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Powering ahead: Perspectives on Japan's energy future

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In the year since a devastating earthquake and Tsunami hit north-eastern Japan, the country has had to confront some previously unimaginable challenges. One is that its entire energy policy, upon …

In the year since a devastating earthquake and Tsunami hit north-eastern Japan, the country has had to confront some previously unimaginable challenges. One is that its entire energy policy, upon which the future of the nation depends, was destroyed along with the nuclear power plant at Fukushima. The plan had been to expand nuclear power’s contribution from one third of electricity generation to one half by 2030. This now seems almost impossible. Where does this leave Japan’s long-term energy future?
This question was the starting point for this paper. The Economist Intelligence Unit (EIU) asked prominent figures from research, industry and academia to consider Japan’s long-term energy future, taking their analysis beyond the contentious factors that are presently the focus of much heated debate. Their contributions, in the form of essays and in-depth interviews, tackle the fundamental issues Japan must consider when plotting a sustainable and secure energy future. These include: the strategic necessities of a national energy plan; prospects for renewable energy; how to encourage greater energy efficiency; how to meet the energy needs of industry and commerce; challenges in reforming generation and distribution; and what Japan can learn from other countries’ energy strategies.
GE Japan was the sponsor of this project but had no editorial input into any of the sections below, which are solely the work of the authors.


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  • 1. Powering ahead Perspectives on Japan’s energy futureA report from the Economist Intelligence UnitSponsored by GE
  • 2. Powering ahead: Perspectives on Japan’s energy future Contents Preface 2 Japan’s energy future: The EIU view 4 Martin Adams, Energy Editor, Economist Intelligence Unit Japan’s energy strategy: Past and future 8 Jitsuro Terashima, President, Japan Research Institute A greener future? Prospects for and challenges to expanding the use of renewable energy in Japan 12 Tetsunari Iida, Executive Director, Institute for Sustainable Energy Policies Saving energy: can more be done? Improving energy efficiency in the commercial and residential sectors 16 Kenji Yamaji, Director-General, Research Institute of Innovative Technology for the Earth Industry and Japan’s energy supply: Maintaining a competitive energy landscape 21 Mitsudo Urano, Chairman, Nichirei Japan’s distribution challenge: Lessons from abroad 24 Paul J. Scalise, JSPS Research Fellow, Institute of Social Science, University of Tokyo The best energy mix for Japan: International perspectives 29 Christoph Frei, Secretary General, World Energy Council1 © The Economist Intelligence Unit Limited 2012
  • 3. Powering ahead: Perspectives on Japan’s energy future Preface In the year since a devastating earthquake and GE Japan was the sponsor of this project but had tsunami hit north-eastern Japan, the country has no editorial input into any of the sections below, had to confront some previously unimaginable which are solely the work of the authors.1 Their challenges. One is that its entire energy policy, contributions can be summarised as follows: upon which the future of the nation depends, was destroyed along with the nuclear power plant at 1. Japan’s energy future: The EIU view Fukushima. The plan had been to expand nuclear Martin Adams, Energy Editor, power’s contribution from one third of electricity Economist Intelligence Unit generation to one half by 2030. This now seems The EIU view is that Japan will rely more heavily almost impossible. Where does this leave Japan’s on nuclear power and more lightly on renewable long-term energy future? energy than many assume. Its efforts to reduce the environmental impact of its energy use, and to This question was the starting point for this shore up its energy security, will suffer as a result. paper. The Economist Intelligence Unit (EIU) asked prominent figures from research, industry and academia to consider Japan’s long-term 2. Japan’s energy strategy: Past and1 Sections 1, 6 and 7 were energy future, taking their analysis beyond the futureoriginally in English, while contentious factors that are presently the focus Jitsuro Terashima, President, Japansections 2, 3, 4 and 5 were of much heated debate. Their contributions, in Research Instituteoriginally in Japanese. the form of essays and in-depth interviews, tackle Japan has faced energy challenges before, mostDavid Line of the EconomistIntelligence Unit was the fundamental issues Japan must consider notably in the oil shocks of the 1970s. But itsthe overall editor of the when plotting a sustainable and secure energy response to those crises, Mr Terashima argues inpaper. Amie Nagano and future. These include: the strategic necessities of this interview, was ad-hoc and relied too heavilyTakato Mori conducted a national energy plan; prospects for renewable on market-based solutions to a strategic problem.the interviews for sections energy; how to encourage greater energy Japan is at another energy-strategy crossroads2 and 5 and oversaw the efficiency; how to meet the energy needs of after the Fukushima disaster. Despite risingtranslations. Gaddi Tam wasresponsible for layout and industry and commerce; challenges in reforming anti-nuclear sentiment, there are compellingdesign; the cover image is by generation and distribution; and what Japan can strategic—as well as practical—reasons for JapanWai Lam. learn from other countries’ energy strategies. to maintain its nuclear power capabilities.2 © The Economist Intelligence Unit Limited 2012
  • 4. Powering ahead: Perspectives on Japan’s energy future3. A greener future? Prospects for and challenges to consider moving production abroad if they have to bear to expanding the use of renewable energy in increasing energy costs. However, many (especially SMEs) can Japan become much more energy efficient by adopting industry best Tetsunari Iida, Executive Director, Institute for practices. On the supply side, decisions about nuclear power Sustainable Energy Policies need careful thought. While renewable energy is a medium-termRenewable energy sources have the potential to make a prospect, its current cost makes broad industry-level adoptionsignificant contribution to Japan’s energy supply, Mr Iida unrealistic.contends in this essay. This is particularly true of wind andphotovoltaic generation. Common arguments against their 6. Japan’s distribution challenge: Lessons frombroader adoption, including supply stability and cost, can be abroadovercome with technological progress. While legislation for a Paul J. Scalise, JSPS Research Fellow, Institute offixed purchase price will be beneficial, Japan needs to separate Social Science, University of Tokyogeneration from distribution and encourage a “knowledge Japan’s electricity transmission and distribution (TD) systemrevolution” to promote the broader adoption of renewable has not changed dramatically in the post-war period, Mr Scaliseenergy, writes in this essay. Prices remain high even as investment in TD has fallen rapidly, while new generators complain4. Saving energy: Can more be done? Improving of uncompetitive charges to access the grid. Is the vertical energy efficiency in the commercial and unbundling of generation from TD the answer? Evidence from residential sectors other countries that have attempted this is mixed. While an Kenji Yamaji, Director-General, Research Institute Asian “Super Grid” remains a pipe dream, demand management of Innovative Technology for the Earth through smart grids and smart appliances seems the mostJapan has a long history of improving energy efficiency, and promising solution.many effective policies have promoted the adoption of cutting-edge technology. But Mr Yamaji argues in this essay that 7. The best energy mix for Japan: Internationalencouraging behavioural change will be crucial to long-term perspectivessustainable consumption. For this, clearer information on Christoph Frei, Secretary General, World Energyenergy supply and demand is vital. Council The Fukushima disaster may have led to global soul-searching5. Industry and Japan’s energy supply: about nuclear power, Mr Frei argues in this essay, but eliminating Maintaining a competitive energy landscape nuclear from the energy-generation mix is a radical step that Mitsudo Urano, Chairman, Nichirei few nations are able to take. Fast-growing emerging economiesJapan has paid insufficient attention to demand-side and developed nations alike have to resolve the thorny tripleperspectives in its energy strategy, Mr Urano argues in this problem of energy security, social equity and environmentalinterview. In the short term, some companies will be forced impact. In its search for a best energy mix, Japan is no different. Economist Intelligence Unit, April 20123 © The Economist Intelligence Unit Limited 2012
  • 5. Powering ahead: Perspectives on Japan’s energy future 1 Japan’s energy future: The EIU view Japan will rely more heavily on nuclear power and more lightly on renewable energy than many assume. Its efforts to reduce the environmental impact of its energy use, and to shore up its energy security, will suffer as a result. Martin Adams Energy Editor, Economist Intelligence Unit When an earthquake and tsunami hit Japan’s a sceptical populace of the safety of nuclear Fukushima Daiichi nuclear facility in March 2011, power and allow local leaders cover to sign off on the disaster devastated the plant and surrounding reactor restarts. But when this can be achieved areas. But the ensuing emergency also destroyed remains uncertain. the ambitious strategy that Japan had laid out for its energy future. This envisaged expanding Nonetheless, central to the Economist the role of nuclear from just under one-third of Intelligence Unit’s long-term view is the electricity generation to one-half by 2030. Sticking assumption that nuclear power will continue to to this plan is now impossible. But with scant satisfy a significant portion of Japan’s electricity indigenous natural resources to rely on, how will demand for this decade and into the next. the world’s third-largest economy meet its future Under Yoshihiko Noda, who became Japan’s energy needs? prime minister in August 2011, the chances of a sudden rejection of atomic energy—which once Nuclear horizon seemed conceivable—have receded. Businesses’ Following Fukushima, popular antipathy to frustration with the protracted closure of dozens atomic energy in Japan, as elsewhere, has of power plants following the natural disasters grown; the majority of Japanese want to see has been palpable. Moreover, policymakers nuclear power phased out, opinion polls suggest. tasked with reshaping energy policy do so in an Against this backdrop, shutdowns of nuclear extremely difficult economic environment. The plants for regular maintenance have combined vast cost of decommissioning waves of reactors with reticence on the part of local governments (only the US and France have more) is but one to sanction restarts: only one of Japan’s 54 argument against forced closures. The nuclear nuclear reactors is currently working. Official lobby is a strong proponent of atomic power’s safety reviews continue in an effort to persuade cost-competitiveness with other energy sources.4 © The Economist Intelligence Unit Limited 2012
