This year presents a new set of challenges for Chinese energy endeavours, and nowhere more so than in oil.

Despite analysts bemoaning China’s ‘cavalier’ approach to risk as it strikes upstream deals in exotic locations, Beijing always knew it would have to cash in some of its chips when geopolitical cards were put on the table. And while some of the bigger cards will be called this year, other options will open up for China — and not where most people would commonly think.

Beijing’s biggest problem for 2012 is Iran. US and EU pressure is mounting via sanctions as rapidly as the Iranian bluster over the Strait of Hormuz is pushing benchmark prices higher. The structural hedge currently being played out in Tehran is the fight for nuclear enrichment against the threat of a major oil price spike. The game will keep being played until someone makes a wrong — or rash — move. Forget Beijing buckling to Western pressure over sanctions — what matters here is the regional dynamics of the Middle East. Unless China can convince the bulk of Middle Eastern producers that its close ties with Iran can help constrain Tehran’s nuclear ambitions, China’s core suppliers in the Gulf will call time on Iran and expect Beijing to comply accordingly. If Iran thinks Saudi Arabia is already tightening the screw by covering prospective Persian supply gaps, it will be turned even harder when the Saudis withhold oil from global markets to force assertive international action on Iran. As painful as this reality is for China, it knows that Arab output will always trump Persian production; of China’s 5.5mb/d of imports in 2011, 2.3mb/d were source from Saudi Arabia, Iraq, the UAE and Kuwait, with Iran only accounting for 550,000b/d. ‘Chirabia’ rather than ‘Chiran’ is the key relationship Beijing needs to get right.

Uncertainties surrounding Iraq also feed into the regional dynamics. Baghdad has little political glue to hold the country together following the US withdrawal. Oil has been at the epicentre of secessionist Kurdish claims. And Sunni–Shia schisms remain ingrained as Baghdad’s core weakness — and these schisms will continue to grow as external power vacuums unfold. The upshot is that regional players will use Iraq to advance their own ambitions, which in turn points toward the real interest for Iran. Disrupting Iraq to buy more nuclear time would do far more harm to the US’s international credibility — and presidential election campaigns — than short-term blockages from the Strait of Hormuz.

This is all bad news for China. Beijing’s overriding energy interests are to secure and maintain steady energy supplies to fuel the Chinese economy and to keep benchmark prices within a ‘stable range’. Even if suspicion over Iranian nuclear weapons had not been raised and uncertainties surrounding Iraq’s future were not a concern, the Arab Spring and prospective ‘Eurasian and African Summers’ pose major questions as to whether China is prepared to do the heavy lifting required to keep global hydrocarbon provisions online. Beijing needs to get its strategy right so that its political risks abroad do not translate into political instability at home.

At the very least, Beijing should start reflecting upon which energy policies to keep and which to trade in at ‘reasonable energy prices’. This logic should not only apply to key producers like Iran, but also to more marginal players in Central and Eastern Africa, not to mention the Gulf of Guinea reserves. China cannot fill all these geopolitical gaps overnight, which means the global power transition from West to East will be intrinsically fraught for energy.

But it will not be all bad news for Beijing in 2012. Political risk — or rather a lack thereof — holds the key for China’s bright future; despite endless hype over US energy independence, China’s energy aces will be found in the Americas this year (most notably Canada, the US and Latin America), and the reason for this is simple. American markets like the colour of Beijing’s money and have the infrastructure in place to harness reserves and investment to ramp up production. True, issues of ‘resource nationalism’, ‘tax hikes’ and ‘fiscal fiddles’ will flare up from time to time in these more mature markets, but they will not be in the same ballpark as problems in the Middle East, West Africa or Central Asia. The prospect of state implosion (or explosion) in these regions will clearly have dramatic implications for global energy provision.

China’s strategic play should therefore see Beijing hedging its stakes in the global energy system by buying into the Americas. Beijing is well aware that it needs to invest geopolitically to secure supplies from some of the world’s key energy producers — and that this will remain a long-term project. Investing in the Americas now, will come in handy for China later, when the truly serious energy bets are cashed in — namely, the US ceding ground in the Middle East in return for Chinese concessions handed back in the Americas. As this ‘neat’ division of hydrocarbon labour plays out, China must be ready to take up the security slack. The year 2012 will thus provide some painful, but very valuable, lessons for China as to how an Asian hydrocarbon century will pan out.

Matthew Hulbert is Lead Analyst at the European Energy Review, Amsterdam.

1. Threat to Asia’s energy security
2. Common ground in US-China energy relations
3. Dealing with China’s energy and resource insecurities – Weekly editorial

China’s spectacular industrial growth has been associated with equally spectacular growth in Chinese energy and resource consumption.

While Chinese energy efficiency (the amount of GDP produced per unit of energy consumed) has risen steadily, except for a few years early this decade, aggregate energy consumption has been lifted by a hugely energy-intensive phase of industrialisation and the spread of motorised transportation on a scale and at a speed that is unprecedented anywhere. China’s economic growth and the demographics will continue to underpin massive growth in energy demand.

China now consumes 47 per cent of the world’s coal, 19 per cent of its hydroelectric power, and 10 per cent of its oil. According to the International Energy Agency (IEA), China surpassed the US as the world’s largest energy consumer in 2009.

China’s dramatic change in status in global energy markets has not only surprised the rest of the world but has caught Chinese policy makers and analysts off-guard as well.

