Fukushima
Opposition to nuclear power in Japan has surged after the Fukushima incident
IAEA

Drastic reforms are needed if Japan is to overcome its power crisis. Proposed remedies include unbundling transmission and distribution grids from the country’s ten major region power companies so that new entrants can enter the market. But Nicholas Newman asks if Japan is ready for such changes and will they work.

Since the nuclear disaster at Fukishima, Japan’s power sector and political economy have undergone a reassessment.

It is now clear that the Japanese public is no longer prepared to accept without question the energy policies dictated by the moguls of the country’s top ten utilities.

And where the public led, government soon followed. In 2011, Japan underwent sweeping changes in policy which resulted in a complete shutdown of the country’s nuclear fleet. Currently, a major restructuring of the power sector, on a scale not seen since Japan’s post-war reconstruction, is underway.

Before Fukushima, Japan was the world’s third largest electricity producer, behind the US and China, generating some 1041 TWh in 2009, or roughly 5 per cent of the world’s total electricity production.

In 2008, electricity consumption averaged 8507 kWh per head, compared with an EU 15 average of 7409 kWh per head, according to an IEA report of 2009.

In 2009, Tokyo Electric Power Company (TEPCO) sold 2.8 billion kWh of electricity, making it the world’s largest private sector power generating company, reports Kay Kitazawa, staff director of the Rebuild Japan Initiative Foundation’s Independent Investigation Commission on the Fukushima Daiichi Nuclear Accident.

Japan’s power was sourced principally from gas (27.4 per cent), nuclear (26.9 per cent), and coal (26.8 per cent), with the remaining 19 per cent made up of oil, hydro and non-hydro renewables, reports the International Energy Agency’s World Energy Statistics 2011.

Giovanni Strasorier, a consultant at Energy Think Tank, observes that deregulation in Japan was extremely limited. It only marginally impacted on the established utilities, as a consequence of the self-regulation of the Japanese utilities (no independent FERC or Ofgem-like organisation was set up).

In addition, matters were not helped by the deference of Japanese politicians to the experts. Before 2011, the ten regional power companies dominated supply, accounting for some 85 per cent of the power market. Competitors such as industry and gas companies accounted for less than 4 per cent of the 60 per cent of Japan’s electricity market that had been deregulated.

Fukushima
In focus: the aftermath of Fukushima has seen calls for a greater use of renewables in Japan
TEPCO

Electricity is relatively expensive for both consumers and industry. Japanese consumers pay the world’s eighth highest electricity rates, at some $0.22/kWh, while the manufacturing sector endures power prices of about $0.15/kWh, which is the world’s fifth highest rate. As a result, Japanese companies have become highly energy efficient, said Strasorier.

In 2012, energy prices were costing the country’s manufacturing sector some ¥8 trillion ($101 billion) a year, according to Japan’s national policy unit. These high industrial power prices are driving many Japanese energy intensive manufacturing concerns to relocate to countries such as Indonesia with lower power prices.

Japan’s Electricity Business Law permits utilities to set rates whereby power revenues always exceed operating costs. It allows electricity prices to be set as the sum of ‘appropriate cost’ and ‘appropriate profit’. As a consequence, utilities have no incentives to be efficient because they can pass on their inefficiencies to the customer, according to Strasorier. A profit of 3 per cent is specified. Allowable costs are generous and they include fixed assets – power plants and nuclear fuel – and even operating capital.

“TEPCO claimed ¥11.6 billion in advertising expenses in fiscal 2010 and included this outlay in its operating costs. However, since TEPCO effectively has no competitors it is questionable whether it is even necessary to spend that much money on ads,” said Yu Tanaka, executive director of the Mirai Bank and author of a book about Japan’s electricity pricing.

Tanaka suggests that the current system has encouraged the power sector to overestimate the demand for power and build the world’s most costly gold plated power plants, which has resulted in Japanese consumers paying excessively for the privilege.

