Potential for U.S.-Japan Cooperation on Supply-Chain Resilience for Clean Energy Technologies

This commentary is part of the Deepening U.S.-Japan Clean Energy Cooperation project, a CSIS initiative featuring analysis by leading Japanese and U.S. experts on the potential for enhanced coordination on energy strategy.

Electricity at the Heart of Energy Transition and Growth Strategy

The rapid increase of data centers and the reshoring of semiconductor production substantially altered the projection for electricity demand from stable or downward trends to a surge. Specifically in Japan, electrification of the iron and steel industry due to changes in the product mix and cyclical equipment renewal, while reducing emissions, compounds the challenge of meeting the incremental demands, which are critical for the nation’s sustainable economic growth and industrial competitiveness.

Renewables are free from the short-term price volatility and supply disruption that are generally associated with fossil fuel power generation. They, however, create heavy reliance on a handful of suppliers, and vulnerability to market disruptions, whether intended or unintended, and state management and control. The rise in polysilicon prices from the Covid-19 lockdowns and factory damages from natural disasters illuminated their supply-chain vulnerability. The current geographic concentration of solar photovoltaics and batteries shows a high concentration of manufacturing capacity in a single country throughout their production processes.

Japan’s experience with rare-earth supply shortage and price hike following China’s temporary export ban in 2010 over the diplomatic dispute is another example of the supply-chain resilience challenge. In response, Japan reduced its dependence on Chinese rare earth elements from more than 90 percent to 58 percent in 2020, through intensive public-private efforts including the diversification of supply sources, equity finance to mining companies, assuring the long-term supply contracts, and loan guarantees to investment projects abroad.

We are further exposed to these vulnerabilities as the reliance on renewables grows. Especially, the accelerated expansion of solar photovoltaic is altering the system, which requires energy storage (meaning batteries in the current environment) to accommodate its intermittency and mitigate daily and seasonal overcapacity issues. Clean energy products, namely wind, solar, and batteries, are also material-intensive, especially critical minerals, and urge careful consideration for the supply chain resilience.

Rare Earth Resources Management Regulations (Xitu Guanli Tiaoli) in China, enacted and came into force in October 2024, further raise the concern. The regulation clearly states, “rare earth resources belong to the state,” and “the state shall regulate the total amount of rare earth mining, smelting and separation, and optimize dynamic management.” The regulation applies to the product circulation, import and export, as well as the mining, smelting, and separation.

Japan is import-dependent for natural resources, which sometimes differentiates its policy approaches and diplomatic positions from those of the United States. Yet, the two countries share concerns over supply security and the supply chain challenges associated with critical minerals and clean energy products.

Policy Actions and Bilateral and Plurilateral Cooperation to Date

In response to the changing environment surrounding critical minerals, Japan enacted the Economic Security Promotion Act (Keizai Anzenhosho Suishinho) of 2022 and identified the critical products with strategic importance. Also, the Policy for Securing Stable Supply of Critical Minerals of 2023 set the procurement targets required for domestic production of batteries and permanent magnets in 2030 (including lithium, nickel, cobalt, graphite, manganese, and rare earth elements) as well as provided support for their exploration, mine development, and smelting. As there emerge occasions when the competitive investment practice by international players goes beyond the business risks reasonably borne by the private sector and consequently limits access to the resource interests for Japanese manufacturers, those policy actions are crucial for supply chain resilience. Japan Organization for Metals and Energy Security (JOGMEC), a government-affiliated agency, plays a central role in those actions.

Japan has sought cooperation with the United States and like-minded countries through the U.S.-led initiatives such as the Minerals Security Partnership and the supply chain pillar of the Indo-Pacific Economic Framework for Prosperity. There are also bilateral agreements and partnerships on critical minerals between the United States and Japan and between Australia and Japan. As the Japanese business community continuously pursues the free and open international economic order, the plurilateral agreements on trade and investments for strategically important areas were valuable as a practical step toward the integration of economic security into trade and investment practices and avoiding further economic fragmentation. Those agreements were also expected to contribute to supply chain resilience and restrain the economic intimidation by third parties. Consistency of trade policies and parties’ commitments to and enforcement of the rules under a plurilateral framework are most expected to enhance the mutual trust and consequently deliver the tangible results. Japan contributed to the realization of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, which includes resource-producing countries, and naturally expects its effective functioning by incorporating elements developed under other plurilateral agreements on trade and investments.

