Rethinking National Energy Policy
Japan’s Electricity Crisis, Nuclear Power, and the Fate of TEPCO
EARTHQUAKE 11.3.2011 – 14:45 (PT) 8.9 MAGNITUDE Miyagi Prefecture
TOKYO
earthquake epicenter damaged nuclear power plant
May 27, 2011
Dr. Paul J. Scalise Institute of Contemporary Asian Studies scalise@tuj.ac.jp
Japan
Political Economy
4 Categories of Risk
Operational: includes infrastructure,
geography, and security • • • • Disruptions to grid system, transportation, and power supply Social unrest and local opposition Security threats to fuel supply Government responses to natural disaster damage
Commercial & Economic:
includes policy decisions, external shocks, regulations, taxes, property rights, and contracts • • • • • • Tariff changes Environmental regulations Domestic market obligations Property rights Commodity price shocks Subsidies
Societal: includes changes in social
and labor structures and behaviors • • • • TEPCO labor relations & strikes US-Japan relationship Reputational risk and social responsibility Public attitude towards clean vs. conventional energy
Political: includes manifestos and
public speeches
• • • • •
Regime stability Resource nationalism Candidate attitudes to sector Regulatory actions Country-level reputational risk
Slide 2
Dr. Paul J. Scalise
Japan
Political Economy
Spillover effects (next 5 years?)
• Impact on privately-owned power companies, especially TEPCO • Impact on energy market (e.g., prices, profits, productivity, and resource allocation) • Impact on Japan’s energy policy • Impact on NIMBY politics • Impact on global supply-chain • Impact on Japanese politics • Impact on US-Japan relations
Dr. Paul J. Scalise
Slide 3
Japan
Political Economy
Operational Risk
Japan’s looming electricity crisis
Slide 4
Dr. Paul J. Scalise
Japan
Political Economy
Conventional Wisdom: Japan Will Be OK?
Characteristics of the 2 Earthquake Epicentres Miyagi Hyogo
2011 Population (% of national total) Population over 64 (% of prefecture total) GDP (% of total) Agriculture, forestry and fisheries (% of total) Manufacturing (% of total) Containerized shipping (000 TEU) Earthquake magnitude Loss of life Damage (trillion ¥) (% of GDP)
Note: TEU = twenty-foot equivalent unit Sources: Prefectural GDP from Economic and Social Research Institute, Cabinet Office; shipping data from “List of world's busiest container ports”: http://en.wikipedia.org/wiki/List_of_world's_busiest_container_ports. Courtesy of Arthur Alexander and Oxford Analytica.
1995 4.3 19.8 3.7 1.7 4.3 2,200 7.3 6,400 10 2
1.8 26.9 1.6 2.4 1.1 105 8.9 20,000+ 24? 4.0?
Slide 5
Dr. Paul J. Scalise
Japan
Political Economy
Not just Miyagi, Iwate, and Fukushima
Tohoku Electric Power Co. • Residential: • Industrial: 6,782,929 904,649 Tokyo Electric Power Co. (TEPCO) • Residential: • Industrial: • Prefectures: • % GDP: 36.5 • Sq miles (km): 15,254 (39,510) 26,405,866 2,193,087 8
• Prefectures: 7 • % GDP: 7.8 • Sq miles (km): 30,708 (79,534)
Total Customers: 36,286,531 Total Prefectures: 15
Sources: Company data, Paul J. Scalise
Total Sq. Miles: 45,962 Total % GDP: 44.3
Slide 6
Dr. Paul J. Scalise
Japan
Political Economy
Context: TEPCO Historically Stable
• Blackouts few and modest in postwar Japan • Effectively used by incumbents to maintain stable costumer base • Effective strategy against new entrants in post2000 contestable electric power market
Average duration of forced outages (min)
80 70 60 50 40 30 20 10 0 TEPCO USA UK France
Sources: TEPCO: Company data. USA: “SAIDI” (System Average Interruption Duration Index) average duration of 5 US electric power companies—Consolidated Edison, Florida Power & Light, NStar (former Boston Edison), Pacific Gas & Electric, and Southern California Edison. UK: “Ofgem Report on Distribution and Transmission Performance.” France: “EDF Annual Report.”
