As we approach the two-year anniversary of 3.11, Japan has not yet adopted a new national energy policy after the earthquake and tsunami in March 2011 that devastated the country, and destroyed the nuclear facility in Fukushima causing the worst nuclear crisis since Chernobyl in 1986.
This, however, is not surprising given that developments in energy capacity and infrastructure are normally measured in decades, and not in years and months. Also, Japan does not move quickly on substantive issues like this.
The new Japanese government that took office following a lower house election on Dec 16 now expects a new national energy policy to evolve over the next three years.
Following the Fukushima disaster there have been no significant power blackouts in Japan due principally to higher than forecast excess generation capacity, significant efforts around energy conservation by households and industries, and re-starting older fossil-fuel based generation plants.
Forty-eight of Japan’s 50 nuclear reactors remain off-line today. The new independent Nuclear Regulatory Authority (NRA) is expected to finalize revised safety standards by early summer, that the operators of the reactors must comply with. A period where all reactors may be off-line again may emerge in late summer.
The implications of the Fukushima disaster continue to be felt around the world particularly for the nuclear energy industry.
Lithuania rejected nuclear power through a recent national referendum and Bulgarians also refused to endorse the further development of nuclear energy in their country due to a low turnout in another national referendum. Costs have escalated dramatically for new nuclear facilities, in some cases doubling, and in other cases taking over 10 years to construct twice the original planned time-scales.
France recently completed an assessment indicating that the economic cost of an accident similar to Fukushima at any of its 58 reactors might be in excess of $500 billion (almost 20% of French GDP).
Nevertheless, other countries, many close neighbors of Japan, continue to pursue civilian nuclear strategies such as China, India, Russia, South Korea. Several Mideast countries are also using their petro-dollars to finance alternative energy sources in preparation for oil and gas depletion that may in the long run be inevitable.
Also, contrary to some expectations, in Japan’s recent election, the Liberal Democratic Party won an overwhelming majority of seats in the lower house of parliament despite its very close relationships with companies closely associated with the power sector including TEPCO. The anti-nuclear parties did not fare well in this election.
Post 3.11 Japan has ended up with the lowest energy security or independence of any OECD country.
Its natural gas imports have now risen to almost 90 million metric tons annualized or over $70 billion with much of the pre-3.11 increase used to make up for its lost nuclear capacity.
Two new receiving liquefied natural gas terminals are now planned for Fukushima and Aomori prefectures. Costs for construction of these facilities can run up to $5 billion.
Japanese gas importers have for the most part contracted to import natural gas at prices that are linked to crude oil prices. As oil prices have continued to rise and the Japanese currency has recently weakened, this has resulted in significantly higher local currency import costs.
Japan may now be spending $250 billion per year on imported oil, gas, and coal. Increased use of fossil fuels may over time undermine Japan’s GHG emissions reduction targets that are now under review with a new Japanese CO2 emissions reduction policy position expected to be announced in November 2013 by the Ministry of Environment (MoE).
It remains to be seen whether Japan’s considerable investments in overseas oil and gas exploration assets by its large trading companies and its exploration and development companies can bring these fuels back to its own shores at reasonable prices given the recent very large escalation of exploration and development costs globally.
Increasing reliance on fossil fuel imports
Japan’s foreign policy positions may also be impacted by its increasing reliance for fossil fuel imports on several exporting countries including Qatar, Iran, Russia, Australia, Iraq, Malaysia, Indonesia, and the U.S. and Canada.
Nevertheless, Japan’s energy dilemma may also have some positive effects as Japan seeks a long overdue rapprochement with Russia with which it has not signed a peace treaty since WWII. There are now discussions about gas pipelines from the northern islands to Tokyo, and the construction of an LNG exporting facility at Vladivostok to serve Western Japan.
Japan may also agree to enter into preliminary discussions around its engagement in Trans Pacific Partnership (TPP) trade discussions that seeks to eliminate all import duties among the 11 participating Pacific countries over the next decade.