Experiences in Solar and Nuclear Industry Developments

Japan’s decline in industrial competitiveness in solar photovoltaics is sometimes attributed to the lower and slower level of investment to establish a competitive giga-scale production system and effectively capture the opportunities in the rapidly expanded global markets, and the lagged development in affordable and sufficient polysilicon supply which subsequently bound the industry by relatively expensive imports with the long-term contracts and led it to the high cost structure in declining system price environment.

On the other hand, researchers described China’s development of solar industries as an export-oriented sector-driven process that initially benefited from imported equipment and subnational government support for local investments through capital provision. The central government addressed the misalignment and overcapacity issues by creating the domestic market. While those policies were ad hoc responses, the consistent policy support from central and subnational governments worked out to facilitate technology acquisition, manufacturing scale-up and process innovation, and the creation of industrial clusters and integrated supply chains. The presence of multiple players across each segment of the value chain, combined with market competition among them, contributed to the declining cost of solar modules, making them an increasingly affordable alternative.

In the Notice of the Three Departments on Promoting the Collaborative Development of Supply Chain of the Photovoltaic Industry (Cujin Guangfu Chanyelian Gongyinglian Xitong Fazhan) published in August 2022, the Chinese government showed a clear direction to support the enterprises to build a data platform for the supply chain of silicon materials, wafers, cells, modules and promote the application of services including online procurement, vehicle cargo matching and cloud warehousing to improve the responsiveness and collaborative capabilities of the supply chain. It also stated to support the companies to establish long-term cooperation through the strategic alliances as well as to strengthen the supervision to crack down the illegal activities such as price gouging and monopolization. This would make the Chinese solar industry further sophisticated and harder to compete with.

Nuclear power is one of the few areas where Japan keeps a complete industrial ecosystem. The extremely large number of components, complex equipment, and advanced technologies have enhanced and benefited from the rich industrial ecosystem encompassing engineering, fuel fabrication and enrichment, casting, construction of the buildings, containment vessels, steam generators, pumps, and valves. It also boasts a high rate of domestic production beyond 90 percent in many fleets. Nuclear industries in the United States and Japan are very much intertwined due to the course of their development and complementary to keep the supply chain vital. Long-term suspension of operation and the slowdown of construction are, however, harming the supply chain and technical and human capacities.

While the U.S.-Japan Clean Energy and Energy Security Initiative focuses on forward-looking technologies, its commitment to accelerating the development and global deployment of advanced and small modular reactors provides vital opportunities for the maintenance of supply chains and human capacities. Japan’s Ministry of Economy, Trade, and Industry (METI) and the U.S. Department of Energy also issued a joint statement in 2023 regarding energy security and cooperation for the clean energy transitions. In the statement, the intention to work on building robust nuclear components and fuel supply chains, including uranium fuel, among like-minded countries, was confirmed, along with cultivating opportunities for cooperation on the development and construction of next-generation advanced reactors.

A Way Forward

The pathways toward supply chain resilience for clean energy technologies based on the U.S.-Japan cooperation could be characterized as follows.

1. Strengthen the policy dialogues and restore the practical policy goals and instruments with consideration of the key parameters (i.e., energy efficiency, carbon intensity, resource efficiency, and critical material intensity).

A clear indication of the target and commitment by the government through regulatory initiatives and incentives would be useful for the creation of supply chains for new products and technologies in immature markets. It is, however, true that placing too much emphasis on a single technology (e.g., solar) and artificial creation of the accelerated demand will lead to a similar situation, which we have already experienced. We should note that the complex and capital-intensive process to build and/or expand manufacturing capacity creates a time lag, and a country easily misses the opportunity to create its solid supply chains. The technology of choice at the time of a large supply and demand gap is not always the best available technology, but once it becomes dominant in the market, it optimizes the business environment.

Even before the word “energy transition” gains popularity in policy terminology, the electric power industries see energy efficiency and carbon intensity as key parameters to drive to sustainability of the industry. Resource efficiency and critical material intensity are added as new parameters in the pursuit of rational energy mix, as economic security becomes an additional layer in the policy agenda.