  • 6. Powering ahead: Perspectives on Japan’s energy future For Japan, the energy security implications of Neither do we expect that Japan will be able to rejecting nuclear are also worrying. Government deploy renewables on a markedly greater scale ministers say that they envisage a gradual than is currently the case. A green revolution slimming down of Japan’s reliance on nuclear in along these lines is keenly advocated by some, the “medium to long term”. such as Naoto Kan, Japan’s prime minister at the time of Fukushima incident. For renewables, Use of nuclear will remain at low levels this though, cost remains a serious obstacle when year and next due to a mixture of continued compared with Japan’s other energy options. inspections, further foot-dragging on restarts This is one reason why presently they currently and the likely decommissioning of some aged provide only a tiny share of Japan’s power: even reactors. But we expect the proportion of nuclear the largest of the group, hydropower, satisfies in the energy mix to rise. It is likely, in most little more than 1% of Japanese energy demand. cases, that existing nuclear plants will resume operations, although we foresee a gradual drop It is likely to prove difficult for Japan to stump in the reactor numbers over the course of this up strong enough incentives to raise renewable decade and beyond as old reactors are shut down energy’s share of total energy significantly this and decommissioned. Electricity generation decade (and, indeed, to fund a necessary grid from nuclear will not therefore recover to overhaul) just as many other developed-world pre-Fukushima levels. Our forecast is for 30.6 governments are cutting back on subsidies. gigawatts (gw) of nuclear capacity in 2020 (our Allowing electricity costs to rise to reflect current forecast horizon), down from 47.7 gw in the higher cost of renewable electricity looks 2010—a significant revision from the 61.2 gw we politically problematic given the dissatisfaction forecast before Fukushima. among many ordinary Japanese with the performance of some electricity utilities (most A greener future? notably but not exclusively that of Fukushima How will Japan fill the gap? Much attention has Daiichi’s owner, TEPCO). focussed on boosting renewable energy and energy efficiency. Yet, on both counts, there are Neither are Japan’s grid companies, which reasons for caution. traditionally carry considerable political weight, keen to accept more power from Japan has an enviable record on energy renewable sources. On top of this, sceptics efficiency. Its economy is nearly one-third the point to a shortage of suitable sites for solar size of that of the US, but energy consumption is plants and wind farms in the heavily populated, only one-fifth of US levels—not least thanks to mountainous country. We expect solar and wind the efficiency of many Japanese manufacturers. power capacity will only manage to top 5 gw by Conversely, though, such achievements will make 2020. Hence, renewable energy will contribute eking out new gains harder. Energy consumption less than 4% of Japan’s energy needs at the end by the household and transport sectors, of this decade (Figure 2). moreover, has continued to rise: Japan has high levels of car ownership; there is heavy demand for power to run air conditioners in the warmest Fossils plug the hole months; and, even as electrical appliances have If renewables are to play such a small part in become more efficient, consumers have used substituting for Japan’s forsaken nuclear build- them more. We think it will be difficult to reverse out, what will step into the breach? Fossil fuels, these trends, despite redoubled energy-saving in our view, will be the chief beneficiaries of last efforts following last year’s disaster. year’s events.5 © The Economist Intelligence Unit Limited 2012
  • 7. Powering ahead: Perspectives on Japan’s energy future Figure 1: % of Japan’s gross domestic energy consumption (%) 50 Petroleum products Natural gas Coal Nuclear Other 45 40 35 30 25 20 15 10 5 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: Economist Intelligence Unit estimates/forecasts Japan’s liquefied natural gas (LNG) imports have Although Japan will rely more on gas, petroleum surged by over a quarter following Fukushima. products will nonetheless remain the biggest Japan is already the biggest market for LNG: gas is source of energy for Japan: their share of total an attractive option partly because of its relatively energy will stagnate at just under 45%, but owing low carbon emissions versus other fossil fuels. to the fact that overall energy usage will climb Moreover, it is available from relatively nearby over the coming decade, in absolute terms this sources in Asia: Russia’s Sakhalin gasfields, for will still entail using 40% more oil in 2020 than instance, will send much of their production to was the case in 2011. Japan. Australian LNG production and export infrastructure is also coming on apace. Coal consumption, meanwhile, will also climb by nearly 20% over the course of this decade, The EIU believes that fresh long-term LNG deals according to our forecasts, making up about will be struck, with Russia and Australia prime one-fifth of total energy consumption. From candidates to provide new supply. For energy- a strategic perspective, coal is seen as a security reasons, however, Japan’s government more secure alternative to oil for electricity will be keen to make sure that dependence on generation. Heavy industry will also be important individual suppliers (especially Russia, which has source of coal demand, particularly high-end shown itself ready to cut off gas supplies during steel manufacturing, where Japan is a global disputes) is limited—a difficult balance to strike. leader. We anticipate that Japanese natural gas demand will double between 2011 and 2020. As a Dirtier, less secure proportion of Japan’s energy mix, we forecast that One conclusion from our forecasts is that Japan’s gas will rise from 19% in 2011 to 26% of the whole progress towards creating a low-carbon economy in 2020 (Figure 1). In order to turn to achieve will, for now, disappoint. Climate change has such an expansion, however, pressure will grow to been relegated far down the government’s resolve problems in Japan’s gas-supply network: agenda by last year’s earthquake, and the ruling partly thanks to the country’s mountainous Democratic Party of Japan will be unable to fulfil nature, this remains strikingly underdeveloped. a pledge, made before natural disaster struck, to6 © The Economist Intelligence Unit Limited 2012
  • 8. Powering ahead: Perspectives on Japan’s energy future Figure 2: % of Japan’s gross domestic energy consumption (%) 1.60 Combustible renewables and waste Hydro Geothermal Solar/wind/other 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: Economist Intelligence Unit estimates/forecasts Figure 3: CO2 emissions and energy consumption as % of 1990 levels (%) 160 Total CO2 emissions from fuel combustion Total energy consumption 150 140 130 120 110 100 2000 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 Source: Economist Intelligence Unit estimates/forecasts cut carbon emissions by 25% by 2020 compared Japan will try to reduce its dependence on the to 1990 levels. Emissions from burning fuel will Middle East for oil and diversify its oil supplies. be 40% higher than 1990 levels by the end of this Yet Japan’s energy security will be more difficult decade, we forecast (Figure 3). to manage than would have been the case had it been able to go pursue its nuclear expansion. Another important implication is that increased fossil-fuel imports are likely to raise energy- For many, the Fukushima nuclear emergency security risks. Japan is the third-largest net revealed the dangers of relying on atomic energy. importer of oil (following the US and China), and Yet, in the longer view, the dramatic events of it worries about relying on the instability-prone March 2011 may well be noted for setting Japan Middle East for most of its oil imports. Over time, on a less green, less energy-secure path.7 © The Economist Intelligence Unit Limited 2012
  • 9. Powering ahead: Perspectives on Japan’s energy future 2 Japan’s energy strategy: Past and future Japan has faced energy challenges before, most notably in the oil shocks of the 1970s. But its response to those crises, this contributor argues, was ad-hoc and relied too heavily on market-based solutions to a strategic problem. Japan is at another energy-strategy crossroads after the Fukushima disaster. Despite rising anti-nuclear sentiment, there are compelling strategic—as well as practical—reasons for Japan to maintain its nuclear power capabilities. Jitsuro Terashima President, Japan Research Institute NB: Mr Terashima is currently a member of the forced to realise, in a shocking manner, the risk of advisory committee on energy and natural resources excessive dependence on oil. at Japan’s Ministry of Economy, Trade and Industry (METI) that is reviewing Japan’s current Basic In 1973, I joined a research project at the Japan Energy Plan in the wake of the the Fukushima Center for Economic Research [a non-profit, disaster. In an interview on February 16th 2012, the independent research institution] to evaluate EIU asked Mr Terashima to discuss the historic and the nation’s energy strategy towards the year future challenges of formulating Japan’s national 2000. A report entitled The limits to growth, energy strategy. commissioned by the Club of Rome, had recently been published.1 This was a pioneering report Economist Intelligence Unit: What were that considered problems such as resource the key changes in energy strategy in scarcity, population growth and environmental post-war Japan? issues in a holistic manner. We embraced this Jitsuro Terashima: In 1961, the primary viewpoint and were among the first to work on structure of Japan’s energy supply began to Japan’s energy future considering the idea of a1 Donella H Meadows, Dennis change: the key energy source for Japan shifted shift from fossil fuels to renewable energy.L Meadows, Jørgen Randers from coal to oil. It’s not an overstatement to sayand William W. BehrensIII: The Limits to Growth, that Japan’s high-growth period was supported However, around the same time as interest inUniverse Books, New York, by this shift to oil. But then Japan experienced renewables started growing, Japan’s first nuclear1972. the oil crises of 1973 and 1979. The country was reactor for commercial use started running in8 © The Economist Intelligence Unit Limited 2012
  • 10. Powering ahead: Perspectives on Japan’s energy future Fukushima in 1971, just before the first oil crisis. (DPJ), the governing party, came up with a new [Nuclear power] was driven by awareness in Basic Energy Plan for Japan. The plan envisaged Japan about the need to overcome excessive that nuclear power would contribute around 50% dependence on fossil fuels—as well as the US’s of Japan’s total energy by 2030. The emphasis on ambition to transform nuclear technology from nuclear resulted from Japan’s determination to military to commercial and peaceful applications. reduce carbon-dioxide emissions by 25% in the mid-term. That is, Japan took the nuclear option EIU: How did the two oil crises change on a single, environmental factor: that it does not Japan’s energy strategy? produce carbon dioxide. JT: Japan faced two oil crises, but it does not mean we learned lessons and formulated a With the Fukushima accident, however, the 50% strategic approach to the idea of energy security proposition became unrealistic. The previous as a result. In fact, in a sense the country has prime minister, Naoto Kan, declared that society been dealing with energy issues in an ad-hoc should not depend on nuclear power. Japanese manner. For instance, in 1973 the Middle East media and public sentiment now resonate with supplied 78% of all Japan’s imported oil. Today, similar anti-nuclear calls. The feeling is such that this has risen to over 80%, despite the call to anyone who takes an anti-nuclear stance will be diversify energy sources after the oil crises. applauded. Many are fixated on the thought that the shift of nuclear power to renewable energy is One reason for this was the trend of “energy the “mega trend” in Japan’s energy strategy. liberalisation”—the idea that a country’s energy supplies would be best managed by the market rather than as a strategic asset. EIU: What do you consider the best mix During the 1980s and 1990s the global energy- of energy supply towards 2030? security debate shifted rapidly from a focus on JT: I am proposing an energy mix whereby 20%2 See Statement of Position of the total energy supply is derived from nuclear considerations like long-term investments andNo.2, Jitsuro Terashima, risk diversification, to the idea of buying oil in power, 30% from renewable energy sources andsubmitted to the AdvisoryCommittee on Energy and the market as cheaply as possible. Japan’s policy 40% from fossil fuels.2 I think Japan’s best mixNatural Resources, Ministry drifted in line with this seemingly easier way will settle around these ratios. While the ratioof Economy, Trade and of dealing with the energy challenge; that is, of supply by fossil fuels will have to be increasedIndustry, February 14th securing energy supply meant building bigger oil temporarily, we should attend to the trend2012. In comparison to towards natural gasses; shale gas, for instance, tankers and letting a string of them bring oil tothe 2010 national plan Mr Japan through the Straits of Hormuz. is entering a new era. We can also expect aTerashima’s propositionreduces the ratio of energy significant role to be played by non-conventionalsupplied by nuclear in 2030 This choice is backfiring today. To be sure, there energy sources, including domestically producedby 30 percentage points, and have been some improvements in terms of Japan’s methane hydrate.increases the contributions energy security, such as the establishment ofof renewable energy and a reserve of 200 days’ worth of supply, and an In fact, I think it’s possible for us to build a societyfossil fuels by 10 percentage increased contribution by liquefied natural gas that does not depend on nuclear energy. Butpoints each. The proposedmix also assumes total (LNG) at the expense of oil. But fundamentally I still believe that we should maintain aroundenergy consumption will fall Japan’s energy-security situation is still in a very 20% of our energy to be supplied by nuclear10% (a crude-oil equivalent fragile state. power. Nevertheless, I am not “pro-nuclear“of 336m kilolitres) through [to the exclusion of other energy sources]. Itechnological innovations EIU: How has the Fukushima accident was proposing renewable energy as early as theand implementation ofenergy-saving measures changed Japan’s energy-security 1970s, and I intend to help turn the wheel asin different sectors of the strategy? much as possible towards renewable energy at thiseconomy. JT: In June 2010, the Democratic Party of Japan crossroads for Japan’s energy strategy.9 © The Economist Intelligence Unit Limited 2012
