HYDROGEN LAW AND REGULATION IN JAPAN

1. CURRENT STATE OF HYDROGEN PROJECTS IN JAPAN

Development of Hydrogen in Japan
Hydrogen Innovations Japan - Japan is one of the further advanced countries in relation to developing hydrogen projects and has the advantage of having a designated government policy supporting the uptake of hydrogen, coupled with a public acceptance of hydrogen projects in the domestic-energy mix.

Japan is now in the third wave of hydrogen. The first wave was in the early 1990s, the second wave was in early 2000s, and the third wave started around 2015. In pursuit of finding a way to be independent from the fossil fuel produced in the Middle East and recognising both Japan’s limited domestic energy resources as well as a desire to decarbonise its energy mix, Japan made a deliberate choice to develop a hydrogen-based society in the 1990s.

Significantly, in 2002, the Japanese government enacted the "Basic Act on Energy Policy" and has been formulating and updating a "Basic Energy Plan" every 3 years since its first publication. Subsequently, in 2008, the "Cool Earth - Energy Innovation Technology Plan" was announced to promote technological innovation and deregulation in the promotion of fuel cell vehicles (“FCV”) and hydrogen refuelling stations. In 2000s, the Japanese government and industries focused on popularizing FCV, with the view to stimulating a decrease in the price of FCV and improving the effectiveness of hydrogen refuelling stations.

In 2011, Japan was affected by the Great East Japan Earthquake and the nuclear accident at the Fukushima Daiichi Nuclear Power Station. These disasters accelerated the government’s efforts to realize a hydrogen-based society. The government announced the "4th Strategic Energy Plan" which was substantially adjusted from the 3rd Strategic Energy Plan. In the same year, the government compiled the "Strategic Roadmap for Hydrogen and Fuel Cells" (the “Roadmap”) to implement the "4th Strategic Energy Plan". The plans were further bolstered by the Paris Agreement in December 2015. As a result, 2015 is known as the "First Year of Hydrogen" in Japan.

Recent Efforts by Government
In 2017, the government formulated the "Basic Hydrogen Strategy" (the “Strategy”). Japan has set a long-term goal that, by 2050, aims to reduce 2013-levels of CO2 emissions by 80%; the Strategy sets out an action plan for the period up to 2030. In response to the "5th Strategic Energy Plan" formulated in 2018, the Roadmap was revised for the third time. Japan's current hydrogen programme is based mainly on the Strategy and the latest Roadmap.

In October 2018, Japan held the world's first "Hydrogen Energy Ministerial Meeting” (“HEM”) under the main theme of "Realization of a Hydrogen-Based Society" and, as a result, the "Tokyo Statement" was released. In 2019, the second HEM was held, with approximately 600 participants from 35 countries, regions and organizations attending. The third HEM will be held online in October 2020 and will share the efforts and progress of each country to realize the hydrogen-based society.

Japan has also entered into memorandums of agreement with New Zealand, Argentina and the Netherlands, among others, regarding cooperation for the realisation of a hydrogen-based society. For example, in the memorandum which was entered into between Japan and New Zealand, both countries agreed to cooperate on the exchange of information and personnel, developing technology, and establishing an international supply chain, among other things.

Now Japan is rapidly developing hydrogen power generators and establishing a hydrogen supply chain; it is a leader amongst industrialised nations on how to integrate hydrogen technologies into the energy, transport and industrial sectors.

Supply Chain
In Japan, where natural resources are scarce, hydrogen is attracting attention as a low-carbon alternative to fossil fuels. In order to promote the utilisation of hydrogen, it is essential to reduce the cost for procuring and supplying hydrogen.

As a measure to reduce the cost of hydrogen supply, two methods are considered promising: one approach is the combining of low-cost unused energy from overseas with Carbon Capture and Storage (“CCS”), and the other is procuring a large amount of hydrogen from low-cost renewable energy overseas. To achieve this, the goal in the Strategy is to build a comprehensive international supply chain in the manufacture, storage, transport and use of hydrogen. Specifically, Japan aims to procure approximately 300,000 tonnes of hydrogen per year at approximately 30 JP¥/Nm3 by around 2030, and in the future, to procure it at reduced cost of 20 JP¥/Nm3.

