Japanese Energy Policy One Year Later

March 19, 2012

The Great East Japan Earthquake and tsunami of March 11, 2011, followed by the reactor damage at Fukushima, have shaken the core of Japanese energy policy.

Japan is dependent on imports of virtually all fossil fuels. In reaction to the oil disruptions of the 1970s, Japanese energy policy has focused on efficiency, diversity, and development of indigenous energy sources. Because virtually all fossil fuels must be imported, nuclear power had offered an indigenous option that became a cornerstone of Japan’s energy policy. Nuclear power is also affordable, especially compared to purchasing oil and gas on world markets. Prior to the Fukushima accident, a strong alliance between government and industry had developed to support expansion of nuclear power in Japan.

The desire to reduce greenhouse gas (GHG) emissions to deal with climate change further heightened the role of nuclear power. The government’s commitment to reducing GHG emissions to 25 percent below the 1990 level required significant expansion of nuclear power. The last energy plan targeted the expansion of nuclear generation to 50 percent from 30 percent before disaster.

Fukushima has changed the fundamentals of energy policy planning.

The March 2011 tsunami took about a dozen reactors off line and precipitated a series of events that resulted in the meltdown in three of the Fukushima Daiichi reactors.

The loss of energy from the reactors was made up by aggressive energy efficiency and conservation efforts, but also sharply increased imports of liquefied natural gas (LNG), crude oil, and fuel oil. LNG imports in 2011 increased by nearly 25 percent. Japan has a number of old oil-burning facilities that are a legacy from a period when oil was the predominant fuel for power generation. In 2011, oil use went up by nearly 85 percent.

Feared blackouts were avoided during the peak months of summer 2011. The cost, however, was very high. Reportedly, an additional ¥3 trillion—more than $35 billion—were spent on fossil fuel imports. This additional expenditure served as a major contributor to Japan’s trade deficit last year.

The crisis, however, has been extended. Japanese nuclear power plants must shut down every 13 months for maintenance and inspections. Through informal arrangements made over the years, local consent is required to restart a plant after maintenance. The fear of another accident has shifted public sentiment against nuclear power. The Fukushima crisis was the second major earthquake-related problem for Japan’s nuclear power. In 2007, the largest nuclear installation at Kashiwazaki-Kariwa was damaged by a magnitude 6.8 earthquake—another incident beyond design expectations.

No plant that has shut down since the Fukushima crisis has been able to gain the necessary consent to restart. As of today, only 2 of 54 plants are still operating, and they will be taken off line by the end of April. On the one-year anniversary of the earthquake and Fukushima accident, Prime Minister Yoshihiko Noda reiterated his government’s commitment to restarting nuclear reactors currently under scheduled maintenance, stating that his government “should make every effort” to obtain the local support for restart and that he would “take a lead” in this regard. If the effort to restart nuclear power plants is not successful, the cost for fossil fuels to make up the difference in 2012 will be high—estimated at ¥4.6 trillion (about $57.5 billion).

Furthermore, the Japanese electricity system is fully exposed to international oil markets since liquefied natural gas is purchased with contractual linkage to oil prices. The current risk of price increases in global oil markets could further aggravate the balance of trade situation for Japan.

Japan has embarked on a major review of its energy policy. The plan approved in 2010 is clearly no longer acceptable. The parameters for the new plan are that nuclear power is to be reduced to the lowest level possible, and the goal is to introduce renewable energy over time to make up for the loss of nuclear power.

A transition of this type is without parallel in major economies. Any plan to greatly expand renewable energy sources will have to deal with replacing a source with high utilization factors and stability of production with one that is more intermittent and variable. Nuclear reactors operate at an average utilization rate of 80 to 90 percent whereas wind and solar tend to run roughly in the range of 15 to 30 percent.

The rate at which this transition can occur and the ultimate cost to government and consumers will be driven by a number of key factors:

• How many nuclear plants—if any—are acceptable to the public?
• If existing plants are allowed to reopen and stay in operation, will they be closed at the end of the initial 40-year lifetime, or will extensions to 60 years continue to be allowed? In the absence of life extension beyond 40 years, 12 reactors will cease operation by 2020, followed by additional 18 reactors by 2030.
• How fast can renewable energy be built up? The government has announced that feed-in-tariffs will be put in place starting this July to provide incentives for renewables investment, but there are no set targets and the price levels are not yet known. Non-hydro sources of renewable energy currently account for about 2 to 3 percent of power generation.
• Will the current industry structure facilitate or retard widespread introduction of renewables, and will the government force changes in the electricity sector to allow more decentralization?

Given the lead time necessary to develop renewables, increased fossil fuel generation is likely to last for a long time. LNG will be favored over oil, but it still has geopolitical security risks. Such risks, in the absence of changes to current contractual practices, will be priced in a way that makes a strong linkage to oil prices.

Diversification of LNG sources creates an important opportunity for cooperation with the United States. Surplus shale gas has created strong interest in exporting natural gas from the Gulf of Mexico and other areas. The current export approval process treats countries with which the United States has a free trade agreement (FTA) differently from non-FTA countries, including Japan. While exports to FTA countries must be approved expeditiously, those to non-FTA countries must be evaluated to determine if they will be in the “national interest,” which is an increasingly political process.

This issue may be fixed if Japan joins the Trans-Pacific Partnership (TPP) structure. However, it may be sensible to give Japan equal treatment to FTA countries given the earthquake-induced special circumstance and the history of strong U.S.-Japan economic relations. Treatment of Japan in this category could also give U.S. LNG project sponsors and Japanese customers greater assurance of project security.

Alaskan gas represents another significant opportunity. About 35 trillion cubic feet of gas has been stranded on the North Slope for more than 30 years. The beginning of new exploration in the Arctic is highly likely to find additional large gas fields. The governments of Alaska, the United States, and Japan should work with industry in both countries to determine what will be required to build the pipeline and LNG infrastructure to bring this gas to Japanese and potentially other Asian markets.

With a period of triage behind it, Japan may be better positioned to seek longer-term solutions to its energy security concerns. This also creates greater opportunities for the United States to further close cooperation with Japan, not only for Japan’s successful reconstruction but also for the robustness of the U.S. natural gas industry.

Jane Nakano is a fellow, and David Pumphrey the deputy director, of the Energy and National Security Program at the Center for Strategic and International Studies in Washington, D.C.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

© 2012 by the Center for Strategic and International Studies. All rights reserved.