NEWS

TOP

Japan’s US LNG volumes to jump on Cameron expansion
Top business lobbies clash on future of nuclear power
Big changes to energy efficiency may pressure renewables

OIL & GAS
Mauritius oil spill latest: Hull splits, raising fear of more leaks

JERA appoints American director with green credentials

Defense ministry fuel tender avoids scrutiny over low price
Idemitsu says it struck oil in North Sea project
Idemitsu puts online second Chinese lubricants factory
Toho Gas unit actively promotes cogeneration to win clients

POWER & NUCLEAR
Power-to-heat strategy could help Japan store green energy
TEPCO Power Grid signs accord to prevent more outages
KEPCO boosts security after website hacked six times

RENEWABLES & OTHER
ENEOS, KEPCO, others establish USD 3.75 renewables fund

Hokkaido fishermen shift from foe to friend of offshore wind
Orix Bank to market renewables investment to individuals
Vena Energy starting building 47MW Aomori wind farm

TDK pledges to use only local, hydropower for facility

CONTACT US

nrgnews@yuri-invest-research.com

ANALYSIS

POST UNBUNDLING, IS JAPAN’S POWER GRID ACTUALLY INDEPENDENT?

On April 1, 2020, Japan planned to abolish regulated electricity tariffs, freeing the incumbent utilities to compete with new market entrants by lowering rates. However, the plan was predicated on creating a neutral grid industry, which was supposed to cut ties with the 10 dominant power utilities.

Evidence suggests that grid companies retain an unhealthy proximity to their ancestor utilities. And the tariffs still remain. We explore why.

NUCLEAR RESTARTS IN JAPAN BRING MORE PROBLEMS THEN SOLUTIONS

Last week we outlined the bull case for nuclear plant restarts. The industry has recently gained some positive momentum. And yet, we see nuclear’s role in the country’s energy mix dropping to 10% or less by 2030. A mass-restart of nuclear power in Japan faces three major issues: the public, market forces, and a myriad of technical problems. Here is the bear case.

HOUSE VIEW

COVID has wreaked havoc with Japan’s economy. It shrank an annualized 27.8% in April-June, the worse since 1955. Yet, recent global geopolitical turmoil helped lift oil prices, and that’s mostly good news for Japan’s oil firms and investors. Brent, at $19 in April, has rebounded above $40 since early June. Further support for energy prices could come from the run-up to the US presidential election, US-Iran tensions, a Turkey-Greece dispute over gas, and potential escalation of unrest in Belarus. Japan’s economic recovery is uncertain, yet weakness in non-US oil benchmarks will likely be offset by global tensions.

Post-unbundling, Japan’s grid firms retain unhealthy proximity

to ancestor power utilities

Timeline of the deregulation of the Japanese electricity market

(Source: Ministry of Economy, Trade and Industry)

Competing on Price

In the Ministry of Economy, Trade and Industry’s (METI) original roadmap for deregulation, the incumbent utilities were forced to continue to offer regulated tariff plans for the first four years of the post-2016 market. With incumbent utilities’ rates bloated from years of acting as regional monopolies, new retailers with a modicum of competence could run their businesses for a four-year “grace period”, beating the Electric Power Companies (EPCOs) on price.

At the same time, METI granted the incumbents the ability to create new retail companies that could offer deregulated rate plans when the market opened, partially undercutting the stated purpose of the continuation of regulated rate plans for the first four years. Indeed, at the end of 2018, METI found that the new retail arms of the former monopolies had captured about 40% of the customers who had switched away from their old regulated service; in other words, only 60% of customers who had switched away from the incumbents had truly moved to new electricity retailers.

When METI set the beginning of FY 2020 as the date to untie the hands of the incumbents and allow them to lower their prices, it left itself an off-ramp by reserving the right to “assess the competitive environment,” and delay the abolishment of regulated tariff if necessary.

The criteria for a delay was as follows: In a given grid (former monopoly) zone, there should be two or more retailers with no association with the incumbent who have captured at least 5% of low voltage (residential and small commercial) market share. In July of 2019, it was judged that none of Japan’s nine deregulated grid zones had met these criteria, and therefore regulated tariff should be kept in place for another year.

