• Renewable electricity (RE) is essential for decarbonising Japan’s steel industry. The 7^th Strategic Energy Plan (SEP) should allocate RE for electric arc furnace (EAF) steel production, and provide competitive electricity pricing for steel companies aiming to decarbonise.

• Decarbonising the steel industry would require RE additions amounting to 0.5% of Japan’s total electricity generation by 2030 and 5-7% by 2050 to reach near zero emissions steel production. This represents a relatively small amount of Japan’s total electricity production for such a transformational change.

• A manageable target of 4.5 mtpa of EAF steel connected to greenfield RE can achieve the 2030 steel industry decarbonisation target. This would replace an equivalent amount of BF-BOF steel and steer the industry toward carbon neutrality by 2050.

“There is no room for debate that a robust supply system for green power is essential,” Eiji Hashimoto, Chairman and CEO of Nippon Steel Corporation, July 2024, discussing the next Strategic Energy Plan at the Basic Policy Subcommittee of the Advisory Committee for Natural Resources and Energy.

Shifting to imported green HBI-EAF production represents the most viable pathway for Japan to produce high quality primary steel

Japanese solar and wind electricity often costs more than the market tariff. To encourage the decarbonisation of the steel industry through the use of RE, the 7^th SEP needs to prioritise policies that can incentivise steel companies to sign agreements with new RE projects, while ensuring the contractual bases for the RE projects themselves are stable and bankable.

Japan’s Strategic Energy Plan informs the steps to be taken for the country’s long-term energy policy, aiming to ensure a stable supply of energy while addressing environmental and economic challenges. For the steel industry, the most recent version of the plan, the 6^th edition revised in 2021, highlighted improving utilisation of current blast furnaces (BF), reducing iron ore using hydrogen (H₂) and separating and recovering CO₂ from BF exhaust gas. ¹Little progress has been made since 2021 with no commercial-scale hydrogen reduction technology or Carbon Capture and Storage (CCS) technology in operation. Furthermore, utilisation of BFs has decreased as demand for Japanese steel has reduced.

Primary steel production is particularly energy-intensive but can be decarbonised with RE. Thus, the decarbonisation challenge facing the three primary steelmakers in Japan (Nippon Steel, JFE, Kobe Steel) must be met within the context of Japan’s 7^th SEP, specifically focusing on providing RE for the steel industry. Policymakers in METI must seek to build and provide more RE to decarbonise both Japan’s grid and the steel sector, alongside advocating for financial incentives to assist the steel sector in decarbonising.

Charging green hot briquetted iron (HBI) or scrap steel in an EAF is the least electricity-intensive domestic steelmaking process, accounting for approximately one-sixth of the electricity that domestic H₂-DRI-EAF processes demand due to the electricity needs for H₂ electrolysis. The ability to produce steel at such low electricity usage makes these two inputs particularly attractive due to electricity constraints in Japan. Furthermore, Japan has a mature scrap-EAF industry but remains a net exporter of scrap, indicating potential for organic EAF expansion within the industry. The import of HBI into Japan has already begun with steelmakers Kobe Steel and JFE utilising international supply chains to their benefit. Leveraging international supply chains like this opens Japanese steelmakers up to spatial decarbonisation possibilities where electricity-intensive processes can be outsourced to countries with plentiful RE resources to, for example, processing iron ore into HBI.

Source: TA analysis

Given the lack of decarbonisation the 6^th SEP delivered for the steel industry, the 7^th iteration needs to specify which steelmaking technologies should take precedence within Japan. Depending on whether grid electricity or RE is used, the technologies we have analysed can have highly variable emission intensities. Importing hydrogen or HBI, or reusing scrap steel offers the highest decarbonisation potentials. When utilising RE, these methods can achieve decarbonisation rates of up to 95% compared to BF-basic oxygen furnace (BF-BOF) steelmaking.

Highlighting the importance of using RE instead of  unabated grid electricity, our analysis for the domestic H₂-DRI-EAF production, suggests an increase in emissions per tonne of steel, exceeding the emissions of BF-BOF by 7% when utilising grid electricity at today’s emission intensity. Independent of the electricity used, COURSE50 technology using coal and BF technology has a limited emission reduction potential of approximately 20% to 30% compared to conventional BF-BOF.

Source: TA analysis

Our analysis also suggests that secondary steel production through 100% scrap-EAF is the most efficient way to decarbonise, achieving 2.15 to 2.59 tonnes of CO₂ reduction for every MWh of RE. This is closely followed by the imported green HBI-EAF process which can also reach the CO₂ abatement level of 2 tCO₂/MWh. Where some Japanese steel companies and downstream steel purchasers have doubts about the quality of obsolete scrap, importing green HBI to be charged into EAFs presents the most viable pathway for Japan to produce high-quality primary steel. This approach minimises strain on the domestic power grid while achieving the highest decarbonisation rates. Hence, these are the two processes where the 7^th SEP should prioritise support.