Thirty years ago, China was energy and resource self-sufficient. Indeed, on opening up to international engagement at the end of the 1970s, China was an exporter of coal and other resources, not an importer. But China’s soaring appetite for energy has driven Chinese energy users to international markets to satisfy a growth in demand that has outstripped the capacity to procure increased supplies domestically. In the meantime, some in the policy community have become nervous about growing import-dependence and ‘energy security’.

To some, who are not used to dealing in reliable international markets, any measure of import dependence appears to risk energy security. But many large resource-deficient economies, like Japan, have become used to depending on international markets for the overwhelming proportion of energy supplies to serve their industrial base. Japan relies on imports for 99.6 per cent of its oil imports at last count.

‘Energy security’ can be seen as the ability of a country to procure sufficient, affordable and reliable energy supplies. International supplies are a critical component of affordable and reliable energy for import-dependent economies, and no country is insulated from developments in international energy markets in an open global economy. But the sudden rise in energy imports and reliance on the international energy market has landed China in unfamiliar territory. ‘Energy security’ (nengyuan anquan) was a term that appeared only once in the People’s Daily in the year 2000; in the two years following 2008 the paper published 476 different articles using the term. For many Chinese observers, mounting reliance on energy imports implies external vulnerability and is a worry on both political and economic grounds. For others, the challenge is to lift national energy efficiency and ease back from over-reliance on coal with its associated environmental problems. China produces most of the coal it consumes but now draws over half of its oil supplies from overseas. The IEA projects that, by 2035, China will import nearly 12.8 million barrels per day, or 84 per cent of its total supply.

As Andy Kennedy points out in this week’s lead essay, China has adopted a variety of supply-side policies to ensure its access to oil supplies over the next several decades. Most, he concludes, have been ineffective, wrongly directed, or are under-developed.

The Chinese government ‘has encouraged its national oil companies (NOCs) and other state-owned enterprises to ‘go out’ — to invest overseas and gain greater access to resources abroad’. At the beginning of last year, the NOCs had equity in overseas production of 1.36 million barrels per day — nearly one-third of China’s net imports in the previous year. But has this has enhanced China’s energy security?

The NOCs don’t necessarily send the oil they produce overseas back to China. Nor is it reasonable to assume that oil produced by the NOCs would somehow be cheaper or more readily available to China in a supply crisis. Physical disruptions that impede the flow of oil to China will affect foreign and Chinese firms alike, and the NOCs, seeking profits in the international market as they are, have shown little inclination to give Chinese customers a discount when prices are high.

‘China is also diversifying the sources of its oil imports away from Middle Eastern suppliers’, says Kennedy, ‘its ‘loans for oil’ deals in recent years have facilitated long-term contracts with a range of oil-producing countries in other parts of the world — including Russia, Brazil and Venezuela’. Yet this has had a marginal effect on reliance on supplies from the Persian Gulf.

China is also building its naval capabilities to secure its sea lanes, although it is doubtful that anything other than an anti-piracy capability is a sound investment in the relevant timeframe.

And China is building its Strategic Petroleum Reserve to cover 63 days worth of net imports in an emergency at levels projected in 2020. To be effective, Chinese reserve strategies will have to be coordinated with those of other major importers.

China’s growing position in the international market makes reliance on unilateral and bilateral measures to reduce its vulnerability to oil-supply shocks a doubtful strategy. China will need to pursue greater coordination with other major oil importers through the IEA and develop the multilateral side of its approach to energy security. China is not yet a member of the IEA: it needs to be. Multilateral engagement would provide Beijing with more information and greater influence in the event of future supply shocks — a danger that faces other oil importers as much as it faces China, around uncertainties in the Middle East. ‘Greater multilateral engagement would also demonstrate that Beijing is looking for ways to cooperate with the international community as the story of China’s rise continues to unfold’, as Kennedy argues.

Yet there is no global regime that protects importer interests in reliable energy supply as there is for reliable market access under the WTO. That was one dream in the Atlantic Charter never realised in the Bretton Woods architecture after the Second World War. What there is by way of substitute is a complex surrogate of understandings and agreements, bilateral and global, that work to project the same effect. This is why for big (non-oil) energy exporters, like Australia, assurances of reliable energy and resource supply to major importers such as Japan, China and Korea are important to confidence in international resource markets. It is also why China, the United States, Japan and other major oil importers understandably expend as much diplomatic effort and good will as they do in the Middle East.

Peter Drysdale is the Editor of the East Asia Forum.

1. What does the Middle East situation mean for energy supplies?
2. China’s petroleum predicament
3. Dealing with China’s energy and resource insecurities – Weekly editorial

If China’s rise is one of the most important stories of this century, China’s growing appetite for energy is one of its most striking subplots.

China’s energy consumption more than doubled between 2000 and 2009, and the country is now the world’s top energy consumer. While coal remains China’s dominant energy source, oil poses a unique challenge for the country: China remains far more dependent on the outside world for oil than for any other energy source. China imported less than 4 per cent of its natural gas in 2009, but 53 per cent of its oil. By 2035, according to the International Energy Agency (IEA), China may import as much as 12.8 million barrels per day (bpd), or 84 per cent of its supply, notwithstanding its energetic efforts to control its growing demand.

