The once-hot investment boom in Japanese electric power storage is facing a policy adjustment challenge as $26 billion in investments encounter a cooling trend.

As the demand for electricity in Japan begins to recover after a long decline, investors are accelerating the injection of over $2.6 billion into the emerging electricity storage market. However, reform measures aimed at optimizing the matching of supply and demand in the grid and lowering electricity prices may pose challenges to project returns. Japan relies on imported fossil fuels for around 70% of its electricity, and despite efforts to enhance energy security by expanding renewable energy sources in recent years, the decentralized transmission grid system still frequently faces pressure to reduce electricity, especially in the northeast and Kyushu regions. This situation has spurred demand for battery energy storage systems (BESS) - since December 2023, companies have announced at least $2.6 billion in battery energy storage investments, including Hulic's $677 million project disclosed in January of this year and Sumitomo's investment layout of $1.3 billion last year. In a typical case, the 1 gigawatt-hour (GWh) battery project in Fukushima Prefecture, a collaboration between Gurin and Saft, a subsidiary of TotalEnergies, will start in 2026 and expand to 2 GWh in 2028, with a total investment of 91 billion yen (about $618 million) and consisting of 200 container-based units. According to statistics from the Ministry of Economy, Trade, and Industry (METI) of Japan, the declared battery storage capacity connected to the grid by companies in the fiscal year ending in March of this year reached 113 gigawatts, nearly double compared to the same period last year, with hotspots concentrated in the northeast, Tokyo, Kyushu, and the San'in-San'yo region - these regions have become investment focuses due to their abundant renewable energy sources and frequent power restrictions. Rystad Energy analyst Batbayar pointed out that Japan's BESS base is only 0.23 gigawatts, significantly lower than China (75 gigawatts) and the United States (26 gigawatts), indicating significant growth potential. LTDA Reform in Japan Impacts Storage Prospects However, adjustments to the Long-Term Decarbonization Capacity Auctions (LTDA) by the government may weaken the attractiveness of energy storage. Introduced in 2023, the LTDA was intended to promote the development of renewable energy, but after the first round of auctions, the government expanded the participation of fossil fuels and nuclear energy sources. According to the plans of the Ministry of Economy, Trade, and Industry (METI) of Japan, in the next round of auctions, the quota for battery storage capacity will be significantly reduced to 800 megawatts, much lower than the previous 1.7 gigawatts; meanwhile, the natural gas power generation capacity will increase from 1.3 gigawatts to 3 gigawatts, and nuclear power generation capacity will reach 1.5 gigawatts. More importantly, the discharge duration requirement for BESS has been extended from 3-6 hours to at least 6 hours. METI explains that this adjustment is to match the needs of integrating more intermittent renewable energy sources into the grid, reduce power restrictions, smooth the flow of electricity in the grid, and ultimately reduce electricity prices for end-users. However, battery companies generally prefer short-duration batteries because they can profit from capturing price differences during peak hours. For example, Eku Energy, a battery storage developer planning to build a station in Kyushu, Kentaro Ono, the Managing Director of its Japanese subsidiary, pointed out that the 6-hour discharge requirement means that operators who originally deployed a 3-hour system need to apply for additional land for equipment placement, and if relocation is required, they need to obtain a new grid connection permit again, not only increasing short-term compliance costs, but also because the policy adjustment window is only 5-6 months, companies may not be able to meet the registration deadline for the October auction. The project leader of Eku Energy in Kyushu stated that the 6-hour discharge requirement forces the company to reconsider equipment layout, and the tight policy adjustment timeframe may affect registration for the October auction. Analysts are more concerned that the policies deviate from the initial purpose of decarbonization. Mika Kudo, Chief Researcher at the Institute of Renewable Energy in Japan, bluntly stated that extending the discharge duration may actually allow traditional generation assets to be retained rather than promoting the replacement of old facilities with new ones. Mahdi Behrangrad, Head of the Energy Storage Department at Pacifico Energy, emphasized that the LTDA adjustments essentially support existing generation assets rather than storage technology, which may dampen investor enthusiasm - after all, global capital has many choices, and Japan needs to prove its attractiveness. "We find it difficult to explain: why Japan is the best investment destination among many markets?"