Japan reacts and evolves
Japan’s energy economy is pulsating – under the weight of its past, imprisoned by imports, and a desire to innovate
"The economy struggled after Fukushima. We've had to recalibrate our energy economy entirely." Ken Koyama, managing director and senior economist at Japan's Institute of Energy Economics, is speaking. We're in the Inui building in the Kachidoki region of Tokyo, where government offices dominate the landscape. It's here that the country's ministers had to decide - fast - how to bring energy back on line as disaster struck five years ago. "We had planned blackouts. Given the circumstances, we dealt with it well - but we needed an instantaneous rebuilding process."
The earthquake and tsunami that hit Japan's Pacific coast on 11 March 2011 changed the country forever, leaving its energy economy devastated and needing both short- and long-term reconstruction. Ever since the Second World War, Japan's governments have scratched around the global energy market, looking for ways to reduce the country's energy dependence on imports. Under the Shinzo Abe government liquefied natural gas and coal will remain critical - and renewables will play an ever larger role too. Nuclear is also coming back.
The epicentre of the 8.9MW undersea megathrust quake was just 70km from the Oshika Peninsula of Tokoku, so the impact on land was always going to be overwhelming. In Sendai, the ground shook for a full six minutes at 2-3g - the acceleration of gravity used to measure the force of an earthquake. To put that into context: at 1g, it's impossible to stand. Buildings were collapsing as cars were tossed across streets. Silence, and then came the waves.
The 10-foot tsunami hit approximately ten minutes after the earthquake. Many in the major cities peppered across Japan's east coast - those whose homes hadn't been destroyed by the initial strike - would be drowned. The government told people to reach higher ground, urgently.
Fukushima I nuclear power plant, operated by the Tokyo Electric Power Company (Tepco), felt the full force of the tsunami as the sea wall built to protect it was rendered useless: it wasn't designed to withstand waves of this height or vigour. On the earthquake's impact, three of the six reactors automatically shut down to safety. The three others continued to operate as waves rushed over the plant's buildings. The cooling water pump house, diesels, and other essential equipment were instantly ruined. Elements of the active cooling system and electrical back-ups on which they rely were incacapitated. Hydrogen and other gases started to build as fuel elements melted and explosions continued into the days that followed. A full meltdown was in progress as radiation started to escape.
Provided Japan can continue to increase coal-plant efficiencies and win public approval, coal seems destined to play a role in the country’s energy security
While parts of the systems had been upgraded, the 40-year old plant had been due for decommissioning, and its mortality became obvious quickly. As the core melted in Reactor 1, some of the fuel penetrated the reactor's shell, reaching the bottom of the containment vessel. In an attempt to cool the systems sea water was pumped in, which corroded the critical metal casings. Leaks were inevitable. Groundwater from the mountains dotted around the city spilled into the buildings, causing concerns that contaminated water would reach the sea via the port at the plant's boundaries. More than 1,000 tanks were hastened into the plant to collect the water but fears soon spread that they also were corroding.
The disaster was unlike any in the country since 1945. Japan watched on as what seemed like antiquated methods were used to deal with what was considered a modern and dangerous power source. Popular opinion swayed quickly and heavily against nuclear energy. The country was already wary of the industry following a data-falsification scandal at Tepco, and its forced closure of the Kashiwazaki-Kariwa plant after the Niigata-Chuetsu-Oki earthquake in 2007. Much like Chernobyl and Three Mile Island, the disaster at Fukushima Daiichi brought fierce scepticism about the industry's safety standards.
Five years on, the government is overhauling its energy infrastructure, and just as Fukushima had consequences beyond Japan, so will the shifts underway now in what remains one of the world's largest consumers and importers of energy. Nuclear share of the energy mix slumped from almost 30% in 2010 to less than 2% in 2013 - but under the Ministry of Economy, Trade and Industry's (Meti) 2014 strategic plan, it will regain a central role, accounting for 20-22% by 2020. Liberalisation of the electricity sector is underway. And a country that imports 90% of its energy, at huge cost to the economy, is now poised to take advantage of the glut in supply of liquefied natural gas. In short, the legacy of the planned blackouts and shortages that followed the tsunami has moved on from fanning scepticism of nuclear energy, and broadened to a more fundamental attitude: Japan will take control of its own future.
The electricity market has been monopolised for years, determined by rate-of-return regulations - in which the government sets the price a company can charge, leaving no incentive to reduce operating costs. By abandoning the policy and opening the sector to the free market, the government hopes end-users will enjoy lower prices while distributors and producers are spurred to innovate further upstream. Crucially, a greater number of suppliers should increase competition, though prices may be higher than expected as the market matures.
