Japan: Strong fundamentals for energy storage drive expectations despite challenges

“Energy storage is expected to play a critical role in stabilising the grid and integrating more renewable energy sources into the power mix.”

Kelley is speaking to Energy-Storage.news shortly after the US-headquartered energy storage technology and software services provider signed a deal with Japanese energy trading and aggregation specialist ENERES Corporation.

The fundamental drivers are there and strong. As we heard in the previous instalment of this deep-dive series from representatives of developer Eku Energy and BloombergNEF (BNEF) analysts, the Japanese government has set out its commitment to promoting and supporting the uptake of energy storage as part of its ‘Green Transformation’ (‘GX’) policy strategy.

However, while government subsidy schemes and a low-carbon capacity market are in place, as is the ability to stack battery energy storage system (BESS) revenues from wholesale energy trading and ancillary services, according to BNEF Japan analyst Umer Sadiq, the market design and regulations are in a near-continuous state of evolution.

With the Long-Term Decarbonisation Auction (LTDA) capacity market mechanism potentially changing to a 6-hour-plus long-duration energy storage (LDES) procurement only and power market design in flux, it is tricky for merchant business models to get project financing.

BNEF expects installations to exceed 1.5GW annually before 2030

“I don’t think there is a consensus in the market yet,” says Hirofumi Sho, Eku Energy head of investment and origination for Japan, on how much energy storage the country’s grid will need to achieve its renewable energy and decarbonisation goals.

There is “quite a spread” between analyses of different parties, be they government entities, market consultants or academic experts at universities, Sho says. Unlike some other countries, there is no formal target or central modelling of the gigawatts and gigawatt-hours the electricity networks will require.

“However, we believe the transformation is happening, and the Japanese government is committed to carbon net zero. The battery is a key critical generator for the Japanese power mix.”

BNEF creates market forecasts for the near term, meaning three to five years ahead, considering announced projects, their development status, and the firm’s expectations of when those will come online.

It has also been looking longer term up to about 2035, making its projections based on factors like forecasted renewable energy additions, the expected power mix, and others, including government policies.

From 2027, projects awarded contracts through the Long-Term Decarbonisation Auction (LTDA) capacity market mechanism will go into operation, adding around 1.3GW. The following auctions are expected to procure lower volumes, around 800MW of new storage in 2029 and 2030.

BNEF also counts projects that have been awarded subsidies through two schemes: one hosted by the Japanese government’s Ministry of Economy, Trade and Industry (METI), which offers up to 50% of project capex, and the other from the Tokyo Metropolitan Government, which offers between one-third and two-thirds of capex, depending on specific criteria.

BNEF global energy storage analyst Isshu Kikuma says that from 2026, grid-scale battery storage installations are expected to exceed 1GW annually, increasing to at least 1.5GW per year in the latter part of this decade.

Other factors that might affect the numbers are the potential uptake of new pumped hydro facilities—Japan already has a fleet of about 27GW of PHES—and other technologies, which could include aggregated virtual power plants (VPPs). However, Kikuma says that despite a lot of interest in VPPs over several years, customer acquisition has proven difficult in Japan as it has in other markets.  

Emerging drivers and opportunities

Eku Energy’s Japan managing director, Kentaro Ono, adds that solar power output curtailment is increasing in the southern Kyushu region, which has an abundance of solar PV.

He says curtailment is expanding to other transmission system operator (TSO) areas in Chugoku, Shikoku, Tohoku, and potentially Tokyo during this year. While today, battery developers’ main revenue stream is in the primary balancing market, the drivers are there for broader opportunities.

“Personally, I think that the value of batteries will change not only from balancing market support, but also to time shifting for the volume [of energy] itself. Batteries can reduce those output curtailments because during the daytime, an excess amount of solar power generation charges into the remotely installed grid-scale battery,” Ono says.

“Which means, if we want to increase [the uptake of] solar power, energy storage is, I think, a must.”

Fluence’s Andrew Kelley says other forms of grid support that battery storage can provide are likely to become more desirable in Japan too. One example is the type of ‘Gridbooster’ project, aka storage-as-a-transmission asset, that Fluence is carrying out for TSOs in Germany, where storage increases carrying capacity and provides redundancy to transmission lines.

