Powering ahead perspectives on japans energy future

Powering ahead Perspectives on Japan’s energy future A report from the Economist Intelligence Unit Sponsored by GE Powering ahead: Perspectives on Japan’s energy future Contents Preface Japan’s energy future: The EIU view Martin Adams, Energy Editor, Economist Intelligence Unit Japan’s energy strategy: Past and future 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 Christoph Frei, Secretary General, World Energy Council © The Economist Intelligence Unit Limited 2012 29 Powering ahead: Perspectives on Japan’s energy future Preface 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? Sections 1, and were originally in English, while sections 2, 3, and were originally in Japanese David Line of the Economist Intelligence Unit was the overall editor of the paper Amie Nagano and Takato Mori conducted the interviews for sections and and oversaw the translations Gaddi Tam was responsible for layout and design; the cover image is by Wai Lam 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 © The Economist Intelligence Unit Limited 2012 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.1 Their contributions can be summarised as follows: Japan’s energy future: The EIU view Martin Adams, Energy Editor, Economist Intelligence Unit The EIU view is that 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 Japan’s energy strategy: Past and future Jitsuro Terashima, President, Japan Research Institute Japan has faced energy challenges before, most notably in the oil shocks of the 1970s But its response to those crises, Mr Terashima argues in this interview, 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 Powering ahead: Perspectives on Japan’s energy future A greener future? Prospects for and challenges to expanding the use of renewable energy in Japan Tetsunari Iida, Executive Director, Institute for Sustainable Energy Policies Renewable energy sources have the potential to make a significant contribution to Japan’s energy supply, Mr Iida contends in this essay 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 fixed purchase price will be beneficial, Japan needs to separate generation from distribution and encourage a “knowledge revolution” to promote the broader adoption of renewable energy, Saving energy: Can more be done? Improving energy efficiency in the commercial and residential sectors Kenji Yamaji, Director-General, Research Institute of Innovative Technology for the Earth Japan has a long history of improving energy efficiency, and many effective policies have promoted the adoption of cuttingedge technology But Mr Yamaji argues in this essay that encouraging behavioural change will be crucial to long-term sustainable consumption For this, clearer information on energy supply and demand is vital Industry and Japan’s energy supply: Maintaining a competitive energy landscape Mitsudo Urano, Chairman, Nichirei Japan has paid insufficient attention to demand-side perspectives in its energy strategy, Mr Urano argues in this interview 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 Japan’s distribution challenge: Lessons from abroad Paul J Scalise, JSPS Research Fellow, Institute of Social Science, University of Tokyo Japan’s electricity transmission and distribution (T&D) system has not changed dramatically in the post-war period, Mr Scalise writes in this essay Prices remain high even as investment in T&D has fallen rapidly, while new generators complain of uncompetitive charges to access the grid Is the vertical unbundling of generation from T&D 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 The best energy mix for Japan: International perspectives Christoph Frei, Secretary General, World Energy Council The Fukushima disaster may have led to global soul-searching about nuclear power, Mr Frei argues in this essay, 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 Economist Intelligence Unit, April 2012 © The Economist Intelligence Unit Limited 2012 Powering ahead: Perspectives on Japan’s energy future 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 Fukushima Daiichi nuclear facility in March 2011, the disaster devastated the plant and surrounding areas But the ensuing emergency also destroyed the ambitious strategy that Japan had laid out for its energy future This envisaged expanding the role of nuclear from just under one-third of electricity generation to one-half by 2030 Sticking to this plan is now impossible But with scant indigenous natural resources to rely on, how will the world’s third-largest economy meet its future energy needs? Nuclear horizon Following Fukushima, popular antipathy to atomic energy in Japan, as elsewhere, has grown; the majority of Japanese want to see nuclear power phased out, opinion polls suggest Against this backdrop, shutdowns of nuclear plants for regular maintenance have combined with reticence on the part of local governments to sanction restarts: only one of Japan’s 54 nuclear reactors is currently working Official safety reviews continue in an effort to persuade © The Economist Intelligence Unit Limited 2012 a sceptical populace of the safety of nuclear power and allow local leaders cover to sign off on reactor restarts But when this can be achieved remains uncertain Nonetheless, central to the Economist Intelligence Unit’s long-term view is the assumption that nuclear power will continue to satisfy a significant portion of Japan’s electricity demand for this decade and into the next Under Yoshihiko Noda, who became Japan’s prime minister in August 2011, the chances of a sudden rejection of atomic energy—which once seemed conceivable—have receded Businesses’ frustration with the protracted closure of dozens of power plants following the natural disasters has been palpable Moreover, policymakers tasked with reshaping energy policy so in an extremely difficult economic environment The vast cost of decommissioning waves of reactors (only the US and France have more) is but one argument against forced closures The nuclear lobby is a strong proponent of atomic power’s cost-competitiveness with other energy sources Powering ahead: Perspectives on Japan’s energy future For Japan, the energy security implications of rejecting nuclear are also worrying Government ministers say that they envisage a gradual slimming down of Japan’s reliance on nuclear in the “medium to long term” Use of nuclear will remain at low levels this year and next due to a mixture of continued inspections, further foot-dragging on restarts and the likely decommissioning of some aged reactors But we expect the proportion of nuclear in the energy mix to rise It is likely, in most cases, that existing nuclear plants will resume operations, although we foresee a gradual drop in the reactor numbers over the course of this decade and beyond as old reactors are shut down and decommissioned Electricity generation from nuclear will not therefore recover to pre-Fukushima levels Our forecast is for 30.6 gigawatts (gw) of nuclear capacity in 2020 (our current forecast horizon), down from 47.7 gw in 2010—a significant revision from the 61.2 gw we forecast before Fukushima A greener future? How will Japan fill the gap? Much attention has focussed on boosting renewable energy and energy efficiency Yet, on both counts, there are reasons for caution Japan has an enviable record on energy efficiency Its economy is nearly one-third the size of that of the US, but energy consumption is only one-fifth of US levels—not least thanks to the efficiency of many Japanese manufacturers Conversely, though, such achievements will make eking out new gains harder Energy consumption by the household and transport sectors, 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 months; and, even as electrical appliances have become more efficient, consumers have used them more We think it will be difficult to reverse these trends, despite redoubled energy-saving efforts following last year’s disaster © The Economist Intelligence Unit Limited 2012 Neither we expect that Japan will be able to deploy renewables on a markedly greater scale than is currently the case A green revolution along these lines is keenly advocated by some, such as Naoto Kan, Japan’s prime minister at the time of Fukushima incident For renewables, though, cost remains a serious obstacle when compared with Japan’s other energy options This is one reason why presently they currently provide only a tiny share of Japan’s power: even the largest of the group, hydropower, satisfies little more than 1% of Japanese energy demand It is likely to prove difficult for Japan to stump up strong enough incentives to raise renewable energy’s share of total energy significantly this decade (and, indeed, to fund a necessary grid overhaul) just as many other developed-world governments are cutting back on subsidies Allowing electricity costs to rise to reflect the higher cost of renewable electricity looks politically problematic given the dissatisfaction among many ordinary Japanese with the performance of some electricity utilities (most notably but not exclusively that of Fukushima Daiichi’s owner, TEPCO) Neither are Japan’s grid companies, which traditionally carry considerable political weight, keen to accept more power from renewable sources On top of this, sceptics point to a shortage of suitable sites for solar plants and wind farms in the heavily populated, mountainous country We expect solar and wind power capacity will only manage to top gw by 2020 Hence, renewable energy will contribute less than 4% of Japan’s energy needs at the end of this decade (Figure 2) Fossils plug the hole If renewables are to play such a small part in substituting for Japan’s forsaken nuclear buildout, what will step into the breach? Fossil fuels, in our view, will be the chief beneficiaries of last year’s events 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 2018 2019 45 40 35 30 25 20 15 10 2010 2011 2012 2013 2014 2015 2016 2017 2020 Source: Economist Intelligence Unit estimates/forecasts Japan’s liquefied natural gas (LNG) imports have surged by over a quarter following Fukushima Japan is already the biggest market for LNG: gas is an attractive option partly because of its relatively low carbon emissions versus other fossil fuels Moreover, it is available from relatively nearby sources in Asia: Russia’s Sakhalin gasfields, for instance, will send much of their production to Japan Australian LNG production and export infrastructure is also coming on apace The EIU believes that fresh long-term LNG deals will be struck, with Russia and Australia prime candidates to provide new supply For energysecurity reasons, however, Japan’s government will be keen to make sure that dependence on individual suppliers (especially Russia, which has shown itself ready to cut off gas supplies during disputes) is limited—a difficult balance to strike We anticipate that Japanese natural gas demand will double between 2011 and 2020 As a proportion of Japan’s energy mix, we forecast that gas will rise from 19% in 2011 to 26% of the whole in 2020 (Figure 1) In order to turn to achieve such an expansion, however, pressure will grow to resolve problems in Japan’s gas-supply network: partly thanks to the country’s mountainous nature, this remains strikingly underdeveloped © The Economist Intelligence Unit Limited 2012 Although Japan will rely more on gas, petroleum products will nonetheless remain the biggest source of energy for Japan: their share of total energy will stagnate at just under 45%, but owing to the fact that overall energy usage will climb over the coming decade, in absolute terms this will still entail using 40% more oil in 2020 than was the case in 2011 Coal consumption, meanwhile, will also climb by nearly 20% over the course of this decade, according to our forecasts, making up about one-fifth of total energy consumption From a strategic perspective, coal is seen as a more secure alternative to oil for electricity generation Heavy industry will also be important source of coal demand, particularly high-end steel manufacturing, where Japan is a global leader Dirtier, less secure One conclusion from our forecasts is that Japan’s progress towards creating a low-carbon economy will, for now, disappoint Climate change has been relegated far down the government’s agenda by last year’s earthquake, and the ruling Democratic Party of Japan will be unable to fulfil a pledge, made before natural disaster struck, to Powering ahead: Perspectives on Japan’s energy future Figure 2: % of Japan’s gross domestic energy consumption (%) Combustible renewables and waste 1.60 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 (%) Total CO2 emissions from fuel combustion 160 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 to 1990 levels Emissions from burning fuel will be 40% higher than 1990 levels by the end of this decade, we forecast (Figure 3) Another important implication is that increased fossil-fuel imports are likely to raise energysecurity risks Japan is the third-largest net importer of oil (following the US and China), and it worries about relying on the instability-prone Middle East for most of its oil imports Over time, © The Economist Intelligence Unit Limited 2012 Japan will try to reduce its dependence on the Middle East for oil and diversify its oil supplies Yet Japan’s energy security will be more difficult to manage than would have been the case had it been able to go pursue its nuclear expansion For many, the Fukushima nuclear emergency revealed the dangers of relying on atomic energy Yet, in the longer view, the dramatic events of March 2011 may well be noted for setting Japan on a less green, less energy-secure path Powering ahead: Perspectives on Japan’s energy future 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 advisory committee on energy and natural resources at Japan’s Ministry of Economy, Trade and Industry (METI) that is reviewing Japan’s current Basic Energy Plan in the wake of the the Fukushima disaster In an interview on February 16th 2012, the EIU asked Mr Terashima to discuss the historic and future challenges of formulating Japan’s national energy strategy Economist Intelligence Unit: What were the key changes in energy strategy in post-war Japan? Donella H Meadows, Dennis L Meadows, Jørgen Randers and William W Behrens III: The Limits to Growth, Universe Books, New York, 1972 Jitsuro Terashima: In 1961, the primary structure of Japan’s energy supply began to change: the key energy source for Japan shifted from coal to oil It’s not an overstatement to say that Japan’s high-growth period was supported by this shift to oil But then Japan experienced the oil crises of 1973 and 1979 The country was © The Economist Intelligence Unit Limited 2012 forced to realise, in a shocking manner, the risk of excessive dependence on oil In 1973, I joined a research project at the Japan Center for Economic Research [a non-profit, independent research institution] to evaluate the nation’s energy strategy towards the year 2000 A report entitled The limits to growth, commissioned by the Club of Rome, had recently been published.1 This was a pioneering report that considered problems such as resource scarcity, population growth and environmental issues in a holistic manner We embraced this viewpoint and were among the first to work on Japan’s energy future considering the idea of a shift from fossil fuels to renewable energy However, around the same time as interest in renewables started growing, Japan’s first nuclear reactor for commercial use started running in Powering ahead: Perspectives on Japan’s energy future Fukushima in 1971, just before the first oil crisis [Nuclear power] was driven by awareness in Japan about the need to overcome excessive dependence on fossil fuels—as well as the US’s ambition to transform nuclear technology from military to commercial and peaceful applications EIU: How did the two oil crises change Japan’s energy strategy? JT: Japan faced two oil crises, but it does not mean we learned lessons and formulated a strategic approach to the idea of energy security as a result In fact, in a sense the country has been dealing with energy issues in an ad-hoc manner For instance, in 1973 the Middle East supplied 78% of all Japan’s imported oil Today, this has risen to over 80%, despite the call to diversify energy sources after the oil crises See Statement of Position No.2, Jitsuro Terashima, submitted to the Advisory Committee on Energy and Natural Resources, Ministry of Economy, Trade and Industry, February 14th 2012 In comparison to the 2010 national plan Mr Terashima’s proposition reduces the ratio of energy supplied by nuclear in 2030 by 30 percentage points, and increases the contributions of renewable energy and fossil fuels by 10 percentage points each The proposed mix also assumes total energy consumption will fall 10% (a crude-oil equivalent of 336m kilolitres) through technological innovations and implementation of energy-saving measures in different sectors of the economy One reason for this was the trend of “energy liberalisation”—the idea that a country’s energy supplies would be best managed by the market rather than as a strategic asset During the 1980s and 1990s the global energysecurity debate shifted rapidly from a focus on considerations like long-term investments and risk diversification, to the idea of buying oil in the market as cheaply as possible Japan’s