Tomohiro Ohsumi/Bloomberg

Japan’s Solar Boom

As Japan still struggles to contain leaks from its tsunami-wracked Fukushima nuclear plant, its alternative energy sector is growing rapidly to meet electricity demand. The island nation is poised to overtake Germany as the world’s largest solar revenue market this year. In the first quarter of 2013, 1.5 gigawatts (GW) of solar PV systems were installed in Japan. Analysts expect to see $20 billion in PV installed this year, up 82 percent from $11 billion in 2012. The market could top out at 6.1 GW by year’s end. One GW can supply about a quarter million homes with electricity.

Japan’s energy reformers celebrate the solar boom as proof of the country’s smooth transition away from nuclear—technology deemed too dangerous after Fukushima’s meltdown. The country is projected to install solar capacity this year equivalent to five to seven nuclear plants.

Japan’s generous feed-in tariff has catalyzed Japan’s solar sector more than any other factor. It requires utilities to purchase electricity from solar PV systems and other renewable sources based on a fixed period contract at a fixed price.

This allows solar to compete effectively as it matures and gains credibility in energy markets. Looking beyond 2013, market conditions look favorable for continued growth in Japan’s solar industry.

The Goldman Sachs Group plans to invest about $487 million in Japan’s renewable energy market over the next five years. IBM has also invested in Japanese solar. A new University of Texas report indicates that Tokyo’s rooftops alone could support 43.1 GW of PV.

Meanwhile, Japan’s biggest banks are preparing their lending services for solar. Mitsubishi UFJ Financial Group Inc., Mizuho Financial Group Inc., and Sumitomo Mitsui Financial Group Inc. expect the domestic solar market to be worth as much as 1.8 trillion yen, or $19 billion, over the next three years. “A lending pipeline of this size is rare,” said Koji Shiroishi, senior vice president at the structured finance division of the corporate lending unit at Mizuho.

Solar enthusiasts worry that the feed-in tariff could produce a consumer backlash if utility bills soar high enough. Spain ended its aggressive solar incentives program last year in an effort to cap consumer prices and promote austerity. But Japan could have the right fix for utility bills very soon.

Prime Minister Shinzo Abe has pledged to break apart decades-old monopolies in the country’s regional energy markets—a move which promises more competition and lower prices. He also has pushed reforms to help renewables better integrate into an old-fashioned electricity grid. “For 20 long years of deflation, Japan suffered a deep loss of confidence,” Abe said. “It is now time for Japan to become an engine of global economic growth.”

It is likely, moreover, that most Japanese citizens will acknowledge that a risk premium—the likelihood of a costly error—has raised the cost of doing nuclear business considerably. An opinion poll in February indicated that more than 70 percent of Japanese believe nuclear power should be phased out completely.

Japan, historically prized for its intellectual capital and skill in adaptation to resource scarcity, is no stranger to solar. In fact, solar technology was pioneered in Japan by Sharp Corp., the oldest producer of panels globally and a vanguard in the country’s new energy future. The country has already accomplished an astonishing turnaround in its energy infrastructure. The country’s 50 nuclear reactors once supplied a quarter of its electricity. In a year, it closed every plant. Only two have since been restarted.

As atomic power-reliant countries like the U.S. struggle to adapt their nuclear fleet to the droughts and heat waves associated with climate change, Japan has the opportunity for a fresh start. The world watches as its third-largest economy begins a grand solar experiment.