Publication Future-proofing Japanese utilities: The case for grid-scale battery investment

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Executive Summary

Ramping up investment in grid-scale batteries is an untapped opportunity for Japan’s incumbent electric utilities. With price and technological barriers tumbling, the strategic deployment of grid-scale batteries offers utilities long-term earnings resilience and a much-needed evolution of business models.

Japan’s incumbent electric utilities (“Japanese utilities”), which include the 10 electric power companies with regional monopolies (EPCOs) and the largest wholesale generator J-POWER, are increasingly misaligned with Japan’s decarbonising energy system. Their business models are built around centralised baseload generation and predictable demand, whereas the grid is increasingly driven by variable renewables and decentralised supply, and customer expectations are changing.

Investor reticence about the challenges facing Japanese utilities is reflected in the deep discount-to--book value that the group average trades at. These companies are also highly leveraged, underscoring the need to reduce debt over time through more prudent capital allocation.

Battery projects are increasingly attractive investments globally due to rapidly declining costs. The global battery storage levelised cost of electricity (LCOE) dropped from US$300/MWh in 2018 to US$104/MWh in 2024 and is projected to halve again to US$53/MWh by 2035. In Japan, battery projects can achieve an expected internal rate of return (IRR) of more than 10% with the support of currently available government subsidies, while the cost of building and operating new batteries in Japan will soon be cheaper than the cost of running existing LNG plants.

Japan needs more energy storage capacity. Variable renewable energy (VRE) is scaling up, and with it, rates of curtailment – wasted renewable energy. Batteries’ millisecond response capability provides the flexibility to store excess renewable energy until it is needed. When equipped with grid-forming inverters, batteries can mimic the stabilising role of traditional turbines, which help set and maintain the grid’s frequency and voltage.

Japanese utilities are uniquely placed to deploy grid-scale batteries. Their local operational expertise and strong regional presence give them a clear competitive advantage. They also have, for now, first-mover advantage. While major utilities – including the EPCOs and J-POWER – have yet to meaningfully scale their participation, given the strong business case for batteries it is only a matter of time before there is broader commercial uptake.

Investors in Japanese utilities should be asking their companies if batteries are factored into decarbonisation and capital allocation strategies. If the answer is no, the question is - why not?

Key Findings

Japan’s incumbent utilities – the 10 EPCOs and J-Power – are under pressure to evolve their business models and investing in batteries can help utilities adapt to the energy transition. Business models built around centralised baseload generation and predictable demand are increasingly misaligned with Japan’s decarbonising energy system. (Section 4)

Incumbent Japanese utilities have a competitive advantage in the battery market, as they own most generation assets and grid infrastructure while having regional operational expertise, giving them relative knowledge and cost-competitive advantages. They can install batteries at retiring coal plants; co-locate with existing and new VRE assets; and site batteries near constrained transmission corridors and/or substations. (Section 2)

Utilities should act now and secure first mover advantages. There is a narrowing window for early movers to benefit from government subsidies and secure strategic locations ahead of broader commercial uptake. (Section 5)

Grid-scale batteries can support Japan’s national energy security and clean energy transition. As distributed renewable generation grows, batteries can help stabilise the grid, reduce curtailment and ease congestion, as well as reducing the grid’s need for the use of imported LNG. (Section 3)

Deploying batteries will help Japan make the most of its growing wind and solar energy. Existing storage capacity provided primarily by pumped hydro is no longer sufficient to meet Japan’s increasing renewable needs (Section 3). Markets forecast a significant scale up of batteries, with BloombergNEF estimating a tenfold increase in storage volume from 2023. (Section 5)

Battery costs are plummeting. Global battery storage levelised cost of electricity (LCOE) has dropped from US$300/MWh in 2018 to US$104/MWh in 2024 and is projected to halve again by 2035 (Section 2). The cost of building and operating new batteries will soon be cheaper than the cost of running existing LNG plants. (Section 3)

Batteries are already commercially viable in Japan. There are opportunities to earn above 10% IRR via multiple revenue streams - capacity payments, energy arbitrage and ancillary services payments - supported by government subsidies. (Section 5)

Regions that are constrained in importing or exporting electricity provide greater opportunities for battery investment. Import-constrained demand centres and export-constrained, high-VRE regions need dispatchable storage capacity like batteries to maintain system reliability and stability^[1] while reducing curtailment. (Section 6)

Recommendations

Japanese utilities have a timely opportunity to deploy grid-scale batteries. Their local operational expertise and strong regional presence give them a competitive advantage to act now. Utilities can target high impact regions where they can maximise system value, capture stronger returns and secure first-mover advantages, creating future shareholder value.

A strategically important window is now open for investors to push Japanese utilities on battery investment. Falling costs, supportive policies, rising curtailment and IRRs of more than 10% have created favourable conditions for batteries to scale. This alignment of market and policy drivers may be temporary before broader commercial uptake, which makes timely investor engagement critical to ensuring that utilities act and capture the current financial and decarbonisation benefits.

From an energy transition perspective, battery investment can:

• enable greater VRE uptake by shifting generation to higher-value time periods and reducing curtailment
• displace LNG peaking generation with zero-emissions energy
• enhance the credibility of transition plans.

Key engagement questions for investors:

• Do you think battery storage will play an important role in Japan’s energy transition?
• How do batteries fit into the company’s broader decarbonisation and capital allocation strategies?
• What is the company’s strategy for deploying batteries in demand centres and high-VRE regions? How will this strengthen decarbonisation and financial performance via capacity payments for firming, arbitrage returns and ancillary services payments?
• Are you advocating for streamlined approval processes to unlock investment and accelerate the deployment of viable battery projects?
• Do you see batteries as one option that can enhance the shareholder value of utilities in Japan, particularly considering that utilities face long-term structural risks from the energy transition?
• What, so far, has held back more aggressive investment into battery storage? What role does the company see themselves having in the build out of battery storage in the Japanese grid?

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Published on

23rd October 2025

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