  • 11. Powering ahead: Perspectives on Japan’s energy future EIU: What do you see as the strategic of nuclear power. I believe Japan must remain the rationale for maintaining nuclear symbol and exemplar of countries that resist the energy? temptation of nuclear militarisation and focus JT: I don’t believe nuclear energy should be instead on its peaceful use. Japan can help other maintained on old justifications—such that its countries that have the same aim. running cost is lower compared with other energy sources, and that it’s environmentally friendly Furthermore, while it wouldn’t be impossible given that it does not produce carbon dioxide [to abandon nuclear energy], it would require emissions. Given the accidents, these rationales significant diplomatic and leadership capabilities are now readily shot down—correctly, in my view. in order to achieve this in the long-term. It’s worthwhile noting that European countries have However, the reality is such that whether Japan been making efforts to build mutual understanding quits nuclear or not, others show no intention of and a system of energy interdependence via a doing so. China, for instance, is aiming to increase collaborative power-supply infrastructure. There the number of its reactors from 14 currently to 80 are power-distribution networks running across by 2030. Even the US, which had resisted acquiring the borders of France and Germany, for instance; additional reactors since the Three Mile Island Germany was able to decisively break away from accident, has recently decided to build two new nuclear energy because it can get energy from ones. Korea is aiming for 25 reactors and Taiwan France in times of shortage. But Japan has not is currently operating six reactors. There will be at collborated with its neighbouring countries, least 100 reactors just in the eastern part of Asia such as Korea, China and Russia, to secure such a surrounding Japan. system. At least for the moment, Japan will have to pursue a self-contained energy strategy. Coming If Japan chooses not to retain its specialised up with a pan-Asian energy distribution network nuclear power human capital and technical will take at least 10 years. infrastructure, it will lose influence in the international community, for instance to It might appear to be justifiable to argue for negotiate the safety of nuclear plants elsewhere. quitting nuclear energy because it is seen as There is a view that research alone is enough to ethically correct or because renewable energy maintain such a human-capital base and technical can be derived domestically or ecologically. But foundations. But this view misunderstands the I question if we can indeed secure the kind of essence of technology. Without having an actual diplomatic and leadership capabilities needed to application base for the research, it’s unrealistic stick to this path, given Japan’s current strategic to assume that Japan could secure the national realities. I believe a realistic and responsible path budget and talent necessary to ensure its nuclear for this country is to have a mix of energy options. technology is maintained at a competitive level. Even if one were to decide on the non-nuclear Moreover, Japan’s position in the international renewable energy option, it does not mean that a community is unique and is of paramount new system could start operating from tomorrow. importance: as the only sufferer of nuclear It’s clear that Japan will have to rely on fossil bombing, Japan has a role to affirm a militarily fuels for the next 10 to 20 years. It’s important non-nuclear policy in the world, through to think about how to get by during this phase. international organisations like the International Given that almost all nuclear reactors will stop Atomic Energy Agency (IAEA). Japan is the working by spring this year, Japan is making a only militarily non-nuclear country that the rapid shift towards LNG and fossil fuels to get by international community permits to run a nuclear- in the short run. [Increased demand] will cause fuel cycle, because it has resisted the military use energy prices to rise. This is something consumers10 © The Economist Intelligence Unit Limited 2012
  • 12. Powering ahead: Perspectives on Japan’s energy future globally, and especially those in developing countries, would rather not see. People working in the world of energy have a shared understanding that a developed nation like Japan, with advanced technologies, should pursue a balanced energy strategy, based on the idea of the “best mix”.11 © The Economist Intelligence Unit Limited 2012
  • 13. Powering ahead: Perspectives on Japan’s energy future 3 A greener future? Prospects for and challenges to expanding the use of renewable energy in Japan Renewable energy sources have the potential to make a significant contribution to Japan’s energy supply, this contributor contends. This is particularly true of wind and photovoltaic generation. Common arguments against their broader adoption, including supply stability and cost, can be overcome with technological progress. While legislation for a fixed1 See for instance Daly, purchase price will be beneficial, Japan needs to separate generation from distribution andHerman E., Beyond encourage a “knowledge revolution” to promote the broader adoption of renewable energy.growth: the economics ofsustainable development, Tetsunari IidaBoston: Beacon Press, 1996 Executive director, Institute for Sustainable Energy Policies(Jizoku Kano na Hatten noKeizaigaku, Misuzu Shobo,2005) Sustainability is the most important principle in has been growing by more than 40%.2 By the thinking about the future of energy. The core idea end of 2010, the aggregate generation capacity2 “Renewables 2011: Global of sustainability is found in Our Common Future, of wind, biomass and PV exceeded the installedStatus Report”, REN21 also known as the Brundtland report, published capacity of the world’s nuclear power facilities.(Renewable Energy Policy by the United Nations World Commission onNetwork for the 21st Environment and Development in 1987. This Globally and in Japan, the potential of renewableCentury), July 2011 defines development as sustainable if it “meets power—the only truly sustainable energy3 See Lebel, Phillip G., Energy the needs of the present without compromising source—is undeniable. Solar energy alone isEconomics and Technology, the ability of future generations to meet their expected to become a huge energy resource, atBaltimore and London: a scale of 10,000 times that provided by fossil own needs.” The equivalent definition for theJohns Hopkins University energy sector would stipulate the use of renewable fuels consumed each year.3 According to a recentPress, 1982 energy, or “the use of resources within the range survey by Japan’s environment ministry, PV4 “Study of Potential for the that they can be renewed.”1 Besides actual energy power generation can eventually be expected toIntroduction of Renewable saving, renewable energy is the concept that best produce 200m kW of power and wind generationEnergy (FY 2010)”, Ministry captures the idea of sustainability. (including oceanic areas) 1800m kW.4 Together,of Environment in Japan, this far exceeds Japan’s total current powerApril 2011. The figures are With European countries at the forefront, the generation capacity of around 240m kW (at theestimated by identifying world is rapidly adopting renewable energy. end of March 2010).feasible areas for systeminstallation, taking The market for wind-power generation has beenlandscape and various social growing by around 20% annually in recent years, Japan is well suited to wind and PV powerfactors into account. while that for photovoltaic (PV) power generation generation. The development and adoption of12 © The Economist Intelligence Unit Limited 2012
  • 14. Powering ahead: Perspectives on Japan’s energy future geothermal power, and environmentally friendly these two types of fluctuations with energy from small hydroelectric and biomass generation, peak-hour-only sources, such as natural gas and are also desirable, with wave-power and tidal hydropower. power possible in the longer term. But when Japan’s total potential renewable energy supply However, when the penetration rate of is considered, wind and PV energy account for intermittent renewable power sources in by far the largest proportion. In addition, given the power grid exceeds 20%, other, longer- that these sources of energy are less likely to run term solutions are required. These include into trouble over various competing rights and connecting intermittent renewables to a broader conflicts of interest (for example, hot springs’ transmission system; adjusting fluctuations rights to geothermal energy), the barriers for in demand; storing energy; and disposing of their development are comparably small. While excessive amounts of energy or transforming other renewable energy sources suffer from such it into other forms such as hydrogen. With the problems—or limits to the absolute amount of increased use of renewable energy, it is expected the available resource, as with hydroelectric that technological developments will allow these or biomass generation—the reality is that they measures to be improved and gradually adopted. cannot be regarded as potential main sources The high cost of renewable energy is also of Japan’s electricity supply, unlike wind and PV frequently cited as a problem for its broader generation. adoption. But technical progress has led to significant cost reductions in small-scale and Countering common arguments against distributed energy technologies such as wind and renewables PV power. In particular, the cost of PV power has Electricity companies often cite problems with fallen rapidly in recent years: it has halved in the stability and electricity quality as barriers to past twelve months, to a module price of ¥100 the deeper penetration of wind and solar energy per watt.5 In Germany, the purchase price of PV in their transmission networks. Such excuses, generation is as low as ¥20 JPY per kWh (within5 For recent trendsconcerning renewable among others, have been used to mislead the the mega solar system).6 The purchase price isenergy sources, see Special general public. Ensuring the quality of electricity expected to keep dropping, by around 10% everyReport on Renewable means reducing the risks of blackout, while year. The price in Japan will also certainly fallEnergy Sources and managing frequency or voltage fluctuations rapidly as the market expands.Climate Change Mitigation, within a certain range. These goals are notIntergovernmental Panel on The greater use of renewable energy also has the impeded by the use of intermittent renewablesClimate Change, June 2011 such as wind and PV power. merit of increasing Japan’s ability to avoid the6 See http://www. use of fossil fuels. The more renewables Japanerneuerbare-energien. The experience of some European countries is uses in its electricity system, the more it cande/files/english/pdf/ instructive. Spain, for example, has managed avoid bearing the burden of rising fossil-fuelapplication/pdf/eeg_2012_ with intermittent renewables providing around prices. Some suggest that savings on reducedverguetungsdegression_en_ consumption of fossil fuels could exceed thebf.pdf 20% of its power. The supply fluctuations that are associated with these sources can be leveled additional cost of adopting renewable energy.77 See press release by out by using more than one source of energy.Institute for Global Moreover, fluctuations from these sources are not A step forward: the fixed purchase priceEnvironmental Strategies/ totally unpredictable; they can be anticipated to systemInstitute for Sustainable a certain extent from meteorological conditions. On the legislative side, a key for increasingEnergy Policies, July 21st,2011 (available at http:// Given that demand for energy also fluctuates the use of renewable energy is the Act onwww.iges.or.jp/jp/news/ in a predictable manner, the total electricity Special Measures concerning the Procurementpress/11_07_21_2.html) supply can be adjusted by filling any gaps from of Renewable Electric Energy by Operators of13 © The Economist Intelligence Unit Limited 2012