It's in the mid and upstream that the greatest changes will transpire and Tokyo aims to control growth. In the transmission and distribution sector - which the government says will be fully unbundled by 2020 - a number of regulatory bodies have been established to make sure fair access is available to new entrants and existing players. The Organization for Crossregional Coordination of Transmission Operators (Occto) and the Electricity Market Surveillance Commission (EMSC) will be charged with monitoring fair access.
Thanks to the shift in the fundamentals, buyers are going to challenge sellers, establishing a genuine secondary market in which to resell LNG
Liberalisation of power generation began in April and is already having an impact. Companies can build power stations of their choosing: a preference for coal, nuclear, renewables, and LNG has left relatively expensive crude as the main casualty. Last year, crude oil imports fell by 2.3%, to 3.37m barrels a day, the lowest level since 1988. Japan remains one of the world's biggest oil importers - but exporters should expect further declines.
In this shifting landscape, nuclear is well poised. The country's reactors - 35 were operating before 2011 - were costly to build but cheap to run. Under pressure from utility companies enthused by the changing electricity market, prime minister Shinzo Abe has cautiously supported the restart of many reactors. Efforts to win public approval are underway. The economy ministry, considered a cheerleader for nukes, has distanced itself from the Nuclear Regulation Authority (NRA). And the NRA has created a number of post-Fukushima safety standards that it hopes will draw a line under the incident and meet international approval. The International Atomic Energy Agency has endorsed them, and producers have stepped forward. Between mid-May and mid-June alone, four reactors moved a step forward to restarting. The Ikata 3 reactor, powered by the Shikoku Electric Power Company, completed work on a number of its safety requirements. Another provider, Kansai, applied to extend its Takahama 1 and 2 reactors, though Takahama 3 and 4, due to begin production earlier this year, have been held up by a court injunction (under appeal). Chubu Electric Power Company, meanwhile, plans to submit a safety review of its Hamaoka 5 reactor, which was damaged in flooding in 2011. Those four reactors would account for capacity of more than 10 gigawatts.
Yet coal is the other beneficiary. Because the country's nuclear arsenal won't be up and running overnight Japanese industry has turned to the black stuff. Forty-nine new coal-fired plants are planned, adding 28GW of capacity to the market. Environmentalists oppose all this, and so do some analysts. A recent study by Oxford university's Smith School of Enterprise and the Environment says overcapacity in Japan's coal supply would reach a whopping 191%, leaving up to $56bn of coal-plant investment stranded. Undeterred, Japan plans to meet a third of its power needs from coal by 2040, and will still be burning it by 2070. The Oxford study suggests this is unrealistic, because renewables and solar will soak up coal's market share.
The environmental case is debatable, as Japan considers itself an innovator in clean-coal technology. Its poster child is J-Power's Isogo thermal plant, which uses ultra-supercritical (USC) technology to generate steam up to 620°C, and boasts thermal efficiency as high as 45%. The site's two units have been recalibrated over the past decade and now emit 50% less SO₂, 80% less particulate, and 17% less CO₂. These are emissions comparable to a gas-fired power plant.
Government figures suggest that thermal coal use declined in 2015, while coal imports grew to 145m tonnes as utility firms capitalised on weak prices to build up inventories. It was perhaps a peak year: by January this year imports were down 13.2% compared with a year earlier. Either way, provided Japan can continue to increase coal-plant efficiencies and win public approval, coal seems destined to play a crucial role in the country's energy security.
Gas is the other plank in the strategy - and Japan has picked its moment with aplomb. In May, Meti published its Strategy for LNG Market Development; a plan to loosen up a rigid marketplace, deploy the country's purchasing power and make greater commercial use of LNG, a commodity it has bought and planned for in abundance. The glut of supply in Asia is an opportunity and Japan - the world's biggest LNG importer, which buys 35% of the market's 250m tonnes a year of supply - intends not to waste it. With new projects coming on stream in Australia, including Inpex's own 8.9m t/y Ichthys plant, and rising export capacity from the US, Japan feels it's in a position to make demands. The country has more than two dozen regasification plants and plans to grant third-party access to regasification terminals before the end of 2017, spelling change in market dynamics that traditional LNG sellers might not like. And the government has a far more flexible, liquid market in mind.
The country has for decades paid over the odds for LNG - and felt gouged by price rises after the Fukushima disaster - but the current glut means the so-called Asian premium may have had its day. The long and inflexible contracts, including rigid destination clauses that make the resale of excess supply impossible, are now under threat, to Japan's benefit. As spot market prices have fallen by more than a third in the past year, these market externalities are coming under attack from trading houses sniffing out arbitrage and utility firms preparing for greater competition. At the Japan OTC Exchange (JOE), where prime minister Abe asked CMC Group to help develop the LNG market, they've even been giving masterclasses to Japanese utility companies on how to hedge using newly established LNG OTC products. And that's just the start.