policy drifted in line with this seemingly easier way of dealing with the energy challenge; that is, securing energy supply meant building bigger oil tankers and letting a string of them bring oil to Japan through the Straits of Hormuz This choice is backfiring today To be sure, there have been some improvements in terms of Japan’s energy security, such as the establishment of a reserve of 200 days’ worth of supply, and an increased contribution by liquefied natural gas (LNG) at the expense of oil But fundamentally Japan’s energy-security situation is still in a very fragile state EIU: How has the Fukushima accident changed Japan’s energy-security strategy? JT: In June 2010, the Democratic Party of Japan © The Economist Intelligence Unit Limited 2012 (DPJ), the governing party, came up with a new Basic Energy Plan for Japan The plan envisaged that nuclear power would contribute around 50% of Japan’s total energy by 2030 The emphasis on nuclear resulted from Japan’s determination to reduce carbon-dioxide emissions by 25% in the mid-term That is, Japan took the nuclear option on a single, environmental factor: that it does not produce carbon dioxide With the Fukushima accident, however, the 50% proposition became unrealistic The previous prime minister, Naoto Kan, declared that society should not depend on nuclear power Japanese media and public sentiment now resonate with similar anti-nuclear calls The feeling is such that anyone who takes an anti-nuclear stance will be applauded Many are fixated on the thought that the shift of nuclear power to renewable energy is the “mega trend” in Japan’s energy strategy EIU: What you consider the best mix of energy supply towards 2030? JT: I am proposing an energy mix whereby 20% of the total energy supply is derived from nuclear power, 30% from renewable energy sources and 40% from fossil fuels.2 I think Japan’s best mix will settle around these ratios While the ratio of supply by fossil fuels will have to be increased temporarily, we should attend to the trend towards natural gasses; shale gas, for instance, is entering a new era We can also expect a significant role to be played by non-conventional energy sources, including domestically produced methane hydrate In fact, I think it’s possible for us to build a society that does not depend on nuclear energy But I still believe that we should maintain around 20% of our energy to be supplied by nuclear power Nevertheless, I am not “pro-nuclear“ [to the exclusion of other energy sources] I was proposing renewable energy as early as the 1970s, and I intend to help turn the wheel as much as possible towards renewable energy at this crossroads for Japan’s energy strategy Powering ahead: Perspectives on Japan’s energy future underlined the significance of another aspect of energy saving: altering people’s behavioural patterns, for instance by adjusting factories’ operating hours and promoting setsuden (energy saving) by households crisis last year At the same time, Home Energy Management Systems (HEMS) and Building Energy Management Systems (BEMS) are being developed and installed in the commercial and residential sector For consumers, changing behavioural patterns of consumption requires forbearance In the summer of 2011 this was underpinned by a strong sense of crisis, which has now eased Promoting energy-saving behaviour on a more permanent and less strenuous basis is believed to be possible by making available to consumers timely information on the supply and demand of energy—coupled with the provision of appropriate incentives Policies to promote behavioural change via information provision are especially important in dealing with energy saving in the commercial and residential sector, where small-scale consumers lack sufficient information on energy supply and demand The next stage is the integration of information and energy management in wholesale “social system innovation”, for instance in “smart cities” For instance, if a pricing system is established with the use of smart meters that responds to the state of supply and demand of electricity, consumers will be able to fine-tune their consumption at different times of the day In addition, if information regarding the supply and demand of energy can be fed into the energy management system, it will be possible to reflect that information on the appliance at the consumer end—allowing for the efficient adjustment of energy supply and demand by both 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 on the supply and demand of energy They also involve the energy management system that uses the information to bring about rational behavioural change A smart meter is one gateway information system for consumers: the use of such devices has been spreading since the 20 © The Economist Intelligence Unit Limited 2012 By securing smart energy management that integrates energy and information, various possibilities open up with regard to energy saving in the commercial and residential sector In adversity lies opportunity It is hoped that the March disaster will translate into an energy revolution Powering ahead: Perspectives on Japan’s energy future 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 the Realisation of a Low Carbon Society and of the Project Team on Energy Policies at Keizai Doyukai (the Japan Association of Corporate Executives) In an interview on March 1st 2012, the EIU asked Mr Urano to discuss the energy challenges facing Japanese industry, and his recommendations for securing a competitive energy infrastructure for Japanese business in the long term Economist Intelligence Unit: What are Japanese industry’s energy priorities? Historically, how well have Japan’s energy policies taken industry needs into account? Mitsudo Urano: There are no shared energy priorities among all industries as such But in thinking about Japan’s energy strategy I believe there are four perspectives that must be included These are stable supply, economic efficiency, environmental protection and safety 21 © The Economist Intelligence Unit Limited 2012 Energy is a long-term phenomenon, requiring the detailed discussion and consideration of issues in advance It’s a very complex agenda It’s not simply about the economy or natural sciences; politics also plays a part, and it concerns people’s livelihoods as well as economic growth Yet I think Japan’s energy policies have been made on a very simplistic model Industry’s biggest concern is that energy policies were made merely on the basis of supply-side logic; there has been hardly any demand-side perspective If private companies managed their strategies in a similar fashion, and got into any trouble through their own negligence, they would simply go bust But if the government behaves in this way, the whole country suffers Broadly, there are three perspectives lacking in Japan’s overall energy strategy One is this consumer perspective Another is geopolitical, considering national energy security The third Powering ahead: Perspectives on Japan’s energy future concerns the question of whether it is appropriate to continue making energy policies on the assumption that the country’s industrial structure is static For instance, even if our manufacturing sector won’t completely disappear, Japanese industry may become a knowledge-based business that sells know-how and patents abroad Then it might be sufficient to secure only 60-70% of the energy required today But energy policies are formulated in a simplistic manner, considering only today’s realities EIU: In the short term, how is Japanese industry preparing for possible energy shortages? Is there a national plan in place? MU: Last year, the biggest challenge was to manage energy consumption during peak hours By and large we succeeded given that we did not encounter blackouts But companies paid a heavy price for this in various ways [Such actions] might be repeatable as a temporary measure Companies operating in the areas served by Tokyo Electric Power Company might ask to be spared from doing the same again However, [regarding a nationwide plan] we have heard nothing Companies will probably get by, if the situation lasts this year only If they are required to the same [ie reduce peak consumption] again next year, then the question of whether or not to relocate abroad will loom as an issue for many of us Many companies will be in trouble if they cannot secure a stable supply of electricity So [industry] might grant the government one year’s grace, with the condition that a national plan must be clarified for next year EIU: On the demand side, what energy strategies can Japanese industry take? MU: Strategies differ by nature of business For instance, companies that produce [goods