It is against this backdrop that China has adopted a variety of supply-side policies to ensure its access to oil supplies over the next several decades. Thus far, however, these policies have ranged from largely ineffective to insufficiently developed. For more than a decade, for example, the Chinese government has encouraged its national oil companies (NOCs) and other state-owned enterprises to ‘go out’ — to invest overseas and gain greater access to resources abroad. By the first quarter of 2010, the NOCs’ overseas equity shares had reached 1.36 million bpd — nearly one-third of China’s net imports for 2009. Yet it is unclear that this has enhanced China’s energy security. The NOCs do not necessarily send the oil they produce overseas back to China. Nor is it reasonable to assume that oil produced by the NOCs would somehow be cheaper or more available to China in a supply crisis. Physical disruptions that impede the flow of oil to China will affect foreign and Chinese firms alike, and the NOCs have shown little inclination to grant Chinese customers a discount when prices are high.

China is also diversifying the sources of its oil imports away from Middle Eastern suppliers, and its ‘loans for oil’ deals in recent years have facilitated long-term contracts with a range of oil-producing countries in other parts of the world — including Russia, Brazil and Venezuela. Yet the volume involved in these deals is not large enough to greatly reduce China’s reliance on the Persian Gulf. Moreover, Russia’s reliability as an energy supplier remains open to question, as some Chinese analysts recognise, and it remains unclear how much oil will be shipped from the Americas to China given the distance involved.

China is also investing in new naval capabilities that could help it to patrol the sea lines of communication through which its oil shipments flow. It is debatable whether a much stronger navy would actually be a worthwhile investment for China, as far as energy security is concerned. A robust force that would allow China to challenge the United States for sea control would provide the country with the means to counter an American-led oil blockade. Such capabilities would take a long time to develop, however, and they would be quite costly as well. Nor is it clear that the US would ever attempt such a blockade, for both economic and military reasons. A less robust force, in contrast, might actually prove more appropriate, particularly if it focused on multinational anti-piracy missions of the sort currently underway off the coast of Somalia.

Lastly, China is actively building its own Strategic Petroleum Reserve (SPR) to bolster its energy security. When completed in 2020, China’s SPR will hold approximately 500 million barrels — enough to cover 63 days of imports at levels projected for 2020. To prove effective, the SPR will need to be coordinated with the reserve systems of other countries. In the event of future supply crises, Beijing is likely to find itself drawing on its own reserves at the same time that other major importers are drawing on theirs, since supply disruptions are far more likely to affect many countries at once than just China alone. Should China’s actions fail to be coordinated with those of other countries, or should China’s response be insufficiently transparent, oil traders are more likely to be confused than reassured, and instability in the markets will persist.

This raises a broader issue concerning how China pursues energy security. China has thus far emphasised unilateral and bilateral measures to reduce its vulnerability to oil-supply shocks. Pursuing greater coordination with other oil importers through the IEA would allow China to develop the multilateral side of its approach to energy security. In the short term, China could deepen its level of consultation with the IEA and make its energy sector more transparent. In the longer term, China could seek membership in the organisation. Such multilateral engagement would provide Beijing with more information and greater influence in the event of future supply shocks — a danger that appears all too real in light of recent instability in the Middle East. Greater multilateral engagement would also demonstrate that Beijing is looking for ways to cooperate with the international community as the story of China’s rise continues to unfold.

Dr Andrew Kennedy is Assistant Professor at the Crawford School of Economics and Government, the Australian National University. This is a digest of an article by the same name that originally appeared in Rising China: Global Challenges and Opportunities.

1. Securing China’s energy supplies
2. Common ground in US-China energy relations
3. China and India: High on octane, low on clean

Commentators on these pages have been pondering the implications of the Fukushima explosion on Japan’s energy policy and its strategy for international purchases.

Samuels suggests an extensive re-examination of energy policy in Japan and a possible shift toward renewable energy. Vivoda pointed to a scenario in which the share of nuclear power in Japan’s total electricity consumption could fall. This share previously accounted for 30 per cent of consumption, and even as little as 12 months ago the plan was to raise this to 50 per cent.

An increase in the share of gas and coal in the short to medium term and a switch to renewable energy sources in the longer term is now expected: Peter Drysdale referred to the growth of LNG imports this year and its likely further growth in 2012. That nuclear power is not so cheap when the costs of meeting safety or dealing with incidents are taken into account is the key driver behind these developments, as Len explains. Still, expectations about a switch to gas, at least in the short term, are a source of anxiety in Japan. The main gas suppliers to Northeast Asia are Southeast Asia, the Middle East and Russia — nothing comes from the Pacific. There are also expectations that two major suppliers — Malaysia and Indonesia — will switch to net imports. Consequently, obtaining more gas without paying a higher price is not going to be so straightforward. And there is also the possibility of having to deal with a smaller number of suppliers.

The scope for growth in trans-Pacific gas trade was addressed in a report for the Pacific Economic Cooperation Council (PECC). The scope to shift toward gas is driven firstly by the reassessment of natural gas reserves in North America. If shale gas deposits are included, the North American share of world reserves could rise from 5 per cent to around 36 per cent. Further, there is a big price gap between the East Asian and North American markets, which have been segmented. Before Fukushima, this gap — based on indicators in both markets — was around US$6.40/MMBtu, but it is now about US$12.50/MMBtu. These margins are attractive to both US and Canadian producers, although Canada has a considerable location advantage. But the US could then focus its resources on replacing the need for such imports, including those from Canada.