Today, BNEF’s Umer Sadiq says, ancillary services prices and battery storage returns are very high, registering an average of ¥172(US$1.18) per kW/30 minutes for day-ahead settlements in the Tertiary-2 (III-2) balancing segment during the first half of the 2025 fiscal year. There are a total of four ancillary services markets in Japan, with the newest launched in April 2024. However, as we have seen in other regions around the world, ancillary services prices can come down as new competitors enter the market.

“If you are currently in the market, because the prices are so high, you can get a very high level of revenues,” Sadiq says.

“It’s just that, because the battery projects are not here for two to three years, they are here for 20 years and some of these developers want to build their next and next projects… do they consider current ancillary services prices or a future that is very hard to predict based on the difference in how the policy is going to be, how the power mix is going to look like?”

“Once we get enough balancing capacity in the market, the prices should come down and that’s when some of these developers should probably think about the usual way of how to make sure that they get money out of the wholesale power market, through efficient charging and discharging and making sure that the money from the merchant model is coming in.”

Biggest bottleneck in the market

While the market continues to open up and is attracting more investment than ever before, Eku Energy’s Kentaro Ono says that the remaining challenges include the high cost of the battery value chain in Japan.

This spans the whole spectrum from equipment procurement to securing land and grid connections, engineering, procurement and construction (EPC) and operations and maintenance (O&M).

With the market in its early stages still, Eku Energy needs to focus as much as it can on the development side, i.e., land and grid connections, as much as it can, Ono says.

TSOs are receiving “a lot of grid connection applications,” and then grid connection studies and physical interconnection works are also time-consuming.

“What companies are struggling with is that first of all, it takes time to get the response from TSOs, and then even when they comment back, they might say there’s no availability,” BNEF’S Isshu Kikuma says.

“Which basically means, if they want to connect, they have to pay for the grid reinforcement cost, which is very expensive, and adds to the cost of the project.”

Sadiq says the grid connection queue is probably the biggest bottleneck in the market for projects that are looking to go into near-term commercial operation. Some efforts are being made to create fast-track processes, although the analyst says it is yet to be seen if they will pay off.

On the other hand, with more than 70% of Japan’s topography mountainous, and most of that heavily forested, much of the favourable land space is registered for agricultural use.

At Solar Media’s Energy Storage Summit Australia earlier this year, developers said that suitable land for sites in Australia’s National Electricity Market (NEM) is being quickly acquired by developers in a “land grab”. Umer Sadiq says that is happening in Japan now, too.  

“We have heard from developers that sometimes land has been bought by other people in the market, knowing that there might be a potential energy storage project, and they want to resell that,” Sadiq says.

“Because there is such a long queue and there are a lot of people who want to put their projects in as fast as possible, there are also people coming in who are trying to benefit from that.”

Start small, think big

Due to the challenges, and the nascency of the market in general, many of the projects developers and investors are starting with are relatively small. For those trading in wholesale markets in particular, a 2MW/8MWh project size is fairly typical.

A caveat is that those competing in the LTDA capacity market have to be of a minimum size of at least 30MW. There are also larger projects based on different business models, a notable example being Eku Energy’s Hirohara BESS, for which the developer has a tolling agreement with utility Tokyo Gas.

Nonetheless, the 2MW, 4-hour duration project is likely the most common BESS project in Japan today. It also requires smaller plots of land and grid connection points.

It’s also quite common for energy storage developers to begin small and work toward larger projects: Texas’ ERCOT market is a good example of this, where many began with 10MW sites in the early 2020s and are now into the tens or even hundreds of megawatts per site.

“Most of these developers are still learning, especially because there are not a lot of developers who have developed energy storage projects [in Japan], not only constructing them, but also how to operate them: aggregation, how to make sure that you have that revenue upside as well,” Umer Sadiq says.

“Most of these developers are going with their first couple of projects in different power market areas and trying to understand the market. You might have seen very big announcements that by, let’s say 2031, developers would want however much capacity online, but for now, they’re just trying to understand the market, have good business-to-business relationships, but also business-to-local community relationships as well, and try to make sure that this new thing gets accepted into society as well.”