Japan Gears Up its Quest for the “Best Energy Mix”

Dust is settling on the national politics, and Japan is gearing up its drive to define its energy future. As the Liberal Democratic Party (LDP) secured the upper house in the July 2013 elections—following its lower house election victory in December 2012—the scene is ripe for some serious debate and decisionmaking on the country’s energy mix, including the future size of its nuclear reactor fleet, the rising reliance on natural gas, and the pace of renewable energy deployment in its energy economy.

The scrutiny brought by the Fukushima nuclear accident upon nuclear power sector governance and the soundness of the regulatory system has reduced the number of operating nuclear power reactors to two. The nuclear power outage is a major economic blow to Japan, as it relies on imports to meet almost all of its energy needs. Although Japan depends on imported uranium to run its nuclear reactor fleet, nuclear energy became a cornerstone of Japan’s energy policy after the Arab oil embargos of the 1970s, as nuclear’s economics are less vulnerable to volatilities in the global oil market. Prior to Fukushima, nuclear energy accounted for roughly one-third of Japan’s electricity generation mix.

The Fukushima accident led to an extensive nuclear power outage, and natural gas and oil stepped in to fill the electricity supply shortage. Japanese imports of natural gas rose by 11.2 percent to a total of 87.3 million metric tons and 2 percent for oil to 3.66 million barrels per day from 2011 to 2012. The share of thermal power in Japan’s power generation mix rose from about 60 percent in 2010 to nearly 90 percent in 2012. This adjustment, however, came with a price. Japan spent ¥6 trillion or $67.7 billion for liquefied natural gas (LNG) alone in FY 2012—double the level of the year before. This substantially added to the trade deficit of ¥6.9 trillion ($78 billion) in the same fiscal year, making it the highest ever in the nation’s history and up 170 percent from a year earlier. And Japan is bracing itself for an even higher deficit in FY 2013 given the depreciation of Japanese yen—which affects Japan’s purchasing power—as well as the sustained level of high oil prices—which has a direct effect on the price of imported oil, as well as on the price of imported natural gas, which is closely linked to the price of oil.

The importance of nuclear energy and natural gas in Japan’s energy strategy under Prime Minister Shinzo Abe was most recently articulated during the expeditious visit—literally within a week of the upper house election victory—to Washington by Economic Minister Toshimitsu Motegi, whose itinerary included a meeting with Energy Secretary Ernest Moniz. A request for smooth approval of LNG export projects and an expression of interest in continued nuclear cooperation with the United States were among the key messages from Tokyo. In addition to some bilateral cooperation in nuclear science/technology research and development, the two countries have commercial cooperation in this area. In fact, Prime Minister Abe, not unlike his predecessor from an opposition party, is an advocate for nuclear export despite the split in public opinion over this issue. The United States and Japan are close allies in active efforts to seize opportunities in the nuclear power business as countries like the Czech Republic, Finland, and Lithuania look to foreign suppliers to help expand their commercial nuclear power programs.

Meanwhile, much remains to be seen for the re-start of nuclear reactors in Japan. In July, a year-old nuclear regulatory body, the Nuclear Regulatory Authority (NRA), issued new criteria to improve the safety of nuclear power plants against a severe accident and earthquake/tsunami. Specific measures include constructing a second control room at a nuclear power station and installing a filter venting system in boiling water reactors (BWRs). To date, four of the nation’s nine utilities with nuclear power generation assets have applied for the NRA evaluation of twelve reactors at six locations for re-start based on the new criteria. At the pace announced by the NRA—three teams of two dozen inspectors spending half a year to inspect a reactor concurrently—would translate into over eight years for the entire commercial nuclear fleet to be evaluated and approved for re-start. Moreover, retrofitting BWRs would delay the NRA evaluation of about half of the country’s nuclear reactor fleet by another year to two. Additionally, the ongoing efforts to garner public support for nuclear re-start may be severely set back by a recent revelation that contaminated water with high levels of radiation is leaking from a Fukushima storage tank.

Renewable energy continues to be an important aspect of Japan’s future energy mix, and the deployment is driven through a generous feed-in-tariff scheme. Yet, its success is not a foregone conclusion. Since the Fukushima accident, power sector reform has become a contentious issue in Japanese politics. Those in support of fully liberalizing the electricity retail market, freeing electricity rates, and—last but not least— separating the transmission and distribution segments from power generation see the liberalized and distributed power supply network system as an important step in laying the groundwork for a robust penetration of renewable energy into the country’s energy economy. Meanwhile, others argue that the reform would be detrimental to the stability and affordability of electricity, both of which have been fundamental to the nation’s economic growth and key to today’s economic recovery. The Abe cabinet plans on reintroducing the power sector reform bill for Diet deliberation this fall. The outcome of this effort will inevitably impact the future role of renewable as well as nuclear energy in Japan.

As underlined by the July 2013 meeting between Energy Secretary Moniz and Economic Minister Motegi, as well as by the preceding summit between President Obama and Prime Minister Abe, Japan has a vested interest in the pace and scope of U.S. LNG project approval. In addition to investments in U.S. upstream projects, Japanese companies have stakes in three U.S. LNG export projects (the Freeport project in Texas, the Cameron project in Louisiana, and the Cove Point project in Maryland).

Japan eagerly looks at LNG exports from the United States, which have heretofore been tied up in a lengthy permitting process, as a mechanism for advancing its energy security through supplier diversity and as a way to secure a more flexible contractual model based on a shorter contractual term and Henry Hub–based pricing terms. In fact, the diversification of suppliers is a tenet of Japan’s natural gas import strategy, where no single supplier makes up more than 20 percent of its market share. And, Japan is keen to welcome North American supply in the mix: Japanese companies are lined up to off-take—either through sales and purchase agreements (SPAs) or heads of agreements (HOAs)—more than 730 billion cubic feet per year (15 million tons a year) of LNG from North America—a volume equivalent to nearly 20 percent of Japan’s annual imports.

But the Japanese gas market may not be able to keep its arms wide open for U.S. supplies for long, as other producers whose economies rely heavily on energy exports are eager to capitalize on Japan’s natural gas needs. As continued economic woes in Europe have dampened regional demand for its gas, Russia—which already supplies about 10 percent of the Japanese gas import—is anxious to cement projects with Japan that would deliver natural gas via pipelines. Also, Qatar, which had stepped in to help Japan alleviate power supply shortages in the aftermath of Fukushima, subsequently won some long-term supply agreements with Japanese utilities.

Whether and how natural gas markets may become more dynamic and global is among the top concerns to Japan, where natural gas has become a fuel of choice for some years to come. The Fukushima-induced power shortage caused a bump in the oil consumption level, but Japan is shifting back to its decade-long policy of scaling down oil-fired power generation.

Post-election Japan is now ready to move various energy policy pieces forward to formulate what Prime Minister Abe termed the “best energy mix” for the nation. It may still be too early to foretell the effect of the new nuclear safety criteria on reactor re-starts, the fate of the power sector reform bill, or the magnitude of Japanese gains from U.S. LNG export project investments. No matter what Japan’s “best energy mix” may look like, it will have implications that go beyond the nation’s borders, as the health of Japan’s energy economy is not an insignificant factor for global economic recovery, as well as for the economic health of its trading partners like the United States, China, and Europe.

Jane Nakano is a fellow with the Energy and National Security Program at the Center for Strategic and International Studies in Washington, D.C.

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© 2013 by the Center for Strategic and International Studies. All rights reserved.

Jane Nakano
Senior Fellow, Energy Security and Climate Change Program