Unusually amongst industrialised nations, Japan lacks a single national grid, relying instead on two separate eastern and western grids. While the standard voltage at power outlets is 100 V, the grids operate at different frequencies: 50 Hz in the east and 60 Hz in the west. This bottleneck makes it difficult to switch power between the two grids, as only three facilities can push power – up to 1.2 GW – east or west across Japan’s AC frequency frontier.

Until the Fukushima incident, Japan had never needed to shift surplus power quickly to regions with short supply. Agreeing power exchanges outside the norms to assist stricken areas was therefore a protracted process, said Strasorier. In addition, as Japan’s grid is isolated from those of its neighbours – South Korea, Russia and China – there is no opportunity to exchange power internationally.

In terms of energy resources, Japan currently imports some 84 per cent of its energy needs, being the world’s largest importer of seaborne coal and liquefied natural gas (LNG), and the world’s third-largest consumer of oil. Japan’s decision to opt for nuclear generation is therefore unsurprising, as this offered a means both to save the balance of payments and to improve energy security.

Transparency and accountability

While Japan has long appeared to have one of the world’s most technically advanced, best managed, best regulated and most competitive power sectors, many reports written since Fukushima have uncovered the system’s many deficiencies. The power sector has failed to adopt a modern management approach, and its processes and practices lack transparency and accountability.

In a sense, Japan’s power sector exhibits symptoms of the ‘Galapagos Syndrome’ that some consider to afflict the country’s wider business culture, said Devin Stewart, programme director and senior fellow at Carnegie Council for Ethics in International Affairs. In his view, the power sector community shares an inward looking corporate culture with tendencies towards groupthink, isolationism and secrecy. Outside views can be met with condescension.

TEPCO
Under pressure: a geothermal plant run by TEPCO which posted losses of $3.68bn earlier this year
TEPCO

This perspective is reiterated in a report published in March 2012 by the parliamentary investigation of the accident at Fukushima. Its chairman, Dr Kiyoshi Kurokawa, professor of the National Graduate Institute for Policy Studies, believes the Fukushima incident’s fundamental causes are to be found in the “ingrained conventions of Japanese culture: our reflexive obedience; our reluctance to question authority; our devotion to ‘sticking with the programme’; our groupism; and our insularity”.

An excessively close relationship between regulators and the regulated is also blamed for letting power utilities subject regulators and politicians to undue pressure and influence. The major utilities have used their sway over authorities to put a virtual stop to any real change in direction of government energy policy and deregulation, said Toshiro Matsumura, a University of Tokyo professor.

Which could explain why Phase 4 of electricity deregulation in 2007 never took place and why, until the Fukushima disaster, neither the public nor the mainstream Japanese media seemed to care. Despite high electricity prices, the media have tended to report official press releases rather than to provide real information and analysis, said Strasorier.

The limited deregulation that has been introduced has raised obstacles to new entrants to the power market. Currently, new suppliers must be able to balance supply and demand every 30 minutes, and they are subject to a hefty penalty if any imbalance exceeds 3 per cent.

In addition, Japan lacks an independently owned national grid. Each regional power utility owns the transmission and distribution grids in their service areas. For Andrew DeWitt, energy policies professor at Rikkyo University in Tokyo, this means new entrants face inevitable challenges. “Under monopoly control, the utilities can make sure these new entrants face a tough climb,” he said.

Yoshihiko Noda
Under predecessors to Japan’s current prime minister, Yoshihiko Noda, little reform has been achieved. A lack of real competition has let utilities “do business like Samurai lords”, said Yukio Edano, the minister of Economy, Trade and Industry. The anti-nuclear MP for Setagaya, Tokyo, Nobuto Hosaka, has complained that the utilities have run the power market as an electricity oligopoly.

Even in good times, TEPCO’s corporate culture was notoriously customer-unfriendly, in large part because of its special status as a private firm that operated as a regional monopoly, said Kitazawa. But as long as this monopoly remains, TEPCO has little incentive to reduce costs or improve management, but instead will charge higher rates when facing financial difficulties.