Japan has established EAF steel mills in operation with companies like Tokyo Steel, Japan Steel Works and Yamato Steel producing EAF steel, albeit with a limited supply of RE. These steelmakers currently account for a minority of Japan’s steel products, as BF-BOF steel accounts for 75% of Japanese steel production.² Yet the future of decarbonised steelmaking is through electrification. In the US, the steel market is dominated by EAFs, accounting for over 70% of steel production, with American steelmakers providing high-grade steel for automotive and industrial customers.³ Even as large-scale electrified iron and steel infrastructure is being developed in the EU, some policymakers are publicly calling for ironmaking to be outsourced to other countries, allowing the continent to focus further on steel production via EAFs. Japanese steel production needs to be electrified to keep pace.

Japan’s iron and steel industry is localised on the coast near highly urbanised areas. Because of this, captive RE generation is not a viable option to provide the iron and steel industry with the electrical requirements to power EAFs. Therefore, on-grid solutions must take precedence to achieve a decarbonised iron and steel sector in Japan.

Currently, corporations seeking to decarbonise their electrical supply in Japan can utilise a number of market-based solutions such as J-Credits, green electricity certificates and non-fossil certificates. Energy attribute certificates (EACs) such as these leave the industry exposed to market electricity tariffs and their role in facilitating the addition of RE capacity is questionable. Noting the preference to have stability in prices and reliability in decarbonised electrical supply, and contribute meaningfully to new RE projects; corporate power purchase agreements (CPPAs) represent a strong and viable mechanism in which the steel companies can meet and deliver these items. CPPAs are beneficial in providing stabilised, hedged electricity prices for both the generator and offtaker. However, PPAs are not as common as in other regions such as North America or Europe, due in part to the market risks both offtakers and developers must price into contracts. This must be tackled by policy makers to accelerate corporate demand for RE.

Should steelmakers sign CPPAs for scrap-EAF and green HBI-EAF processes, they will drive the decarbonisation of their steel operations and Japan’s power sector at the same time. If the Japanese steel industry were to adopt these two processes to reach a 30% reduction in emissions by 2030, a total of 590-600 tonnes of EAF capacity would have to replace existing BF-BOF production, replacing 4.5 mtpa of BF-BOF steel.  Approximately 3 TWh of RE would be required for this transition, less than 0.5% of the current electricity generation in Japan.⁴

Source: TA analysis

By 2050, total RE requirements amount to 43-61 TWh, or 5-7% of Japan’s current electricity production. Grid electricity emissions would also drop 5-7% from today’s levels to 409-418 tCO₂/GWh for this infrastructure alone. Consequently, steel sector emissions would reduce 95% from 2013 levels. In reaching this target, the total EAF production capacity in Japan would have to reach 64 to 86 mtpa, representing a substantial EAF capacity albeit comparable with the US steel sector today.

The 7^th SEP must prioritise the most electricity efficient and high carbon abatement potential steelmaking processes for the future of Japan’s steel industry. Within 2030, a manageable target of 590-600 tonnes of EAF capacity should be connected to greenfield RE infrastructure. This would replace 4.5 mtpa of BF-BOF steel. Toward 2050, these targets must be increased so that by 2050, between 8,600 and 11,500 tonnes of EAF capacity provide steel production of between 64 and 86 mtpa.⁵

To fully realise the abatement potential of EAF-based steel production, RE must be the power source. The 7^th SEP should incorporate targets for RE capacity specifically allocated for new EAFs. Within 2030, 3 TWh of new RE should be allocated to EAFs. This equates to a modest sum of approximately 2.5 GW of solar PV capacity. Toward 2050, these targets must be increased  to between 43 and 61 TWh RE supply for EAFs.   

Lastly, steel companies aiming to decarbonise should not incur higher electricity costs than standard grid tariffs. The 7^th SEP needs to advocate for the support of financing solutions to help Japanese industry realise these targets.

1. https://www.meti.go.jp/press/2021/10/20211022005/20211022005-1.pdf
2. https://www.meti.go.jp/shingikai/sankoshin/green_innovation/energy_structure/pdf/018_04_00.pdf
3. https://www.steel.org/steel-technology/steel-production/
4. https://www.iea.org/countries/japan/energy-mix
5. Upper and lower ranges for Japan’s long term steel output

This analysis is for informational purposes only and does not constitute investment advice, and should not be relied upon to make any investment decision. The briefing represents the authors’ views and interpretations of publicly available information that is self-reported by the companies assessed. References are provided for company reporting but the authors did not seek to validate the public self-reported information provided by those companies. Therefore, the authors cannot guarantee the factual accuracy of all information presented in this briefing. The authors and Transition Asia expressly assume no liability for information used or published by third parties with reference to this report.

Kenta Kubokawa

Japan Analyst

Lauren Huleatt

Program Manager and Investor Lead