  • 15. Powering ahead: Perspectives on Japan’s energy future Electric Utilities (or “feed-in tariff”), due to be the separation of electrical power production enacted in July this year. The basis for the act from distribution and transmission (although originated in Germany in 1990 and varieties only one tool) is the key measure of electricity have spread to 87 countries in the world, helping market reform. This is because power grids are promote the renewable energy revolution. It is quasi-public goods, similar to motorways; while known as the most successful environmental one company may own the grids in a monopolistic policy in history. way, the company must deliver fair services. But the generation and selling of electricity are The act establishes a purchase price for various competitive and profit-making businesses. In order sources of renewable energy—in accordance with to ensure better services at a low cost, Japan must scale of use and installation requirements—that secure an open market that anyone can enter. power companies are obliged to pay. They can impose a set consumer surcharge to allow an The realities of Japan’s electricity market are appropriate amount of profit. While the purchase such that electricity prices are the highest among price is fixed for a certain period of time, the developed nations, and the breakdown of costs government will reduce it according to the lacks clarity. Moreover, electricity companies have adoption of new projects; eventually, it is hoped, attempted to thoroughly eliminate opposition to a point where no burden will be shouldered views with regard to the monopoly situation in the by consumers if they choose renewable sources market, and nuclear power, by cultivating mass of electricity. The act therefore promotes the media support in the guise of publicity expenses. expansion of the market for renewable energy and reduces its costs. I contend that this elimination of opposing views, coupled with the reckless construction of nuclear In addition, by systematically including in plants and the devaluation of the importance of the calculation a reduction in the cost of ensuring safety measures, were the factors that environmental externalities such as carbon led to the Fukushima accident—potentially the dioxide and air pollution, radioactive substances, world’s worst ever nuclear disaster. and the merit of being able to avoid the use of fossil fuels, renewables will reach grid parity (the Since March 11th 2011, however, the adverse tipping point at which consumers can switch to implications of the monopoly situation in the renewable energy at no extra cost) earlier than electricity market have been exposed to public expected. scrutiny. Media taboos about covering the problems of nuclear power and the electricity The need for electricity market reform monopolies have been shaken off to reveal Yet such measures, while welcome, are not various realities, such as the murky pricing of enough. Japan has lagged behind in the adoption electricity and the cozy relationship between of renewable energy because of political and power companies and local politicians. The policy failures.8 These have been underpinned TEPCO Management and Finance Investigation by the monopolistic structure enjoyed by Committee, established to calculate electricity companies, and outdated thinking on compensation for damage to be paid by TEPCO, environmental energy policy. has found that a total of around ¥600bn was excessively included in electricity costs in the One policy that is required to expand the use of past ten years—a finding that represents just the8 See also Tetsunari renewable energy involves the stipulation of a tip of the iceberg.Iida, “Nihon no KankyoEnerugi Kaikaku wa Naze “priority connection”, under which the ownerSusumanainoka”, Sekai, May of the power grid is required to prioritise the Reform in the electricity market to include the2009 connection and supply of renewable energy. But separation of electrical power production from14 © The Economist Intelligence Unit Limited 2012
  • 16. Powering ahead: Perspectives on Japan’s energy future distribution and transmission is therefore local resources, while minimising environmental an urgent matter. This is because there is no burdens. The gap between such a trend and justification for the vertical integration of the reality in Japan, marked by an unchanging electrical power, whether as a measure of monopolised market, is of utmost concern. economic or public policy. Indeed, the magnitude of its adverse implications is unacceptable. One of the reasons for the delayed adoption of renewable energy in Japan is the lagging Towards social innovation and a awareness among the “knowledge community” knowledge revolution of such rapidly changing realities. Even the The participation of various players accelerates state’s white paper on energy is not up-to-date. innovation both in technical and social terms—a Discourse on Japan’s energy policies also relies trend that is perhaps best exemplified by the on outdated ideas and knowledge—a trend that is effect of the Internet. A similar reality is seen fostered partly via the influence of monopolistic within the electricity market. For instance, in electricity companies that support the status quo northern Europe and Germany, the open market and reject liberalisation. has resulted in various innovations, including the emergence of electricity companies that allow Needless to say, the country today awaits consumers to select renewable energy—from urgently the realisation of energy-policy reform which Japan in particular ought to learn. that can advance the adoption of renewable energy. The most important agenda is to reform A new energy market structure has emerged in society fundamentally into an innovative form the past 20 years that leverages several layers through a “knowledge revolution” in the area of of various markets and maximises earnings from environmental energy policies.15 © The Economist Intelligence Unit Limited 2012
  • 17. Powering ahead: Perspectives on Japan’s energy future 4 Saving energy: can more be done? Improving energy efficiency in the commercial and residential sectors Japan has a long history of improving energy efficiency, and many effective policies have promoted the adoption of cutting-edge technology. But encouraging behavioural change will be crucial to long-term sustainable consumption. For this, clearer information on energy supply and demand is vital. Kenji Yamaji Director-General, Research Institute of Innovative Technology for the Earth (RITE) Professor Emeritus, Department of Electrical Engineering, School of Engineering, University of Tokyo After the first oil shock of 1973, Japan made It remains the case that energy saving in the substantial progress in energy saving. Japan’s GDP commercial and residential sector is the key for the grew around 2.3 times from 1973 to 2009, but final country to make further progress in overall energy energy consumption during the period rose just efficiency. 1.3 times. However, during those years, although energy consumption in the industrial sector grew Policy progress1 The Aso administration approximately 0.85 times, energy consumption Japan’s energy saving policies have been basedstarted the Eco-Point in the commercial and residential sector (that is, around regulatory requirements and financialprogramme in 2009 as an people’s direct use of energy at home or in the incentives. In the commercial and residentialeconomic and environmental workplace) rose 2.4 times. In the transport sector it sector, regulations include the “Top Runner”measure. The programme rose 1.9 times. Evidently the industrial sector made programme (detailed below), requirementsallows consumers to collect substantial progress in the efficient use of energy, to label home electrical appliances with their“eco-points” by purchasingcertain home appliances while the commercial and residential sector lagged energy-saving capacity, and the registration ofwith high energy-saving behind. buildings’ energy-efficiency ratings at the time ofcapacity, and use the points construction.to buy other energy-saving Japan fares comparatively well in terms of the ratioproducts. In late 2009 the of energy consumption to GDP. If Japan’s score on Incentives include subsidies and preferential taxgovernment approved an this ratio (for 2009) is set to 1, the US stands at treatment for the installation of energy savingextension of the system for 1.9, the EU at 1.7 and China at 7.2. Although Japan facilities; preferential tax treatment (for instancehousing, allowing those is therefore comparatively energy efficient, the special depreciation) for the construction ofwho build or renovate eco-friendly houses to collect amount of energy used per unit of GDP stopped energy saving buildings; tax cuts for homeeco-points. falling in Japan around the latter half of the 1980s. renovations; the Eco-Point programme1;16 © The Economist Intelligence Unit Limited 2012
  • 18. Powering ahead: Perspectives on Japan’s energy future Figure 1: The Top Runner programme—improving energy efficiency Air conditioners: Electricity consumption (Under certain conditions specified by Japan Refrigeration and Air Conditioning Passenger cars: Change in average fuel consumption of new cars Industry Association) Fuel consumption (km/litre) Electricity consumption (kWh) 18 17.8 1,600 1,500 17 1,492 16.5 1,400 16 15.7 15.5 1,300 1,302 15 15.0 15.1 1,200 1201 14.6 14.7 Overall improvement: 47.1% 1,100 Overall reduction: 43.1% 14 14.0 1,159 13.5 1,017 13.2 1,000 1,068 990 13 12.9 947 963 945 900 919 12.3 12.4 882 865 858 849 12 12.1 800 11 700 1995 96 97 98 99 2000 01 02 03 04 05 06 07 08 09 1995 96 97 98 99 2000 01 02 03 04 05 06 07 08 09 (Note: Fuel consumption rates reflect consumption for 10-15 mode cycle, which simulates combined (Note: Wall-hanging type dual-purpose (cooling heating) air conditioner; cooling capacity 2.8kW; city and highway driving patterns) average rate for main energy-saving models) Overall improvement of fuel consumption performance Performance comparison of the best model by country (1995 to 2008) (Cooling capacity: 2.5kW class) (%) (COP*) 40 8 34.1 6.5 30 6 5.5 20 21.2 4 3.9 3.2 3.5 10 10.5 2 0 0 Japan EU US Japan US EU China Thailand Source: Energy Efficiency Standards Subcommittee (November 7th 2011) * Coefficient of performance subsidies for the development of energy-saving The Top Runner programme was introduced under technologies; and public-information initiatives an amendment to the Energy Conservation Law to increase awareness of energy saving. in 1998. By 2011 it covered 23 appliances. Under its terms, manufacturers that fail to achieve Top Among the measures used in the commercial and Runner standard by the target year are asked to residential sector, the Top Runner programme report on the reasons for their failure and their has been one of Japan’s most original and plans to improve efficiency. Having made these successful policies. This requires manufacturers plans, if they still fail to make sufficient progress of high-energy-consumption commercial goods the Ministry of Economy, Trade and Industry (METI) like air conditioners, TVs and cars to upgrade intervenes with progressively tougher measures to the energy efficiency of their products—after a punish non-compliance, including disclosure of the certain period of time—to a level that surpasses company name, formal orders and fines. the most energy efficient product in the class. The initiative is unique in the sense that it does As shown in Figure 1, the Top Runner programme not directly regulate the energy consumption of has had a levering effect in raising the efficiency households and workplaces, but rather regulates of appliances that were already thought to have the manufacturers of the appliances used achieved high levels of energy efficiency, such as intensively by these sectors. air conditioners and passenger cars. In turn, the17 © The Economist Intelligence Unit Limited 2012
  • 19. Powering ahead: Perspectives on Japan’s energy future Figure 2: Energy consumption in the commercial and residential sector Change in floor space and energy consumption in commercial sector Change in number of households and energy consumption in residential sector (Vertical axis shows index figures; 1990=1) (Vertical axis shows index figures; 1990=1) 1.6 Energy consumption 1.35 Number of households Floor area Energy consumption 1.5 1.30 Energy consumption/Number of households Energy consumption/floor area 1.25 1.4 1.20 1.3 1.15 1.2 1.10 1.1 1.05 1.0 1.00 0.9 0.95 1990 91 92 93 94 95 96 97 98 99 2000 01 02 03 04 05 06 07 08 1990 91 92 93 94 95 96 97 98 99 2000 01 02 03 04 05 06 07 08 Source: Energy Efficiency Standards Subcommittee (November 7th 2011) programme has contributed to strengthen the Future priorities: energy-saving competitiveness of Japanese goods, as their high buildings levels of energy efficiency have surpassed those In contrast to measures implemented to improve achieved by manufacturers in other countries. the efficiency of appliances, Japan is relatively weak in its efforts to make buildings more energy Japan has also made efforts to raise consumers’ efficient. Since 1980 the infrastructure ministry awareness about the energy efficiency of various has sought to improve the energy efficiency of goods, especially home appliances. For instance, buildings by promoting certain standards of METI’s agency for natural resources and energy insulation and heat efficiency (for instance by introduced a labeling programme in 2000, under regulating the thickness of insulation in the outer the auspices of an Energy Efficiency Act, which surface). The ministry also established standards recommends manufacturers label goods with for insulating efficiency and air-leakage efficiency their yearly consumption of electricity and their for residential housing in 1980, dividing the energy-efficiency rating, helping consumers country into six regions according to climatic select energy-efficient products. conditions. Figure 2 shows that with such measures—when The rate of adoption of energy-efficiency evaluated in terms of energy consumption by standards for new non-residential buildings workplace area or per household— Japan’s rose to 90% by 2005. But the adoption rate commercial and residential sectors have seen for new residential housing, although recently steadily improving energy efficiency. But improved through the Eco-Point programme the absolute amount of energy consumption for housing, remains low, at around 40%. This continues to rise due to the continued expansion situation reflects the fact that energy-efficiency of workplace floor area and the number of standards apply only to buildings with a floor households. This rising trend, despite the space of 300m2 or more, and that the adoption progress made overall, suggests the need for of such standards is not a legal duty. In addition, broad behavioural change in the home and as the lifecycle of buildings is long, the rate of workplace to ensure the sustainability of Japan’s improvement of the total stock of buildings is future energy consumption. slow.18 © The Economist Intelligence Unit Limited 2012