In Japan, various pilots are being carried out in order to develop an international hydrogen supply chain. For example:

A project is underway to extract hydrogen from brown coal, of which there are large reserves in Australia, and liquefy it in order to transport it to Japan by sea. In December 2019, the world's first liquefied hydrogen carrier "Suiso Frontier" was launched and is scheduled to be completed in the autumn of 2020. In Kobe, where the hydrogen will be received, a 2,500 m3 tank became operational in June 2020.
Another project is underway in Brunei to extract hydrogen (as methylcyclohexane (“MCH”)), using the organic hydride method from unused gas, and transport it to Japan. In December 2019, hydrogen produced in Brunei arrived in Japan for the first time. As such, the domestic policy agenda is to combine the surplus fossil fuels from overseas and use these to produce “blue” hydrogen – by capturing the carbon dioxide using CCUS technologies - alongside the establishment of international supply chains for Japan’s hydrogen.
In Japan, transportation of hydrogen in the form of (i) liquid hydrogen, (ii) MCH, and (iii) ammonia is expected. The transported hydrogen in the form of MCH is now used as fuel for thermal power plants. Currently, hydrogen, as an import, is undergoing verification testing and results of this study are expected in due course.
In anticipation of a large amount of renewable energy coming onto the grid in the coming years, attention is being focused on power to gas (“P2G”) technology, which uses electrical power (produced from renewable sources) to produce a gaseous fuel (hydrogen) and then store it. Improvement of water electrolysis technology is necessary for the commercialisation of P2G technology.

In March 2020, the world's largest (10 MW) renewable hydrogen production facility "Fukushima Hydrogen Energy Research Field (“FH2R”)" was opened in Namie Town, in the Fukushima Prefecture. FH2R has achieved positive results in demonstration experiments.

In addition to renewable energy, the utilisation of unused local resources, such as waste plastics and sewage sludge, is being considered as a low-carbon hydrogen supply source.

Transport
According to the Strategy, the goal is to have:

40,000 FCVs by 2020, 200,000 FCVs by 2025 and 800,000 FCVs by 2030;
100 fuel-cell buses by 2020 and 1,200 fuel-cell buses by 2030; and
500 fuel-cell forklifts by 2020 and 10,000 fuel-cell forklifts by 2030.
In addition, Japan is developing and commercialising fuel-cell trucks and shifting passenger vessels to fuel-cell powered vehicles.

FCVs
In terms of passenger cars, Toyota Motor Corporation (“Toyota”) and Honda Motor Co. (“Honda”) started lease sales of FCVs to Japanese government departments for business and industrial use, in December 2002. After years of further technical developments, Toyota began retail sales in December 2014 and plans to launch its next FCV model at the end of 2020. The new model’s performance has been drastically improved by completely renewing the fuel cell system and extending the cruising range by approximately 30%, compared to the conventional model. Honda maintains its strategy to continues lease sales in Japan and announced in June 2020 that it will begin lease sales to individuals.
By contrast, in June 2018, the corporate affiliation between Nissan Motor and Renault of France froze the commercialisation of FCVs that was being jointly developed with Daimler and Ford Motor. At the end of the 2019 financial year, 3,757 FCVs were in use.

As for fixed-route buses, Toyota first put a fuel cell hybrid vehicle (“FCHV”) into practical use in the 2000s. Fuel-cell buses were developed in the 2010s and mass-marketed for sale in March 2018. At the end of the 2019 financial year, 57 fuel-cell buses were in use. There still remains various hurdles to overcome, such as: high vehicle pricing (five times that of a conventional type of bus), improvement in performance, durability and reliability, cost reduction technology and establishment of mass production technology, reduction of operational costs and deployment of stable filling facilities.

Fuel-cell trucks
In January 2020, Honda and Isuzu Motors Ltd. (“Isuzu”) agreed to conduct joint research on fuel cell trucks. In March 2020, Toyota and Hino Motors, Ltd. (“Hino”) agreed to jointly develop a heavy-duty fuel cell truck, and to proceed with initiatives toward its practical use through verification tests and other means. Mitsubishi Fuso Truck and Bus Corporation announced its vision to make all new vehicles for the Japanese market CO2-neutral by the year 2039. In line with this vision, it aims to start the series production of fuel-cell trucks by the late 2020s.

Toyota also announced, in June 2018, that together with Seven-Eleven Japan Co. Ltd. (“Seven-Eleven”), they will be conducting a joint project to reduce CO2 emissions by introducing a newly developed small fuel cell truck in the distribution process, aiming to achieve zero emissions of substances of concern including CO2.

Fuel-cell trains
JR East, the East Japan Railway Company, signed an agreement with Toyota in September 2018 for a comprehensive business partnership, focusing on the use of hydrogen, and has been cooperating with Toyota to introduce fuel cell technology to railway vehicles. JR East is aiming to complete a hybrid vehicle test car, that uses hydrogen as fuel, and is preparing to start a demonstration test on an operating route in 2021.