Reform proposals

Japan will have revolutionised its power sector by 2030 if all the proposals in the Options for Energy and Environment Report of 22 June 2012, issued by a panel of ten independent experts in response to Fukushima, are accepted by the Japanese Cabinet.

The report’s recommendations, which would have been considered revolutionary before the Fukushima incident, feature four important policy themes.

The first is the need to ensure nuclear safety and reduce future risks through new safety management measures across the entire nuclear cycle. This may include reducing Japan’s dependence on nuclear power.

The second is the strengthening of energy security. This means that any effort to reduce dependency on nuclear energy must be framed to be compatible with both energy security and diversification of energy sources.

Thirdly, efforts to cut carbon emissions – which include new technologies to store carbon dioxide – should continue amid measures to reduce dependence on nuclear energy.

Fourthly, measures must be made to restrain electricity costs to prevent industry being hollowed out and to safeguard employment prospects and business opportunities for Japan’s citizens.

In effect, Japan aims by 2030 to reduce its reliance on nuclear power and fossil fuels, to maximise the use of renewable energy, and to promote energy conservation, while meeting its targets to reduce carbon emissions. The report offers three possible scenarios for discussion. Despite envisaging drops in power consumption and gas, the report also forecasts power generation costs increasing from ¥8.6/kWh in 2010 to about ¥15/kWh by 2030.

A fourth option comes from Hirokazu Funatsu of the Institute for Sustainable Energy Policies of Japan, who suggests nuclear could provide 5 per cent of the country’s power, with renewables contributing 30-35 per cent and fossil fuels 60-65 per cent. He also calls for Japan to initiate a discussion about renewables and fossils fuels similar to the one now taking place over nuclear’s future role.

In his view, the nuclear share in 2030 cannot realistically be more than 10 per cent. While many citizens advocate immediate abolishment of nuclear power, many people also see zero nuclear as an extreme idea, he said. “Although the 15 per cent nuclear option might seem the middle course, to achieve [this] all the existing nuclear plants including Fukushima II or Hamaoka have to be operated at very high utilisation rate. That is impossible to achieve in fact.”

Several studies have concluded that Japanese nuclear plants have been working at considerably lower efficiencies than those officially reported by the utilities, said Strasorier.

The Options for Energy and Environment Report also advocates sweeping structural reforms, including unbundling the regional utilities’ grip on the transmission of electricity, as well as generation, and opening up the retail power business supplying households and other small-lot users to new entrants.

“Unbundling would generate market competition so many newcomers would enter the market and compete, and we can expect the tariff should be lower,” said Hiroshi Takahasi, a research fellow at Fujitsu Research.

Kitazawa recommends that the government implement direct control of TEPCO rather than continue its present de facto control of the company. Nationalising TEPCO would help speed up the liberalisation of the Japanese power market and weaken the power of the big regional monopolies, he argues.

In addition, Japan must create a genuine real-time market for power, similar to the European model to balance output with demand, suggests economist Tatsuo Hatta.

While only time will reveal whether Japan’s power sector and government can make the innovative proposed changes, Japan has already demonstrated a capacity for wide-ranging sector reform. In response to the automotive industry after the 1973 oil crisis, the country adopted a new dynamic way of managing processes, resources and people in order to improve its world competiveness.

The path of reform

The government expects the comprehensive nationwide consultation now taking place to complete by the end of the year. But Funatsu predicts that tough public discussion will delay completion by at least half a year.

A framework for a new strategic energy plan, including policy themes on the future of nuclear and green energy, is expected to be formulated in time for the legislative process due to be completed by 2014. The authors expect a continuous transparent review of the energy situation by all stakeholders to monitor developments in progress, market and technological developments.

Whatever is decided, Funatsu sees the government as genuinely committed to reform. “This time power reforms are very seriously considered. METI [Ministry of Economy, Trade and Industry] wants to introduce more competition in the electricity business, in order to value up utility business in Japan.”

