Japan's Energy Policy After Fukushima

January 24, 2013

Masakazu Toyoda
, Chairman & CEO, The Institute of Energy Economics, Japan

Michel Di Capua
, Head of US Analysis, Bloomberg New Energy Finance

On January 24, 2013, Masakazu Toyoda, Chairman and CEO of The Institute of Energy Economics, Japan, and former Vice Minister for International Affairs at METI, visited Japan Society to discuss the changing contours of Japan's energy policy.

Energy Policy Before 3/11
Japan's energy policy before Fukushima was founded on three basic values, Mr. Toyoda said: energy security, of great concern given Japan's low self-sufficiency ratio, which at 4 percent is one of the worst among the G-8 countries; environmental conservation, to address climate change; and efficiency, "which means cost: what is the cheapest way" to achieve an appropriate energy mix.

The energy plan that Japan published in 2010 called for:

• Conservation measures to achieve approximately a 20 percent reduction in the growth of primary energy demand in 2030; and

• An increase in zero-emission energy, with renewables rising from 6 percent in 2007 to 13 percent in 2030 and nuclear power rising from 10 percent in 2007 to 24 percent in 2030.

The Impact of Fukushima
Then came March 11, 2011 and the Fukushima nuclear accident. "Trust in nuclear safety was seriously damaged." The "three Es" of the old energy plan—energy security, the environment and economic efficiencies—were not enough. The new plan had to address safety concerns as well as the macroeconomic impact of possible energy mix, to minimize adverse effects.

Fossil fuels are often a source of energy instability, Mr. Toyoda observed. Japan still depends heavily on imported oil, and 85 percent of Japan's oil imports come through the Strait of Hormuz from the politically unstable Middle East. Prices fluctuate a lot, with crude oil prices remaining very high in 2012.

Before Fukushima, nuclear energy played an important role in Japan's quest to promote energy efficiency and protect the environment. Projections showed nuclear energy would remain the cheapest of the big three—nuclear, LNG and coal—well into the future.

We do well to remember that all kinds of energy have safety issues, not just nuclear, he reminded the audience. The dangers of nuclear energy are uppermost in people's minds because of the Fukushima accident. Germany and Italy in fact have reinstated plans to phase out nuclear power. For Japan, however, negative attitudes towards nuclear energy will have to change before progress can be made in developing a reasonable energy mix.

What Went Wrong: Nuclear Safety
A report released in 2012 by the Diet's Fukushima Nuclear Accident Independent Investigation Commission identifies three major problems, Mr. Toyoda noted. First, "we were not well prepared for a severe accident and blackout." Second, there was no specific plan for what the government and operators should do when an accident takes place. And third, "we did not have a independent regulatory agency." A single ministry, METI, housed both the division responsible for promoting the use of nuclear energy and the division responsible for regulating the nuclear industry.

Each of these problems is addressed in the list of core safety principles set out by IAEA, the International Atomic Energy Agency, Mr. Toyoda noted.

Under the newly formed independent Nuclear Regulatory Authority, Japan hopes to have new safety standards in place by July 2013. The next step will be for the NRA to inspect all of Japan's reactors, and "if they confirm safety, those nuclear reactors would be restarted."

What Went Wrong: Macroeconomic Impact
The macroeconomic impact of Fukushima represents "a vicious cycle," Mr. Toyoda said. With only two out of 54 nuclear reactors currently operating, Japan must import more oil and gas. Higher fossil-fuel imports drive up the cost of fuel; between 2010 and 2012, fuel costs rose almost $30 billion. Higher fuel costs lead to trade deficits that are hard to mitigate. A country like Germany can offset lower levels of domestic electricity production by buying more from the EU-wide electricity network, but Japan doesn't currently have a comparable resource.

Options for Japan's Energy Mix
Three energy-mix options have been under discussion in Japan: a no-nuclear plan, a 15-percent-nuclear plan and a 20- or 25-percent-nuclear plan. Public opinion is divided, with the largest fraction supporting the zero-nuclear plan.

Businesses, however, are united against the zero-nuclear plan, which they believe would reduce real GDP and increase electricity costs, which would "severely damage" international competitiveness and hurt employment. Businesses are also mostly opposed to the 15-percent and 20/25-percent options, again because they fear that Japanese firms will be less able to compete in the global economy.

The United States has expressed concerns regarding nonproliferation issues if Japan were to stop using nuclear energy and continue reprocessing, Mr. Toyoda said.

The LDP's overwhelming victory in the December elections was not specifically a vote to approve nuclear energy, he added. The primary focus of the party's campaigns was on the revitalization of the Japanese economy.

In the short term, the LDP wants to restart the nuclear reactors when the Nuclear Regulatory Commission, now independent, says the reactors are safe. It's expected the review process will take about three years. Longer term, the LDP believes that the energy mix should be determined within 10 years, depending on how reliable and affordable renewables prove to be.

The LDP hasn't expressed any opinion on what the energy mix should be.