like] titanium require significant amounts of energy It would be difficult for them to continue producing domestically if the cost of energy were to go up by 20-30% And for companies that have domestic 22 © The Economist Intelligence Unit Limited 2012 models of business, such as Nichirei, there are limits in their ability to [move production] abroad One thing we can say—judging from the experience of last summer— is that most companies with domestic operations, especially the small and medium sized enterprises that account for more than 90% of companies in Japan, are still wasting a lot of electricity For them, electricity is simply a commodity to purchase; they have not really attended to how they have been using it In terms of consumption, therefore, there is still room for improvement [among such companies] if they follow the “top runner” energy savers in their respective industries Among industries that consume electricity in bulk, however, many have already made significant efforts to reduce energy consumption For these businesses, unless new technology to save energy becomes available, there is probably very little room for further energy cuts EIU: On the supply side, what you think is the appropriate mix of generation sources? What future role should nuclear play in Japan’s energy profile? MU: From Keizai Doyukai’s standpoint, inclusive of considerations of economic efficiency, the environment and supply stability, getting rid of all nuclear plants in the short-term is not an option [For one thing], since Japan’s accident, other countries will continue with their plans for nuclear energy Under such circumstances, it does not seem right for Japan to conclude to quit nuclear on the basis that it cannot ensure its safety My view regarding nuclear energy is that it is important not to make a rushed decision In the medium to long-term, you never know whether an innovative technology may come about to allow all nuclear operations to be conducted entirely underground, for instance From the viewpoint of companies’ senior management, it is certainly not the sort of problem where a decision can be taken quickly Making a quick decision today Powering ahead: Perspectives on Japan’s energy future seems irrational, especially on the assumption that circumstances in future—including available technologies—will remain the same Once something [dramatic] happens, we tend to overplay the incident If it becomes apparent that we could not have prevented the accident from happening even if we had taken every possible precaution, only then should we start having a discussion about abandoning nuclear power And the reality is that even if Japan quits nuclear power generation completely today, it would not at all ensure its safety For one thing, there is the question of how to manage spent fuel rods The international community is yet to come up with a solution on this; together, we will innovate and devise a safe method When considering the merits of nuclear power generation, I believe we should consider a route to better manage this energy source with further technical developments There would be nothing more unfortunate than for Japan to lose knowhow on nuclear energy by exiting the industry We then wouldn’t be able to contribute anything to the world in this area Therefore, in the shortrun, it’s important to restart nuclear plants in respective regions, having first clarified the causes of the Fukushima accident in a way that is internationally endorsed EIU: Is the greater adoption of renewable sources of energy supply in Japan realistic, from industry’s point of view? MU: In the medium to long term, we should certainly pursue renewable sources of energy, including geothermal heat But I must say that there is [currently] perhaps nothing worse than solar and wind power in terms of efficiency, when considering the required investment in relation to output We will therefore have to think carefully about the appropriate use of these sources—for instance, they might be good for local consumption, or for use in workplaces and households Anything beyond such use is 23 © The Economist Intelligence Unit Limited 2012 difficult, though of course it depends on the pace of technological development In addition, with regard to solar power, we must avoid losing biodiversity via the loss of satoyama [traditional rural areas] as a result of turning terraced paddy fields into solar-panel wastelands Regarding thermal sources [such as liquefied natural gas, LNG] in the short run, the ministry of foreign affairs will need to better deal with issues about from where and in what ways LNG is to be secured As a medium to long-term measure, we might also need the state’s input to help transform methane hydrate into a viable source of energy for practical use, within ten years for instance So for all energy sources, whether nuclear, thermal or renewable, we still have a variety of issues to deal with in the short, medium and long term EIU: What is industry’s position on the separation of power generation and transmission? MU: I believe we lose sight of the big picture when we single out this issue in a simplistic manner The question of whether the current setup—marked by regional monopolies of nine major electricity suppliers—is meeting today’s needs should come first Increasingly, for various reasons, we will need diversified energy sources With this realisation, only then [the implications of] separating power generation and transmission emerge When one considers the ideal mix of energy sources, the current set up of electricity supply starts crumbling Until now, we have only looked at this issue from the supply side but really, it’s an infrastructural issue for the country as a whole The basis of the discussion should be the reality that Japan’s energy security is in danger if we not diversify energy sources, given the fragile state of nuclear power generation and a reconsideration of the legitimacy of using oilfired thermal energy Powering ahead: Perspectives on Japan’s energy future Japan’s distribution challenge: Lessons from abroad Japan’s electricity transmission and distribution (T&D) system has not changed dramatically in the post-war period Prices remain high even as investment in T&D has fallen rapidly, while new generators complain of uncompetitive charges to access the grid Is the vertical unbundling of generation from T&D 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 Scalise Ph.D is JSPS Research Fellow at the Institute of Social Science, University of Tokyo and Non-resident Fellow at the Institute of Contemporary Asian Studies, Temple University, Japan Campus His most recent publication is “Hard Choices: Japan’s Post-Fukushima Energy Policy in the 21st Century” in Jeff Kingston, ed., Natural Disaster and Nuclear Crisis in Japan: Response and Recovery after Japan’s 3.11 London: Routledge, 2012 There are four types of unbundling: administrative (separate financial accounts), managerial (separate staffing units), legal (separate legal entity, sometimes a subsidiary), and ownership (separate ownership with no shared operational activities) 24 Paul J Scalise1 JSPS Research Fellow, Institute of Social Science, University of Tokyo Seventeen years since Japan began its experiment with electric power liberalisation, slowing demand growth, growing environmental concerns, and pricing pressures constrain a country now debating the future of its energy market design The nuclear crisis at Fukushima is only the latest complication of an energy policy that must balance what the Ministry of Economy, Trade and Industry aptly calls the “3 Es”—economic growth, environmental friendliness, and energy security Policymakers are now faced with both daunting challenges and encouraging prospects Any reforms to Japan’s market design and energy policy, however, would be incomplete without an assessment of its network facilities They are broadly divided into two types: transmission and distribution Transmission networks are high-voltage three-phase alternating current (AC) lines transmitting electric power over long interconnected distances from power generators to substations by way of “the grid” Distribution networks deliver electric power at medium-level © The Economist Intelligence Unit Limited 2012 and low-voltage current from transmission substations to end-users such as residential households and businesses In Japan, distribution lines run densely throughout the country and account for 96% of the total length of the transmission and distribution network (hereafter T&D) In 2010, Japan’s T&D spanned over 5.2m kilometres (3.2m miles)—about 130 times larger than the circumference of the earth at the equator This T&D technology and its corresponding market