar power generation. As you are aware, from around 2013 the demand for grid electricity fell dramatically, and that makes it appear as if total demand for electricity across Japan has fallen, but we posit that this may not be the case. That's because if private consumption through household solar power generation increases, the demand for grid power from electricity utilities will decrease accordingly. Given these circumstances, if small-scale distributed solar power generation were to increase in the future, leading to a rise in electricity demand not reliant on the grid, I think we have to consider how formulate the right balance in the overall electricity portfolio, ultimately considering this as one of the risks.

Yamada: As you pointed out, the statistics don't cover the amount of private electricity consumed by households. That's because while it is technically possible to collect this data, consumers are not obligated to report how much they used. On the other hand, more than a tenth of large-scale consumers maintain private power generating facilities at plants and other facilities, and that portion of private consumption is reflected in statistics for electricity demand. Considering the expected expansion of the adoption of distributed power sources that do not rely on the grid in the future, I think we need to accurately quantify private electricity consumption, and incorporate that data into the evaluation and analysis of total electricity demand.

Kudo: For people purchasing less grid power because they privately generate and consume electricity, and therefore face a reduced financial burden from electricity bills, there is a risk that their willingness to conserve electricity could suffer due to the notion that "since I'm generating my own electricity, I might as well use more of it." In that case total electricity consumption across Japan could steadily increase. From a carbon neutrality perspective, this could diminish the impact of introducing renewable energies. Given that meters are already becoming digitized, leveraging this data on electricity generation and demand could provide insight into the actual situation and facilitate a stronger connection to energy conservation efforts.

Yamada: As you noted, the data itself is already being collected and utilized through smart meters. However the challenge, as I perceive it, lies in the lack of a system to handle this information as statistical data.

Kudo: There is concern that a large influx of renewable energy could lead to grid instability. However, discussions are already taking place in the market on how to mitigate those risks. For example, new business models have emerged, such as the idea of bundling small-scale power producers that are independent of the grid to facilitate their interaction with it. Were that to happen, I think we would need to properly ascertain the actual state of consumers and draw a picture of future mechanisms that would contribute to electricity demand adjustments through demand response. To accomplish that, the real-time monitoring of actual data would be extremely important.

The current Study Group on Future Power Supply-Demand Scenarios is focused on grid power, but I have been saying within the study group that in the future it will be important to take a comprehensive look at everything together, including outside the grid. Otherwise, it could give rise to misunderstandings, such as that a rapid decoupling is developing because GDP is expanding but electricity usage is declining. That's because the apparent decoupling may have been caused by private consumption. It's difficult with the lack of public data, but in the future, I think we need to perform analyses that also take into account this private consumption.

Yamada: The amount of electricity sold by electric power utilities and the amount of electricity demand from private power generation used to be disclosed by industry and region, but that data stopped being released after the deregulation of the electric power market. I think electricity demand data with attribute information such as region, industry and scale updated every 30 minutes would be valuable information for forecasting future electricity demand. In the context of exploring ways to utilize data from smart meters, there has been some progress in developing solutions and services, but I think this data should be utilized in the formulation of energy policies. This would enable so-called evidence-based policy making (EBPM). And I think the information would be very useful when considering pricing schemes given that demand curves are undergoing significant changes due to the expanded adoption of solar power generation. There also appears to be a lot of discussion going on about how to utilize data in the US electricity market, but as the notion "Garbage in, Garbage out" suggests, we must find ways to prevent flawed, incomplete and inaccurate data from leading people toward bad decision making.

Kudo: The problem we face now is like having a comb whose teeth have broken off—the data we need for statistical analysis is no longer available. However, I do understand that utilizing data that is close to personal information poses difficulties.

Renewable energies becoming mainstream and energy conservation taking root hold the keys

Yamada: What do you personally believe is the most vital key to achieving carbon neutrality.

Kudo: I think it would be establishing renewable energy as the main source of power. With the share of renewable energy on the rise, we face the mammoth task of determining whether electric power systems can be operated in a stable manner. However, if our goal is to raise our emission reduction targets in pursuit of carbon neutrality, we have only two viable options for contributing to decarbonization: renewable energy or the restarting of nuclear power plants. As long as the current cautious tone about nuclear power persists, renewable energy is the only feasible option to meet any heightened emission reduction targets. To achieve this, we also need to consider adjustment capabilities that can facilitate the stable operation of electric power systems. That is because the greater the rise in the share of renewable energy, known for its unstable supply, the more complex the equation needed to make these adjustments becomes.

I think this situation may also put renewed attention on energy conservation. However, the energy conservation targets set forth in the Sixth Basic Energy Plan were already quite stringent, and envisioning a scenario where those targets are further stepped up could be quite challenging. Even if we pursue further energy conservation through technology, there's no doubt that it will be quite tough. Having said that, we can never afford to halt economic growth, right?

Yamada: I think there are inherent limitations to how much energy conservation we can achieve through changes in human behavior and thinking alone. That's why I invariably think it is essential to leverage sensors in smart ways and make technical progress on energy conservation through automation and digitalization. Mechanisms linked to market pricing might also be effective, such as automatically adjusting the operation of equipment such as lighting and air conditioning when the price of electricity is low or high.

Kudo: It may be contradictory in terms of the circular economy that Europe is currently pursuing, but I think switching to more energy-efficient products and rebuilding homes with improved environmental performance are also effective measures.

Yamada: That's quite true. There are many products today that you could replace with an equivalent product that consumes less than half the electricity.

The motivation of companies and workers is important

Kudo: Another important consideration is international standardization. Not only ISO but various other standardization bodies are now moving to incorporate carbon neutrality. This is a given considering the worldwide trend toward carbon neutrality, but I think it is somewhat misguided to go in the direction of limiting what can and cannot be done in the form of do's and don'ts.

This is similar to the carbon credits approach that involves companies trading greenhouse gas emission reductions between themselves. There have been some moves to reject the practice as outrageous, and the views of different standardization bodies vary. Indeed, if the goal is zero emissions, it will be difficult through the credit trading framework we have now, and the only credits that will be usable in the future will be negative emission credits, in other words credits for technologies that capture and remove greenhouse gases from the atmosphere. But since negative emission initiatives will not become widespread without credit trading in the first place, I think rejecting credit trading outright is the wrong way to go.

What I want to say is that from a corporate management perspective, being able to reflect action on emissions economically and flexibly in your initiatives will drive the appetite for corporate decarbonization, and that is why I don't think we should implement measures that would impede the willingness of companies to do so. Particularly in the case of Japan, once a reduction target has been set, there is a tendency to take achieving so seriously that it ends up compromising competitiveness. On that point, as I mentioned that the beginning, I think the EU is tackling this in very flexible and strategic ways. I believe we are at a critical juncture where steering the direction of the country in this way is extremely important.

Yamada: It's vital that we pursue carbon neutrality as a growth strategy without demotivating companies and individuals.

Kudo: And to do that we have to examine the details of these growth strategies. The first consideration is whether we can change Japan's economic structure of creating goods and selling them overseas to generate profits. If that can't be changed, that question will be how to maintain the motivation to create good products and sell them. In terms of various regulations and taxation, we also need measures aimed at reducing the burden on industry from an international competitiveness perspective. If companies lose their competitiveness and become discouraged as a result, it will impact the collective fate of Japan. To prevent that eventuality, rather than simply raising wages, it is crucial that we build an attractive labor market in which young people want to work.

Yamada: I agree. However, the question of how to cultivate the literacy and mindset needed from every citizen is also an important proposition.

Kudo: For that to happen, I think it needs to be accompanied by something perceived as real. Far away from Japan, Antarctica's glaciers are breaking away and causing sea levels to rise. When you hear that, it's hard to get a sense of it as something real. On the other hand, the Noto Earthquake demonstrated the catastrophic damage that disasters can inflict on energy infrastructure, forcing many people into extremely uncomfortable situations. These scenes may have made many people realize the extent of what can happen in such emergencies. I got the sense that it is only by connecting emotionally with events in this way that people gain the ability take action toward solving issues.

But I think current policies are all about mitigation, in other words lessening the impact that human activities have on the environment. With that narrow focus, it could give people the impression that even if they don't take action, someone else will. Instead, I think we should be drawing on the lessons learned from disasters while working to develop distributed energy sources, strengthen buildings, build compact cities and otherwise enhance the resiliency or attractiveness of urban systems, including energy. I believe that by drawing people's attention to these endeavors, we can cultivate a mindset in every citizen that supports the move towards carbon neutrality.

In that sense, I have high hopes for what the Hitachi Group can accomplish, given its activities spanning the globe in energy security, action on climate change, and the development of environmental technologies.

Yamada: We will do our best to meet your expectations. Thank you very much for your time today.