Japan is getting serious about diversifying into biofuels and non-hydrocarbon sources of power generation. The country's parliament, the Diet, on July 1 passed a legislation that provides for imposing fines of up to Yen 1 million or $10,500 on companies failing to meet the minimum government requirements of non-fossil fuel consumption.
The new regulation, expected to come into force within two years, leaves out smaller players, who might not have the financial capability to make the necessary changes. The government is set to kick off a series of panel discussions August 3 to fill in the details in the broad framework that has been agreed and define the legal obligations of the companies that will be covered by the regulation.
Japan is keen to lower its dependence on hydrocarbon fuels, which account for more than 80% of its energy consumption.
The new law will require power companies to increase the collective proportion of nuclear, solar and hydropower generation to more than 50% by 2020 from the current levels of around 40%. Nuclear power accounted for 31% of Japanese power generation at the March 2007 close of Japan's 2006-07 fiscal year, while hydropower contributed 9%. There is currently no solar power generation in Japan.
The new regulation also aims to get oil and gas companies to increase their use of biofuels and biogas and increase the efficiency of their own oil and gas consumption, though specific targets have yet to be set.
The Yen 1 million fine is regarded as mild, compared with the heavy investment required for facilities to meet the new biofuel standards. But the thinking within the government is that companies will try to meet the new targets to avoid being seen as violating laws.
As the new law will not be enforced until 2011, it is unlikely to have an impact on Japan's current commitment to consume 500,000 kl/year (8,616 b/d) crude equivalent of biofuels in the fiscal year to March 2011 under its Kyoto commitments. Japan has agreed to reduce its greenhouse gas emissions by 6% from 1990 levels between 2008 and 2012 under the Kyoto Protocol.
Under the current plan, the Petroleum Association of Japan, which groups all Japanese refiners, has committed to consuming 840,000 kiloliters annually of ETBE-blended gasoline, which would require 210,000 kl/year crude equivalent of bioethanol, in fiscal 2009-2010.
It remains unclear how Japan will make good on consuming another 290,000 kl/year crude equivalent of ethanol to achieve its target for 2010-2011, as the PAJ does not have any plans to increase its volumes. Most likely, the country will fall short of its commitment.
Japanese regulations introduced in 2003 permit up to 3% ethanol blending in gasoline but the country is constrained by limited availability of the biofuel; most supply comes from government-funded pilot projects.
When Japan commits to new targets under the post-Kyoto Protocol framework to be defined under UN-led negotiations in December, the world's third largest oil consumer behind the US and China will likely have to pledge to consume more than 500,000 kl/year of biofuels.
Last month, the country finalized a plan to replace 600,000 kl/year of crude consumption with biofuels by 2020 as a new target for the post-Kyoto Protocol commitments.
The government is hopeful that cellulosic ethanol will pump up domestic production volumes to around 610,000 kl/year in 2020, guaranteeing a local supply for much of the new requirement.
However, cost will be key. Japan's domestically produced biofuels have been costlier than imports so far. Local companies will have to choose between the indigenous product and imports, depending on the economics. But what they won't have a choice in is to meet the new minimum biofuel use requirements.
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