Mr. Toyoda's own view of the best energy mix for Japan takes "sort of a balanced approach," he said:

• Nuclear energy, 25 percent
• Renewables, 25 percent
• Thermal, 35 percent
• Cogeneration, 15 percent

This balance reflects an important reality, namely that none of the sources are perfect and each has both advantages and disadvantages.

Asia Overview
Mr. Toyoda discussed the overall energy picture in Asia and the benefits of cooperation among Asian countries.

• Energy conservation: Japan is perhaps number one in energy efficiency, whereas Korea, China, India and Russia are "not necessarily good in terms of energy efficiency.... So at least we can share our technology with Korea and China."

• The "Asian premium" in LNG pricing: Ten years ago, LNG prices across regions were quite even. But currently, due to U.S. shale gas production plus the Asian trade custom of linking natural gas prices to oil prices, LNG prices in Asia carry a premium. Cooperation among Korea, China and Japan will help address this problem, and the U.S. can "contribute a lot" by exporting shale gas to Japan and other Asian countries.

• Nuclear safety: Of the 60 or 70 new reactors currently under construction, almost two-thirds are in Asia. Japan learned many lessons on safety regimes, safety culture and safety technology from the Fukushima accident, lessons that it must share with other countries.

• Energy mix: With an appropriate energy mix, Asia "could realize more sustainable economic development."

• U.S. efforts to maintain stability and safety in the sea lanes through the Strait of Hormuz are important contributions to the goal of sustainable development, and "clearly Asia should support that, particularly Japan."

• The environment and climate change: The U.S. and Japan can act jointly to "create a realistic framework" for dealing with this issue.

"We have a lot of problems in Japan in the area of energy policy, but U.S.-Japan cooperation could resolve those problems to a considerable extent. And also that would be good for the United States in the sense that the U.S. could see the continuation of booming economy in Asia. So my conclusion today is that U.S. and Japan cooperation is quite indispensable. And I hope all of you could support this and we can work together," Mr. Toyoda concluded.


As presider, Michel Di Capua of Bloomberg began the Q&A:

You showed a chart that had four or five Japanese newspapers asking the Japanese public how they feel about four different energy strategy options, and it's inconceivable to me picturing that in the U.S., the idea of polling the American public around what's the right energy mix—-that seems like a pretty sophisticated discussion for the Japanese public to be having. This is a blunt way to ask the question: Should people invest in Japanese clean energy companies? How competitive are Japanese firms in battery manufacturing, solar manufacturing, more efficient cars—whatever it is that Japan is thinking about in terms of cleaner energy?

"It depends on the product," Mr. Toyoda said. Solar panels are a simple product, and it's "extremely difficult" to continue being competitive. But batteries and energy-efficient cars "still have a big advantage with Japanese companies."

Whether you're paying for imported fossil fuels or imported solar panels, don't you still have the same problem of net capital leaving the country?

"Yes, to some extent. I think it's only part of the picture. I think if we could maintain a certain share of nuclear power, then we could at least minimize the increase in fossil fuel. And over all... if we can increase exports, then we could have a much sounder trade balance."

What would you say about the question of political certainty, especially to a foreign investor coming into Japan, investing in something like an LNG import terminal, a renewable energy project?

The LDP won an "overwhelming victory" in December's general election, and is pursuing "an economy-first policy, which has been supported by most people" in the electorate, Mr. Toyoda replied. "There is a high chance they could win in the upper house election. And then there will be at least a three-year period of stability." So investors "can feel more comfortable making an investment in Japan. I think the situation in Japan is getting more normal."

Members of the audience joined in the conversation:

Could you tell us about the technologies Japan can use to reduce CO2 in the atmosphere?

CCU technology, carbon capture and utilization, for example using artificial photosynthesis, "is quite important. But in addition to that, in the quite near future, production of hydrogen is very promising," Mr. Toyoda said.

The latter process does produce CO2, but that could be addressed by having Japan "produce hydrogen in oil, coal or gas-producing countries, and then we could use the CCS technologies there" to store CO2 under ground, after which the hydrogen could be transported to Japan. "This is quite possible. I don't necessarily think it's very difficult technology."

As you foresee more demand for nuclear energy, would you expect to see more new companies starting up, or do you think there is also an opportunity for companies in oil and coal production, let's say, to shift into nuclear energy supply?

"We are not necessarily expecting newcomers with nuclear. Newcomers perhaps with renewables first, and secondly natural gas," and also cogeneration, which uses the heat produced during power generation to generate more electricity, Mr. Toyoda replied.

Based on the failure to produce a working fast-burner reactor in Japan, and the view that at the earliest it will be 2050 until we get closed fuel systems going there, how is Japan going to deal with its used fuel problem?

"We tend to think nuclear is semi-self-sufficient energy," Mr. Toyoda said. Scientists' views on the best methods are divided, and the important thing is international cooperation.

—Katherine Hyde

Topics:  Business, Policy

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