Slide 7
Dr. Paul J. Scalise
Japan
Political Economy
Now a Crisis: Not Just Fukushima Dai-ichi
Hydro Coal LNG Oil Nuclear Renewables
•
70,000 Installed Capacity (MW) 60,000 50,000 40,000 30,000 20,000 10,000 TEPCO (pre) TEPCO (post) Tohoku (pre) Tohoku (post)
•
•
•
•
Sources: Company data, Paul J. Scalise
•
13 of TEPCO’s 17 nuclear reactors offline (12,396 MW) All 4 Tohoku nuclear reactors offline (3,274 MW) 10 of TEPCO’s 20 oilfired thermal plants offline (7,100 MW) Both of TEPCO’s coalfired thermal plants offline (1,600 MW) All 4 of Tohoku’s coalfired thermal plants offline (3,200 MW) 1 of Tohoku’s 9 LNGfired thermal plants offline (600 MW)
Slide 8
Dr. Paul J. Scalise
Japan
Political Economy
TEPCO Reserve Margins (1965-2011)
26 21 Reserve Margin (%) 16 11 6 1 -4 -9 -14 -19 1965 1980 1995 2010 2025
• •
Optimal reserve margin: 15-20% Peak demand in August underestimated Protracted leadtimes in siting new build Worst-case: planned and unplanned blackouts in August 2011
? ?? ?
?
•
•
Note: Reserve margin is the amount of unused available capability of an electric power system at peak demand, or peak load, measured in megawatts (MW) for a utility system as a percentage of total capability. Sources: Company data, Paul J. Scalise
Slide 9
Dr. Paul J. Scalise
Japan
Political Economy
Allocation Inefficiencies
Electric Power Company Installed Capacity Electricity Sales (% Sales Total) Hokkaido 7GW 34.3GWh (11%)
0.6 GW
•
2 incompatible hertz systems (60 Hz v 50 Hz) JEPX cannot overcome it Self-generation (21,681 MW) inaccessible? New entrants minor players Can quick build overcome environmental regulations?
Transfer (GW) Hokuriku 8GW 43.3GWh (4%)
0.3 GW
• •
Tohoku 16GW 106GWh (11%)
2.2 GW
Chugoku KEPCO 12GW 61.3GWh 2.6 GW 34GW 129.4GWh (4%) (14%)
2.2 GW 2.2 GW
Kyushu 20GW 104.2GWh (11%)
Chubu 33GW Shikoku 119.8GWh 7GW 44.4GWh (12%) (4%)
1.5 GW
TEPCO 64GW 273.7GWh (29%)
1 GW
• •
60Hz 114GW
50Hz 87GW
Note: GW=gigawatt (1,000 MW); 'Normal GW' and 'Rated GW' refer to the total number of gigawatts and their total market shares. Sources: Denki Jigyō Binran, METI, calculations by Paul J. Scalise
Slide 10
Dr. Paul J. Scalise
Japan
Political Economy
Conventional Power Also Hurt
•
WORST-CASE (PEAK DEMAND) BASE-CASE (PEAK DEMAND) BEST-CASE (PEAK DEMAND)
65,000
Installed capacity (MW)
60,000 55,000 50,000 45,000 40,000 35,000 30,000
• •
) cy 3 ) 6 ) ) d) ne se on (1) (1) er y d) ne ( ge f fli age ff li icien no , 5, rcha rati ka ild cov pa a O u O o 3 o a f C a Dam ar ( D am al ( Inef H ir (2, Pu est hin w b R e e ( le l ( rm e u R t ac N e ion k a ub a e at ct ua ar uc Hi him C h -q ucle N erm Th n R pe e as K Pr N Ins Th tio za ili Ut y ci t
• • •
Sources: Company data, Paul J. Scalise
Environmental regulation constraints on new build 1GW only from Chubu Electric Some damaged thermal plants hopefully back online Mothballed plants restored Barely sufficient in best-case scenario Expect blackouts in summer with basecase and worst-case scenarios
Slide 11
Dr. Paul J. Scalise
Japan
Political Economy
Factors of Operation Affected by Disaster
Number likely to rise significantly by summer
Evacuation directive from nuclear power plant Flood Stagnant supply Blackout, power failure Damaged production line Damaged lifeline and infrastructure Building destruction
18 20 66 88 194 208 529 0 100 200 300 400 500 600
Survey sample: 1597 firms. Source: Tokyo Shoko Research (as of 16 March 2011). Courtesy of Naomi Fink, Japan Strategist, Jefferies Equity Research Asia, 28 March, 2011.
• • •
Worst-case: TEPCO misjudges both peak demand and its ability to acquire supply before year-end. Planned and unplanned blackouts ensue until year-end. Base-case: TEPCO forecasts of supply and demand are correct. Rolling blackouts would be limited to the summer, but short-timed. Best-case: TEPCO is too cautious in its estimates. Rolling blackouts are avoidable past late-April 2011.