There are stumbling blocks to this scenario, and the PECC report points to these. One is the capacity of gas terminals in North America, particularly those in Canada. There may also be local community resistance on the grounds of environmental impact, although Canada has an advantage in that its terminals will be in relatively isolated areas. Another issue is the use of the fracking process in the gas’ recovery and the subsequent reaction of communities in North America. Resistance to investment in export-related projects by the present buyers of natural gas in North America, who fear the impact on domestic prices, is a third issue.

Another implication is the growth in investment by Asian economies in North American gas projects. The PECC report provides some examples, referring to China, South Korea and India partaking in gas projects, which add up to nearly US$14 billion. Investors in other current export countries like Indonesia and Australia might think about how to get a return on their expertise in exporting LNG, one way or another. And finally, a thicker market in gas might lead to a change in the pricing mechanisms for natural gas, which is now mainly traded under long-term contracts. An alternative could be the greater use of spot markets that complement structures for managing risk.

The reassessment of global gas supplies creates new opportunities for trade, but does not diminish the role of regional cooperation. The trade, infrastructure, finance and investment components of the response are all talking points in the short term, and even if the US picks this up in its role as APEC chair, the incoming Chair (Russia) will most likely give the topic even further attention. There is one more thing to consider: relative prices will move against Australia — despite the regional growth in energy demand — because of the long-term supply response. This said, Australia could ultimately maintain its volumes, but at lower prices — even in the face of North American competition.

Professor Christopher Findlay is Executive Dean of the Faculty of the Professions at the University of Adelaide.

1. Fukushima’s implications for Korea’s nuclear dilemmas
2. Happy days ahead? Policy implications of the global recovery for India
3. The new DPJ government in Japan: Implications for law reform

Indonesia is among the world’s largest greenhouse gas emitters, and it has committed to cut its carbon footprint.

Can Indonesia achieve its goals, what is its role in the region, and how could developed countries assist?  Indonesia’s government has stood by its emissions target announced at a 2009 G20 summit. Just last week the President stated that he would ‘dedicate the last three years of [his] term as President to deliver enduring results that will sustain and enhance the environment and forests of Indonesia’. But, as always with such ambitious announcements, many observers are doubting how much will actually come of it.

The target is for a 26 per cent reduction relative to business-as-usual at 2020  undertaken by Indonesia unilaterally, and up to 41 per cent with international assistance. This is a substantial undertaking when taken at face value, even in comparison with other major countries. But what it actually means will depend on the definition of the business-as-usual baseline. An earlier government document submitted to the UN assumes fast growth in emissions under a business-as-usual scenario. If chosen as the official baseline, this would make the target less ambitious and affect its international credibility.

The overwhelming share of reductions over the next decade is likely to come from the land sector.  This emphasis is reflected in a list of emissions reductions programs to be initiated and financed by the Indonesian government, announced last month.

But if large-scale and sustained carbon savings are to be made, this must go hand-in-hand with a more holistic approach to land-based industries. Greater emphasis would need to be placed on local environmental factors like watershed protection, local economic development that is socially inclusive, and promoting models of land use that are productive over the long run — not just profitable in the short term. ‘Green growth’ thinking along these lines is evident in some provinces, districts and central government ministries. There is even a new national motto which demands development be ‘pro-growth, pro-poor, pro-jobs and pro-environment’.

But this is set against the strong influence of industry and parts of the government and bureaucracy that have a strong vested interest in the status quo. This difficult political economy is, of course, not unique to Indonesia; it has played out in the US and Australia in recent years, with very different results. What counts on the ground though is economic opportunity and enforcement of laws and regulations. Protecting forests and peatlands, for example, will require substantial financial incentives for businesses and local governments. Reforms to the tax system, along with intergovernmental fiscal transfers tied to environmental outcomes and properly enforced regulatory measures, could achieve this — especially if they are coupled with alternative strategies to promote local economic development.

The longer-term challenge is in Indonesia’s energy system. Industrial energy use, electricity use in public buildings and homes, and transport are all growing rapidly as the country moves up the development ladder. The solution involves a shift from coal to gas, expansion of renewable energy like geothermal power, better energy efficiency and better transport systems. But making the shift requires policy reform that is difficult both technically and politically. Power sector reform has been on the agenda for decades and energy subsidies have, to date, only partially been removed. Copious amounts of additional investment will also be needed: what role can developed countries in the region play in helping Indonesia achieve its goals?

Aid can be important, and plenty of donors are (or want to become) active on climate change in Indonesia. The most promising area for aid is targeted capacity building, helping Indonesia reap the opportunities that arise in policy reform and in access to international funding. Trialling implementation options is also important, for example testing payment schemes for better land management. This carries risks, but could have large returns where successful models are identified. Large scale concessional finance, for example through the World Bank, has a role in facilitating clean energy investments. But the big game down the track could be carbon markets. A number of developed countries will be looking to invest in emissions reductions in developing countries, as part of their own climate change commitments. In most advanced countries, emissions reductions at home — beyond a certain point — will come at a higher cost than cutting emissions in developing countries. Australian annual payments for overseas emissions reductions could be as high as AU$3 billion dollars at 2020, according to government modelling. While the actual amount of market flows could be lower, this figure is in the ballpark of what Australia might commit through its Copenhagen climate financing commitment.

Large flows could also become available from Japan, South Korea, California and elsewhere. It will be natural for these and other countries to turn to Indonesia as a key ‘supplier’ of emissions reductions. But more preparatory work needs to be done in Indonesia before this can happen. Trading emissions reductions across borders requires reliable monitoring, confidence in institutional frameworks, as well as sound policies and consistent implementation. After all, investors will want confidence that they are in fact supporting change. And to the extent that Indonesia is successful in addressing climate change, it gives the country a natural leadership position on the issue in Southeast Asia.