  • 20. Powering ahead: Perspectives on Japan’s energy future In response to this situation, METI introduced companies joining a voluntary action plan “Top Runner” standards in 2009 to regulate for energy saving. Some 150,000 households the energy efficiency of houses sold by housing also participated in the “Home Energy Saving construction companies above a certain size. Declaration” programme. It is also promoting the Zero-Energy Buildings (ZEB) concept for commercial property. (The ZEB The impact of such campaigns was seen not only concept means a building’s net annual primary in the way people reduced overall usage but also energy requirement is reduced to zero, through in the purchase of energy-saving appliances. One improving energy efficiency and making use of clear change was an increase in the sales volume renewable energy.) METI is also preparing Top of LED light bulbs, which are known to give Runner standards for building components such sizeable energy savings. LED bulbs accounted as heat-insulation materials and windows— for around 20% of total light bulb sales prior through which the energy-saving capacity of to the March crisis, but this shot up to reach buildings, including the existing buildings, is over 40% by July 2011, overtaking the share of expected to improve. incandescent lamps for the first time. These were impressive gains in the face of a Lessons from the March crisis national crisis, in terms of energy saving within The Tohoku earthquake of March 2011 and the the household segment. But the task of reducing nuclear accidents that followed had a sizeable peak-hour demand still needs to be tackled. impact on the supply of energy in Japan, causing Within the area served by TEPCO, electricity a radical overhaul of the country’s energy policy. consumption (kWh) by households in August To manage the demand of electricity during the 2011 was down by 17% compared with the summer season, the government demanded the previous year. But peak-hour consumption was areas served by Tokyo Electric Power Company down just 11%, even after an adjustment for air (TEPCO) and Tohoku Electric Power Company (EPCO) temperature conditions (and was down only 6% curb peak consumption by 15%. The Electricity without the adjustment). Business Act made similar demands of bulk scale customers (with contract demand of 500kW or This suggests that the biggest efforts were made over). Companies duly shouldered significant to reduce consumption during off-peak hours. costs and responded in various ways, for instance Apart from making efforts to reduce the total by shifting their operations to weekends and amount of electricity consumption, a creative evenings. As a result, both TEPCO and EPCO effort is required to promote energy saving achieved energy savings of more than 15%. during peak hours. To promote energy-saving measures in the commercial and residential sector (and especially Towards the smart management of in households) the government and electricity energy companies pursued a public campaign on energy The actions that followed the March crisis saving, while also making concerted efforts suggest the future of energy-saving policies. to visualise the information on the supply and Until now, such policies in Japan have focused demand of electricity via their “electricity on technological advancements or innovation forecast”, and giving warnings when a supply to improve the efficiency of energy-consuming shortage was expected. Other organisations, appliances. More recently, authorities have such as universities and research institutes, directed their efforts at the planning stage of joined the effort to provide information that infrastructure projects, buildings and cities. To be helped energy saving. Commercial and residential sure, such measures will continue to be important. consumers responded, with around 100,000 However, the response to last year’s emergencies19 © The Economist Intelligence Unit Limited 2012
  • 21. Powering ahead: Perspectives on Japan’s energy future underlined the significance of another aspect crisis last year. At the same time, Home Energy of energy saving: altering people’s behavioural Management Systems (HEMS) and Building patterns, for instance by adjusting factories’ Energy Management Systems (BEMS) are being operating hours and promoting setsuden (energy developed and installed in the commercial and saving) by households. residential sector. For consumers, changing behavioural patterns The next stage is the integration of information of consumption requires forbearance. In the and energy management in wholesale “social summer of 2011 this was underpinned by a system innovation”, for instance in “smart strong sense of crisis, which has now eased. cities”. For instance, if a pricing system is Promoting energy-saving behaviour on a established with the use of smart meters that more permanent and less strenuous basis is responds to the state of supply and demand of believed to be possible by making available to electricity, consumers will be able to fine-tune consumers timely information on the supply and their consumption at different times of the demand of energy—coupled with the provision day. In addition, if information regarding the of appropriate incentives. Policies to promote supply and demand of energy can be fed into the behavioural change via information provision energy management system, it will be possible are especially important in dealing with energy to reflect that information on the appliance at saving in the commercial and residential sector, the consumer end—allowing for the efficient where small-scale consumers lack sufficient adjustment of energy supply and demand by both information on energy supply and demand. the supplier and consumer, with data available on a variety of devices. The key issues involve a system that enables the timely delivery of information to consumers By securing smart energy management that on the supply and demand of energy. They also integrates energy and information, various involve the energy management system that possibilities open up with regard to energy uses the information to bring about rational saving in the commercial and residential sector. behavioural change. A smart meter is one In adversity lies opportunity. It is hoped that gateway information system for consumers: the the March disaster will translate into an energy use of such devices has been spreading since the revolution.20 © The Economist Intelligence Unit Limited 2012
  • 22. Powering ahead: Perspectives on Japan’s energy future 5 Industry and Japan’s energy supply: Maintaining a competitive energy landscape Japan has paid insufficient attention to demand-side perspectives in its energy strategy, this contributor argues. In the short term, some companies will be forced to consider moving production abroad if they have to bear increasing energy costs. However, many (especially SMEs) can become much more energy efficient by adopting industry best practices. On the supply side, decisions about nuclear power need careful thought. While renewable energy is a medium-term prospect, its current cost makes broad industry-level adoption unrealistic. Mitsudo Urano Chairman, Nichirei NB: Mr Urano is chairman of the Committee on Energy is a long-term phenomenon, requiring the the Realisation of a Low Carbon Society and of the detailed discussion and consideration of issues Project Team on Energy Policies at Keizai Doyukai in advance. It’s a very complex agenda. It’s not (the Japan Association of Corporate Executives). simply about the economy or natural sciences; In an interview on March 1st 2012, the EIU asked politics also plays a part, and it concerns people’s Mr Urano to discuss the energy challenges facing livelihoods as well as economic growth. Yet I Japanese industry, and his recommendations for think Japan’s energy policies have been made securing a competitive energy infrastructure for on a very simplistic model. Industry’s biggest Japanese business in the long term. concern is that energy policies were made merely on the basis of supply-side logic; there has been Economist Intelligence Unit: What are hardly any demand-side perspective. If private Japanese industry’s energy priorities? companies managed their strategies in a similar Historically, how well have Japan’s fashion, and got into any trouble through their energy policies taken industry needs own negligence, they would simply go bust. But into account? if the government behaves in this way, the whole Mitsudo Urano: There are no shared energy country suffers. priorities among all industries as such. But in thinking about Japan’s energy strategy I believe Broadly, there are three perspectives lacking there are four perspectives that must be included. in Japan’s overall energy strategy. One is this These are stable supply, economic efficiency, consumer perspective. Another is geopolitical, environmental protection and safety. considering national energy security. The third21 © The Economist Intelligence Unit Limited 2012
  • 23. Powering ahead: Perspectives on Japan’s energy future concerns the question of whether it is appropriate models of business, such as Nichirei, there are to continue making energy policies on the limits in their ability to [move production] abroad. assumption that the country’s industrial structure is static. For instance, even if our manufacturing One thing we can say—judging from the experience sector won’t completely disappear, Japanese of last summer— is that most companies with industry may become a knowledge-based business domestic operations, especially the small and that sells know-how and patents abroad. Then it medium sized enterprises that account for more might be sufficient to secure only 60-70% of the than 90% of companies in Japan, are still wasting energy required today. But energy policies are a lot of electricity. For them, electricity is simply formulated in a simplistic manner, considering a commodity to purchase; they have not really only today’s realities. attended to how they have been using it. In terms of consumption, therefore, there is still room for improvement [among such companies] if they EIU: In the short term, how is Japanese follow the “top runner” energy savers in their industry preparing for possible energy respective industries. shortages? Is there a national plan in place? Among industries that consume electricity MU: Last year, the biggest challenge was to in bulk, however, many have already made manage energy consumption during peak hours. significant efforts to reduce energy consumption. By and large we succeeded given that we did not For these businesses, unless new technology to encounter blackouts. But companies paid a heavy save energy becomes available, there is probably price for this in various ways. [Such actions] very little room for further energy cuts. might be repeatable as a temporary measure. Companies operating in the areas served by Tokyo EIU: On the supply side, what do Electric Power Company might ask to be spared you think is the appropriate mix of from doing the same again. generation sources? What future role However, [regarding a nationwide plan] we should nuclear play in Japan’s energy have heard nothing. Companies will probably profile? get by, if the situation lasts this year only. If MU: From Keizai Doyukai’s standpoint, inclusive they are required to do the same [ie reduce peak of considerations of economic efficiency, the consumption] again next year, then the question environment and supply stability, getting rid of all of whether or not to relocate abroad will loom as nuclear plants in the short-term is not an option... an issue for many of us. Many companies will be [For one thing], since Japan’s accident, other in trouble if they cannot secure a stable supply countries will continue with their plans for nuclear of electricity. So [industry] might grant the energy. Under such circumstances, it does not government one year’s grace, with the condition seem right for Japan to conclude to quit nuclear that a national plan must be clarified for next year. on the basis that it cannot ensure its safety. My view regarding nuclear energy is that it is EIU: On the demand side, what energy important not to make a rushed decision. In the strategies can Japanese industry take? medium to long-term, you never know whether an MU: Strategies differ by nature of business. For innovative technology may come about to allow instance, companies that produce [goods like] all nuclear operations to be conducted entirely titanium require significant amounts of energy. It underground, for instance. From the viewpoint would be difficult for them to continue producing of companies’ senior management, it is certainly domestically if the cost of energy were to go up by not the sort of problem where a decision can 20-30%. And for companies that have domestic be taken quickly. Making a quick decision today22 © The Economist Intelligence Unit Limited 2012
