Circularity and the Energy Sector Part 2

The Circular Economy is not just an environmental regulation, but is being promoted in many countries as a policy to change the very structure of the economy. How is Japan faring in this context? How does it look to those who, like investors, keep a close eye on economic trends and changes?

 In 'Talk Circular x Economy', Mr. Andre-Hottinguer, who has been involved in investments in global companies for more than 10 years and has travelled back and forth between Europe and Japan, gives his unique perspective on these topics, drawing on his background as an investor and as a foreigner.  Let's enjoy his 'way of seeing' and explore the 'Circularity x Economy

In Part 1, we explored the energy sector with a particular emphasis on electricity generation. In Part 2, we will examine the key tools that can enhance circularity in the medium term: renewable energy and modernized grid infrastructure.

Countries initially focused on reducing fossil fuel consumption by improving efficiency—essentially generating more energy from the same amount of fuel. This is a gradual process, with improvements typically measured in percentage points over decades. On a global basis, the efficiency of electricity generation from fossil fuels like coal, natural gas, and oil currently averages around 35–40%. While this may seem low, it reflects the complexity of these processes.

However, to increase circularity, expanding renewable energy offers even greater potential, by eliminating reliance on fossil fuels altogether. Japan has already made significant strides in solar power but given the country’s limited land availability, it is increasingly important to explore other options. Two promising alternatives are wind power and geothermal energy, both of which could play a key role in Japan’s future energy mix.

Japan has developed onshore wind projects, but limited land availability restricts large-scale development. The country’s long coastline offers significant potential, but most surrounding waters are too deep for traditional fixed-bottom turbines, making floating offshore wind the most promising option for large-scale deployment.

Although floating wind is not yet fully commercialized, Japan is investing heavily in research and development. Recognizing the vast potential of floating offshore wind, the Ministry of Economy, Trade and Industry (METI) has advanced legislation to permit wind projects in Japan’s Exclusive Economic Zone (EEZ), expanding opportunities far beyond the current limits of territorial waters. According to the Mitsubishi Research Institute, Japan’s floating offshore wind potential exceeds 2,000 GW, of which more than 300 GW considered low-cost capacity.

While both the technology and regulatory frameworks are still evolving, these strategic moves position Japan to become a global leader in floating offshore wind, supporting its decarbonization objectives and strengthening energy security.

Geothermal power is also considered a promising technology for its ability to provide stable, reliable electricity without relying on fuel resources. However, while some European countries—like Iceland, where geothermal supplies a significant portion of electricity and heating—have made substantial progress, Japan’s installed geothermal capacity remains low, contributing less than 0.5% to its electricity generation.

Several factors seem to contribute to this limited uptake: high initial costs and development risks, but also regulatory hurdles with many geothermal sites are located within national parks or protected areas. Opposition also comes from local communities and especially onsen operators worrying that it could deplete or alter the hot springs that are key for tourism and local economy.

However, they are signs of renewed momentum, driven by new technology. In April 2025, Japan’s METI established a new public-private council to explore next-generation geothermal energy. This council has already suggested that advances in technology could raise Japan’s geothermal potential from the previous estimate of 23 GW up to 77 GW.

Another key enabler for the expansion of renewables and the overall efficiency of the energy system is the modernization of grid and transmission infrastructure. This effort serves two main purposes.

First, it ensures that electricity can be efficiently transported from generation sites—often remote locations where renewables like wind and solar are abundant—to the areas where demand is highest. As renewable energy sources are variable and their output cannot always be controlled, robust transmission systems become even more essential to balance supply across regions.

Second, transmitting electricity over long distances inevitably results in energy losses, typically exceeding 10% with conventional alternating current (AC) systems. One effective solution is the adoption of high-voltage direct current (HVDC) transmission, which can reduce these losses to around 3–4% per 1,000 kilometers. HVDC becomes particularly advantageous for distances greater than 100 kilometers, offering a more efficient alternative to traditional methods.

Upgrading grid and transmission systems is a priority for both Europe and Japan as they integrate more renewables, but Japan faces a unique challenge due to its historically divided power grid. The country is split into two regions: eastern Japan operates on a 50 Hz frequency, while western Japan uses 60 Hz. This division dates to the late 19th century, when Tokyo imported German generators (50 Hz) and Osaka imported American ones (60 Hz). This split complicates grid resilience as electricity can only be transferred between the two regions via a limited number of frequency conversion stations, creating a bottleneck as seen during the 2011 Great East Japan Earthquake.

Let’s conclude by examining the ongoing and emerging challenges that lie ahead: political uncertainty, cost inflation and recyclability.

While uncertainty around energy policy was primarily a European issue, it has now expanded to the United States where changes to tax incentives and fluctuating political support for renewables have led to the cancellation or scaling back of major renewable projects.

For long-term projects, which often have investment horizons of 10–20 years, such uncertainty makes it difficult for developers and investors to make timely decisions. The lack of policy clarity increases doubts about project returns and prompts investors to demand higher returns to compensate for added risk.

This is particularly problematic at a time when government debt is at record highs in many advanced economies, limiting the ability of the public sector to finance the energy transition, and relying on private capital to be the primary funding source for new power generation projects

Another challenge—hopefully a temporary one—has been the recent difficulties faced by the renewable sector: rising construction and financing costs, along with supply chain disruptions, which have led to project cancellations worldwide and financial write-downs for many companies involved. The issue come from optimistic assumption in the bidding process, with developers expecting continued declines in construction and equipment costs that ultimately did not materialize; in fact, costs have increased in many cases.

While technological advancements are expected to help offset some of these issues, governments are also stepping in to address the situation. In Japan, for example, major developers such as Mitsubishi Corporation are reassessing the viability of previously awarded projects and renegotiating terms with the government. These projects were awarded at relatively low bid prices under a fixed feed-in-tariff (FIT) scheme, making them especially vulnerable to cost increases compared to later projects awarded under the more flexible feed-in-premium (FIP) scheme. In response to these challenges, Japan’s METI is revising the format of offshore wind tenders, with some changes being applied retroactively, to better reflect the current realities of costs and supply chain constraints.

A third challenge arises from the relatively short lifespans of clean energy infrastructure compared to traditional power plants, which can operate for 40–60 years. Millions of solar panels and thousands of wind turbines will reach end-of-life in the coming decades, creating an urgent need to manage this wave of waste through circular strategies like repurposing, refurbishing, and recycling.

Batteries face similar issues. While technology advances rapidly, design priorities often overlook longevity and recyclability. Current recycling rates for lithium-ion batteries remain low raising concerns about resource waste and environmental contamination.

Even traditional energy sectors grapple with circularity challenges. Nuclear power, for instance, involves decommissioning processes that are lengthy and complex, with limited global experience. While immediate dismantling can take 5–10 years, a delayed approach, often preferred to let radioactivity decay, can take as long as 50 years.

This underscores the broader need for circular planning across energy systems, ensuring infrastructure is designed not just for operation but also for safe, efficient end-of-life management.

Despite these challenges—which are likely to be temporary—significant progress has been achieved over the past decades, and the ongoing energy transition demonstrates that the world is heading in a positive direction.

While there will inevitably be setbacks and occasional reversals, it is especially encouraging that the private sector is taking a leading role in developing new projects, with decreasing dependence on government subsidies.

The influence of political leadership will be most evident in how quickly progress is made and in the level of support for emerging technologies that can accelerate further decarbonization.

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