Dr Frank Jotzo is Director at the Centre for Climate Economics and Policy, Crawford School of Economics and Government, the Australian National University.

This is an abridged version of a paper presented at the 2011 Indonesia Update Conference, the Australian National University.

1. An important international climate change funding proposal from China
2. Changing the international climate for global climate change negotiations
3. US: Waxman-Markey Bill changes the landscape of international climate change negotiations

In the wake of the Fukushima accident, a growing push for denuclearisation is playing out in Japan.

Under pressure from this movement, Japan’s nuclear power industry faces an immediate crisis. 

Presently, Japan is sustaining its energy needs through power conservation efforts and an increase of fossil fuel use, but a full‐scale break from nuclear power would have an enormous impact on Japan’s energy policy. It would also have a significant bearing on Japan’s international commitments vis‐à‐vis global warming, and inevitably deal a fatal blow to Japan’s economy and its people’s quality of life.

Any discussion of denuclearisation must be accompanied by a dispassionate consideration of the pertinent issues from the perspective of Japan’s national interests, including the quantitative potential of alternative energies to replace nuclear power over the short, medium and long term. It is dangerous to simply be swept along by the public mood. The broad connectedness of nuclear power means that the impact of denuclearisation would be extensive and it would be extremely difficult to make a return to nuclear power once it has been abandoned.

Japan has an extremely low rate of self‐sufficiency in both energy and food. Its energy self‐sufficiency ratio is a mere 4 per cent — one of the lowest among developed countries. Also, Japan, as an island nation, cannot access electric power transmissions from neighbouring countries. Given these circumstances, nuclear power contributes greatly to Japan’s energy security. At the same time, the remarkable economic development of emerging countries in Asia and elsewhere will likely spur a rapid rise in demand for fossil fuels, making nuclear power all the more important. Another factor is the urgency of worldwide efforts to prevent global warming and the prominence of nuclear power as an energy source that does not produce CO2 emissions. At the September 2009 UN Summit on Climate Change, then Prime Minister Hatoyama announced a target for 2020 of cutting CO2 emissions by 25 per cent from 1990 levels (a 30 per cent reduction from 2005 levels). Although this was a conditional declaration, the figure took on a life of its own as a de facto promise to the international community. Nine additional nuclear reactors would need to be built and operated at a rate of eighty per cent or higher to achieve this.

And the Fukushima accident had major repercussions worldwide. Countries around the globe pushed for more stringent nuclear safety regulations and insisted the IAEA should play a central role in this. But opinions vary on what to do about nuclear power generation itself. Many countries have adopted greater safety‐consciousness, while public sentiment has pressured Germany, Italy and a few other Western countries into steering away from nuclear power altogether. In Japan, as of 6 September, only 12 of Japan’s 54 nuclear reactors were in operation, and restarting the offline reactors upon completion of periodic inspections will be politically difficult. The worst‐case scenario would be a shutdown of all nuclear power generation throughout Japan by next March.

Should nuclear power, accounting for about 30 per cent of Japan’s electric power production, disappear, the likely short-term substitute would be fossil fuels. But this would lead to mounting import costs, more funds diverted to purchase emissions credits to cover greater CO2 emissions, and higher power generation costs. Forecasted rises in fossil fuel prices would only exacerbate the problem. Natural energy such as wind and solar power could become available over the medium and long term, but Japan has been one of the slowest among developed countries to pursue renewable energy, currently representing about 1 per cent of its total power generation.

Dependence on natural energy will create problems relating to the reliability of supply, quantitative expansion, energy economy, and the quality of the power generated. Natural energy might be useful as a dispersed and supplementary power source but not as a primary source of electricity for such a large economy; and unwarranted changes in energy policy will only bring about major disruptions to Japan’s economy.

Furthermore, what do proponents of denuclearisation intend to do about the array of international agreements Japan has entered into, including for the export of nuclear power plants? What about the de facto international restrictions on CO2 emissions put in place to prevent global warming? These issues will affect the international community’s trust in Japan. Abandoning nuclear power would involve withdrawing from the ‘nuclear fuel cycle’, one of resource‐poor Japan’s most important energy policies. With the nuclear fuel cycle dependent on accumulated experience and trained personnel, any withdrawal would make it extremely difficult to restart. Evidently, careful deliberation is needed to assess the wisdom of withdrawal.

I believe that an objective look at Japan’s geopolitical situation and the scale of its economy, as well as quantitative assessments of the issues concerned, will show that abandoning nuclear power is an unreasonable choice for Japan. The most practical measures are to continue the use of nuclear power while conducting thorough safety reviews. In parallel, natural energy sources should be actively developed and the best mix of all forms of energy sought. Denuclearisation is not a path which Japan should go down.

Tetsuya Endo is Senior Adjunct Fellow at the Japan Institute of International Affairs (JIIA) and was formerly Vice Chairman of the Japan Atomic Energy Commission.

1. Nuclear power in Asia after Fukushima
2. ASEAN going for nuclear power
3. Nuclear power and spent fuel in East Asia: Balancing energy, politics and nonproliferation

In a recent public lecture at the India Policy Forum, Deputy Chairman of the Planning Commission Montek Singh Ahluwalia underlined the new challenges of managing water, energy, urbanisation and environment as critical to accelerate growth, arguing it must fulfil a more substantial part of the 12th Plan.