  • 24. Powering ahead: Perspectives on Japan’s energy future seems irrational, especially on the assumption difficult, though of course it depends on the that circumstances in future—including available pace of technological development. In addition, technologies—will remain the same. with regard to solar power, we must avoid losing biodiversity via the loss of satoyama [traditional Once something [dramatic] happens, we tend to rural areas] as a result of turning terraced paddy overplay the incident. If it becomes apparent that fields into solar-panel wastelands. we could not have prevented the accident from happening even if we had taken every possible Regarding thermal sources [such as liquefied precaution, only then should we start having natural gas, LNG] in the short run, the ministry a discussion about abandoning nuclear power. of foreign affairs will need to better deal with And the reality is that even if Japan quits nuclear issues about from where and in what ways LNG is power generation completely today, it would not to be secured. As a medium to long-term measure, at all ensure its safety. For one thing, there is the we might also need the state’s input to help question of how to manage spent fuel rods. The transform methane hydrate into a viable source international community is yet to come up with a of energy for practical use, within ten years for solution on this; together, we will innovate and instance. So for all energy sources, whether devise a safe method. nuclear, thermal or renewable, we still have a variety of issues to deal with in the short, medium When considering the merits of nuclear power and long term. generation, I believe we should consider a route to better manage this energy source with further EIU: What is industry’s position on the technical developments. There would be nothing separation of power generation and more unfortunate than for Japan to lose know- transmission? how on nuclear energy by exiting the industry. We MU: I believe we lose sight of the big picture then wouldn’t be able to contribute anything to when we single out this issue in a simplistic the world in this area. Therefore, in the short- manner. The question of whether the current run, it’s important to restart nuclear plants in setup—marked by regional monopolies of nine respective regions, having first clarified the major electricity suppliers—is meeting today’s causes of the Fukushima accident in a way that is needs should come first. internationally endorsed. Increasingly, for various reasons, we will need EIU: Is the greater adoption of renewable diversified energy sources. With this realisation, sources of energy supply in Japan only then do [the implications of] separating realistic, from industry’s point of view? power generation and transmission emerge. MU: In the medium to long term, we should When one considers the ideal mix of energy certainly pursue renewable sources of energy, sources, the current set up of electricity supply including geothermal heat. But I must say that starts crumbling. Until now, we have only looked there is [currently] perhaps nothing worse than at this issue from the supply side but really, solar and wind power in terms of efficiency, it’s an infrastructural issue for the country as a when considering the required investment in whole. The basis of the discussion should be the relation to output. We will therefore have to reality that Japan’s energy security is in danger think carefully about the appropriate use of if we do not diversify energy sources, given the these sources—for instance, they might be good fragile state of nuclear power generation and a for local consumption, or for use in workplaces reconsideration of the legitimacy of using oil- and households. Anything beyond such use is fired thermal energy.23 © The Economist Intelligence Unit Limited 2012
  • 25. Powering ahead: Perspectives on Japan’s energy future 6 Japan’s distribution challenge: Lessons from abroad Japan’s electricity transmission and distribution (TD) system has not changed dramatically in the post-war period. Prices remain high even as investment in TD has fallen rapidly, while new generators complain of uncompetitive charges to access the grid. Is the vertical unbundling of generation from TD the answer? Evidence from other countries that have attempted this is mixed. While an Asian “Super Grid” remains a pipe dream, demand management through smart grids and smart appliances seems the most promising solution. Paul J. Scalise11 Paul J. Scalise Ph.D is JSPS Research Fellow, Institute of Social Science, University of TokyoJSPS Research Fellow at theInstitute of Social Science, Seventeen years since Japan began its experiment and low-voltage current from transmissionUniversity of Tokyo and with electric power liberalisation, slowing demand substations to end-users such as residentialNon-resident Fellow at the growth, growing environmental concerns, households and businesses. In Japan, distributionInstitute of Contemporary and pricing pressures constrain a country now lines run densely throughout the country andAsian Studies, Temple debating the future of its energy market design. account for 96% of the total length of theUniversity, Japan Campus. The nuclear crisis at Fukushima is only the latest transmission and distribution network (hereafterHis most recent publicationis “Hard Choices: Japan’s complication of an energy policy that must TD). In 2010, Japan’s TD spanned over 5.2mPost-Fukushima Energy balance what the Ministry of Economy, Trade and kilometres (3.2m miles)—about 130 times largerPolicy in the 21st Century” Industry aptly calls the “3 Es”—economic growth, than the circumference of the earth at the equator.in Jeff Kingston, ed., Natural environmental friendliness, and energy security.Disaster and Nuclear Crisis Policymakers are now faced with both daunting This TD technology and its corresponding marketin Japan: Response and design have not changed dramatically over the challenges and encouraging prospects.Recovery after Japan’s 3.11. post-war period. In addition, the increasingLondon: Routledge, 2012. Any reforms to Japan’s market design and energy number of aged TD facilities in Japan heightens2 There are four types of policy, however, would be incomplete without the concern for future investment, innovation andunbundling: administrative an assessment of its network facilities. They are rehabilitation. This situation anticipates several(separate financial broadly divided into two types: transmission questions: is Japan’s TD network inefficient?accounts), managerial and distribution. Transmission networks are Can unbundling2 transmission and distribution(separate staffing units), high-voltage three-phase alternating current increase investment and innovation? What arelegal (separate legal entity,sometimes a subsidiary), (AC) lines transmitting electric power over long the lessons from abroad? What are the politicaland ownership (separate interconnected distances from power generators chances of a decentralised bargaining system overownership with no shared to substations by way of “the grid”. Distribution such rights, such as found in the UK or Nord Pooloperational activities). networks deliver electric power at medium-level hybrid, determining dispatch in Japan? And what24 © The Economist Intelligence Unit Limited 2012
  • 26. Powering ahead: Perspectives on Japan’s energy future the 60Hz region to the 50Hz region. However, Figure 1: Japanese electric power supply system (2005~) these converters are limited in scope and transfer capacity creating bottlenecks at key cross-border (Competitive bidding on new thermal power sources) areas between prefectures and service regions. Specified-scale Generation EPCO IPPs EPDC segment electricity suppliers In addition, Japan’s TD network is atypical in a cross-national context. Unlike European EPCO transmission lines Special electric and North American markets, where highly Trans. distribution utilities interconnected grids span political borders, segment Supply mountain passes, and bodies of water, Japan is obligation EPCO distribution lines separated from relatively cheap electric power in Special regional Russia, South Korea and Taiwan. Eligible Retail segment Captive customers customers Despite these market constraints, Japan’s TD (Specified-scale electricity suppliers) network exhibits both strengths and weaknesses. (Back-up supply) The latest data from the Japan Electric Association Notes: EPDC = Electric Power Development Co, or J-Power: one of two wholesale suppliers in Japan. indicate that relative TD loss ratios rank Japan IPPs = independent power producers Source: Ministry of Economy, Trade, and Industry (5.2%) as the most technically efficient among the US (5.8%), Germany (5.8%), Italy (6.4%), France (6.9%), the UK (7.8%), and Canada (9.1%). are the prospects for smart-grid technologies in In addition, Japan’s 10 service regions boasted Japan? pre-3/11 relative blackout ratios well below3 In 2010, the weighted those of its European and North American peers,average OECD price of The current structure of the Japanese suggesting an easy-to-control and self-containedelectricity per kilowatt-hour power market network system largely immune from outsidekWh) was ¥13.4/kWh versus Japan is divided into ten service regions. shocks.¥16.4/kWh in Japan. Each region is a distinct geographic market4 Japanese households serviced by a combination of Japan’s five power Against this, Japan’s most salient weakness is the(ex industrials) consumed suppliers (Figure 1). Dominating the market high cost of its retail electricity in international304,230 gigawatt-hours in each region is the general electric utility: a context. On a purchasing-power-parity basis,(GWh) in 2010. The average vertically-integrated, investor-owned private Japan’s electricity tariffs in 2010 were 24% higherJapanese and South Korean electric power company (EPCO). Identifying these than the OECD average.3 If Japan’s residentialhousehold electricity tariffsare US$ 0.183/kWh and EPCOs from north to south, they are: Hokkaido, electricity tariffs were reduced to those of0.117/kWh, respectively. Tohoku, Tokyo, Chubu, Hokuriku, Kansai, neighboring South Korea, Japanese householdsThe difference between the Shikoku, Chugoku, Kyushu and Okinawa. Each would have saved US$20bn in 2010.4Japanese and South Korean service region has its own share of wholesalehousehold price in 2010 is suppliers, special electric utilities, independent Japanese EPCOs explain these price disparities bya total US$45.3bn using pointing to the country’s lack of natural resources, power producers, and specified-scale electricitysimple exchange rates, and suppliers (new entrants). expensive real estate, and high transactionUS$20bn using the adjustedOECD PPP rate of ¥111.45 to costs in the siting, licensing, and construction ofUS$1. Domestically, Japan is constrained by two conventional thermal, hydroelectric, and nuclear separate frequency regions. Eastern Japan, or power plants in local host communities.5 While5 See Paul J. Scalise, The the 50Hz region, occupies 43% of the network possibly true, one oft-cited theoretical argumentPolitics of Restructuring: spanning from Tokyo to Hokkaido. Western Japan, in favor of restructuring is the expectation thatAgendas and Uncertainty or the 60Hz region, occupies the remaining 57% competition would drive innovation, energyin Japan’s ElectricityDeregulation, Doctoral of the network. Because electrical output must efficiency and cost-cutting to a lower marginalDissertation: University of be maintained at a fixed setting, Japan requires cost for retail electricity, while simultaneouslyOxford, 2009. frequency converters to transfer electricity from bypassing inefficient regulations to site approval.25 © The Economist Intelligence Unit Limited 2012
