Ensuring Investment Predictability for Decarbonized Power Sources - Long-term Decarbonized Power Source Auction -

In the past, under the cost-of-service regulation framework, generation companies were able to anticipate long-term cost recovery. However, the electricity system reform initiated after the 2011 Great East Japan Earthquake and subsequent rolling blackouts led to full retail liberalization in 2016. While liberalization brought benefits such as increased retail competition, the growing reliance on short-term price formation through power markets heightened price volatility, making long-term investment recovery increasingly uncertain. As a result, development of new power sources requiring large upfront investments has stalled. Although a capacity market was introduced in FY2020 to secure generation capacity, procurement covers only a single delivery year and is conducted four years ahead of the delivery year. As a result, most awarded capacity comes from existing power plants. Consequently, the scheme has not provided sufficient return stability to stimulate new power-generation investment.

To address these issues, the Long-term Decarbonized Power Source Auction was established in FY2023. The scheme aims to promote power-source development by guaranteeing multiyear capacity returns for new investments, thereby enhancing long-term investment predictability. While the scheme primarily targets new decarbonized power sources to support

Japan’s 2050 carbon-neutral goal, it also temporarily covers new and replacement LNG-fired power projects to address near-term supply shortages arising from the increasing number of shutdowns and retirements of thermal power plants. In the first and second auctions held in

FY2023 and FY2024, battery storage bids far exceeded the offered volumes, whereas bids for large-scale decarbonized power sources and dedicated LNG-fired generation fell short, highlighting several operational issues within the scheme.

This paper reviews the mechanisms and challenges of the Long-term Decarbonized Power

Source Auction as a means of securing investment predictability for decarbonized power in

Japan. It also reviews related policy measures and compares them with overseas schemes to propose future directions for achieving both stable electricity supply and decarbonization.