design have not changed dramatically over the post-war period In addition, the increasing number of aged T&D facilities in Japan heightens the concern for future investment, innovation and rehabilitation This situation anticipates several questions: is Japan’s T&D network inefficient? Can unbundling2 transmission and distribution increase investment and innovation? What are the lessons from abroad? What are the political chances of a decentralised bargaining system over such rights, such as found in the UK or Nord Pool hybrid, determining dispatch in Japan? And what Powering ahead: Perspectives on Japan’s energy future Figure 1: Japanese electric power supply system (2005~) (Competitive bidding on new thermal power sources) Generation segment Trans & distribution segment EPCO IPPs Specified-scale electricity suppliers EPDC EPCO transmission lines Special electric utilities Supply obligation EPCO distribution lines Retail segment Captive customers Special regional Eligible customers (Specified-scale electricity suppliers) (Back-up supply) Notes: EPDC = Electric Power Development Co, or J-Power: one of two wholesale suppliers in Japan IPPs = independent power producers Source: Ministry of Economy, Trade, and Industry are the prospects for smart-grid technologies in Japan? In 2010, the weighted average OECD price of electricity per kilowatt-hour kWh) was ¥13.4/kWh versus ¥16.4/kWh in Japan Japanese households (ex industrials) consumed 304,230 gigawatt-hours (GWh) in 2010 The average Japanese and South Korean household electricity tariffs are US$ 0.183/kWh and 0.117/kWh, respectively The difference between the Japanese and South Korean household price in 2010 is a total US$45.3bn using simple exchange rates, and US$20bn using the adjusted OECD PPP rate of ¥111.45 to US$1 See Paul J Scalise, The Politics of Restructuring: Agendas and Uncertainty in Japan’s Electricity Deregulation, Doctoral Dissertation: University of Oxford, 2009 25 The current structure of the Japanese power market Japan is divided into ten service regions Each region is a distinct geographic market serviced by a combination of Japan’s five power suppliers (Figure 1) Dominating the market in each region is the general electric utility: a vertically-integrated, investor-owned private electric power company (EPCO) Identifying these EPCOs from north to south, they are: Hokkaido, Tohoku, Tokyo, Chubu, Hokuriku, Kansai, Shikoku, Chugoku, Kyushu and Okinawa Each service region has its own share of wholesale suppliers, special electric utilities, independent power producers, and specified-scale electricity suppliers (new entrants) Domestically, Japan is constrained by two separate frequency regions Eastern Japan, or the 50Hz region, occupies 43% of the network spanning from Tokyo to Hokkaido Western Japan, or the 60Hz region, occupies the remaining 57% of the network Because electrical output must be maintained at a fixed setting, Japan requires frequency converters to transfer electricity from © The Economist Intelligence Unit Limited 2012 the 60Hz region to the 50Hz region However, these converters are limited in scope and transfer capacity creating bottlenecks at key cross-border areas between prefectures and service regions In addition, Japan’s T&D network is atypical in a cross-national context Unlike European and North American markets, where highly interconnected grids span political borders, mountain passes, and bodies of water, Japan is separated from relatively cheap electric power in Russia, South Korea and Taiwan Despite these market constraints, Japan’s T&D network exhibits both strengths and weaknesses The latest data from the Japan Electric Association indicate that relative T&D loss ratios rank Japan (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%) In addition, Japan’s 10 service regions boasted pre-3/11 relative blackout ratios well below those of its European and North American peers, suggesting an easy-to-control and self-contained network system largely immune from outside shocks Against this, Japan’s most salient weakness is the high cost of its retail electricity in international context On a purchasing-power-parity basis, Japan’s electricity tariffs in 2010 were 24% higher than the OECD average.3 If Japan’s residential electricity tariffs were reduced to those of neighboring South Korea, Japanese households would have saved US$20bn in 2010.4 Japanese EPCOs explain these price disparities by pointing to the country’s lack of natural resources, expensive real estate, and high transaction costs in the siting, licensing, and construction of conventional thermal, hydroelectric, and nuclear power plants in local host communities.5 While possibly true, one oft-cited theoretical argument in favor of restructuring is the expectation that competition would drive innovation, energy efficiency and cost-cutting to a lower marginal cost for retail electricity, while simultaneously bypassing inefficient regulations to site approval Powering ahead: Perspectives on Japan’s energy future Figure 2: T&D and generation capital expenditures (9 EPCOs, US$bn) 500 Generation Transmission & Distribution 400 300 200 100 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 Foreign blueprints to the restructuring of electric power markets provide mixed lessons for Japan Vertical ownership unbundling—the separation of an electric power company’s generation, transmission, distribution, metering, and sales chain within a single commercial entity—aims theoretically to correct the potential abuse of incumbent suppliers’ high market concentration, thus creating a non-discriminatory and more transparent system for all stakeholders Although market restructuring takes many forms, the basic features include the introduction of competitive generation markets at the wholesale and retail levels, open access to the T&D network for all market players, and the creation of an Independent System Operator (ISO) that deals with the generation and dispatch of electric power to end-users In the most notable British case, these features were driven by a top-down political ideology (Thatcherism) and its distaste of coal miner strikes, the desire to limit strong labor unions, a predisposition towards free markets, and the hope of attracting foreign investment In other markets—such as Alberta, Australia, California, Chile, New York, New Zealand, Nordic countries, and Texas—unbundling generally assumed bottom-up consumer welfare gains, greater technological innovation, and heightened efficiency 26 © The Economist Intelligence Unit Limited 2012 Among EU-27 member states, more broadly, several top-down electricity directives have addressed the technological, economic, environmental, and regulatory environment of member markets without forcing incumbent suppliers to vertically unbundle ownership The Netherlands has been one of the rare member states to take this directive to the extreme by completely unbundling ownership; many other member states have yet to comply with the directive, facing resistance from incumbent suppliers Case studies on post-liberalisation effectiveness are also circumstantial, suggesting this inertia is partially the result of complexity and uncertainty Since the California Crisis of 2000-01 and a series of major blackouts in the US and Europe, policy analysts have begun to doubt its practical application What is often viewed as a pure lack of power-generating capacity threatening energy stability and economic growth is actually, in some instances, a lack of T&D infrastructure brought about by insufficient pricing signals, downgraded credit risk ratings threatening much-needed loans, and other investment disincentives in liberalised markets One oft-cited example is the case of California, where insufficient T&D infrastructure and investment from the Mountain states to California, and especially from southern California to northern California, resulted in further bottlenecks on the grid contributing to sharp electricity price mismatches in 2000-2001 Powering ahead: Perspectives on Japan’s energy future Prospects for Japan’s T&D network In Japan, the vast majority of T&D assets will be ready for replacement and refurbishing within the next 20 years Japanese EPCOs will need to make large investments in order to protect the grid Yet, the electric power market has already experienced a significant decline in both T&D and generation investment over the past 20 years (Figure 2), with a corresponding drop in the reserve margin from approximately 30% in 1985 to below 10% in 2010 The cause of this T&D decline is sometimes attributed to insufficient deregulatory measures provoking sub-optimal outcomes for incumbent suppliers and new entrants alike From 1997-2000, the