"I expect that now since the price is listed on Nymex as a benchmark for the OTC clearing product if we go to overseas companies to promote they can see we're a global benchmark." says JOE's managing director Kosuke Araki. As contractual restrictions are removed under pressure from LNG buyers, the exchange plans to market more avidly to international sellers and allow Japanese LNG to kick off.
"One of the bottlenecks we have to expanding our market is lack of sell-side trading members," says Araki. "Japanese buyers are waiting to have their physical contracts linked to trading activities at JOE but we've been asked to have more of an established set of contracts with sellers and they say we're asking the sellers to introduce pricing contracts in Japan."
"Now the government needs to further promote energy efficiency. Particularly in the industrial sector – but this could be costly"
Giving more clout to all this is Jera, the LNG-buying venture established by Tepco and Chubu Electric in 2015. It created a buy-side heavyweight to force the market to work for Japan and the rest of Southeast Asia. In May, Jera set up the first resale deal by a Japanese buyer, selling 1.5m tonnes of LNG to France's EdF. The agreement won't be carried out until 2018-20, and is linked to cheaper European prices, but it sets a precedent. It's also rumoured to be just the tip of the iceberg for Jera. Thanks to the shift in the market's fundamentals, buyers are going to challenge sellers, establishing a genuine secondary market in which to resell LNG.
Much has been made of the competition with SLNG - the physical LNG trading hub being created by Singapore, which is seen as the forerunner of the new trading arena that Japan is forcing its way into. But that neglects the bigger picture. "Our ultimate goal is to shift from oil-linked contracts to purely LNG contracts and we've tried to establish a spot LNG benchmark which can be used for those contracts," says Akari. Singapore and Japan are singing from the same hymn sheet. "In that sense SLNG are introducing another LNG benchmark. That drives the shift from oil-linked contracts. In the ultimate sense we could help to drive the shift."
Indeed, the government wants to establish Japan as an LNG trading hub alongside Singapore and China by 2020. Established LNG exporters may try to resist it but in a buyers' market the three countries will direct proceedings. If a wholesale gas price can be established quickly, the entire energy market could change.
Just as Japan wants to lead the revamp, its aim to take hold of wider energy dynamics goes further, and starts at home. In the C suite, corporate scandals over the past few years have forced companies to reconsider governance, while keiretsus - huge conglomerates in which different organisations hold shares, exposing each unit to greater market volatility - are fading. This has energy implications.
A new social ideal has taken grasp thanks to the frailties of the country's population figures, in which efficiency is key: younger people have moved to the cities, use less power and invest where they can in smaller, growing companies. This brings with it new methods to attain energy security. Reducing imports is a priority, because almost 5% of GDP, or ¥78 trillion ($0.77bn), is lost paying for them. Fossil fuels account for a third of this. Renewables and battery technology are a solution.
Tetsu Iida, director of the Institute for Sustainable Energy Policies in Japan (ISEP) is adamant that further change can - and must - happen. "Something of a disruptive change has been happening and we need to create a social model otherwise we'll fall behind the global trend. Batteries are becoming cheaper and they can have an impact on the mobilities sector, where we can be more and more flexible."
It should be a boon for Japan's big industry too. While Toyota and Honda are pushing hydrogen fuel cells, a revolution is also on the way for electric vehicles. "In the next decade there will be explosive growth in batteries and companies such as Nissan - who have made great progress with electric vehicles - could be very well placed. They need to lead innovation."
Japan is a leading exporter of clean energy technology and many hope it will support prosperity, with nuclear and LNG stabilising to give the country a sound position on the energy atlas. Koyama is hopeful.
"Our energy efficiency target is to reduce energy intensity by 35% for the next 20 years. This is an ambitious target. But we hit 35% between 1970 and 1990 during two oil crises. The government plan is to repeat that." It will make up for the fallow years between 1990 and 2010, when no big improvement in energy efficiency took place, says Koyama. "Now the government needs to further promote energy efficiency. Particularly in the industrial sector - but this could be costly. So we also need to focus on residential sector and transport sector. LNG will do this - not coal."
The demand-side solutions will, therefore, play a role in Japan's energy buying strategy. Koyama sees relations with Indonesia and Australia burgeoning over the next few years; and with Russia, when the political climate becomes more stable.
"We are in a very fortunate situation with the decline in prices for oil and LNG - it's a gift from heaven. But the situation won't last long - perhaps three years or until 2020 we have a window of opportunity. Japan needs to best utilise the windows of opportunities with major supplying countries as well as major companies. This is a unique period for Japan."