The financial implications of March 11 disaster for Japan’s power industry
The human costs of last year’s March 11 triple tragedy in Japan are incalculable. However, the financial and political implications of the disaster are becoming more transparent as time elapses, and Japan moves forward from the tragic events of that day.
The Japanese government’s initial financial estimates were $300 billion to re-build damaged infrastructure in the Tohoku area of Japan or about 5.5% of Japanese GDP. The political implications have been slower to evolve although undoubtedly the political climate is changing with increasing levels of activity among grass roots political movements particularly around the nuclear issue. The candidacy of Tetsunari Iida, a former nuclear scientist and now a prominent proponent of renewable energy, for governor of Yamaguchi Prefecture on July 29 is one such example.
In the wake of the damage to the Fukushima Daiichi nuclear power plant and the subsequent decision to permanently decommission all four nuclear reactors at that site, the financial implications for Japan’s power industry are significant, and in some cases existential. Japan is currently reviewing all aspects of its national basic energy plan, and is expected to finalize a long term energy strategy before the end of the summer.
The adoption of a new basic energy plan will significantly impact the operations of all 10 of Japan’s electric power companies (EPCs). Since last year’s accident, the financial condition of most of these companies has significantly deteriorated. Their ability to access financing through global equity, debt and loan capital markets has been significantly curtailed as a result of the liabilities and risk perceptions arising from March 11. The credit default swaps or CDS of all of the EPCs has increased significantly reflecting the market’s increased risk profile of these companies post-Fukushima, which will increase their borrowing costs.
From a macro-economic perspective, Japan’s public finances with public debt at $11 trillion, annual fiscal deficits at $400 billion, and annual debt servicing charges at $150 billion leave it with limited scope for investment in the power industry or other fiscal stimulus.
All of the EPCs with the exception of Okinawa lost money in the Japanese financial year through March 2012 because of increased fuel costs due to substitution of fossil fuel sources (oil, gas and coal) for nuclear power. This will continue well into the 2012/13 financial year with 48 of the 50 commissioned reactors still temporarily offline for maintenance and pending the publication of a government review of the Fukushima accident.
Prior to Fukushima, nuclear power accounted for 30% of Japan’s electricity needs with about 48 GW of capacity at 17 locations on Japan’s four main islands. This was temporarily reduced to zero in early May when the last operating reactor, the Tomari reactor in Hokkaido, was temporarily shut down for maintenance. This had been the first time Japan was without nuclear power since 1972.
Japan’s electricity industry generates in excess of $200 billion of revenues per annum. The EPCs had a combined capital stock of about $33 billion prior to March 11 with approximately $500 billion of assets. The capital stock of these companies may have been depleted by about $20 billion in the aftermath of Fukushima. The future of civilian nuclear electricity in Japan is now a critical part of Japan’s basic energy plan discussions with three reliance scenarios being considered: zero, 15%, and 20-30%. The government has recently estimated that closure of NPPs would cost $54 billion in asset write-offs and an additional $16 billion in additional provisions for treatment of spent nuclear fuel.
This would directly impact the EPCs and in some cases would eliminate their capital bases, specifically TEPCO and Tohoku EPCs, which had large dependencies on nuclear power. Recently one of TEPCO’s banks had insisted they restart their Kashiwazaki NPP facility in Niigata, the largest civilian nuclear facility in the world, as part of their agreement to extend further loans underscoring concerns about the financial condition of the EPCs. Also, the Japanese government had previously estimated that the costs of dealing with the nation’s 14,200 tons of irradiated nuclear fuel rods would be $150 billion through 2030.
While we await the outcome of the nuclear discussion and formalization of a new Japanese nuclear regulatory infrastructure similar to the NRC in the U.S., Japan now has a plan to increase the proportion of electricity from renewable sources. As a transitional mechanism, while renewable electricity infrastructure is constructed, Japan is also likely to use gas powered stations to make up for the loss of nuclear generation capability. Japan currently has 17 gas powered stations with generation capabilities in excess of one gigawatt.
Recent unconventional shale gas discoveries in various parts of the world may significantly increase electricity generation using this hydrocarbon source. Japan is currently the largest importer of liquefied natural gas (LNG) in the world, and has one of the world’s leading gas turbine construction capabilities. However, its nationwide gas pipeline structure is among the least developed among OECD countries.
Japan’s imports of fossil fuels are now running close to $300 billion dollars per annum and Japan currently absorbs between three and four per cent of the world’s oil and gas production. In recent years, oil has become a marginal source of electricity production with most of Japan’s daily petroleum usage of 4.4 million barrels used for transportation purposes principally to operate its 75 million stock of private vehicles. Coal and LNG accounted for almost 90% of Japan’s fuel requirements for electricity generation in 2010 with Australia being a major source of both fuel sources.
Capital investment by the Japanese EPCs in power infrastructure in the most recent decade may have been relatively insignificant. The No. 1 reactor in Fukushima was over 40 years. The obsolescence of Japan’s power infrastructure may be a significant issue in the months ahead as old thermal plants are operating at full capacity, and may be prone to break-downs. From an international perspective, the UK recently announced that $350 billion of investment would be required to bring the UK’s power infrastructure up to proper standards over the next decade, and to compensate for significant levels of recent under-investment.
On an annual basis, this is equivalent to six or seven times the level of annual investment that took place in recent years by the UK’s privatized power industry. Japan’s economy is over two times larger than the UK’s and a similar and proportionate investment in Japan’s power infrastructure may require investments closer to $1 trillion. The transmission and distributions grids in Japan may also require significant investment.
Japan’s goal for solar renewable energy is to create up to 20 gigawatts of capacity by 2020. This may require an investment of $90 billion or $4 million per one megawatt of capacity including land costs in the coming years. Japan invested $8 billion in renewable energy sources in 2011, according to a recently announced PEW survey. This included investments in solar, wind, geothermal, and hydro and compared with almost $50 billion of renewable investments each for the U.S. and China so Japan has lagged some its industrial peers. Estimates are that electricity revenues from renewable energy sources in Japan will reach $30 billion by 2016.
The cost of Japan’s electricity prior to March 11 was among the most expensive in the world. The introduction of feed-in-tariffs on July 1 will undoubtedly push these costs higher for final consumers until renewable sources attain grid parity. Industrial and retail users are voicing significant concerns about the higher cost of electricity in Japan as compared with other countries. Japan is already suffering a significant hollowing out of its industrial capacity with 18% of Japanese manufacturing now taking place overseas. This is an additional obstacle to overcome for Japan’s EPCs.
In conclusion, the challenges facing the electric power companies in Japan are significant both from infrastructure and political perspectives. Climate change obligations must also weigh on their collective agendas. The second half of 2012 may be as critical a time as the Japan’s power industry has faced in its entire history.