Ministry of International Trade and Industry (now METI) threatened incumbent suppliers with vertical unbundling to facilitate lower electricity prices, but failed to provide the needed international success stories and domestic consensus to support the agenda Revisions to the Electric Power Utility Law in 1995, 2000, and 2005 gradually introduced competitive principals Phase introduced wholesale competitive bidding Phase introduced retail competition to approximately 30% of the total market at the “extra-high voltage” level of 20 kV with a contract supply of 2000kW or above Phase expanded the market to include the remaining industrial and commercial level customers at approximately 60% of the market The largest new entrants by units sold in 2010 included Ennet (9,772 GWh), Marubeni (1,395 GWh), and Summit Energy (1,346 GWh) 27 Today, 46 specified-scale electricity suppliers have entered the contestable market6 holding a minority 3.7% share since March 2000.7 Although the Japan Electric Power Exchange (JEPX) serves as a wholesale trading market for spot transactions in the buying and selling of surplus power, new entrants still must rely on the T&D assets owned and operated by incumbent suppliers (Figure 1) to reach eligible customers Some argue that the wheeling charge to gain third-party access to the T&D network is prohibitively high and lacks transparency, thus lowering their competitive advantage They also argue these wheeling contracts are inflexible: new entrants are required to sign for one year, cannot have more than one contract, and cannot change their access points at short notice Incumbent suppliers counter-argue that consumers “get what they pay for.” The relative stability of the network system, relatively few blackouts, and reduced T&D losses require additional safety measures Those measures include loop flow studies required by incumbent suppliers before new entrants can be granted © The Economist Intelligence Unit Limited 2012 transmission access, additional back-up power charges, ancillary charges and maintenance charges to pay for the stability of the network Nevertheless, vertically integrated suppliers in regulated markets often de-prioritise T&D investment and rehabilitation due to budget constraints and insufficient returns on investment In Japan, too, this problem has become increasingly evident since declining demand growth, growing post-liberalisation risk, and criticism of Japan’s wheeling charges imposed further disincentives on the EPCOs to prioritise the T&D network In 1993, the EPCOs recorded a combined US$223bn in capital expenditures on T&D infrastructure By 2003, total investment fell by 78% to only US$53.6bn in an attempt to satisfy outside pressure to reduce wheeling charges and expenditures simultaneously (Figure 2) These expensive—albeit correctable—bottlenecks have contributed to Japan’s high electricity prices Asia’s high economic growth rate, rising electricity demand, aging T&D network and desire to improve energy security, coupled with the possibility of integrating more renewable energy sources into the existing network system, have translated into talks of greater interconnection Proponents have argued that the development of an “Asia Super Grid” connecting multiple countries across east Asia would facilitate the rapid integration of renewable energy sources, while simultaneously helping to resolve the electric power dispatch problems commonly associated with using intermittent renewable energies such as wind, solar and tidal power sources In addition, lower transmission losses would equate to lower electricity tariffs, thereby inducing greater competition in liberalising electric power markets The support for an Asia Super Grid remains largely theoretical with only exploratory interest among domestic and international actors The South Korean and Russian governments have indicated their willingness to consider such cross-national projects, while the Japanese government has Powering ahead: Perspectives on Japan’s energy future remained largely silent Perhaps not surprisingly, companies that stand to benefit from the exported sale of competitive electric power to Japan have expressed an interest; Korea Electric Power Corporation (KEPCO) and Japan’s Softbank have initiated discussions, while in Japan, calls for links to the Asian mainland continue to grow Electricity grid builders such as ABB, a multinational corporation specialising in power products and systems, alongside consulting firms such as Visiongain, forecast the emergence of such a super grid market by 2022 The greatest challenges will be the financing, logistics, and political sovereignty issues complicating such an initiative From a demand-management perspective, Japan’s emerging “smart grid” and “smart metering” technology is undergoing a bottom-up revolution at the municipal level in countries worldwide, and may prove more powerful than either the Super Grid or vertical unbundling ever could “Smart” technologies encompass the application of a wide array of digital technologies, monitoring, two-way communication, and the Internet The smart meter eliminates monthly meter readings by sending real-time information directly to power companies in an effort to control load By providing greater information to suppliers and consumers, smart meters were designed to reduce power consumption and increase efficiency Italy has been the first country in Europe to implement smart meters nationwide in order to control rising demand and prevent theft, while South Korea began in 2008 to address similar concerns However, the issue of cost raises the question of who will pay for it—the EPCO, the government, or both, via the consumer? In Japan, smart meters cost approximately ¥50,000 to install per household Pushed by the supplydemand imbalance created by the Fukushima nuclear crisis, Tokyo Electric Power Corp (TEPCO) has announced it will implement smart metering from 2013 in an effort to avoid rolling blackouts Kyushu EPCO, in contrast, will continue to test 28 © The Economist Intelligence Unit Limited 2012 the technology until 2015 to see the problems posed by the effects (voltage, power flow) on the T&D network How other Japanese regions will welcome real-time monitoring and the potential legal risks and economic benefits it provides will only become clearer over time The future of Japan’s grid Prospective competitors in Japan’s liberalised electric power market continue to face barriers to entry, including high sunk costs, poor access conditions and a high level of regulatory uncertainty A faction within METI—including its minister, Yukio Edano—has revisited restructuring to help correct these problems in the wake of the Fukushima nuclear crisis However, large upfront costs in the reorganisation and separation of electricity businesses, coupled with organised resistance from incumbent EPCOs and the uncertainty over restructuring’s net benefits, presents hard choices for re-election minded politicians faced with national budget constraints, fractious in-fighting and a slowing economy The recurring question in post-Fukushima Japan is what measures policymakers will take to guarantee energy efficiency, environmental friendliness and economic growth: the three—perhaps contradictory—pillars of Japan’s energy policy Should nuclear power play a smaller role in the country’s diversification portfolio in future years, further long-term investment will prove necessary to close the conservation gap and facilitate the growth of renewable energy, whose technology faces substantial intermittency and dispatch problems associated with its on-grid transmission and distribution Japan’s lack of political will and growing economic uncertainty have provided little impetus for the renewed talks, leaving communities, businesses, and EPCOs the daunting task to develop smart technologies and green energy on their own One thing is certain: as smart technology evolves, so will the opportunities to restructure in Japan Powering ahead: Perspectives on Japan’s energy future 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 struggling to find the best solution to meet the ever-increasing demand for energy Developed countries are assessing how to upgrade and replace existing infrastructure, while developing nations need to address increasing demand to meet unprecedented growth These changes are taking place against a backdrop of concern over climate change, serious economic problems in some parts of the world (placing stress on potential funding mechanisms) and increased political uncertainty, resulting in price instability On March 26th Tokyo Electric Power Co turned off the No unit at the Kashiwazaki-Kariwa power station in Niigata, leaving