  • 27. Powering ahead: Perspectives on Japan’s energy future Figure 2: TD and generation capital expenditures (9 EPCOs, US$bn) 500 Generation Transmission Distribution 400 300 200 100 0 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99200001 02 03 04 05 06 07 08 09 10 Note: “Transmission distribution” includes transformation, transmission and distribution Source: Handbook of Electric Power Industry Unbundling: Lessons from abroad Among EU-27 member states, more broadly, several Foreign blueprints to the restructuring of electric top-down electricity directives have addressed power markets provide mixed lessons for Japan. the technological, economic, environmental, and Vertical ownership unbundling—the separation regulatory environment of member markets without of an electric power company’s generation, forcing incumbent suppliers to vertically unbundle transmission, distribution, metering, and sales ownership. The Netherlands has been one of the chain within a single commercial entity—aims rare member states to take this directive to the theoretically to correct the potential abuse of extreme by completely unbundling ownership; incumbent suppliers’ high market concentration, many other member states have yet to comply with thus creating a non-discriminatory and more the directive, facing resistance from incumbent transparent system for all stakeholders. Although suppliers. market restructuring takes many forms, the basic features include the introduction of competitive Case studies on post-liberalisation effectiveness generation markets at the wholesale and are also circumstantial, suggesting this inertia is retail levels, open access to the TD network partially the result of complexity and uncertainty. for all market players, and the creation of an Since the California Crisis of 2000-01 and a Independent System Operator (ISO) that deals series of major blackouts in the US and Europe, with the generation and dispatch of electric power policy analysts have begun to doubt its practical to end-users. application. What is often viewed as a pure lack of power-generating capacity threatening energy In the most notable British case, these features stability and economic growth is actually, in some were driven by a top-down political ideology instances, a lack of TD infrastructure brought (Thatcherism) and its distaste of coal miner about by insufficient pricing signals, downgraded strikes, the desire to limit strong labor unions, credit risk ratings threatening much-needed loans, a predisposition towards free markets, and the and other investment disincentives in liberalised hope of attracting foreign investment. In other markets. One oft-cited example is the case of markets—such as Alberta, Australia, California, California, where insufficient TD infrastructure Chile, New York, New Zealand, Nordic countries, and investment from the Mountain states to and Texas—unbundling generally assumed California, and especially from southern California bottom-up consumer welfare gains, greater to northern California, resulted in further technological innovation, and heightened bottlenecks on the grid contributing to sharp efficiency. electricity price mismatches in 2000-2001.26 © The Economist Intelligence Unit Limited 2012
  • 28. Powering ahead: Perspectives on Japan’s energy future Prospects for Japan’s TD network transmission access, additional back-up power In Japan, the vast majority of TD assets will be charges, ancillary charges and maintenance ready for replacement and refurbishing within the charges to pay for the stability of the network. next 20 years. Japanese EPCOs will need to make large investments in order to protect the grid. Yet, Nevertheless, vertically integrated suppliers the electric power market has already experienced in regulated markets often de-prioritise a significant decline in both TD and generation TD investment and rehabilitation due to investment over the past 20 years (Figure 2), budget constraints and insufficient returns on with a corresponding drop in the reserve margin investment. In Japan, too, this problem has from approximately 30% in 1985 to below 10% in become increasingly evident since declining 2010. The cause of this TD decline is sometimes demand growth, growing post-liberalisation risk, attributed to insufficient deregulatory measures and criticism of Japan’s wheeling charges imposed provoking sub-optimal outcomes for incumbent further disincentives on the EPCOs to prioritise suppliers and new entrants alike. the TD network. In 1993, the EPCOs recorded a combined US$223bn in capital expenditures on From 1997-2000, the Ministry of International TD infrastructure. By 2003, total investment fell Trade and Industry (now METI) threatened by 78% to only US$53.6bn in an attempt to satisfy incumbent suppliers with vertical unbundling to outside pressure to reduce wheeling charges and facilitate lower electricity prices, but failed to expenditures simultaneously (Figure 2). These provide the needed international success stories expensive—albeit correctable—bottlenecks have and domestic consensus to support the agenda. contributed to Japan’s high electricity prices. Today, 46 specified-scale electricity suppliers Asia’s high economic growth rate, rising have entered the contestable market6 holding electricity demand, aging TD network and desire6 Revisions to the Electric a minority 3.7% share since March 2000.7 to improve energy security, coupled with thePower Utility Law in 1995, Although the Japan Electric Power Exchange possibility of integrating more renewable energy2000, and 2005 gradually (JEPX) serves as a wholesale trading market sources into the existing network system, haveintroduced competitive for spot transactions in the buying and selling translated into talks of greater interconnection.principals. Phase 1 of surplus power, new entrants still must rely Proponents have argued that the developmentintroduced wholesale on the TD assets owned and operated by of an “Asia Super Grid” connecting multiplecompetitive bidding. incumbent suppliers (Figure 1) to reach eligible countries across east Asia would facilitate thePhase 2 introducedretail competition to customers. Some argue that the wheeling charge rapid integration of renewable energy sources,approximately 30% of to gain third-party access to the TD network is while simultaneously helping to resolve thethe total market at the prohibitively high and lacks transparency, thus electric power dispatch problems commonly“extra-high voltage” level lowering their competitive advantage. They also associated with using intermittent renewableof 20 kV with a contract argue these wheeling contracts are inflexible: new energies such as wind, solar and tidal powersupply of 2000kW or entrants are required to sign for one year, cannot sources. In addition, lower transmission lossesabove. Phase 3 expandedthe market to include the have more than one contract, and cannot change would equate to lower electricity tariffs, therebyremaining industrial and their access points at short notice. inducing greater competition in liberalisingcommercial level customers electric power markets.at approximately 60% of the Incumbent suppliers counter-argue thatmarket. consumers “get what they pay for.” The relative The support for an Asia Super Grid remains largely stability of the network system, relatively few theoretical with only exploratory interest among7 The largest new entrantsby units sold in 2010 blackouts, and reduced TD losses require domestic and international actors. The Southincluded Ennet (9,772 GWh), additional safety measures. Those measures Korean and Russian governments have indicatedMarubeni (1,395 GWh), and include loop flow studies required by incumbent their willingness to consider such cross-nationalSummit Energy (1,346 GWh). suppliers before new entrants can be granted projects, while the Japanese government has27 © The Economist Intelligence Unit Limited 2012
  • 29. Powering ahead: Perspectives on Japan’s energy future remained largely silent. Perhaps not surprisingly, the technology until 2015 to see the problems companies that stand to benefit from the exported posed by the effects (voltage, power flow) on the sale of competitive electric power to Japan have TD network. How other Japanese regions will expressed an interest; Korea Electric Power welcome real-time monitoring and the potential Corporation (KEPCO) and Japan’s Softbank have legal risks and economic benefits it provides will initiated discussions, while in Japan, calls for links only become clearer over time. to the Asian mainland continue to grow. Electricity grid builders such as ABB, a multinational The future of Japan’s grid corporation specialising in power products and Prospective competitors in Japan’s liberalised systems, alongside consulting firms such as electric power market continue to face barriers Visiongain, forecast the emergence of such a super to entry, including high sunk costs, poor grid market by 2022. The greatest challenges access conditions and a high level of regulatory will be the financing, logistics, and political uncertainty. A faction within METI—including its sovereignty issues complicating such an initiative. minister, Yukio Edano—has revisited restructuring to help correct these problems in the wake of the From a demand-management perspective, Japan’s Fukushima nuclear crisis. However, large upfront emerging “smart grid” and “smart metering” costs in the reorganisation and separation of technology is undergoing a bottom-up revolution electricity businesses, coupled with organised at the municipal level in countries worldwide, and resistance from incumbent EPCOs and the may prove more powerful than either the Super uncertainty over restructuring’s net benefits, Grid or vertical unbundling ever could. “Smart” presents hard choices for re-election minded technologies encompass the application of a politicians faced with national budget constraints, wide array of digital technologies, monitoring, fractious in-fighting and a slowing economy. two-way communication, and the Internet. The smart meter eliminates monthly meter readings The recurring question in post-Fukushima Japan is by sending real-time information directly to what measures policymakers will take to guarantee power companies in an effort to control load. By energy efficiency, environmental friendliness providing greater information to suppliers and and economic growth: the three—perhaps consumers, smart meters were designed to reduce contradictory—pillars of Japan’s energy policy. power consumption and increase efficiency. Should nuclear power play a smaller role in the country’s diversification portfolio in future years, Italy has been the first country in Europe to further long-term investment will prove necessary implement smart meters nationwide in order to to close the conservation gap and facilitate the control rising demand and prevent theft, while growth of renewable energy, whose technology South Korea began in 2008 to address similar faces substantial intermittency and dispatch concerns. However, the issue of cost raises the problems associated with its on-grid transmission question of who will pay for it—the EPCO, the and distribution. government, or both, via the consumer? In Japan, smart meters cost approximately ¥50,000 Japan’s lack of political will and growing economic to install per household. Pushed by the supply- uncertainty have provided little impetus for the demand imbalance created by the Fukushima renewed talks, leaving communities, businesses, nuclear crisis, Tokyo Electric Power Corp (TEPCO) and EPCOs the daunting task to develop smart has announced it will implement smart metering technologies and green energy on their own. One from 2013 in an effort to avoid rolling blackouts. thing is certain: as smart technology evolves, so Kyushu EPCO, in contrast, will continue to test will the opportunities to restructure in Japan.28 © The Economist Intelligence Unit Limited 2012
  • 30. Powering ahead: Perspectives on Japan’s energy future 7 The best energy mix for Japan: International perspectives The Fukushima disaster may have led to global soul-searching about nuclear power, but eliminating nuclear from the energy-generation mix is a radical step that few nations are able to take. Fast-growing emerging economies and developed nations alike have to resolve the thorny triple problem of energy security, social equity and environmental impact. In its search for a best energy mix, Japan is no different. Christoph Frei Secretary General, World Energy Council Across the world, governments have been evaluating their plans to meet the growing struggling to find the best solution to meet the demand for energy. ever-increasing demand for energy. Developed countries are assessing how to upgrade and replace existing infrastructure, while developing The Fukushima effect Before the Fukushima accident, Japan generated nations need to address increasing demand to approximately 30% of its electricity from nuclear meet unprecedented growth. These changes power, with gas and coal accounting for around 50% are taking place against a backdrop of concern of the generation mix. At the time of writing (22nd over climate change, serious economic problems February 2012) only two nuclear power plants out in some parts of the world (placing stress on of a total of 54 commercial nuclear reactors are still potential funding mechanisms) and increased operating in Japan.1 This is equivalent to a 72% political uncertainty, resulting in price instability. decrease in nuclear power generation, taking into On 11th March 2011 the most powerful earthquake account installed nuclear capacity. ever recorded in Japan struck its north-east coast, triggering a massive tsunami. The ensuing To replace this supply Japan has had to spend meltdown of the Fukushima Daiichi nuclear power more on other sources of energy. According to the1 On March 26th Tokyo plant caused policymakers in Japan and across the Institute of Energy Economics of Japan and theElectric Power Co turned world to look again at the role of nuclear power in Japanese Ministry of Finance, Japanese liquefiedoff the No 6 unit at theKashiwazaki-Kariwa power the energy mix. While the full implications of the natural gas (LNG) imports in 2011 were 12%station in Niigata, leaving Fukushima disaster are yet to be fully assessed, higher than in 2010, while LNG imports were uponly one reactor operational. governments around the world have been re- 28.2% year on year in January 2012.Incremental29 © The Economist Intelligence Unit Limited 2012
