Planning an efficient energy future for Japan

Author: Masakazu Toyoda, Institute of Energy Economics

The Great East Japan Earthquake, the tsunami and the subsequent nuclear power plant accident in Fukushima on 11 March 2011 changed Japan’s energy future drastically. The revised Strategic Energy Plan, which the Japanese Cabinet approved in April 2014, outlines a new conceptual framework for Japan’s energy policy.

The basic framework of the Strategic Energy Plan encompasses more than earlier plans, as it has expanded the ‘3Es’ — energy security, environment and economic efficiency — to include safety: ‘3Es plus S’. It is a great pity that ‘S’ needed to be added to the plan’s primary goals, because safety had always been regarded as a basic premise. But the Fukushima disaster reminded Japan that it is necessary to prioritise safety actively to prevent serious accidents that could cause casualties.

The new emphasis on ‘3Es plus S’ is supported by policy pillars of diversification and resilience.

The plan stresses the need to diversify energy resources. The previous Strategic Energy Plan, drawn up in 2010, attempted to increase Japan’s dependence on nuclear energy and renewable energy to up to 50 and 20 per cent, respectively, of total power sources. The plan now seems to minimise dependence on nuclear energy while maximising dependence on renewables. Regrettably, it does not specify numerical goals, which may hopefully be determined in the very near future. The plan does provide qualitative goals which indicate that nuclear energy will be an important base load power source in the future.

The plan also emphasises the importance of developing a resilient energy supply structure. This will include enhanced cooperation in expanding relations with oil-producing countries as well as East Asian countries.

It is important to create a more open and competitive business environment, permitting newcomers to enter the electricity and gas markets. This change envisages a complete liberalisation of the power market, including spreading region-wide grid management across nine power companies, liberalising retail markets and unbundling transmission from power generation.

The Strategic Energy Plan seeks to realise a super energy-efficient society by accelerating energy-saving activities, particularly in the household and commercial sectors where energy consumption has continued to increase.

Japan is aiming to improve its self-sufficiency and address climate change, which were already important policies before the 3/11 accident. Self-sufficiency is to be improved by speeding up the commercialisation of unconventional domestic energy sources such as methane hydrate. Addressing climate change requires accelerating technological innovation through initiatives, such as the newly established Innovation for Cool Earth Forum (ICEF). ICEF will invite many world experts representing research institutions, industries and governments to participate.

There remain several challenges that need to be dealt with before Japan can finalise the design of its energy policy to achieve ‘3Es plus S’.

First, nuclear power reactors should be restarted one after another, once safety inspections have been completed. Since the 3/11 accident Japan’s nuclear safety regulatory scheme has been fundamentally reorganised and improved. The most important change has been the establishment of an independent regulatory commission in September 2012. In July 2013 this commission announced world-class safety standards. And 19 out of the existing 50 reactors have undergone inspections to date.(as of July 15)

The review process took much longer than originally anticipated (around one year) but finally inspections for two reactors in Kyushu were completed on 16 July. Actually restarting those two reactors may require an additional three months in order to respond to public comments and receive final approval from the local community. Inspections for the remaining 17 reactors should reach completion soon.

The Institute of Energy Economics, Japan, recently published an analysis of the impact of restarting nuclear power stations on the Japanese economy. According to this analysis the most optimistic case would be that 32 reactors are restarted by the end of March 2016. In that scenario, the cost of power generation could drop by 2.3 yen (US$0.02) per kilowatt hour, a reduction of about 15 per cent of power tariffs for large users. The import cost of fossil fuels would be reduced by about US$20 billion and carbon dioxide emissions would decrease by about 6.5 per cent. Japan’s self-sufficiency ratio would increase by 7 per cent.

Another interesting outcome of this scenario would be a substantial reduction of liquefied natural gas (LNG) imports (by about 14 million tons) while imports of unconventional LNG could increase to 17 million tons per year after 2017. The return of nuclear reactors combined with the arrival of unconventional LNG would substantially ease the supply and demand situation in Asia.

The second challenge is to obtain the urgently needed numerical goals for the 2030 energy mix. The new Strategic Energy Plan states these goals should be determined as soon as possible so that the appropriate investments can be made. But it might be difficult for the Abe administration to make a decision before March, due to the lack of clear information regarding the restarting of nuclear reactors, the penetration of renewable energy introduced through feed-in-tariffs and the outcomes of international negotiations on climate change mitigation.

At the Advisory Committee for Natural Resources and Energy, three scenarios regarding the share of nuclear energy in the total power source composition have been discussed: zero, 15 per cent and 20–25 per cent. As a member of this Council, I have been advocating for the 20–25 per cent case — diversification is key. Fossil fuels raise issues about energy security and climate change, renewable energy raises issues about cost and dependence on weather conditions and nuclear energy certainly raises safety concerns even if world class regulatory systems are in place. No energy is perfect in light of ‘3Es plus S’. The more diversified the energy sector is, the better it is for the economy.

The details of the new Strategic Energy Plan need to be scrutinised to determine the potential for effective electricity and gas market reform. This is easier said than done. There are still many problems with market reform in the UK, the US and other advanced economies. The typical problems associated with relying on market mechanisms are a shortage of investment and an inappropriate energy mix — particularly with respect to addressing Japan’s carbon emissions.

The challenges of safely using nuclear energy, accomplishing an appropriate energy mix and wisely designing utility market reform are common to all countries in the world. I hope that Japan can work towards the best model through ongoing experiments in energy supply and use.

Masakazu Toyoda is the CEO and Chairman of the Institute of Energy Economics, Japan.

This article appeared in the most recent edition of the East Asia Forum Quarterly, ‘A Japan that can say ‘yes”.

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