[Column Series] Reassessing Japan’s Long-Term Decarbonized Capacity Auctions (No.1) Overview: Questioning the Effectiveness of the Long-Term Decarbonized Capacity Auction

in Japanese

(Japanese original published on 16 July 2025)

The 2025 rainy season began later than usual across Japan, but in western regions, it ended unusually early¹. This has raised expectations of a prolonged period of extreme heat. The increasingly abnormal summer temperatures we’ve been experiencing in recent years are not unrelated to climate change. In such conditions, air conditioning becomes essential for health and comfort — and electricity demand is likely to surge.

To ensure a stable and sustainable power supply, Japan must not only secure sufficient generation capacity to meet demand, but also rapidly cut carbon emissions from the power sector. Accelerating the deployment of renewable energy and phasing out fossil fuel-based power generation are urgent priorities.

Following the Great East Japan Earthquake and the TEPCO’s Fukushima Daiichi nuclear disaster, Japan has pushed forward reforms to its power system. The government reviewed these reforms and, in its evaluation report published in March 2025², identified “promotion of decarbonization of power sources, premised on stable supply” as the foremost challenge and pledged to pursue further reforms.

Yet, this is reflected in the headlines within the report, such as “Establishing a business environment for large-scale decarbonization of power sources” and “Promoting the phase-out of inefficient coal power and decarbonization of thermal power premised on stable supply.” These aims are reflected in Japan’s 7th Strategic Energy Plan, which envisions a 2040 electricity generation mix of approximately 40–50% renewables, around 20% nuclear, and 30–40% thermal power.

One of the key policy tools that is purported to support the “decarbonization of power sources” is the Long-Term Decarbonized Capacity Auction (LTDA)³. Two rounds of bidding have been held so far, and draft guidelines for the third auction have now been released. The auction includes renewables such as solar and wind, as well as battery storage systems which provide the flexibility essential for large-scale renewable integration, offering potential benefits for expanding decarbonized power sources. At the same time, however, there are also concerns. Support for the “decarbonization of thermal power” may in practice leave a large share of CO₂ emissions from large-scale fossil fuel plants unaddressed. Combined with backing for nuclear energy, there is a risk that the power system could become overly costly.

To foster informed discussion, Renewable Energy Institute (REI) will publish a column series highlighting key issues with this auction scheme. This first column offers an overview of the system and its outcomes to date. From the next column onward, we will examine challenges related to specific eligible power generation technologies.

Overview of the LTDA

The LTDA was launched in 2023 with the aim of securing medium- to long-term power supply capacity. In Japan, several mechanisms exist to ensure supply capacity, including the capacity market and the reserved power source procurement (see Table 1).

Table 1: Mechanisms to Ensure Supply Capacity

The capacity market was introduced as part of recent power system restructuring. It pays power generators for their promised supply capacity (measured in kW) to be available in the future. Auctions are held annually for capacity to be delivered four years ahead, and the price paid is determined through a single-price auction. The funding source for these payments, known as the “compensation for capacity resources（capacity levy）”, is collected from retail electricity providers and general transmission and distribution operators, based on the amount of electricity they supply. Ultimately, this cost is passed on to electricity consumers.

The auction’s price ceiling is calculated based on the estimated cost of building new gas-fired power plants. The system was originally designed to trigger new capacity investment if supply becomes tight. However, the capacity market has faced criticism since before its launch in 2020. One key concern is that, because auctions are held annually and prices fluctuate, the system does not provide power producers with long-term revenue certainty⁴.

In response to this issue, the LDTA was introduced as a mechanism to provide long-term visibility and predictability for new investments in power sources. It is designed to ensure a stable stream of revenue over a long period through a single auction, thereby improving the predictability of recovering the total fixed costs.

Aim of the LDTA (from the 2022 summary document):

• Short-term: Measures to prevent power plant retirements. (e.g., procurement of supply capacity and reserves by transmission and distribution operators and others, government assessment of the impact of planned shutdowns on stable supply) • Medium-term: Introduction of a capacity market. (To ensure necessary supply capacity across Japan in response to falling wholesale electricity prices and reduced capacity factors, which have made it difficult for power plants to recover operation and maintenance costs. Scheduled for introduction in FY2024.) • Long-term: Mechanism to secure power generation investments. (With liberalization making long-term investment recovery uncertain, investment in power sources with long lead times and high capital costs has stagnated. A mechanism is needed to ensure stable long-term revenue for new power investments.)

The auction is administered by the Organization for Cross-regional Coordination of Transmission Operators (OCCTO). Bidders submit a price for each power source based on its fixed costs and other relevant factors. Bids are selected from the lowest price upward until the total procurement target is met, and each winner receives the price they bid (a multi-price auction). Price ceilings are set for each generation type based on cost parameters referenced in Japan’s Strategic Energy Plan.

Winning bidders are entitled to receive revenue equivalent to the level of their fixed costs for a period of 20 years. However, if they earn additional income from other electricity markets or services, 90% of that income must be returned to OCCTO (Figure 1).

Figure 1: Illustrative Overview of the LTDA Scheme

Issues observed from Past Operational Results

Two rounds of the LTDA have been conducted so far, and the system has undergone revisions based on the results. The following provides an overview of those outcomes and subsequent changes to the scheme, while also highlighting several emerging concerns with the scheme.

The first issue is its effectiveness in promoting decarbonization. While the auction was originally designed to support the development or replacement of new “decarbonized” power sources, additional slots were created for both existing and new fossil fuel power plants that aim to become “decarbonized” in the future. Following the electricity supply-demand crisis in eastern Japan in 2022, which was reportedly attributed in part to the rising number of thermal power plant closures, an extra category was added for newly built LNG-fired power plants that could be brought online quickly. Although fossil fuel-based generators are required to submit a “decarbonization roadmap”⁵, many of these plans do not achieve full decarbonization until the 2040s. In the meantime, carbon emissions will continue.

The second issue concerns the effectiveness of the scheme in encouraging new investment in power generation. Aside from battery storage, participation has been sluggish, with many auction categories failing to meet their target volumes. One likely reason is that project developers are required to return 90% of their income from other markets, significantly weakening the business case and raising investment risk. At the same time, the scope of support has been extended to include existing nuclear facilities. As will be discussed later, nuclear made up a significant portion of the awarded capacity in the second round, deviating from the auction’s original goal of promoting new clean energy investments.

The third concern is the growing risk of high system costs. Not only does the scheme provide support to relatively expensive generation technologies, but the lack of competitive bidding has also made it difficult to bring prices down through market pressure. There are now proposals to raise the auction’s price ceiling in future rounds to stimulate participation, an approach that could further increase costs.

Summary of Auction Results

In the first and second rounds of the LTDA (fiscal years 2023 and 2024), the government sought to procure 4 GW and 5 GW of “decarbonized power sources”, respectively (Figure 2)⁶. Battery storage drew strong interest in both rounds, with total bids reaching several times the procurement target. However, participation in other generation categories was significantly weaker, with many falling short of their respective caps (Figure 3).

From the second round onward, safety upgrade investments for existing nuclear power plants became eligible for support. As a result, support for existing facilities, especially nuclear, accounted for more than half of both the procured and awarded capacity. Among renewable energy sources, only 200 MW of dedicated biomass and 52 MW of conventional hydro submitted bids.

The separate auction category for dedicated LNG-fired power plants also failed to reach its target volume. While the government sought 6 GW in the first round and over 2 GW in the second, the actual bid volumes were 5.8 GW and 1.3 GW, respectively.

Figure 2: Targeted vs. Awarded Capacity for “Decarbonized Power Sources” and “LNG Power Plant” (FY2023 & FY2024)

Figure 3: Bid and Awarded Capacity by Power Generation Type (FY2023 & FY2024)

The capacity payments awarded to successful bidders are primarily funded through “compensation for capacity resources” (capacity levy) collected mainly from retail electricity providers. The total annual awarded value of the first and second auctions was approximately 400 billion yen each year⁷. According to OCCTO estimates, the net burden of the capacity levy for the auction, after accounting for the required refund of income from other markets (such as wholesale trading and non-fossil value transactions), is expected to be 33.94 billion yen for FY2027 and 69.29 billion yen for FY2028⁸. However, the actual refund amounts vary depending on market conditions, so the levy itself may fluctuate accordingly.

The weighted average awarded price was 580,000 yen/kW/year for decarbonized power and 300,000 yen/kW/year for LNG-fired power in the 2023 auction. In 2024, the averages rose to 680,000 yen/kW/year for decarbonized power and 340,000 yen/kW/year for LNG-fired power⁹.

Changes to Eligible Technologies and Auction Conditions

The design of the auction has been revised each year based on past bidding results and system performance. For decarbonized power sources, the scope of eligibility for battery storage, previously a highly competitive category, has been narrowed, while support for existing power plants has been expanded. Support for fossil fuel power plants that plan to decarbonize in the future has also grown increasingly generous.

Table 2: Changes in Terms of Participation for the LTDA (Examples)

In the upcoming third round, the government plans to procure 5 GW of decarbonized capacity. Within this, the proposed upper limits for each category are: 500 MW for “decarbonized thermal power” (both existing and new facilities), 800 MW for “battery storage, pumped hydro, and long-duration energy storage (LDES),” and 1.5 GW for “safety upgrade investments at existing nuclear power plants.”

Discussions have also begun around the system design for the fourth round and beyond. The current structure, where generators are guaranteed recovery of fixed costs but must return 90% of income earned in other markets, has been criticized for offering little commercial appeal. As a potential alternative, the government is exploring a new framework that would allow operators greater freedom to pursue revenue through their own strategies. In this proposed “insurance-like” model, successful bidders would pay a fee in exchange for the right to receive financial support if their costs or revenues fluctuate significantly. It is still unclear whether this new scheme would coexist with the current one, which generation types would qualify, or how it would be structured in detail.

Conclusion

Securing sufficient power supply and decarbonizing the electricity sector are both achievable by expanding grid infrastructure—such as transmission networks—and enhancing system flexibility to accelerate the large-scale deployment of renewable energy. However, the current direction of the LTDA risks diverging from its original purpose of “encouraging power sector renewal and decarbonization.” Rather than replacing old capacity with new, it may end up preserving existing power sources and slowing progress toward decarbonization.

Battery storage systems, which are essential for providing flexibility, have actively participated in the auction, but their procurement targets are now shrinking. We must take a moment to reconsider whether this scheme is truly advancing decarbonization, or in fact holding it back, and what the long-term consequences of that may be.

In the next installment, we will take a closer look at fossil fuel technologies, carbon capture and storage (CCS), and the role of hydrogen and ammonia.

<Sources>

Ministry of Economy, Trade and Industry,
Advisory Committee for Natural Resources and Energy,
Electricity and Gas Industry Committee,
Subcommittee for Basic Policy on Electricity and Gas, Task Forse on System Design

8th Interim Summary (October 2022)
11th Interim Summary (June 2023)
18th Interim Summary (August 2024)
22nd Interim Summary (Draft) (June 2025)

Column Series: Reassessing Japan’s Long-Term Decarbonized Capacity Auctions

No. 1  Overview: Questioning the Effectiveness of the Long-Term Decarbonized Capacity Auction (18 August 2025)