To better address the challenge of maintaining economic security while pursuing the energy transition, it is important to strengthen the policy dialogues and cooperation between the United States and Japan, and with like-minded countries. The United States and Japan should restore the practical policy goals and instruments with consideration of the key parameters above, rather than rushing into a system centered around variable renewables and storage. We could also share the best practices in regulation, especially to streamline the siting and permitting processes to avoid delays, and seek opportunities for mutual recognition agreements for products and services, and enhance compatibility.

2. Share the best practice, create the vital domestic markets, and encourage supply chain developments by mitigating the financial risk of large infrastructure projects, and gain grounds for competitiveness through business partnerships and/or an intertwined industrial ecosystem.

The competitiveness of China’s new energy sector comes from the continuous investments in capacity enhancement and process innovation through market competition. Vital domestic market for the industries, the existence of multiple players in the segments, and access to capital have supported the development. If the United States and Japan create a joint force through the private sector’s business partnerships and/or intertwined industries observed in the nuclear industry, the United States and Japan could realize a strong industrial ecosystem encompassing all segments in the value chain and gain ground for competitiveness.

Electric utilities in the United States and Japan traditionally played a role in the infrastructure and supply chain developments in power generation, transmission, and distribution equipment, and logistical services. Along with the liberalization and exposure to competitive markets, the industry has more opportunities to face difficulty in securing finance and bear the risk of long-term cost recovery and potential cost overrun. Mitigation of the financial risk of large infrastructure projects and policy instruments for this purpose are critical for the vital domestic markets and supply chain developments. There emerge cases of such practices in offshore wind and nuclear industries, which are the areas of learning by sharing among the United States, Japan, and like-minded countries.

3. Strengthen trade relationships on energy and infrastructure in third countries by leveraging the United States and Japan cooperation, while pursuing resource procurement partners and network in the market. Also seek mutual dependence through the trade relationship rather than extensively seeking decoupling from China.

In recent years, there has been a trend to see decoupling as a strategic shift whereby China switches its position from economic growth to market dominance, especially in some clean technologies and the rare earth elements. Sometimes the trade remedies, such as antidumping and/or countervailing duties, and the incentives for domestic contents were used to appropriate the market conditions. The efforts have also been made to encourage the reshoring of production, support the exploration, mine development, and smelting of critical minerals, and incubate the development of alternative technologies. Those trends and trade remedies, however, would not revert the market conditions to what it was decades ago. Dependence on rare earth elements, for which China plays a substantial role in extraction and processing, will further grow as we move forward to the more sophisticated products and services and increase the power system’s reliance on renewables. It is important to seek mutual dependence through the trade relationship on energy and/or the various goods and services, rather than extensively seeking decoupling from China.

The trade relationship, especially in energy and infrastructure, also helps to maintain the long-term relationship between the countries and broaden the network in the market. As was observed in the liquified natural gas trade and nuclear developments, those projects led not only to the infrastructure developments and provision of technical services but also to the decades-long relationships between the exporting and recipient countries, including the human and institutional capacities, private sector partnerships, and research and development. There exists a vital and intertwined industry ecosystem in nuclear and other industrial areas between the United States and Japan, which could potentially benefit the countries in the Indo-Pacific and other regions. It would be useful to seek opportunities by leveraging the United States and Japan’s cooperation and strengthening trade relationships on energy and infrastructure in third countries, while pursuing the diversification of resource procurement partners in critical minerals and a network in the market.

4. Jointly develop recycling technologies to effectively address process efficiency and lower the cost, mitigate the potential deficit in production capacity, and contribute to the establishment of treatment at the end of life of clean energy technologies.

It is noted that the mining projects take years beyond a decade, even from the discovery to the first production. There would clearly be a deficit in production capacity if the demand for critical minerals, including cobalt, lithium, and nickel, and base metals, especially copper, grows as is projected by various institutions. At the same time, the clean energy technologies such as solar photovoltaics, wind, and batteries are in the area where the treatment at the end life of products has not been established. Recycling of those materials will contribute to the supply chain resilience as well as mitigate the resource and environmental constraints. There is already lithium-ion battery recycling started in Japan to separate out base metals, nickel, and cobalt through the self-combustion and roasting process. It is an area of cooperation between the United States and Japan to develop recycling technologies to effectively address process efficiency and lower the cost.

Ikuo Nishimura is director and head of the research department at Japan Electric Power Information Center.