Hydrogen power generation
The Strategy aims to commercialise hydrogen power generation by 2030. At present, the necessary conditions for introducing hydrogen co-combustion power generation into existing thermal power plants is being clarified. As for the hydrogen co-generation system, the aim is to achieve power generation efficiency of 27% by 2020-2021.

However, in order to fully introduce hydrogen power generation, it will be necessary to reduce the cost of hydrogen procurement by developing a hydrogen supply chain. The government aims to decrease the cost of hydrogen for power generation to 17 JP¥/kWh by the time hydrogen power generation has been commercialised, in 2030.

Fuel cells
Household fuel cells (solid oxide fuel cells (“SOFC”), known locally as "ENE-FARM"), were introduced to the market in 2009 before anywhere else in the world. ENE-FARM produces power and heat for use in the home, from hydrogen derived from city gas or liquefied petroleum gas (“LPG”) and oxygen derived from the air. At the end of January 2019, approximately 274,000 units were in use; it is aimed that costs will further reduce and 5.3 million units will be introduced by 2030.

As for industrial fuel cells, phosphoric acid fuel cells (“PAFC”) and SOFCs have been on the market since 1998 and 2013, respectively. 20 kW-class SOFCs are expected to be put on the market soon. Currently, efforts are being made to increase power generation efficiency and to reduce system prices and power generation costs by 2025.

2. MARKET PROSPECTS FOR HYDROGEN

Hydrogen General
As described above, FCVs and fuel-cell trucks are already used in the transportation sector. As of July 2020, there were 131 hydrogen refuelling stations in Japan. In addition, the household fuel cell ENE-FARM, is widely used due to a subsidy system from the government. However, in other fields, the utilisation of hydrogen in Japan has not yet reached commercial production or is still in the pilot stage.

Given that the current supply chain and power generation projects are mostly the pilots being led and subsided by the Japanese government, there has been limited private sector involvement so far. The scale of business of hydrogen mobility options are still small and would need to grow in order to attract much more private sector investment. In the field of ENE-FARM, major electronics manufacturers and gas companies are involved, but thus far there has been limited M&A activity. Major companies procure finance through ordinary corporate finance and other products and services concerning hydrogen are still at the pre-commercial-stage. This is expected to change as the projects reach further stages of maturity.

Non-fossil Fuel Energy Value Trading Market
In May 2018, the Non-fossil Fuel Energy Value Trading Market was established at the Japan Electric Power Exchange ("JEPX"). This is a green certificates market where non-fossil fuel energy power producers sell "non-fossil fuel energy certificates", which evidence to energy retailers in the market that electric power was generated without using fossil fuel sources. The certificates can be traded separately from actual electricity.

The power is certified using the following values which allows retailers to appeal to consumers that the electricity derived from renewable energy sources is environmentally friendly:

the "non-fossil fuel energy value";
the "zero emission value"; and
the "environmental labelling value".
This certificate system applies to hydrogen derived from crude oil, petroleum gas, combustible natural gas or coal. However, it is not clear whether this system applies to some other types of hydrogen, such as hydrogen derived from renewable energy.

3. CHALLENGES FACING HYDROGEN PROJECTS IN JAPAN

Hydrogen Supply chain issues
At present, the cost of hydrogen atstations in Japan is approximately 100 JP¥/Nm3, which is relatively high. In order to improve this, it will be necessary to:

further study the development of an international supply chain to diversify procurement,
develop water electrolysis technology with higher efficiency and durability along with other technologies; and
expand domestic hydrogen demand.
Transport-related challenges
FCV vehicle prices
The number of components in FCVs is larger than in electric vehicles (“EV”), and the cost of individual devices and components is also high. In addition, production capacity is limited because it requires manual manufacturing by skilled workers. As at December 2015, only a few cars could be produced per day, unlike the significantly greater volumes that can be manufactured as internal combustion engine (“ICE”) vehicles or EVs.

In the latest revision of the "Strategic Roadmap for Hydrogen and Fuel Cells" (the “2018 Roadmap”), the current price of a passenger car type FCV is priced in the ¥7 million range, which is ¥3 million more expensive than a hybrid vehicle (“HV”). The price of a fixed-route bus is ¥150 million.

In order to achieve the target use, the 2018 Roadmap aims to reduce the price difference between passenger car-type FCVs and HVs to ¥700 thousand and to lower the price of fuel-cell buses to ¥52.5 million by 2025, by reducing the FCV system cost.