In one respect, the outcome of the current process looks certain, in the opinion of John Sauven, executive director of Greenpeace UK: earlier ambitions to increase nuclear power’s contribution to Japan’s total power generation from the 24 per cent in 2008 to 50 per cent by 2030 look unlikely, given strong public and political opposition and the questioning of the economics of nuclear new build by investors such as Citigroup. For George Borovas, head of international nuclear at global law firm Pillsbury, under the Fukushima incident’s impact, Japan’s nuclear industry “will change for the better, just like the United States nuclear industry changed after Three Mile Island”. He considers that the nuclear power sector’s leadership will likely become more proactive and more focused on safety, just as the US responded to the Three Mile Island incident by developing nuclear power plants that were not only safer, but ultimately more efficient and profitable.

Ohi nuclear power station
Ohi nuclear power station: the plant was restarted in June this year
WANO

The power sector appears determined to retain nuclear, although it seems to acknowledge that ambitious nuclear expansion plans are unlikely to ever gain sufficient support. In June, Japan began to reopen its mothballed nuclear plants by restarting the Ohi nuclear plant to prevent widespread power cuts in the Osaka region.

Japanese Prime Minister Yoshihiko Noda has said: “Cheap and stable electricity is vital. If all the reactors that previously provided 30 per cent of Japan’s electricity supply are halted, Japanese society cannot survive.” Environment Minister Goshi Hosono is already backing the 15 per cent nuclear option. In addition, proposals to extend the lifespan of all existing safe plants beyond the current 40-year operating lifespan are being considered.

However, the newly established Nuclear and Industrial Safety Agency (NISA), due to come into operation later this year, has run into difficulties. It is no easy task for Environmental Minister Hosono to appoint five untainted members to NISA by 20 September 2012.

Many of the available experts in Japan’s nuclear village have previously worked for the now discredited government regulatory agencies. It is also common for these experts to regularly switch between working for government, academia, industry and regulatory bodies – yet another instance of Japan’s closed, revolving-door relationship between government and industry. But nobody who has worked for plant operators or plant producers in the last three years is eligible for the NISA board.

While experts from abroad could be appointed, which would make the new agency a very powerful independent regulatory body, this bold solution is unlikely to be adopted given Japan’s insularity and negative experience with foreign heads of large Japanese corporations.

Whatever happens to nuclear power, fossil fuels are likely to remain a key resource for Japan’s power sector. In June, the Wall Street Journal reported Japan’s LNG imports had increased by 16.8 per cent in May from a year before. Coal imports were up 20.8 per cent on year and crude oil imports up 7.1 per cent.

However, a significant long-term increase in gas’s contribution to the power mix is uncertain, according to Funatsu. “We need the gas business to reform, yet we have not started discussions on that yet,” he said.

Japan has also made great strides in energy conservation and efficiency, which should minimise the power shortages the country is likely to experience during the hot humid summer.

In addition, the government has introduced a law that obliges all ten major utilities to buy renewable power from private producers with generous feed-in tariffs. This should please Mitsubishi Heavy Industries, which has had to test its wave power technology using EU subsidies off the Scottish coast due to the lack of interest at home.

Interesting future

Japan’s power sector faces an interesting future.Little is clear except that the zero nuclear option is unlikely, as much for reasons of energy security, as for political and economic considerations. Instead, the debate will centre on nuclear power’s future market share.

A fightback by the power sector is already underway to ensure nuclear still has a significant role. As Germany has begun to find out to its cost, abandoning nuclear power can be costly for a country’s economic competitiveness.

Instead, the true victors in this nationwide debate and reform programme are likely to be Japan’s long suffering customers and its economy. Strasorier suggests that the Fukushima accident has delivered an unprecedented boost to Japanese social consciousness. More and more Japanese people are becoming knowledgeable and vocal on energy and nuclear issues.

Japan is at long last being forced to take seriously the need to introduce the innovatory leadership that it will need in order to revolutionise its power sector.