In the two most populous grid zones, TEPCO and Kansai, the competitive retail arm of the incumbent utility had captured more than 10% of market share, as calculated by number of meters.

(Source: Ministry of Economy, Trade and Industry)

METI plans to make a new assessment each year.

Is it any surprise that the incumbents jumped through the gaping loophole which allowed them to start competing from day one of the market by establishing separate retail arms, and have succeeded in using this to stay ahead of the pack?

Legal Separation of T&D from Generation

As of the first day of FY 2020, all of Japan’s former monopoly utilities had spun T&D off into separate legal entities from their generating companies. However, the manner in which it has been done leaves room for doubt over how fair and unbiased the T&D network will be for non-incumbent players.

In the case of TEPCO and Chubu EPCO, both created holding companies which own their respective generation, T&D and retail businesses – each contained in a separate legal entity.

The other utilities, however, have created structures in which their generation and retail arms constitute a single company, and that company owns the T&D company.

(Source: Ministry of Economy, Trade and Industry)

In either of these structures – particularly the latter – it would seem that an enormous number of granular rules, and correspondingly onerous regulatory reporting and monitoring burden, would be needed in order to assure anything resembling neutrality in the way the T&D companies treat market players not associated with the groups they belong to.

Since late 2018, the outsourcing of services between the companies in an incumbent group is nominally prohibited. In reality, the rules allow for so many exceptions – to the point that, under the right conditions, employees can be seconded from one company to another and directors can even sit on the boards of multiple companies within a group.

Government officials see the risk
It remains to be seen whether the policymakers at METI and the industry regulators will get serious about creating the conditions for competition to thrive. One potentially positive indication is that a METI expert committee has identified the possibility of incumbent generating companies giving preferential wholesale pricing to their sister retail companies as a potential risk to competition. The committee has suggested several ways of monitoring to prevent this.

TAKEAWAY: It will take time for the complaints to work themselves through the system, but we hope it will return to give all market players greater assurance on the neutrality of access to the grid.

Nuclear Restarts in Japan Bring More Problems

Than Solutions

Last week we outlined the bull case for nuclear plant restarts in Japan. The industry has gained positive momentum after the regulator gave the (almost) go-ahead to begin spent fuel processing. The recent government decision to close older coal-fired plants will also act as a trigger for restarts as nuclear offers emissions-free, baseload power. And yet, it’s hard to see nuclear’s role in the energy mix above 10% by 2030.Mass restarts of nuclear power in Japan face three main issues: public mood, market forces, and technical challenges.

(1) PUBLIC ISSUES
Astronomical cost. After the March 2011 disaster at the Fukushima Dai-Ichi nuclear station, its operator, Tokyo Electric Power Co. (TEPCO), a private utility, accepted a ¥1 trillion (USD 9.3bn) taxpayer bailout that gave control of the company to the state. Five years later, TEPCO had made 50 requests for state funding and received over ¥5.7 trillion. It has continued to receive around ¥500 billion to ¥800 billion a year of national funds.
Last year, TEPCO itself estimated that it needed ¥22 trillion or USD 206 billion “to address the Fukushima Nuclear Accident.” While this money is due to accumulate from various sources, the ultimate payers for the majority of this money are the Japanese taxpayers and electricity users.

Source: Tepco Integrated Report 2019

Immense human effort. According to TEPCO figures, more than half a million workers so far were engaged in the Fukushima cleanup operation. Add in the people involved in related cleanups in the neighboring prefectures, and the human resource stretches to almost 1% of the country’s population.

The public is on the hook because TEPCO didn’t make provisions. Last month, Japan’s nine utilities with nuclear assets asked the government to pass on another ¥2.4 trillion of costs to the public via additional electricity levies, which would pay for their portion of costs associated with the Fukushima disaster. One of the reasons given for the levy is that TEPCO did not make advanced provisions for such liabilities.

Public opinion overwhelmingly against. Given the above, it’s not a surprise that the public oppose the use of nuclear and have a dim view of TEPCO. Even in the latest official polls published by the Japan Atomic Industrial Forum Inc. (JAIF) almost half of those surveyed want nuclear plants to close “over time,” and a further 11.2% want them shut immediately. Those who want a return to a pre-Fukushima reliance on nuclear power account for less than 10% of total.

