Japan’s solar photovoltaic (PV) industry would seem enviable to countries committed to a successful energy transition. According to Energy Monitor’s parent company, GlobalData, Japan’s solar PV capacity has increased more than 18-fold since the country’s commitment to diversify its electricity mix away from nuclear power after the 2011 Fukushima disaster; that led Japan to take all 54 of its nuclear plants offline for safety checks.

Japan has long been a leader in the solar power industry, and this year it made headlines as the first Asian country to deploy floating solar systems. With an impressive installed solar capacity that, according to GlobalData, ranks below only China and the US, Japan has proven itself a top player in the field. The country is also home to some of the most innovative companies in the solar PV sector, with Panasonic and Mitsubishi the global leaders by number of patents held.

However, a closer look at Japan's solar PV sector reveals a lack of progress in other parts of the business. Despite being home to some of the most innovative companies in the field, Japanese companies lag behind their global peers when it comes to manufacturing solar technology at scale. Data from GlobalData shows that the current top ten solar manufacturing companies are predominantly Chinese.

Overly generous subsidies

Japan’s surge in installed solar capacity can be attributed to the introduction of a renewable energy feed-in tariff (FiT) in 2012, following the 2011 Fukushima disaster. The subsidy of Y40 ($0.37) per kilowatt-hour (kWh) for solar power was higher than the global average (and double the UK rate) and appealed to the domestic market. There was a surge in demand for renewables, with 1.2 million applications by 2015 – mostly for solar PV installations. If all proposed projects went ahead, Japan could switch off most of its nuclear power stations for good, Mika Ohbayashi from the Japan Renewable Energy Foundation, a Tokyo-based think tank, told Japan Today at the time.

However, power utilities struggled to meet the immense demand for grid connections. They revolted, saying they were overwhelmed and blocked access to the grid. Kyushu Electric Power, which supplies electricity to nine million households in southern Japan, stopped accepting new applications for grid connections in September 2015 after 72,000 solar power producers rushed to beat a cut in the guaranteed tariff to Y27/kWh.

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By GlobalData

“The [feed-in] tariffs [left] a huge portion of the solar energy [industry] in shambles,” says Irina Tsukerman, a geopolitical analyst and president of New York advisory Scarab Rising. “The movement in that direction was too drastic, leaving power utilities overwhelmed to the point of revolt. All of this resulted in supply lines becoming unreliable, and as a result of the tariff system being imposed too broadly, the [retail electricity] prices overall skyrocketed and the utilities ended up being underpaid or not paid at all.”

Japan’s FiTs are much lower now, with solar projects between 10kW and 50kW eligible for Y11/kWh and projects between 50kW and 250kW for Y10/kWh for the 2022–23 financial year. Residential solar projects (<10kW) can get Y17/kWh.

Experts say Japan's government should have anticipated the problems with its push for renewables and taken steps to avoid them. Germany triggered a similar rush of small solar PV producers between 2009 and 2012 by offering them guaranteed prices for 20 years and priority access to the grid. This helped increase clean energy's share of Germany's power production to more than 25% by 2014, although it also led to higher electricity bills as the guaranteed payments cost consumers €16bn ($17.09bn) in 2013, according to the Economist.

Japan's solar manufacturing industry

Japan is committed to increasing renewables' share of electricity generation to 20% by 2030 – almost double its pre-2011 share. In March 2022, the government announced a gradual transition from its FiT scheme to a feed-in-premium (FiP) scheme for renewable energy.

Because a FiT scheme offers a fixed price for all electricity generated, generators are decoupled from the market and have no incentive to increase electricity generation during peak hours or reduce production at times of oversupply.

Under the FiP, the revenue received by the generator is expressly linked to the market price; the premium it gets is calculated as a margin that is added to the wholesale market price or the agreed purchase price.

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Japan's solar industry needs more than sensible tariffs, however. “Tariffs are not the only reason solar production is lagging behind general energy need,” says Tsukerman. “The main reason for that is simply that the solar technology available is not sufficient to produce the amounts [of electricity] that could substitute for most of the fossil fuel-based projects in Japan.”

Mika Ohbayashi, director at the Renewable Energy Institute (formerly known as the Japan Renewable Energy Foundation in English), attributes the lack of locally manufactured solar technology to Japan's stunted production of silicon, a natural semiconductor and key component of solar modules. "Unfortunately, there’s been no [silicon] production company in Japan since 1986," she says. "Japanese solar module-makers are shrinking. We should [rebuild the domestic solar manufacturing market] from scratch. [An immediate solution would be to use] imported silicon for solar PV modules made in Japan."

Reinventing the semiconductor business

Japan was once a giant in the semiconductor industry, but a failure to adapt to a changing business model from integrated companies that designed and manufactured semiconductors to highly specialised ones that either designed or manufactured them, put its industry in decline.

The nail in the coffin came with the Covid-19 pandemic, during which many Japanese chip companies were forced to shut down despite a surge in demand for electronics by consumers stuck at home.

Although Japanese technology companies are no longer producing most of the mass-market semiconductors (chips) used in electronic devices globally, they are gradually strengthening their grip on the development and production of advanced materials needed for advanced chip technology.

In the past year, the Japanese government has invested billions of dollars into its domestic chip industry and is providing large subsidies for joint ventures with companies from Taiwan, a crucial semiconductor supplier, and the US.

Capitalising on China-US rivalry

Chinese solar panel manufacturers are busily exporting to Japan and the rest of the world. The International Energy Agency has pointed out that China produces around 95% of the polysilicon, ingot and wafer components used in solar panels. Through 2025, the supply of essential components for the manufacture of solar panels could be virtually entirely dependent on China, it says.

However, geopolitical tensions between China and the US mean Japan could position itself to replace Chinese PV imports to the US.

A December 2022 market report by US industry group the Solar Energy Industries Association and research company Wood Mackenzie found that US solar installations could fall by 23% this year because of a China goods ban following concerns over forced labour. The ban has stalled panel imports from China's Xinjiang region, one of the main sources of US solar equipment and home to internment camps where China has held hundreds of thousands of Uyghurs and other ethnic minorities.

US Customs and Border Protection seized 1,053 shipments of solar energy equipment from the region worth hundreds of millions of dollars between 21 June, when the Uyghur Forced Labor Protection Act went into effect, and 25 October 2022, it told Reuters.

At a time when solar companies are pursuing generous subsidies in the Inflation Reduction Act, the report’s findings highlight the opportunity to fill an up-swell in demand.

“Japan has the potential to displace China [in the global solar supply chain], but its economic policies have prevented it from doing so and [its PV systems] are currently more expensive than China's product,” says Tsukerman. The Japanese solar industry will need to bolster its manufacturing capacity to capitalise on a growing market at home and abroad.