only one reactor operational 29 On 11th March 2011 the most powerful earthquake ever recorded in Japan struck its north-east coast, triggering a massive tsunami The ensuing meltdown of the Fukushima Daiichi nuclear power plant caused policymakers in Japan and across the world to look again at the role of nuclear power in the energy mix While the full implications of the Fukushima disaster are yet to be fully assessed, governments around the world have been re© The Economist Intelligence Unit Limited 2012 evaluating their plans to meet the growing demand for energy The Fukushima effect Before the Fukushima accident, Japan generated approximately 30% of its electricity from nuclear power, with gas and coal accounting for around 50% of the generation mix At the time of writing (22nd February 2012) only two nuclear power plants out of a total of 54 commercial nuclear reactors are still operating in Japan.1 This is equivalent to a 72% decrease in nuclear power generation, taking into account installed nuclear capacity To replace this supply Japan has had to spend more on other sources of energy According to the Institute of Energy Economics of Japan and the Japanese Ministry of Finance, Japanese liquefied natural gas (LNG) imports in 2011 were 12% higher than in 2010, while LNG imports were up 28.2% year on year in January 2012.Incremental Powering ahead: Perspectives on Japan’s energy future oil demand in the Japanese power sector was 280,000 barrels per day (b/d) in 2011 and will be around 320,000 b/d in 2012, according to the IEA Oil Market Report for February 2012 Analysis by the Japanese Ministry of Economy, Trade and Industry (METI) shows that more than ¥3trn (US$37bn at current exchange rates) will have to be spent to substitute nuclear power with thermal power generation from gas and oil The cost of substitution is magnified as nuclear and coal power stations operate continuously at base-load, while LNG and oil-fired plants are run as peak-load or middle-power sources The consumer will have to bear some of this cost As a result of taking nuclear capacity offline METI estimates that electricity prices in Japan will rise by 20%, while power shortages of 10% will occur at peak hours Based on IAEA figures (February 2012) The Energy Sustainability Index has been published since 2009 as part of the WEC’s “Policy Assessment of Climate and Energy Policies” report This unique ranking examines over 60 data sets to provide a detailed analysis of 92 countries’ energy and climate policies and offers an understanding of country energy performance against the three dimensions of energy sustainability: energy security, social equity and environmental impact mitigation 30 The higher price of electricity is a local effect of Fukushima, but the disaster had a global impact The conclusions from a recent study by the World Energy Council, World Energy Perspective: Nuclear Energy One Year After Fukushima, show that the Fukushima accident in Japan did not lead to a significant diminution of nuclear programmes globally Nevertheless, a significant outcome of the Fukushima accident is increased global concern about safety, regulations and public acceptance Globally, OECD countries account for more than 80% of worldwide nuclear generation capacity, with the top four countries (USA: 104 reactors; France: 58 reactors; Japan: 54 reactors, Russia: 32 reactors) accounting for 62% In each of these countries, nuclear power accounts for approximately 20%, 74%, 30%, and 17% of their total generation capacity respectively So far, none of these countries has decided to conclusively abandon future plans for nuclear following the events at Fukushima Indeed, for the first time since 1978, the US Nuclear Regulation Commission recently approved the construction of two nuclear power reactors at Vogtle in Georgia, at an estimated cost of US$14bn Japan is currently re-examining its energy strategy and will clarify © The Economist Intelligence Unit Limited 2012 their proposed stance on nuclear energy in summer of this year As future demand for energy is now coming from non-OECD nations, most new nuclear power plants are being constructed in developing economies, with China, Russia, and India building 26, 10 and reactors respectively, out of a total of 63 reactors currently being constructed worldwide Together, they account for 66% of new nuclear capacity currently under construction.2 Brazil is a notable exception due to the fact that most of its electricity is generated by hydropower Advances in nuclear technology, combined with improved plant operating performance, and the number of new reactors being built in non-OECD countries highlights the fact that electricity that is not affected by fuel price volatility will always remain a strategic priority for countries embarking on a trajectory of strong economic growth Solving the “Energy Trilemma” Against this background, what should a country like Japan when looking to provide a sustainable energy supply? The World Energy Council’s definition of energy sustainability is based on three core dimensions: energy security, social equity and environmental impact mitigation The development of stable, affordable and environmentally sensitive energy systems defies simple solutions Meeting these three goals constitutes a “trilemma”, the complexity of which is multiplied by links between economic factors, national resources and environmental concerns, and public and private actors like governments, regulators and individuals Despite this complexity, when considering a sustainable energy strategy the “Energy Trilemma” provides the best framework for assessing the options Before Fukushima, Japan was successfully addressing the “Energy Trilemma” Out of 92 countries, Japan ranked sixth on the World Energy Council’s Energy Sustainability Index3, indicating Powering ahead: Perspectives on Japan’s energy future a comparatively efficient energy system that ensured stable energy supply, affordable access to electricity for the Japanese population and a relatively low level of CO2 emissions However, as Japan and other countries seek to reassess their energy mix in light of Fukushima, we may well see significant changes in this index, especially due to shifts in energy production to more carbonintensive systems Japan’s policymakers have been trying to assess the best way forward in terms of energy mix The public, for understandable reasons, is very concerned about the use of nuclear power But a review of the policy responses from other countries demonstrates that options can be limited, owing to the differing energy intensity provided by available generating resources Take, for instance, the fact that several (mainly non-OECD) countries have reaffirmed their intention to pursue nuclear programmes and strengthen the position of nuclear energy in their mix in order to meet rising power demand China is leading the way with plans to expand its current nuclear capacity from 12GW to 40GW, an Net changes in number of nuclear reactors from March 10th 2011 to February 22nd 2012 Operating Under construction Planned Proposed China -1 10 Germany -8 -1 India Iran Japan -4 South Korea -1 -2 -1 -2 Lithuania Malaysia Pakistan 1 Russia -1 -1 Saudi Arabia 16 Ukraine -9 UK* -1 US -4 Vietnam -6 * On October 24th 2011, Magnox Ltd announced that Unit at Oldbury nuclear power plant would be permanently shut down in February 2012 (10 months earlier tan expected) after 44 years of operation Source: World Energy Council 31 © The Economist Intelligence Unit Limited 2012 increase that will only go a small way to meeting the country’s fast-growing energy needs Coal continues to be the largest provider of energy in China, representing approximately 79% of the overall electricity mix compared to just 1.9% for nuclear This presents difficult choices when considering the potential impact that continuing with this approach could have on climate change China is therefore seeking to reduce the share of coal from almost 80% of the energy mix to 50% by 2020 This is an ambitious target for a country with such a fast-growing economy As China becomes the largest consumer of energy in the world, it is inevitable that even with this ambition the use of coal will continue to increase in absolute terms Alternatively, it is worth considering that the Fukushima disaster has prompted significant changes to national energy policy in Germany, Switzerland and Italy (as well as Japan itself) Germany’s decision to phase out the use of nuclear by 2022 is the most dramatic change The country has embarked on what has been described as “the world’s biggest energy experiment” Germany is looking to increase the use of renewable sources of energy, including a massive