TEPCO still faces about 30 class action lawsuits over the Fukushima disaster. Former residents of areas near the plant are suing TEPCO and the government for damage caused by the disaster. In addition to the size of reparations, TEPCO and the entire nuclear industry must grapple with the negative publicity. The latest victory in court by citizens came just last week – Aug. 11.

Local political assent needed for restarts. Legally, utilities can restart reactors based on the regulatory approvals alone. In practice, utilities wait for “blessing” from local mayors and prefectural governors, who mostly reflect public opinion and take into account any legal proceedings.

(2) MARKET FORCES

Nuclear power is no longer a cost leader. Japan’s pro-nuclear government estimated in 2014 that the unit cost of nuclear power was ¥10.1 per kilowatt-hour (kWh). Solar was then seen at ¥24 to ¥29. Within just 5 years, the additional safety features required post-Fukushima have inflated the initial capital outlay for nuclear stations, which suggests that 2014 figure should be revised up 10% or more. Meanwhile, this year’s tariffs on solar projects are down to around ¥12 per kilowatt-hour. A breakthrough in battery storage for renewable energy would make it hard for nuclear energy to compete.

The case for new construction is weak. Running existing plants, which have most of the costs sunk in upfront is one thing. Yet, the government’s energy mix scenario for nuclear envisions construction (or at least the completion of construction) of several more reactors and new stations. In a nation with a shrinking population and a deregulated power market, taking on multi-billion-dollar projects to build large nuclear stations is a fantastic risk that can only be accepted by private companies if there are tariffs in place. And yet, the government has committed to phasing out tariffs in line with market deregulation.

Nuclear industry lacks leadership. Major Japanese firms are leaving the field. Toshiba sold off its crown acquisition of Westinghouse, taking heavy losses and effectively ending ambitions of building nuclear plants abroad. IHI, a major parts supplier for the industry, dissolved its nuclear venture with Toshiba. Hitachi froze its UK nuclear project. A year ago, TEPCO proposed to create a national nuclear champion by joining with Chubu Electric, Toshiba and Hitachi. A year on, the project has barely moved with other partners afraid that it could open them up to problems around Fukushima decommissioning and its liabilities.

Utilities will argue for nuclear… until they don’t. Industry insiders estimate the cost of power from an existing nuclear plant at ¥1/kWh. It’s clear why utilities lobby to run existing nuclear plants. And yet, if the cost of scrapping the assets entirely is (as usual) passed onto the public, be it as a separate levy or part of the electricity fee, the utilities will have fewer reasons to promote reactors. Especially, if such an action is taken, say, ten years from now to allow time to develop other generation assets.

(3) TECHNICAL CHALLENGES

Too many questions. This is arguably the biggest reason to be bearish on nuclear restarts in Japan. The domestic industry has not resolved its many, admittedly enormous, technical challenges. And it can no longer ask the public to trust that it will work them out at some later date.

Nuclear Fuel Cycle is uncertain. Much of Japan’s nuclear energy program since the 1960s has been built around the idea of a nuclear fuel cycle. The essence of it was to find a way to recycle nuclear fuel, which promised to cut the volume of nuclear waste, offer cheap, non-CO2-emitting electricity, and give Japan greater energy independence. Like the Holy Grail, the idea of the nuclear fuel cycle has inspired decades of government policy. And yet, like the Grail, a functioning nuclear cycle remains as elusive as ever.

Source: METI website

Rokkasho may face more delays. The heart of the nuclear cycle is the Rokkasho complex. The site, operated by Japan Nuclear Fuel Ltd., recently received regulatory approval for new safety measures – a process that took over six years. However, it was not the final hurdle to start spent fuel reprocessing on the site. Japan Nuclear Fuel still needs to get approval for Rokkasho’s design and some of operational measures. It’s unclear how long either will take. Some Japanese media suggest this could yet be “years,” noting that the process involves an inspection of over 10,000 pieces of equipment.