Running cost of FCVs
For HVs and plug-in hybrid cars (“PHV”), consumers can benefit from the low cost of energy compared to ICE vehicles. FCVs have almost the same cruising range as petrol cars, but the cost of hydrogen fuel is more expensive than petrol, so its value is not directly visible to consumers. Therefore, the popularisation of FCVs is closely related to the reduction of hydrogen production cost.

Low carbon hydrogen
Japan aims to use “green” hydrogen in power generation and other industrial uses of hydrogen in the future. At present, the government is examining the replacement of existing fuels and raw materials with green hydrogen and the associated costs for various industrial processes.

The combination with CCS is necessary in order to produce “blue” hydrogen from coal or natural gas, and a large-scale demonstration experiment of CCS has been conducted in Tomakomai, Hokkaido since 2012. The government aims to commercialise CCS technologies in 2020.

In addition, in order to promote the uptake of green hydrogen, the construction of a scheme to enable trading of the environmental value of hydrogen is being considered. For example, the utilisation of the existing "J-credit Scheme" (the system used for certifying the reduction and absorption of greenhouse gas emissions) and the "Act on the Rational Use of Energy" are under consideration. Utilisation of the "Non-fossil Fuel Energy Value Trading Market", described above, is also expected as a promising option.

4. REGULATION OF HYDROGEN

Current status of hydrogen regulations
There are no laws specific to the use of hydrogen yet. Currently, hydrogen is regulated as a type of high-pressure gas. With respect to hydrogen gas, the High Pressure Gas Safety Act, which regulates the safety of high pressure gas, plays a central role. For example, in order to manufacture and/or store hydrogen, permission from or notification to the prefectural governor is required, with specific requirements being based on the amount of production and/or storage.

In addition, hydrogen must be transported in a manner that meets the technical standards stipulated in the High Pressure Gas Safety Act. However, various regulations such as construction-related regulations and environmental regulations are also applicable. Major regulations are discussed below.

Manufacturing and storage regulations
The installation of hydrogen production and storage facilities is subject to various strict safety regulations due to the flammable nature of hydrogen.

The High Pressure Gas Safety Act requires permission from, or notification to, prefectural governors depending on the processing capacity of hydrogen production facilities and storage facilities.
The Ministerial Ordinance on the Arrangement of Facility Districts for New Business Facilities etc. in Special Disaster Prevention Areas of Petroleum Industrial Complexes, etc. stipulates that, when hydrogen production facilities, for example, are to be established, they must be divided into production facility districts, storage facility districts, incoming and outgoing facility districts. It is also stipulated that a road of a specified width must be interposed, in accordance with the area of production facility districts and storage facility districts.
The Regulation on Safety of General High Pressure Gas provides technical regulations to ensure that hydrogen is not retained in the rooms where hydrogen production facilities, storage containers and consumption facilities are installed, in case of hydrogen leakage.
The Regulation on Safety of General High Pressure Gas sets detailed regulations on the temperature and the location of storage containers in relation to their storage.
Environmental and health regulations
Since reformers for hydrogen production and fuel cells are regarded as gas generators, notification to local governments and the periodic measurement of soot, smoke and NOx are required under the Regulation for Enforcement of the Air Pollution Control Act.

Under the Noise Regulation Act and the Vibration Regulation Act, if a facility installed at a factory or workplace is classified as a specified facility that generates significant noise and vibration, an application must be submitted to the relevant local government. In addition, since the regulation criteria differs for each municipality, it is necessary to confirm the local criteria.

Regulations concerning transportation of hydrogen
Transportation of hydrogen gas by truck, tank lorry, etc., is subject to the High Pressure Gas Safety Act, the Road Vehicle Act and other regulations which stipulate technical standards, such as vehicle loading methods, transportation methods and safety measures for containers.
The Road Act prohibits or restricts the passage of vehicles loaded with dangerous substances having explosive or flammable qualities in underwater tunnels.

Regulations concerning hydrogen stations
Hydrogen refuelling stations play an important role in the use and popularisation of hydrogen vehicles. Regulations on the installation of hydrogen stations are outlined below:

The technical standards for hydrogen refuelling stations are, essentially, in line with those applicable to high pressure gas production facilities under the High Pressure Gas Safety Act. However, more stringent technical standards are included to protect consumers.
The Building Standards Act limits the areas where hydrogen refuelling stations can be installed.
Rules on dangerous goods regulate the location and structure of equipment installed in hydrogen refuelling stations, such as compressors, accumulators and dispensers.
When a hydrogen refuelling station is installed at a gas station, it is necessary to comply with the safety measures prescribed in the Fire Services Act and the High Pressure Gas Safety Act.

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