expansion in the use of wind and solar This has significant consequences on other parts of the sector, not least in the distribution system Since Germany was reunited in 1990 there has been major investment in improving the transmission infrastructure between the east and west of the country Now Germany has to consider the impact of realigning its grid on a north-south axis, which entails additional challenges and costs Like Germany, Japan will need to reform its supply infrastructure as it considers the next phase of its energy strategy Currently the system in Japan is limited by its historic infrastructure, with the electric power system dependent on large-scale intensive power sources If policymakers move towards a more decentralised Powering ahead: Perspectives on Japan’s energy future source of power provision there will need to be significant investment in the grid Manage demand as well as supply As Japan begins to consider the options beyond 2020, managing demand will play as much a role as managing supply Before Fukushima, Japan’s energy policy had placed the priority on securing supply to meet “given demand”, and therefore put a lower priority on effective demand management To be sure, some attempts were made to increase energy efficiency The World Energy Council recently assessed the Japanese “Top Runner” programme, which we identified as a prime example of good policy for promoting energy efficiency (see also P16) Our review assessed that the implementation of this policy had exceeded expectations Such achievements show that energy-efficiency policies can play a key role in managing demand, thus reducing the pressure on the supply side, without detriment to growth This type of scheme also supports the ambition of reducing the impact on the environment “Top Runner” is only one initiative, however, and one that places the onus on the manufacturers of consumer goods to adopt best practices, rather than the consumers themselves In addition, while improving energy efficiency is often seen as relatively easy goal, experience elsewhere has shown that its uptake is often slower than predicted Many studies, including our Energy Efficiency: A Recipe for Success report, point out the large potential for energy efficiency including successful labelling programs for appliances such as the USA Energy Star or PROCEl in Brazil However, they also show that progress has often been slower than expected due to the complexity of the decision-making chains to get 32 © The Economist Intelligence Unit Limited 2012 producers to market more efficient appliances and consumers to buy them Furthermore, at a global level, increased appliance ownership, driven by higher incomes, has partially offset the effect of energy efficiency policies Consumer behaviour, technology developments and challenges in direct financing have slowed energy efficiency in realising its full potential As energy prices increase, the incentive to devise energy-efficiency policies—and to participate in them—will become greater Ultimately, public acceptance will be essential to their increased success In this regard Japan has a significant opportunity to address this challenge as it looks to review its energy policy The country has the technological expertise, which with the right stimulus could benefit not only Japan but also other countries, as the pressure to deliver efficiency improvements increases Before the Fukushima event, Japan’s Strategic Energy Plan of 2010 envisioned that nuclear would account for approximately 50% of generated electricity by 2030, with the construction of 14 additional plants and a facility utilisation rate of 90% It seems likely that we will now see fewer reactors proposed But unless Japan wants to expose itself to gas and coal price volatility, and risk a significant increase in its carbon footprint, it will continue to invest in nuclear power generation in some way In any event, as Japan considers its energy mix, its policymakers will need to consider how to address the “Energy Trilemma” Only by defining strong and transparent energy policies, led by a clear vision for a sustainable energy future, can Japan attract the investment needed to build a new, more efficient energy system, with public acceptance Whilst every effort has been taken to verify the accuracy of this information, neither The Economist Intelligence Unit Ltd nor the sponsor of this report can accept any responsibility or liability for reliance by any person on this report or any of the information, opinions or conclusions set 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 LONDON 26 Red Lion Square London WC1R 4HQ United Kingdom Tel: (44.20) 7576 8000 Fax: (44.20) 7576 8500 E-mail: london@eiu.com NEW YORK 750 Third Avenue 5th Floor New York NY 10017, US Tel: (1.212) 554 0600 Fax: (1.212) 586 0248 E-mail: newyork@eiu.com HONG KONG 6001, Central Plaza 18 Harbour Road Wanchai Hong Kong Tel: (852) 2585 3888 Fax: (852) 2802 7638 E-mail: hongkong@eiu.com TOKYO Yurakucho Denki Bldg North Tower 15/F 1-7-1 Yurakucho Chiyoda-ku Tokyo 100-0006 Tel: (81.3) 5223 2181 Fax: (81.3) 5223 8104 E-mail: tokyo@eiu.com [...]... programme1; 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 Industry Association) Electricity consumption (kWh) Passenger cars: Change in average fuel consumption of new cars Fuel consumption (km/litre) 18 17.8... achieved high levels of energy efficiency, such as air conditioners and passenger cars In turn, the 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 (Vertical axis shows index figures; 1990=1) Change in number of households and energy consumption in residential sector... into an energy revolution 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.. .Powering ahead: Perspectives on Japan’s energy future EIU: What do you see as the strategic rationale for maintaining nuclear energy? JT: I don’t believe nuclear energy should be maintained on old justifications—such that its running cost is lower compared with other energy sources, and that it’s environmentally friendly given that it does not produce carbon dioxide emissions Given the... that savings on reduced consumption of fossil fuels could exceed the additional cost of adopting renewable energy. 7 A step forward: the fixed purchase price system On the legislative side, a key for increasing the use of renewable energy is the Act on Special Measures concerning the Procurement of Renewable Electric Energy by Operators of Powering ahead: Perspectives on Japan’s energy future Electric... liberalisation Needless to say, the country today awaits urgently the realisation of energy- policy reform that can advance the adoption of renewable energy The most important agenda is to reform society fundamentally into an innovative form through a “knowledge revolution” in the area of environmental energy policies Powering ahead: Perspectives on Japan’s energy future 4 Saving energy: can more be done?... regulations to site approval Powering ahead: Perspectives on Japan’s energy future Figure 2: T&D 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... responsibility or liability for reliance by any person on this report or any of the information, opinions or conclusions set 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 LONDON 26 Red Lion Square London WC1R 4HQ United Kingdom Tel: (44.20)... fashion, and got into any trouble through their own negligence, they would simply go bust But if the government behaves in this way, the whole country suffers Broadly, there are three perspectives lacking in Japan’s overall energy strategy One is this consumer perspective Another is geopolitical, considering national energy security The third Powering ahead: Perspectives on Japan’s energy future concerns... we do not diversify energy sources, given the fragile state of nuclear power generation and a reconsideration of the legitimacy of using oilfired thermal energy Powering ahead: Perspectives on Japan’s energy future 6 Japan’s distribution challenge: Lessons from abroad Japan’s electricity transmission and distribution (T&D) system has not changed dramatically in the post-war period Prices remain high ... programme—improving energy efficiency Air conditioners: Electricity consumption (Under certain conditions specified by Japan Refrigeration and Air Conditioning Industry Association) Electricity consumption (kWh)... overall energy strategy One is this consumer perspective Another is geopolitical, considering national energy security The third Powering ahead: Perspectives on Japan’s energy future concerns.. .Powering ahead: Perspectives on Japan’s energy future Contents Preface Japan’s energy future: The EIU view Martin Adams, Energy Editor, Economist Intelligence Unit Japan’s energy strategy: