A New Dawn for Japan’s Power Sector

Kepco's nuclear power plant in Oi, Fukui Prefecture, was ordered by the
Kepco’s nuclear power plant in Oi, Fukui Prefecture, was ordered by the Fukui District court not to restart in May due to local protest Credit: KYODO

Since the 2011 earthquake that destroyed the Fukushima nuclear complex, Japan’s energy supply industry has been in crisis. Utilities are haemorrhaging cash on fossil fuel imports and expensive safety upgrades to an idle nuclear fleet, the economy is under pressure from high energy prices and the government is seemingly dragging its feet on decisive policy action. David Appleyard explores how the Japanese energy sector is responding to these challenges

Ultimately, Japan’s energy woes stem from its lack of any abundant domestic resources. The nation supplies significantly less than one fifth of its total primary energy demand from indigenous reserves.

As a result, according to the US Energy Information Administration, Japan is the world’s largest liquefied natural gas (LNG) importer, consuming well over a third of the 2012 total global supply. It is also the second largest coal importer and the third largest net oil importer.

As an industrial economy, when faced with burgeoning energy imports the country unsurprisingly adopted an aggressive policy of civil nuclear power. Until 2011 Japan was the world’s third largest producer of nuclear power after the US and France, with some 26 per cent of its electricity coming from the atom.

However, all that changed almost three and a half years ago with the massive earthquake and subsequent tsunami that destroyed much of units 1-4 of the Fukushima Daiichi nuclear complex in March 2011. In the wake of the ensuing disaster, the country’s energy supply companies shut down almost all of their reactors. Indeed, with these shutdowns, scheduled maintenance and rigorous new safety controls in place, all of Japan’s reactors were offline by May 2012. And, although two reactors (Kansai Electric Power’s Ohi 3 and 4) were returned to service in mid-2012, they were subsequently shut down at government request in September 2013. They have remained idle since.

The cost of a nuclear-free Japan

With well over 40 GW of nuclear capacity and 48 reactors effectively gathering dust, Japan’s scramble to replace lost power inevitably ramped up thermal capacity, and with it imports of oil, coal and, primarily, LNG. This has had a range of impacts on Japanese energy providers and the wider economy.

For example, the latest figures available from Japan’s Federation of Electric Power Companies (FEPC) reveal CO2 emissions for fiscal 2012 from electric power companies totalled 415 million t-CO2 at a collective intensity of 0.487 kgCO2/kWh. The Environmental Action Plan set out by the Japanese utility industry envisages a target of “reducing CO2 emissions intensity by an average of approximately 20 per cent from the fiscal 1990 level”. Unfortunately, even dumping 270 million tonnes of emissions credits onto the market over five years has seen the average CO2 emissions intensity for the sector decrease only 2.6 per cent from 1990 levels.

This undoubtedly explains why – in a statement to the UN Conference of the Parties (COP19) climate change discussions in Warsaw in November last year – Nobuteru Ishihara, Japan’s Minister of the Environment, said that although the country had hit its target on emissions reduction for the first commitment period, “as the next step, Japan has set a target to reduce emissions by 3.8 per cent compared to the 2005 level in 2020.” This compares with a previous Kyoto commitment to a 25 per cent reduction on 1990 emissions levels by 2020, to the outrage of the environmental movement.

No doubt anticipating the outcry, Ishihara pointed out that the revised plan required Japan to “improve its energy efficiency by 20 per cent when it is already at the world’s top level” and would see the country “enhance development and demonstration of renewable energy-related technologies such as offshore wind power, geothermal power and rechargeable batteries”. He concluded by saying: “Japan reaffirms the goal to reduce emissions by 50 per cent at the global level and by 80 per cent in the developed world by 2050” – absolutely none of which washed with the greens. Naoyuki Yamagishi, leader of the Climate and Energy Group for WWF Japan observed that the move “could further accelerate the race to the bottom among other developed countries” with their analysis showing that the latest emission data from 2011 show that Japan’s emissions are 3.7 per cent above 1990 figures.

