Japan's Decarbonized Capacity Auction : Two Steps Forward, Two Steps Sidewise

Japan's Long-Term Decarbonized Capacity Auction (LTDA) is a key policy designed to secure clean electricity and support the nation's emissions reduction targets under its Nationally Determined Contribution (NDC). However, its design may be failing. The auction is supporting existing fossil fuel and nuclear plants instead of new renewables. This approach risks locking in high costs and emissions, slowing down Japan's energy transition, reports Mika Kudo, Principal Researcher at Renewable Energy Institute.

Why It Matters

• If the auction supports fossil fuels with 2040s decarbonization plans, then Japan's power sector emissions will remain high for the next two decades, directly jeopardizing its 2030 goal to reduce emissions by 46% and achieve net-zero by 2050.

• Without strong incentives for new solar and wind, then Japan will miss its target for renewables to constitute 36-38% of its power mix by 2030, increasing dependence on expensive Liquefied Natural Gas (LNG) imports that already account for over 30% of generation.

• High system costs from this auction are passed to consumers, with projected capacity levies estimated to cost tens of billions of yen annually, leading to rising electricity bills for households and businesses, which are already facing higher electricity prices among the member countries of the Organization for Economic Cooperation and Development (OECD).

• This policy affects corporate sustainability goals by slowing the growth of new renewable projects, hindering the ability of companies to achieve 100% renewable power procurement and meet their 2030 Science Based Targets.

Details

Japan's Long-Term Decarbonized Capacity Auction (LTDA), administered by the Organization for Cross-regional Coordination of Transmission Operators (OCCTO), represents a significant policy mechanism designed to ensure future electricity supply through guaranteed payments to power producers developing new clean energy capacity. As outlined in Figure 1, the scheme operates through two fundamental components:

1. Revenue Level: Winning bidders receive a stable, annual capacity revenue payment. This payment is based on their submitted bid price and is designed to cover their project's fixed costs, like construction and financing.

2. Revenue Period: This financial support is locked in for a 20-year period from the start of operation, providing long-term revenue certainty.

However, a critical condition accompanies this support—approximately 90% of any additional income generated from wholesale electricity markets or other schemes must be returned through a "clawback" mechanism. While this structure ensures project viability by covering fixed costs, it substantially limits operators' potential for market-based profits, ultimately influencing the types of projects that participate.

The auction's outcomes reveal a fundamental misalignment with Japan's decarbonization objectives. While the government sought to procure 4 GW and 5 GW of decarbonized capacity in 2023 and 2024, the results show a clear technological and structural bias. Official OCCTO data confirms that the vast majority of winning bids were awarded to incumbent thermal and nuclear utilities—including TEPCO, JERA, and Kansai Electric—for supporting existing assets such as nuclear safety upgrades and fossil fuel retrofits.

As Figure 3 illustrates, one notable exception was battery storage, which attracted robust bidding activity and significantly exceeded procurement targets, reflecting strong market demand for grid flexibility solutions. By contrast, nearly all categories of new renewable generation—particularly solar and wind—received scant interest and failed to meet their allocated capacity caps. This lopsided outcome, further visualized in Figures 2 and 3, underscores how the auction’s design has primarily reinforced the position of traditional power operators, while failing to stimulate the breadth of new renewable investment required for a genuine energy transition.

This allocation pattern indicates the auction is primarily supporting existing infrastructure rather than driving new renewable development. Most concerningly, the decarbonization roadmaps for these thermal plants typically target the 2040s, effectively locking in substantial carbon emissions for the next two decades and fundamentally undermining the program's decarbonization purpose.

This approach creates substantial risks for both consumers and the broader economy.

The auction's multi-price design, which pays winners their individual bid prices rather than establishing a uniform market rate, inherently leads to higher costs than competitive mechanisms would yield. When combined with the predominant selection of expensive nuclear upgrades and fossil fuel retrofits—as opposed to cheaper renewable alternatives—the total system costs become unnecessarily inflated. These elevated costs are ultimately passed through to electricity consumers via capacity levies, potentially resulting in rising electricity bills for years to come.

Furthermore, by failing to stimulate investment in new renewable projects, the scheme misses the opportunity to drive down costs through technological learning and scale economies, thereby maintaining Japan's dependence on costly conventional generation and impairing the country's long-term economic competitiveness in the global transition to clean energy.

Action Items

To navigate the current challenges and steer Japan's energy transition toward a more effective and affordable path, stakeholders must take proactive steps.

• Policymakers should urgently advocate for reforming the LTDA's rules to prioritize truly new renewable and storage projects, rather than subsidizing existing fossil fuel infrastructure with distant decarbonization promises.

• Business leaders must amplify their voice to support policies that genuinely accelerate the build-out of new wind and solar capacity, which is essential for securing affordable clean power to meet corporate climate targets.

• Investors need to rigorously scrutinize projects winning LTDA contracts, carefully evaluating the long-term financial risks associated with high costs and the potential for stranded assets, as well as the environmental risks of supporting emissions that will continue for decades.

Finally, all parties should commit to staying informed on the draft guidelines for the upcoming third auction and actively participate in public comment periods to ensure the scheme is aligned with the goals of a decarbonized, reliable, and cost-effective power system.