Japan’s import duties on foreign rice are currently almost 800%, a significant bone of contention for its Pacific Rim trade partners. Japan’s entry into TPP may help Japan’s position in seeking export licenses for natural gas from the U.S. to Japan with which it still does not have an FTA agreement.
The annualized cost of electricity production in Japan may also now be in excess of $150 billion including the costs of the imported fossil fuels used to power the generation stations. This implies a levelised cost of electricity for Japan of about 15 U.S. cents/kwh about two to three times the European or U.S. average even though electricity electrons are no different in Japan than they are elsewhere.
In total Japan’s primary energy inputs (approximately $375 to $400 billion) as a percentage of GDP may now be running in excess of 8% or several percentage points higher than its OECD peers.
The costs of energy imports has moved Japan into what now appears to be a consistent trade deficit. Consistent current account deficits may follow. This has also been compounded by recent weakness in the Japanese currency that is rendering dollar-based fuel inputs more expensive. This may ultimately create significant inflationary pressures alongside a stagnant domestic economy.
Despite the recent efforts of the new government around monetary, fiscal, and structural stimulus the Japanese economy has for the most part stagnated over the last 20 years although it has retained its position as the third largest economy in the world as measured by GDP.
However, Japan has the largest Debt to GDP ratio among developed countries at 230% of GDP, or 20 times annual government revenues, with government deficits running in excess of $500 billion, and debt servicing costs of $150+ billion annually. This may constrain Japan’s ability to invest in new energy infrastructure.
The damaged economy is serving to reduce energy usage with many large Japanese multinationals having moving their production facilities overseas to be closer to the markets that they serve, and to benefit from cheaper overseas labor, input, and power costs.
Using the metric of domestic manufacturing, construction, agriculture, and mining production rather than GDP, Japan has suffered a very large economic contraction in recent years particularly among its small and medium sized businesses that were traditionally the bedrock of Japan’s economy. Japan’s manufacturing employment that recently fell below 10 million is now at its lowest in five decades or since 1961. This is also serving to reduce Japan’s energy requirements.
Japan’s population also peaked in 2006 the year it became a “net mortality society” and is now expected to decline from its current 127 million to 106 million by 2040. Working age population is expected to decrease by 30% from 81 million to 57 million by 2040. One in four dwellings in Japan may also now be vacant. This again has helped to reduce Japan’s energy footprint.
We should not, however, forget that Japan’s population stood at 30 million for 265 years between 1603 and 1867 -- the Edo period during which Japan was closed to the world but was self-sustaining.
Today, Japan’s daily oil consumption may have decreased from a peak of over 5 million barrels per day (mbpd) to 3.5 mbpd driven in part by its stagnant economy and the increase in internet commerce that may be reducing transportation requirements. However, higher oil prices have served to keep the overall import numbers high which is negatively impacting many industries such as Airlines and Logistics where there are high dependencies on oil.
Cosmo, JX, and Idemitsu Oil will close their oil refineries in Kagawa, Hokkaido, and Yamaguchi prefectures respectively. Also, 25% of Japan’s retail gas stations are slated for closure. Power sector dominated by big 10
The power sector in Japan continues to be dominated by 10 large electric power companies defined by the geographies in which they operate. These include TEPCO (owner and operator of the Fukushima plant) that continues to serve the greater Tokyo area, and which was nationalized in 2012 by the previous Japanese government.
Following the Fukushima disaster, the Ministry of Economy Trade and Industry (METI) has now proposed a fundamental overhaul of the power sector that is expected to be completed by 2020.
This will involve full deregulation of retail electricity rates, establishment of an independent Transmission System Operator (TSO), legal unbundling of the transmission infrastructures in each of the 10 geographies, ending the cost plus structure for revenue calculations, and separate licensing structures for generation and other power related services. This is expected to generate more competition in the power sector in Japan.