A costly decision?

Japan’s more immediate concerns are rather more related to its declining – if not actually spiralling out of control – economic outlook. International Energy Agency figures indicate that replacing the country’s nuclear fleet cost the country’s top ten utilities more than $30 billion in additional fuel import costs over the two years following the Fukushima disaster. Reuters reports that the cost of replacement fossil fuels is now almost $90 billion, while domestic media sources estimate that a further à‚¥$1.6 trillion ($16 billion) has gone on upgrades and safety enhancements to nuclear plants in order to meet the requirements of a stringent new regulatory regime. Reportedly, the country’s nuclear plant operating companies are sitting on losses approaching $50 billion.

Previously mothballed, the 600 MW Kashima oil-fired power plant
Previously mothballed, the 600 MW Kashima oil-fired power plant has received a new gas turbine in preparation for restart Credit: TEPCO

Furthermore, as natural gas, fuel oil and coal pours into the boilers of sorely taxed and often aging thermal plant, Japan managed to spend some $250 billion in total on fuel imports in 2012, a third of the country’s total imported goods costs. The Ministry of Economy, Trade and Industry (METI) has reportedly estimated that power costs would need to rise by some $37 billion per year – a sizable chunk of Japan’s GDP – for thermal to replace all of the country’s nuclear capacity. Prior to 2011, nuclear had been among Japan’s cheapest sources of electricity, but without it baseload power prices have inevitably risen, squeezing government, industries and commerce as well as consumers.

This has cost an already weak Japanese economy dearly, and rising exports have so far failed to arrest the fall of the yen, nor balance a crushing trade deficit (estimated at some $70 billion) and the weight of soaring fuel costs.

Perhaps more immediate still, a May 2014 METI report on electricity supply-demand outlook for this summer pulled no punches in setting out the country’s tenuous reserve capacity margin. Even with the effects of electricity saving taken into account, demand during the peak months of July and August is expected to top 51.5 GW, assuming normal temperatures, and could peak above 53 GW given a hot spell.

Meanwhile, generation capacity is estimated to be a little above 55.8 GW in July, and likewise should top 56 GW in August, largely as a result of the commissioning of combined-cycle systems at LNG-fired Chiba and city gas-fired group 7 at Kashima, as well as an additional 400 MW variable speed pumped-storage unit at the hydroelectric plant at Kazunogawa. This unit began operating in June against an originally planned schedule of 2020.

This gives a reserve margin of 4.9 per cent under high-temperature conditions, METI says, though it’s probably fair to say that just about every unit in the thermal fleet was ordered into operation in order to fend off the summer onslaught. On 30 June, for instance, Tokyo Electric Power Co (Tepco) announced that it was preparing to crank up unit 1 of the heavy and crude oil-fired Kashima power station. Rated at 600 MW, this plant began commercial operations in 1971 and has previously been held in a planned long-term suspension.

The government has further called upon consumers to conserve electricity between 9:00 am and 8:00 pm on weekdays from 1 July through 30 September, which they argue will deliver a guideline power saving of some 11.7 per cent.

METI also requested that Kansai Electric Power Co (Kepco) and Kyushu Electric Power, where the supply and demand situation is expected to be particularly severe, “increase the reserve margin to more than 240 MW in total so that the utilities will be able to secure the reserve rate of 3 per cent or more as a minimum requirement”. METI subsequently confirmed that Kansai and Kyushu had boosted the reserve margin to 434 MW in total.

As part of a series of measures, the government instigated full inspections of all 86 of the country’s thermal power plants in a bid to prevent unexpected shutdowns. They concluded: “With the increase in Japan’s dependency on thermal power plants for electricity supply following the Great East Japan Earthquake, the frequency of unexpected shutdowns of such plants remains high, mainly due to the aging of the plants, which highlights the risks involved in the supply-demand balance of electricity.”

METI had expressed particular concerns about 31 thermal plants, based on their age and problems that had occurred previously. They noted: “The situation of the supply-demand balance of electricity is still expected to be much more severe this summer and significant uncertainty remains.”