  • 31. Powering ahead: Perspectives on Japan’s energy future oil demand in the Japanese power sector was their proposed stance on nuclear energy in 280,000 barrels per day (b/d) in 2011 and will summer of this year. be around 320,000 b/d in 2012, according to the IEA Oil Market Report for February 2012. Analysis As future demand for energy is now coming from by the Japanese Ministry of Economy, Trade and non-OECD nations, most new nuclear power plants Industry (METI) shows that more than ¥3trn are being constructed in developing economies, (US$37bn at current exchange rates) will have to with China, Russia, and India building 26, 10 be spent to substitute nuclear power with thermal and 7 reactors respectively, out of a total of 63 power generation from gas and oil. reactors currently being constructed worldwide. Together, they account for 66% of new nuclear The cost of substitution is magnified as nuclear capacity currently under construction.2 Brazil is a and coal power stations operate continuously at notable exception due to the fact that most of its base-load, while LNG and oil-fired plants are run as electricity is generated by hydropower. peak-load or middle-power sources. The consumer will have to bear some of this cost. As a result of Advances in nuclear technology, combined with taking nuclear capacity offline METI estimates that improved plant operating performance, and the electricity prices in Japan will rise by 20%, while number of new reactors being built in non-OECD power shortages of 10% will occur at peak hours. countries highlights the fact that electricity that is not affected by fuel price volatility will always The higher price of electricity is a local effect of remain a strategic priority for countries embarking Fukushima, but the disaster had a global impact. on a trajectory of strong economic growth. The conclusions from a recent study by the World Energy Council, World Energy Perspective: Nuclear Solving the “Energy Trilemma” Energy One Year After Fukushima, show that the Against this background, what should a country Fukushima accident in Japan did not lead to a like Japan do when looking to provide a sustainable significant diminution of nuclear programmes energy supply? globally. Nevertheless, a significant outcome of the Fukushima accident is increased global The World Energy Council’s definition of energy concern about safety, regulations and public sustainability is based on three core dimensions: acceptance. energy security, social equity and environmental2 Based on IAEA figures impact mitigation. The development of stable,(February 2012). Globally, OECD countries account for more than affordable and environmentally sensitive3 The Energy Sustainability 80% of worldwide nuclear generation capacity, energy systems defies simple solutions. MeetingIndex has been published with the top four countries (USA: 104 reactors; these three goals constitutes a “trilemma”,since 2009 as part of the France: 58 reactors; Japan: 54 reactors, Russia: the complexity of which is multiplied by linksWEC’s “Policy Assessment of 32 reactors) accounting for 62%. In each of between economic factors, national resourcesClimate and Energy Policies” these countries, nuclear power accounts forreport. This unique ranking and environmental concerns, and public and approximately 20%, 74%, 30%, and 17% of private actors like governments, regulatorsexamines over 60 data setsto provide a detailed analysis their total generation capacity respectively. and individuals. Despite this complexity, whenof 92 countries’ energy So far, none of these countries has decided to considering a sustainable energy strategy theand climate policies and conclusively abandon future plans for nuclear “Energy Trilemma” provides the best frameworkoffers an understanding of following the events at Fukushima. Indeed, for the for assessing the options.country energy performance first time since 1978, the US Nuclear Regulationagainst the three dimensions Commission recently approved the construction of Before Fukushima, Japan was successfullyof energy sustainability:energy security, social equity two nuclear power reactors at Vogtle in Georgia, at addressing the “Energy Trilemma”. Out of 92and environmental impact an estimated cost of US$14bn. Japan is currently countries, Japan ranked sixth on the World Energymitigation. re-examining its energy strategy and will clarify Council’s Energy Sustainability Index3, indicating30 © The Economist Intelligence Unit Limited 2012
  • 32. Powering ahead: Perspectives on Japan’s energy future a comparatively efficient energy system that increase that will only go a small way to meeting ensured stable energy supply, affordable access the country’s fast-growing energy needs. Coal to electricity for the Japanese population and a continues to be the largest provider of energy in relatively low level of CO2 emissions. However, as China, representing approximately 79% of the Japan and other countries seek to reassess their overall electricity mix compared to just 1.9% for energy mix in light of Fukushima, we may well see nuclear. significant changes in this index, especially due to shifts in energy production to more carbon- This presents difficult choices when considering intensive systems. the potential impact that continuing with this approach could have on climate change. China is Japan’s policymakers have been trying to assess therefore seeking to reduce the share of coal from the best way forward in terms of energy mix. almost 80% of the energy mix to 50% by 2020. The public, for understandable reasons, is very This is an ambitious target for a country with concerned about the use of nuclear power. But such a fast-growing economy. As China becomes a review of the policy responses from other the largest consumer of energy in the world, it is countries demonstrates that options can be inevitable that even with this ambition the use of limited, owing to the differing energy intensity coal will continue to increase in absolute terms. provided by available generating resources. Alternatively, it is worth considering that the Take, for instance, the fact that several (mainly Fukushima disaster has prompted significant non-OECD) countries have reaffirmed their changes to national energy policy in Germany, intention to pursue nuclear programmes and Switzerland and Italy (as well as Japan itself). strengthen the position of nuclear energy in Germany’s decision to phase out the use of their mix in order to meet rising power demand. nuclear by 2022 is the most dramatic change. China is leading the way with plans to expand its The country has embarked on what has been current nuclear capacity from 12GW to 40GW, an described as “the world’s biggest energy experiment”. Germany is looking to increase theNet changes in number of nuclear reactors from March 10th 2011 to use of renewable sources of energy, including aFebruary 22nd 2012 massive expansion in the use of wind and solar. Operating Under construction Planned Proposed China 3 -1 1 10 This has significant consequences on other Germany -8 parts of the sector, not least in the distribution India 2 -1 system. Since Germany was reunited in 1990 Iran 1 -1 there has been major investment in improving Japan -4 -2 4 the transmission infrastructure between the South Korea 2 -2 east and west of the country. Now Germany has Lithuania 1 -1 to consider the impact of realigning its grid on Malaysia 1 a north-south axis, which entails additional Pakistan 1 1 -1 challenges and costs. Russia 1 -1 Saudi Arabia 16 Like Germany, Japan will need to reform its Ukraine -9 supply infrastructure as it considers the next UK* -1 phase of its energy strategy. Currently the system US 2 -4 in Japan is limited by its historic infrastructure, Vietnam 2 -6 with the electric power system dependent* On October 24th 2011, Magnox Ltd announced that Unit 1 at Oldbury nuclear power plant would be on large-scale intensive power sources. Ifpermanently shut down in February 2012 (10 months earlier tan expected) after 44 years of operation.Source: World Energy Council policymakers move towards a more decentralised31 © The Economist Intelligence Unit Limited 2012
  • 33. Powering ahead: Perspectives on Japan’s energy future source of power provision there will need to be producers to market more efficient appliances significant investment in the grid. and consumers to buy them. Furthermore, at a global level, increased appliance ownership, Manage demand as well as supply driven by higher incomes, has partially offset As Japan begins to consider the options beyond the effect of energy efficiency policies. Consumer 2020, managing demand will play as much a role behaviour, technology developments and as managing supply. Before Fukushima, Japan’s challenges in direct financing have slowed energy energy policy had placed the priority on securing efficiency in realising its full potential. supply to meet “given demand”, and therefore put a lower priority on effective demand As energy prices increase, the incentive to devise management. To be sure, some attempts were energy-efficiency policies—and to participate in made to increase energy efficiency. The World them—will become greater. Ultimately, public Energy Council recently assessed the Japanese acceptance will be essential to their increased “Top Runner” programme, which we identified success. In this regard Japan has a significant as a prime example of good policy for promoting opportunity to address this challenge as it energy efficiency (see also P16). Our review looks to review its energy policy. The country assessed that the implementation of this policy has the technological expertise, which with the had exceeded expectations. right stimulus could benefit not only Japan but also other countries, as the pressure to deliver Such achievements show that energy-efficiency efficiency improvements increases. policies can play a key role in managing demand, thus reducing the pressure on the supply side, Before the Fukushima event, Japan’s Strategic without detriment to growth. This type of scheme Energy Plan of 2010 envisioned that nuclear also supports the ambition of reducing the impact would account for approximately 50% of on the environment. “Top Runner” is only one generated electricity by 2030, with the initiative, however, and one that places the onus construction of 14 additional plants and a facility on the manufacturers of consumer goods to utilisation rate of 90%. It seems likely that we adopt best practices, rather than the consumers will now see fewer reactors proposed. But unless themselves. Japan wants to expose itself to gas and coal price volatility, and risk a significant increase in In addition, while improving energy efficiency its carbon footprint, it will continue to invest in is often seen as relatively easy goal, experience nuclear power generation in some way. elsewhere has shown that its uptake is often slower than predicted. Many studies, including In any event, as Japan considers its energy mix, our Energy Efficiency: A Recipe for Success report, its policymakers will need to consider how to point out the large potential for energy efficiency address the “Energy Trilemma”. Only by defining including successful labelling programs for strong and transparent energy policies, led by a appliances such as the USA Energy Star or PROCEl clear vision for a sustainable energy future, can in Brazil. However, they also show that progress Japan attract the investment needed to build a has often been slower than expected due to the new, more efficient energy system, with public complexity of the decision-making chains to get acceptance.32 © The Economist Intelligence Unit Limited 2012
  • 34. Whilst every effort has been taken to verify the accuracyof this information, neither The Economist IntelligenceUnit Ltd. nor the sponsor of this report can accept anyresponsibility or liability for reliance by any person on thisreport or any of the information, opinions or conclusionsset out herein. About the sponsor GE supported this paper by the Economist Intelligence Unit in order to examine comprehensively the future prospects of Japan’s energy strategy from a balanced and international perspective.
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