Smart Grid Policy: Implementing the Cabinet-led New Growth Strategy and Basic Energy Plan

Hiroshi Takahashi
Research Fellow

November 15, 2010 (Monday)

Two important policies related to smart grids were approved by the Cabinet on June 18, 2010. One is the New Growth Strategy formulated by the National Policy Unit; the other is the Basic Energy Plan established by the Ministry of Economy, Trade and Industry. While both call for the promotion of smart grids, they diverge significantly in specific content.

1. Smart grid policy in the New Growth Strategy

Following the change of administrations in September 2009, the National Policy Unit was newly established within the Cabinet Secretariat as the prime minister’s brain trust. This Unit has been formulating growth strategy policy since December of last year, and the comprehensive economic policy　which the DPJ Cabinet calls the “Revitalizing Japan Scenario” has only recently been finished. With the “Seven Strategic Areas” and the “21 National Strategic Projects,” the scenario tries too hard to please everyone to be called a “strategy.” Nevertheless, it does raise the “Green Innovation,” and in it touches on smart grids. Since the 2008 US election period, the Obama Administration has clearly placed “investment in a smart grid” as an “essential innovation” that includes “smart metering, [and] distributed storage” (1). That environmental and energy policy has also become recognized in Japan as not just for environmental protection but also as a method for economic growth through innovation should be recognized as a first step forward.

That being said, it hardly feels as if smart grids are a part of “green innovation” at all. For example, “realize efficient power supply and demand and spark new demand for household-related devices through a Japanese smart grid” is, in policy terms, tantamount to saying nothing. A description of smart grids is lacking in the “21 National Strategy Projects” and “Roadmap” sections in the latter half of the New Growth Strategy, and it is unclear what the government intends to do. Specifics such as regulation reform are touched on with regards to the “rapid growth of renewable energy”; in comparison, interest in smart grids is undeniably tepid. Of course, renewable energy could indirectly contribute to the spread of a smart grid if the introduction of distributed power production continues to advance. This kind of language, however, suggests that the National Policy Unit gives priority to the goal of 25% greenhouse gas reduction and emphasizes renewable energy-promoting policy as a means to this end. Smart grids, however, are no more than one measure for achieving this goal (2).

As a researcher of smart grid policy, I made a small contribution in laying the groundwork for the growth strategy policy formulated by this National Policy Unit. In other words, I have had the opportunity to go to the NPU and recommend policy that Japan should undertake based on various other countries’ endeavors towards establishing smart grids. The most important point was that smart grids are not simply an incremental change of power grids, but rather they are a historical technological innovation that will become a new social infrastructure encompassing solar power and electric vehicles. For this reason, smart grids should be regarded as a principle that integrates various policies to realize economic growth. The adoption of this kind of idea, however, had already been rendered difficult when the loosely-correlated “Six Strategic Areas” was announced in the “New Growth Strategy (Basic Policies)” in December 2009 (3). Furthermore, was this New Growth Strategy made for what was the Hatoyama Administration's top priority of environmental protection, or for the cultivation of individual industries, or for national-scale innovation? The original goal has become indiscernible.

2. Smart grid policy in the Basic Energy Plan

The Basic Energy Plan, the other policy approved by the Cabinet on June 18, “makes tangible the basic principles for energy policy.” The Ministry of Economy, Trade and Industry is required to review this plan every three years in accordance with the Basic Laws on Energy Policy. The words “smart grid” were nowhere to be seen in 2007’s Basic Energy Plan, but are a focus of attention in the latest incarnation.

In other words, the section on “construction of next generation energy and social systems” specifies the installation of smart grids, and furthermore “to strive to realize smart communities that intercombine and transform transportation systems and citizens’ lifestyles.” These by themselves are not especially different from the New Growth Strategy, but the point of interest is the liberalization of the electricity market and introduction of new services to achieve these goals.

• Strive to in principle introduce smart meters to all consumers as early as possible in the 2020s.
• Focus on making it possible for consumers to understand and manage in an integrated fashion all their own supply and demand information on electricity, gas, and water.
• While ensuring the security and proper management of personal information, develop an environment where third-parties are able to use energy supply and demand information.
• Create various services that utilize energy supply and demand information, and stimulate domestic demand while also securing foreign demand.

To paraphrase the preceding points, first smart meters will be installed in all homes so as not to fall behind the US and Europe. Though unspecified, this is on the assumption that the government provides some kind of support and directs power companies to provide such efforts. That said, as this is roughly a 10-year goal, Japan needs no special efforts compared to other countries; the burden on power companies, who are already required by the Measurement Act to change electricity meters every 10 years, will not be particularly great.

Second, the information recorded on public utility meters, which are currently the property of their respective providers, is monopolistically controlled by those providers for the purpose of bill collection. This information will be made available to consumers, which might seem obvious from the point of view of electricity users, but is seen as a great interference and undesired problem by providers. Like the clash between hospitals, which physically create and manage such records, and patients, who pay the service fees (medical fees) and provide their private information, over the electronic use of medical record information, this conflict could become a key point in the utilization of smart meters.

This also suggests the potential for integrating public utility meters, which are currently installed separately according to each Business Act. From the consumer’s perspective, there is no need to have three different meters installed in the home. It is already possible from a technological standpoint to combine electricity, gas, and water into one meter; movements towards making integrated smart meters are already underway overseas. The integration of meters could have repercussions of a restructuring that crosses boundaries within the energy sector—the Basic Energy Plan notes the “importance of dealing with multiple energies and, in line with the specific characteristics of the client and region, encouraging the formation of an integrated energy business entity (gas and power, oil and gas, and so forth) that could optimally provide combined energy services.”

Third, this usage history information will be made available to not only consumers, but third-party service providers as well. Releasing electricity usage history information to general consumer households alone will at most allow each household to try to save energy. Entrusting this information to expert service providers, on the other hand, would potentially have great effect, and a new service market would grow as well. This means that newcomers would compete over content and price of electricity (providing) services, which have until now been monopolized regionally by power companies in a one-way manner that allowed for no alternative.

The fourth point organizes the preceding three points and declares that these kinds of EMS service will be established in earnest.

3. Innovativeness of the Basic Energy Plan

In this way, the Basic Energy Plan describes smart grids in great detail and includes much never-before-seen reformative content. As noted in the May 21st opinion article, the essence of smart grids is in services, and therefore policy to liberalize the electricity market is paramount. Existing power companies, however, strongly resist such policy, and frankly METI’s Agency for Natural Resources and Energy, which oversees the power industry, has done well to get this far. Since both the Basic Energy Plan and the New Growth Strategy are policies relating to smart grids, why is the former considered cutting-edge while the latter was received so unenthusiastically?

The first reason that comes to mind is that while the Basic Energy Plan was created by METI, which supervises energy, the New Growth Strategy was established by the Cabinet, and therefore its focus on energy is limited and its content cannot go beyond the abstract. It is also a fact that since the New Growth Strategy is 54 pages excluding the “Roadmap” and the Basic Energy Plan is 65 pages, the disparity in space dedicated to smart grids is unavoidable. I believe, however, that this is not the underlying reason, and, as noted in the June 11th opinion article, that the methodology used by the National Policy Unit in creating the New Growth Strategy is greatly flawed.

I have been researching Cabinet-led policymaking for some time (4), and the value of the Cabinet going to the trouble of getting involved in “national strategy” in a parliamentary system of government where ministries and agencies oversee different areas lies in its creating the kind of advanced reform that would go unrealized if left to the ministries alone. The main significance of assisting bodies under the Cabinet managing to develop, for example, the Intellectual Property Strategy and the e-Japan Strategy was that they were able to implement policy resisted by the overseeing ministries through the strength of the Cabinet (5). In this instance, therefore, the National Policy Unit was expected to counter those ministries skeptical of reform and draft innovative policy.

The National Policy Unit failed to meet this expectation, however, because creating the New Growth Strategy became an end in itself, and they failed to accomplish “selection and concentration,” the most important parts of the strategy. Given the current national situation, the National Policy Unit, ordered to develop a growth strategy, had no choice but to start its policy formation with interviews of the various ministries without any strategic decision on where to concentrate resources. Inevitably, the New Growth Strategy became a please-everyone policy with no unifying principle that organically connects each area of strategy to the others, and smart grids became nothing more than a detail of a detail.

Conversely, the Basic Energy Plan created by METI, which oversees energy, consists of unexpectedly reform-oriented content. For some time I have criticized the fact that even within METI the effective progress of smart grid policy has been hindered by red tape, but I would like to change my opinion on this matter and reevaluate it straightforwardly. According to my estimation, from November, 2009, METI gathered together a cross-section of the myriad energy-related councils and research groups and established the “Committee for next generation energy and society systems,” likely in an effort to reduce red tape and designate smart grids as an area of particular emphasis. It is therefore probable that METI has incorporated a wide variety of opinions, including those of the Agency for Natural Resources and Energy and the Information Policy Unit, into its Basic Energy Plan.

Of course, the increasing global importance of smart grids and the fact that the idea of infrastructure export, which is such a promising industry for Japanese companies, is being widely recognized are encouraging reforms such as those mentioned above. Japanese enterprises are on the global cutting edge of lithium ion batteries, solar power, electric vehicles, and other technologies that are elements of smart grid technology, but from the standpoint of building a new network infrastructure that integrates those technologies, Japan is far from cutting-edge. We must well understand that we are at the center of the maelstrom of a global paradigm shift in energy infrastructure and formulate necessary reforms of competitive conditions and regulations to be in-step with the new industry framework from the beginning.

4. Executing Cabinet-led Smart Grid Policy

One might think that since the Basic Energy Plan is so advanced, all that is left is to leave its execution to METI. This would be completely wrong. For instance, the aforementioned smart meter liberalization policy may deserve appreciation, but nothing has yet been executed, and there are no clear deadlines except for that of introduction. In order to fully realize smart grids, the electricity market must be made completely open (right down to the household level) and the liberalization of electric utility rates (dynamic pricing) is absolutely essential. However, the Agency for Natural Resources and Energy well knows that all this will not happen overnight. It is not impossible to imagine then that the electric companies will go as far as approving of the introduction of smart meters, which holds few disadvantages for them, but will not accede to the liberalization of the electricity market.

Furthermore, the policy for constructing a new social infrastructure is an inter-ministry task that involves motor vehicle transportation, communications, forestry, and biomass and requires top-down leadership in order to be realized. It seems that METI recognizes this, and, regarding the development of smart grids, writes in its Basic Energy Plan that it will “work closely with the Cabinet Secretariat, the Ministry of Land, Infrastructure, Transport and Tourism (MLIT), the Ministry of the Environment (MOE), the Ministry of Internal Affairs and Communications (MIC), the Ministry of Agriculture, Forestry and Fisheries (MAFF), the Ministry of Education, Culture, Sports, Science and Technology (MEXT) to concentrate on related measures and policies.”

We can therefore conclude that the Cabinet’s leadership is vital to the realization of smart grids. Smart grids were not paid much attention in the New Growth Strategy, but we may take it that the details have been entrusted to METI, and the Cabinet should take responsibility to issue instructions to the various related ministries and agencies to execute the strategy. Specifically, a full-time unit dedicated to smart grids should be created within the National Policy Unit; this unit will act as a head office to further formulate policy and concentrate budget on smart grids, as well as arbitrate inter-ministry conflict and eliminate overlapping investment. An advisory council consisting of external experts should be set up for this purpose.

At the beginning of the New Growth Strategy (Basic Policies) presented on December 30, 2009, Naoto Kan, who at the time was the Minister in Charge of National Strategy, condemned the “essence of failure” of the various proposed strategies of the LDP administration, calling it a “lack of political leadership and implementation.” Kan, as Prime Minister, is now the chief executive of implementing the New Growth Strategy and the Basic Energy Plan. As a result of losing in the Upper House election, the Prime Minister Kan of today and his office seem somewhat dejected. Consequently, all we hear these days are backward policy changes such as reducing the functions of the National Policy Unit—so that it now specializes in proposing policy to the Prime Minister personally—and removing it from involvement in drawing up the budget. Leaders must never say die, no matter the straits in which they find themselves; they must advance forward. This holds true all the more so for the prime minister of a country.

I truly hope that the Cabinet together with the related ministries and agencies will work strongly toward executing smart grid policy.

Notes

(1) “Barack Obama and Joe Biden: New Energy for America,” March, 2003. Investment aid and pilot projects, which were implemented after President Obama took office, are proposed here in detail.

(2) In the items of “Rapid Growth of Renewable Energy,” the growths of “formulation of system operation rules” and expansion of “grid interconnection,” which both relate to smart grids, are touched upon, but they are considered only as methods for spreading distributed power production.

(3) Being well aware of this point, I proposed individual regulation reforms related to smart grids to the National Policy Unit, but unfortunately these were not reflected in the drafted policy.

(4) For example, see Takahashi (2008), “The Role of Advisory Bodies in Prime Minister-led Politics,” Journal of Public Policy Studies.

(5) A typical example of this is the Postal Services Privatization Bill drawn up by the Cabinet Secretariat in 2005.