The policy response

With public sentiment towards nuclear power at an understandably low ebb – a number of subsequent nuclear safety scandals having rocked public confidence still further – the government has been reluctant to give even the country’s most modern and safe nuclear installations the go-ahead to resume operations. Indeed, close to 20 plants have now made applications to power up and the government has so far continued to stall.

According to the World Nuclear Association (WNA), back in July 2013 four utilities had already applied to restart 12 pressurized water reactors (PWR) at six sites, including Kansai’s Ohi units 3 and 4 and Kyushu’s Sendai 1 and 2, following exhaustive batteries of stress testing and, in some cases, the construction of giant sea walls to protect the plants against any future tsunami event.

But, with the reality of the situation becoming clear, and with justified if pre-existing concerns over the security of energy supply finally spilling over into outright anxiety, the government cracked in April with Cabinet approval of a new “4th Basic Energy Plan”.

This proposal explicitly recognizes nuclear power, alongside hydro, geothermal and coal, as an “important baseload power source”. In a statement, Makoto Yagi, FEPC chairman and also president of Kepco, described the decision as “highly significant”, though according to Reuters the minister of Economy, Trade and Industry, Toshimitsu Motegi, told reporters after the meeting that “the plan makes clear we will reduce reliance on nuclear power through a variety of measures”.

LNG was further designated as an intermediate resource between baseload and peaking oil, and capable of balancing renewables – which were given the most policy focus, and are set to be “accelerated to full introduction” according to reports on the proposals.

Alongside the new energy plan, the government is also proceeding with its strategy for full deregulation of the country’s energy market, which is due to take place in 2016, followed by separation between generation, transmission and distribution in 2018.

The bill to revise the Electricity Business Act for full retail deregulation of the electric power system was enacted in June, though the FEPC noted that in spelling out the detail of the plans “it is necessary to build a robust mechanism for ensuring that there is sufficient supply capacity to meet the national electricity demand in the future”.

In a statement, Yagi also called upon the government to improve the business environment “to ensure that the nuclear power business can continue to operate stably over the long term even in an increasingly competitive environment.”

The outlook for renewables

With METI minister Motegi highlighting the role of future renewable energy capacity and the government setting up a ministerial-level group to study promoting renewables further, the new Basic Energy Plan aims to exceed previous proposals, which had envisaged up to 20 per cent of power coming from renewables by 2030.

Japan is now only just embarking on its programme of renewable feed-in tariffs (FiTs), with the 1 July, 2014 launch of the second-year initiatives under the Green Power Project by the Agency for Natural Resources and Energy (ANRE). The FiT is supported by a surcharge on electricity prices, which from April 2014 to September 2014 is à‚¥$0.05/kWh.

Currently, METI figures give Japan’s renewable energy as accounting for just 2.2 per cent of total electricity generation. Nonetheless, there is evidence that interest in Japan’s renewable sector is growing.

In June, GE Energy Financial Services (GE EFS) said that it is to invest in the 32 MW Kumenan solar photovoltaic (PV) power project, together with project developer Pacifico Energy. Financing was supported by a à‚¥11 billion loan from The Bank of Tokyo-Mitsubishi UFJ and The Chugoku Bank Ltd. Additional financial details were not disclosed.

Located in the prefecture of Okayama, Kumenan is expected to begin commercial operations in the first quarter of 2016. It will sell power to a regional utility through a 20-year power purchase agreement.

David Nason, president and chief executive officer of GE EFS, noted: “Our investment in Kumenan advances our global growth into new markets with a strong risk-return profile”.

On a somewhat larger scale, just days after the GE announcement Photovolt Development Partners GmbH – comprising Kyocera, Kyudenko, ORIX corporations and Mizuho Bank – revealed that they have reached a basic agreement to investigate the possibility of operating a 430 MW solar power plant on the island of Ukujima, off Sasebo City in Nagasaki Prefecture.