On the energy sector, Ahluwalia stated that an increase in sustainable energy supply would increase the cost of energy and India can contain emissions from energy supply only when it reduces energy intensity. In an article in Economic and Political Weekly, he stated ‘… our ability to grow rapidly in this environment depends critically on our ability to transmit the high energy prices to energy users in the economy, rather than keep the prices artificially low’. Surely, pricing of energy according to its scarcity value is important to ensure efficiency, be it petroleum, natural gas or electricity. But if the central government is dragging its feet in regard to economic pricing of petroleum products, then the State governments are totally insensitive to proper pricing of electricity.

Take the case of pricing of electricity by various state electricity distribution companies. Severe politicisation of economic decision making resulted in not revising the tariffs for a number of years in most state utilities. The regulatory commissions are independent only on paper and the patronage distribution in the form of appointment to the regulatory commissions makes them subservient to political decisions. For instance, in Tamil Nadu, the tariff order was issued just before the recent Assembly elections after an eight year gap. In Rajasthan, tariffs were revised last in 2005, and there have been no revision of tariff orders in Haryana, Tripura or Nagaland since 2006. The situation is not much better in other states as well.

A major consequence of this poor pricing policy is the mounting losses of electric utilities. Most of the utilities do not have up-to-date audited accounts, and even those that are audited are not authentic. The Power Finance Corporation’s findings based on the information supplied by state utilities is alarming. This year’s annual loss is estimated at over Rs 100 billion or USD 2.2 billion (Rs 100,000 crore). Uneconomic pricing is the most important factor contributing to this. The decision to supply free and unmetered supply of power to farmers continues to be a bane in many states. It results in poor cost recovery, overstating the consumption of power by the agricultural sector, and erroneous estimates of transmission and distribution losses.

With the focus on meeting the deficit targets prescribed in the fiscal responsibility legislations, the states are unwilling to meet the losses through budget allocations. The utilities have had to borrow from the banks (of course with state government guarantees). Even as the states’ aggregate fiscal deficit in 2009–10 is budgeted at about 2.3 per cent of GDP, the off budget liabilities on account of the power sector alone can be as high as 1.5 per cent, which is not comforting. And borrowing from the banking system with interest rates higher than the market borrowing will only add to the dilemma. Indulging in such budget liabilities and still claiming to conform to the targets makes a mockery of fiscal responsibility legislations.

Heavy losses and a lack of support from state governments have resulted in very little investments in generation, transmission and distribution systems. In the generation of power for example, state-owned NTPC is a major player. Although the electricity generation opened up for private players, their entry is recent and participation not substantial. But despite these developments, the power deficit persisted and the peak deficit in 2010 was estimated at 13.8 per cent. There has been considerable concern about the shortfall in achieving the 11th Plan targets for generation, and the deficit is likely to continue in the medium term.

Poor finances of state utilities, coupled with supply imbalances, created a peculiar situation. Given their poor finances, the state utilities were unwilling to purchase power at market prices and would rather prolong load shedding (intentional power outages). Declines in demand due to load shedding had an impact on the plant load factor, and the power generators had to slow down their generation. This created a situation in India where NTPC, the largest generator of electricity, had to lower its output because the state electricity utilities preferred to indulge in prolonged load shedding rather than pay the market prices.

Unless concerted action is taken, the problem of scarcity — even when India has the capacity — will continue. Companies like NTPC cannot generate and sell power, as the state utilities would prefer to have black outs rather than supply electricity to consumers. Even maintaining the growth rate at 8.2 per cent, let alone accelerating it to 9 per cent, cannot be done without cleaning up the policy mess in the power sector.

A bail out of the type India had under the accelerated power development program is not the answer. The attempt to sugar-coat the reforms dissolved the sugar, but swallowed reforms.

M. Govinda Rao is the Director of India’s National Institute of Public Finance and Policy in New Delhi.

1. Anna Hazare: Power play over setting up of ombudsman
2. US-China power play puts heat on ASEAN
3. Life after Fukushima: the future of nuclear power in East Asia

A year or so ago nuclear energy was seen in Japan as the way forward to securing a clean energy future, with a government plan to boost nuclear power to 50 per cent of the total from its pre-Fukushima share of just over 30 per cent by 2030.

Since the Tohoku earthquake and the partial meltdown at Tokyo Electric Power Company’s (TEPCO’s) Fukushima plant, there has been a profound reversal of sentiment on nuclear power in Japan. A week or so ago, a Mainichi Newspaper poll suggested that 74 per cent of Japanese want to gradually phase out nuclear power completely. Last week, another poll found that only 5 per cent of Japanese had confidence in the safe operation of the nation’s nuclear power plants, while 60 per cent had little or no confidence in them. This poll suggests 55 per cent want to reduce the number of atomic power plants, a smaller proportion than the Mainichi poll but a comfortable majority of those polled. In Japan a few weeks back, I was stunned at the dramatic shift-around in Japanese attitudes to nuclear energy and the preparedness of quite conservative thinkers to contemplate a Japanese energy future without it.

Only 12 of Japan’s 54 nuclear power plants are currently in operation. The rest are either off-line for regular maintenance or shut down for stress-testing (using more stringent tests than previously) after the Fukushima accident. Ramping up the utilisation rates of non-nuclear capacity, the good fortune of a cooler summer and re-shuffling industrial production schedules have together avoided serious short term power disruptions. But these are band-aid solutions to Japan’s longer term energy problems.