A similar deregulation exercise may be undertaken for the gas sector that is highly fragmented and may be in need of significant infrastructure investment. Gas is a substitute fuel for electricity for cooking in Japan
Several of these power deregulation proposals may however be resisted by entrenched interests even though many of these deregulation measures have already been undertaken in most other developed countries.
Due to the closure of the nuclear plants the power sector is under considerable financial stress. Excluding TEPCO it is expected to generate aggregate losses of $10 billion for the current fiscal year ending in March 2013, and may have aggregate debt of $280 billion (equivalent to 50% of external Greek sovereign debt or 100% of external Indian sovereign debt). This is despite the fact that power rates in Japan (revenues for the EPCs) are among the most expensive in the world.
The future shape of nuclear energy continues to be largest unknown factor in Japan’s energy dilemma. The nuclear waste repository and re-processing issues have not been resolved, and the NRA may require seismic studies that trace up to 400,000 years of seismic activity prior to giving their approvals to re-start reactors. Japan’s geological vulnerability is a significant concern.
Additionally, all of the nuclear generation facilities in Japan are owned by the private sector, which may complicate a consistent approach to safety and operation. A recent study indicated that re-starting half of Japan’s reactors might save Japan $22 billion per year in energy costs. However, the NRA is also indicating that any re-starts might require safety modifications in excess of $10 billion for the EPCs.
A decision to halt nuclear power at a substantial number of reactors might also create bankruptcy risk for several of the EPCs absent significant government support or nationalizations.
What may not be in doubt is that a second Fuksuhima would most probably be catastrophic for Japan.
Renewable energy is now a major focus for the Japanese government. This includes solar, wind, geothermal, biomass, and hydropower. Except for hydro renewable energy penetration levels in Japan were very low prior to 3.11 despite Japan’s low levels of indigenous fossil fuels. Before 3.11 nuclear energy had accounted for 30% of power generation which may have been a full 20% ppts above the global average.
A Feed-in-Tariff structure was introduced in July 2012 in Japan to encourage and expedite further investment in renewable energy sources.
At the end of 2011 Japan had 7.5 GW of solar and wind generation capacity, and its 2020 target may be to increase that five-fold. The capital investment required to fund this increase may be as high as $80 to $90 billion.
Significant constraints exist for the successful deployment of large levels of renewable energy in Japan. Land, costs, financing, and extensive and complicated licensing processes are among the constraining factors that developers and investors need to overcome.
Japan’s sea assets are also among the largest in the world but offshore drilling for its own natural resources that have now re-commenced for methane gas may have been hindered due to protection of special fishing interests.
With regard to energy infrastructure Japan possesses some world-beating technologies across the upstream and downstream energy spectrums: solar, wind, pipelines, electric vehicles, batteries/storage, floating oil and gas terminals, drilling, shipping, nuclear, geothermal technologies, carbon capture, conservation initiatives, and grids.
It may be worth remembering that 17 of Japan’s 20 Nobel Laureates are from the field of Science specifically Physics, Chemistry, and Medicine, and none have been from the Economics discipline.
I am concerned at the overwhelming recent focus on monetary policy to re-charge the Japanese economy, that seems to be the central plank of “Abenomics,” the description given to the economic policies of the new government. The balance sheet of the BOJ relative to the size of Japan’s economy is already twice that of the U.S. Federal Reserve's. In many other countries, accommodative monetary policies are failing to stimulate economic growth.
I do, however, believe that a structural overhaul of the economy should include a clearer energy policy leveraging Japan’s considerable scientific capabilities that might serve to create some long-term economic benefits that can be leveraged globally.
Japan’s challenge over the next several decades could well be to reduce its economic dependency on fossil fuels and uranium and build its electrification capabilities using renewable sources of energy that it may possess in abundance. This may also be better suited to a society that is rapidly aging.
In conclusion I believe Japan’s energy challenge over the next several years should include setting a clear energy vision for the future, and building strategies to execute the vision exploiting Japan’s world-beating technologies to benefit the people of its own islands, and future generations of Japanese.© Japan Today