An investment of approximately à‚¥150 billion is envisaged to execute the scheme, which would generate an estimated 500 GWh per year. According to its backers, the goal is to see construction commence during the 2016 financial year. A 60 km undersea cable would connect Ukujima to Kyushu Island and the Kyushu Electric company for power supply under the national FiT programme, which pays around $0.37/kWh.

Recent analysis from IHS highlights Japan as a key market in its forecast of a 15 GW global PV market in the final quarter of 2014, with just Japan and the UK responsible for 42 per cent of global installations in Q1. In fact, IHS predicts Japan as the world’s number two market in 2014, behind only China.

Furthermore, Japan is also pushing its technical and research abilities, centred on the prefecture of Fukushima. In one example, it is aiming to become a new hub for solar research following the April opening of an Energy Institute in conjunction with Fraunhofer ISE, the European solar energy research institute. In other renewable sectors, Fukushima is also the location of one of Japan’s floating offshore wind research installations, with a pilot 2 MW turbine installed in 2013 and a pair of 7 MW machines planned.

Although Japan has only around 40 MW of offshore wind capacity installed to date, there are reports that the government is planning to revise the FiT regime further, boosting support for offshore wind at the expense of solar. According to an advisory document submitted to the government by an expert panel, the FiT for offshore should be increased to around $0.35/kWh, with onshore unchanged at $0.21/kWh, for 20 years. The solar tariff would reportedly fall to around $0.31/kWh under the same proposals.

Energy sector outlook

While renewable energy capacity in Japan is undoubtedly set to accelerate rapidly, starting as it has from a relatively small contribution, it will inevitably take time to grow. This is particularly true if the government is to secure the support of the electorate, already labouring under rocketing energy prices and roundly disenchanted with the apparent U-turn on a nuclear future for Japan.

And what of Japan’s nuclear future? Although the WNA recently reported that the Nuclear Regulation Authority (NRA) is prioritizing six units for restart, with Kyushu’s Sendai units expected to come online first, followed by Kansai’s Takahama 3 and 4, the group acknowledges that “the reactor restarts are facing significant implementation costs ranging from $700 million to $1 billion per unit, regardless of reactor size or age.”

Analysis from Reuters this year indicates that the high cost of upgrades, together with local opposition or more stringent regulations on seismic resilience, will see as many as two thirds of the country’s reactors ultimately never resume operations. Mycle Schneider, an independent energy consultant, is quoted as saying: “I think it is unavoidable that the Japanese utilities will write off most of their nuclear assets and move on. Given the slim realistic prospects for a major nuclear share, the challenge will be flexibility and the whole baseload concept flies out of the window.”

The government believes that, as the currently idling nuclear capacity resumes operations, the proportion of fossil fuel generation with diminish. If so, this line is somewhat belied by the investment that Japan’s corporate giants such as Mitsui and Mitsubishi are ploughing into LNG production capacity. There is also evidence of a concerted programme of thermal upgrades underway. An example comes from the February commissioning of another unit at the Kashima power station which has been remodelled to combined operation from single-cycle. Initially comprising three 268 MW units with a 37.1 per cent thermal efficiency, each of the gas-fired units now produces 420 MW, adding around 460 MW to the total output of the plant. The upgrade also increased the thermal efficiency to about 57 per cent, owner Tepco says.

Meanwhile, some estimates suggest coal capacity could increase by some 21 per cent to 47 GW by the early 2020s, and with good reason. In May, for example, planning for a 500 MW integrated coal gasification combined-cycle (IGCC) project at Tokyo Electric Power’s Hirono power station, again in Fukushima, moved ahead with the submission of its environmental impact assessment to the regulatory authorities.

For the immediate future, Japan’s energy sector will likely become more diverse as pragmatism sees the most viable stations in the nuclear portfolio return to service and new or refurbished thermal capacity and renewables come online steadily to meet the shortfall. Short-term, that almost certainly signals volatility for Japan’s troubled energy sector and its consumers. But a power-hungry market and high prices also flag an opportunity for a whole host of energy sector propositions, new and well-established alike.

David Appleyard is a journalist focusing on the energy sector.

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