In this week’s lead essay, Dick Samuels notes that after the March 11 crisis, former Prime Minister Kan announced plans for a bottom-up review of Japan’s nuclear-centred Basic Energy Plan. Constructed by the Ministry of Economy, Trade and Industry (METI) with considerable input from TEPCO and the other private power utilities, this plan called for the construction of fourteen additional nuclear power plants by 2030. Kan’s announcement was unequivocal and well received: Japan must ‘start from scratch’ on a new national energy policy.

With the growth of hostility towards nuclear power, Japanese energy policy is now in a state of considerable disarray. There are no clear ideas about how the looming shortages in energy supply will be filled without re-starting of Japan’s currently offline nuclear power plants. There are no clear ideas about how the gap in energy needs would be covered if nuclear power were to be phased out over the longer term.

Japan’s new prime minister, Yoshihiko Noda, is not antipathetic to nuclear in the same way as his predecessor. His immediate task will be to persuade the Japanese public, and the local government officials who have direct responsibility to their communities, that it is safe to re-start the reactors that have been shut down for testing — a process that nonetheless won’t be complete until the end of the year. Noda wrote as much in an article which appeared in Bungei Shunju earlier this month. If he fails to act quickly, all 54 of Japan’s nuclear reactors could be offline by May next year in the normal schedule of plant maintenance.

Whether Noda can convince the Japanese public that maintaining the same level of nuclear power capacity, let alone increasing it, is desirable in the longer term is another question altogether. The Ministry of Economy Trade and Industry (METI) calculates that a complete nuclear shutdown would add US$40 billion directly to energy costs, not to mention what it would add to carbon emissions.

Can there be a speedy transition to renewable energy sources in Japan?

It will not be easy, although, the argument now runs, clarity on the goal (for example a long term — 30 or 40 year — phase-out of nuclear) would provide the incentive to develop options and get costs down. The problem is that there is not much clarity on anything right now. Last week, the Diet introduced a scheme that will subsidise electricity produced by five types of green energy, but investors will have to wait for a panel to determine details of the tariffs that will apply to solar, wind, and other green sources of power. Solar and wind currently account for less than 3 per cent of Japan’s energy capacity. The hope is that energy supplied from these sources will quintuple in ten years, but that solves less than half the problem.

Meanwhile LNG imports are surging, and expected to rise 12.2 per cent over the year to 78.6 million tons in 2011 and 81.6 million tons in 2012. Ramping up LNG use has its problems as port handling and processing capacities are likely to reach their limit with volumes like this being imported.

As Samuels says, ‘even if the changes in Japan’s energy policies are less sweeping than those Prime Minister Kan proposed, it will be difficult for his successors, new Prime Minister Noda included, to return to the energy policy status quo ante. Energy policy, and nuclear power in particular, will be an important electoral issue in Japan for a long time to come’.

Peter Drysdale

1. Japan’s nuclear energy future
2. Rethinking nuclear power in Asia after Fukushima
3. Building a solar energy economic zone along Japan’s east coast

Energy policy in Japan seems set to face sweeping institutional reforms as a result of the 11 March disasters.

It is one of the very few areas where Japanese Prime Minister Kan and public opinion are fully aligned. The Japanese public has been treated to a torrent of stories about the villainy of TEPCO and its sibling utility companies.

That is what Kan tried to do. During the crisis, he announced plans for a bottom-up review of Japan’s nuclear-centred Basic Energy Plan. Constructed by the Ministry of Economy, Trade and Industry (METI) with considerable input from TEPCO and the other private power utilities, this plan called for the construction of fourteen additional nuclear power plants by 2030. Kan’s announcement was unequivocal and well received: Japan must ‘start from scratch’ on a new national energy policy.

But Kan was no Koizumi. His move was undercut first when Kaoru Yosano, his own minister for economic and fiscal policy (and a former Japan Atomic Power Company employee) opposed it. It was weakened further when he — typically, many say — failed to coordinate his nuclear policy pronouncements with Banri Kaieda, his minister of economy and industry, who promised to resign over the gaffe. And the Rengo trade union federation, the main support base of the DPJ, supports nuclear power. In American parlance, Kan talked the talk but tripped over himself when he tried to walk the walk.

Still, the idea of a wholesale re-examination of Japan’s energy policy — including shutting down nuclear reactors in precarious locations, moving the regulatory National Industrial Safety Agency out of its home within METI (which is tasked in part with promoting nuclear power), separating generation from transmission, and eliminating the highly controversial fast breeder reactor program — has been welcomed by editorialists and by public opinion as a whole. So was businessman Son Masayoshi’s initiative to work with governors and mayors to build renewable power plants across the nation. The best that nuclear power advocates in the DPJ can do now is reassure investors that Japan’s nuclear plants will be phased out slowly, as they reach the end of their 40-year life cycle and as Japan transitions to alternative power sources.

Even if the changes in Japan’s energy policies are less sweeping than those Prime Minister Kan proposed, it will be difficult for his successors, new Prime Minister Noda included, to return to the energy policy status quo ante. Energy policy, and nuclear power in particular, will be an important electoral issue in Japan for a long time to come.

Richard Samuels is the Ford International Professor of Political Science and Director of the Center for International Studies at the Massachusetts Institute of Technology. This essay is adapted from an interview with Chris Acheson at the US National Bureau of Asian Research.