No space to put used nuclear fuel. Meanwhile, Japan is quickly running out of places to store spent nuclear fuel. There are an estimated 16,000 tons of used fuel lying in cooling pools at Japanese nuclear plants and a further 3,000 tons or so in Rokkasho, which is around its capacity. Utilities including KEPCO have planned to build interim storage for spent fuel, yet so far there are no candidate sites and even the nuclear-friendly prefectures have backed off from giving ascent to construction of such facilities in their territories. Again, the issue is the public mood.
Estimates vary on how much runway Japanese reactors have before their operators run out of space for the spent fuel, but even the most positive ones say: 5-10 years. It’s hard to see more nuclear plants allowed to restart operations without a clear plan for where the utilities will park spent fuel.

Processing fuel will create too much plutonium. Reprocessing spent fuel recovers still-useful uranium and plutonium. The latter can be blended with uranium to create a more potent nuclear fuel known as MOX (Mixed Oxide). However, at full capacity Rokkasho will create seven tons of plutonium a year and Japan does not need that much for MOX fuel. Prior to Fukushima, Japan planned to have at least 16-18 reactors fitted to run on MOX fuel. The 2011 accident led to more stringent rules, and today only 4 of the reactors use MOX.

MOX fuel unlikely to solve storage problem. There is no specific storage or processing facilities set aside for spent MOX fuel. That suggests that it would rest in nuclear station cooling pools, the same as regular spent fuel. Then, the problem of congestion is simply delayed by a few years.

MOX fuel unlikely to solve energy security issue. Currently, Japan doesn’t have its own MOX fuel manufacturing facilities. Most of Japan’s MOX is contracted to France’s Areva, which makes it at facilities in France. This contradicts the energy security thesis.

Plutonium is a global proliferation risk. To date, Japan has accumulated 46 tons of plutonium. Rokkasho’s processing plant will only add to that stockpile, which is already the world’s 4^th largest. Initially, the plan was to feed plutonium into a different kind of nuclear reactor, called a fast-neutron or a breeder reactor. Such reactors were seen as the future of nuclear generation for a long time, but their coolant structure make them costly and complex to operate. Japan’s venture into the field via the Monju fast-reactor project started in 1994. After using more than ¥1.1 trillion in state funding, and falling prey to an astonishing array of incidents, the project was shut down in 2016. It will now be decommissioned at an additional cost of ¥375 billion. There is no current plan to develop another fast reactor. So, what happens to the plutonium stockpile?

Japan’s plutonium emboldens other countries to do the same. South Korea is holding a 10-year joint study program with the US to explore the feasibility of reprocessing in the country. When the study ends in 2021, South Korea could demand the same rights and in time build its own plutonium stockpile.

No long-term plan for storing nuclear waste. No matter how much you process spent fuel, there is still waste and it is highly radioactive. Japan has still not selected a long-term nuclear waste storage site– or even proposed one. Selection is not expected until around 2030. Then comes the work to build, win the many approvals, and move the waste to the site. Who can say in what year that will occur?

Deadlines for new safety measures are not met. Many of the utilities will not meet their own dates for completion of new anti-terrorist measures at the nuclear plants, according to a recent report in the Yomiuri Shimbun. The industry regulator has said it will not extend the deadlines. That will affect One more technical reason the reactors would need to stop.

CODA: POLITICAL TIMES ARE A-CHANGING
Prime Minister Abe Shinzo’s government has always supported nuclear power and the nuclear fuel cycle. His successors might not.

Current defense minister, and former foreign minister, Kono Taro has openly criticized the nuclear industry. His recent decision to cancel the purchase of the Aegis Ashore missile defense system showed that he is not fazed by changing tack on a long-term project supported by all of his predecessors and that he makes his decisions based on practical (money) calculations.

Kono expressed some of his views on Japan’s nuclear cycle in the summer of 2011, slamming Rokkasho and the industry’s inability to solve its own problems. “Back in 1967 the government was saying that a fast breeder reactor would be ready in 20 years; in the 1970s they said it will take 30 years. What will happen in 2050 is that they’ll say it will probably be available in 70 years,” Kono said. “We’re not going to have it, and we know it.”