In January, Japan marked a significant milestone in the country’s capacity market with the launch of a “long-term power decarbonization auction system” that seeks to partly sponsor construction of new clean electricity generation facilities. If successful, it will help drive investments in clean energy and help Japan reach net-zero climate targets.

The new system’s main feature is providing a guaranteed 20-year cash flow mechanism for power sources such as solar, onshore and offshore wind power, hydrogen, storage batteries, nuclear, hydro, geothermal – and, temporarily, LNG. Such a guaranteed revenue stream is precisely what energy companies need in order to be confident to make further investments in the energy transition.

While an auction system that allows dispersing of decarbonization funds beyond renewables might raise some eyebrows, METI is confident it will help to improve grid stability and resilience in times of shortage, and reduce emissions. The terms of the system ensure that any thermal power that gets funded will find a way to abate its emissions within a certain period.

With 2030 interim decarbonization targets not far on the horizon, the government is keen to jump-start the rollout of cleaner energy capacity while also retaining a way to help replace or revamp Japan’s baseload thermal generators. The new auction was launched less than a year after METI officially announced it in April 2023, indicating the urgency of the matter. The results of the first auction will show if any energy source is favored above others. Preliminary conditions, however, indicate a strong readiness to support energy storage.