1. Japan’s energy options after Fukushima
2. Two sides of the same coin: nuclear disarmament and the peaceful use of nuclear energy
3. Nuclear power and spent fuel in East Asia: Balancing energy, politics and nonproliferation

Indonesia is Southeast Asia’s largest energy producer and consumer.

Its government energy policies are fostering reliance on dirty and subsidised fossil fuels and little progress has been made in increasing renewable energy usage. Yet Indonesia has enormous renewable energy potential. Energy sources such as geothermal power could readily meet up to 40 per cent of the country’s energy needs.

Indonesia’s energy policies lack consistency and long term viability, and will continue to drain the country’s financial resources and deplete government budgets. Coal-fired plants contradict Indonesia’s commitment to tackling climate change and produce other environmental harms, such as smog and acid rain. Unless reversed, Indonesia’s current responses to energy shortages — expanding coal-fired power plants and heavily subsidising dirty energy — will see the country fall radically short of its 2025 renewable energy targets.

According to the Green Policy Paper released by the Finance Ministry, total energy demand in Indonesia is growing by around 7 per cent per year as the transport and industrial sectors grow and households become more affluent. A large proportion of this demand is being met by fossil fuels, mainly oil.

A consequence of this skyrocketing demand is that since 2004 Indonesia has become a net-importer of both crude oil and refined products. If no new domestic reserves are found, with the increasing demand for energy and a ‘business as usual’ approach, Indonesia will be a significant oil-importing country in less than two decades.

Already, dramatic increases in average global oil prices have hit Indonesia’s purse strings. Most power generation today is from conventional thermal sources including fossil fuels such as oil, coal and natural gas. Less than 20 per cent comes from hydroelectric, geothermal and other renewable sources. Thus the high price of oil on the global market has made it more expensive to produce and import gasoline and led to increasing electricity-generation costs.

Electricity is heavily subsidised and currently customers pay for electricity at far below market price. The state-owned electricity company PLN, however, is required to buy energy at the market price, something it struggles to do. Fuel is also heavily subsidised by the government. Together, fuel and electricity subsidies create a massive burden on the state budget. Their estimated cost to the government in 2010 was US$9.78 billion, and in 2011 had already hit US$3.68 billion by March.

The subsidies have various perverse economic implications. In 2008 the Coordinating Ministry for Economic Affairs admitted that indiscriminate fuel subsidies have been a poor way to pursue welfare transfers from rich to poor because the wealthiest 40 per cent of households capture 70 per cent of the subsidies. Almost one third of Indonesia’s 225 million inhabitants lack access to electricity (especially in poorer rural areas). Subsidies also lead to over-consumption of energy because the actual cost of that energy is not reflected in the price consumers pay.

Many reports suggest that subsidies discourage energy efficiency measures and the development of alternative or renewable energy sources by way of low electricity tariffs. Adjusting prices and removing subsidies could promote better energy efficiency and conservation while bolstering the competitiveness of renewable energy sources. The money previously used for subsidies could be utilised to help seed investment in renewable energy development, reaching the country’s sustainable energy growth path. Some studies show that such policies could result in increased energy efficiency by as much as 10–30 per cent in households, 10–23 per cent in the commercial sector and 7–21 per cent in industry.

But populism has made such energy reform difficult. Many ordinary Indonesians hate the idea of paying more for fuel, electricity and related services. Throughout the past ten years the government has had some success at whittling away these subsidies but the issue remains politically contentious. As well as taking action on the demand side, the government could take action on the supply side by providing more support for renewable energy. Indonesia possesses a variety of renewable energy resources, including geothermal, solar, micro-hydro, wind and bio-energy. Indeed, Indonesia has more geothermal energy potential than any other country. Most estimates put the potential reserves at 28,000 megawatts, which could meet some 40 per cent of national electricity demand. Yet currently Indonesia only uses 4.2 per cent of that potential. At present, renewable energy production (hydropower, geothermal and biomass) makes use of only 3.4 percent of total potential reserves.

This low figure is partly because shifting the country’s energy portfolio to renewables would require massive investment. Another obstacle is Indonesia’s system of government. Not only is the bureaucracy lacking in capacity and resources, it is also riddled by inter-departmental tension at the national level. The decentralised system of government and the resulting division of power between central and local governments also impedes national coordination in delivering a policy of transition to renewable energy.

Under decentralisation, local governments have been given the rights and responsibility to issue concessions and licenses for renewable energy. Unfortunately most local governments have very limited capacity or understanding of the implications of various energy scenarios. There is no established policy framework through which to encourage local governments to pursue renewable energy initiatives.

The moment is ripe for Indonesia to make tough decisions to sustainably secure its future energy needs. The Indonesian government needs to stiffen its political resolve to phase out subsidies for fossil fuels. Actions to reform policy incoherence, remove structural impediments and promote investments in renewable energy are also needed. Mixing various sources of funds from the private sector and international funding institutions, and encouraging investments with pricing and tax reforms could promote investment in renewable energy. Strong leadership and clear guidance from the top, notably from the president and his cabinet, is needed.

Fitrian Ardiansyah is a PhD candidate at The Australian National University and was formerly program director for climate and energy at WWF-Indonesia.

This is an adapted version of an article that originally appeared here on Inside Indonesia.

1. Energy subsidies of Rp 300 trillion in Indonesia?
2. Energy governance in Asia: beyond the market
3. Building a solar energy economic zone along Japan’s east coast