Slide 12
Dr. Paul J. Scalise
Japan
Political Economy
Societal Risk
Why civil unrest rarely happens
Slide 13
Dr. Paul J. Scalise
Japan
Political Economy
Management-labor relations
• • • • • • “Spring offensive” Relatively low “efficiency wages” Low executive compensation costs Life-time employment Media image of stability Blue-chip brand name
Slide 14
Dr. Paul J. Scalise
Japan
Political Economy
Commercial & Economic Risk
Can Tokyo Electric Power Co. (TEPCO) Survive?
Slide 15
Dr. Paul J. Scalise
Japan
Political Economy
TEPCO: Nationalization, Bankruptcy or Neither?
Extensive operating risks
Non-core business growth sluggish and unprofitable Will tariff rate increases be sufficient? Unclear electricity demand New business investment? Damaged supply Interest payments on debt
Cash flow negative?
Maintenance capex 2011 Dividend payouts discontinued
TEPCO Share Price (¥)
90
8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 Sep-73 Sep-78 Sep-83 Sep-88 Sep-93 Sep-98 Sep-03 Sep-08
Enron Share Price ($)
80 70 60 50 40 30 20 10 0
12/24/1982 2/26/1988 4/30/1993 7/3/1998
nuclear damage liability?
Liberalization? national energy policy? Insurance payments? Public opinion on energy issues
Party support
Cabinet approval ratings
Regulatory uncertainty Slide 16
Dr. Paul J. Scalise
Negative public opinion?
Japan
Political Economy
TEPCO: Segment Analysis
Industry % of sales Electric Power Supply Business Information and Communications Business Energy and Environment Business (Other) Eliminations Overseas Operations Living Environment and Lifestyle-related Business Industry % of EBIT Electric Power Supply Business Information and Communications Business Energy and Environment Business (Other) Eliminations Overseas Operations Living Environment and Lifestyle-related Business Industry % of Assets Electric Power Supply Business Information and Communications Business Energy and Environment Business (Other) Eliminations Overseas Operations Living Environment and Lifestyle-related Business Sources: Company data, Paul J. Scalise
2001 98.3 2003 97.3 2005 93.2 2007 94.3 2009 94.4 2010 93.7 2011 94.3 2012 94.4 1.4 1.8 4.8 2.3 1.9 1.9 1.6 1.6
7.3 -7.0 0.0
7.7 -6.8 0.0
6.2 -7.1 0.3
6.8 -6.4 0.4
7.1 -6.3 0.3
7.1 -5.5 0.3
6.5 -4.6 0.3
6.5 -4.3 0.2
0.0 2001
0.0 2003 100. 5
2.6 2005
2.5 2007
2.7 2009
2.5 2010
1.9 2011
1.6 2012 115. 5
96.9
99.4
69.2
86.5
88.8
875.4 204.7 548.0 -10.1 -12.6
-0.2
-3.7
-6.7
4.7
2.3
2.3
-4.1
3.0 0.2 0.0
2.9 0.3 0.0
4.9 0.5 0.1
13.0 0.9 3.2
7.6 0.2 -0.8
5.7 0.1 0.0
-11.0 -0.2 -0.3
0.0 2001 95.6
0.0 2003 94.6
1.9 2005 93.1
9.1 2007 92.8
4.3 2009 92.8
3.1 2010 92.2
0.0 2011 91.8
0.0 2012 91.1
0.9
0.9
1.3
0.8
0.9
0.7
0.8
0.7
• Electricity: core • Little diversification • Unprofitable noncore businesses • Overseas ↓? • Poor return on assets (ROA) • Poor growth
4.7 -1.2 0.0
6.2 -1.7 0.0
3.7 -1.8 1.2
4.2 -2.0 1.6
4.4 -2.5 1.8
5.6 -2.4 1.5
6.4 -2.6 1.7
7.7 -2.7 1.7
0.0
0.0
2.5
2.5
2.5
2.3
1.9
1.6
Slide 17
Dr. Paul J. Scalise
Japan
Political Economy
TEPCO: Cashflow Analysis (incl. pro forma)
• Declining cash generation • Increased borrowing • Threatened dividend payouts • Borrowing rate to rise? • Will capital expenditures fall? • Role of new entrants?
CASH FLOW (¥ billion)
2001
2003
2005
2007
2009
2011
2012
Cash generated Investing cash outflows
1,464
1,148
936
510
988
477
331
(918)
(699)
(650)
(731)
(686)
(724)
(736)
Free cash 1 Total proceeds from asset sales
546
448
286
(221)
302
(247)
(406)
12
(12)
34
45
87
100
-
Free cash 2
559
436
320
(176)
389
(147)
(406)
Dividends paid
(81)
(81)
(81)
(101)
(81)
-
-
Borrowings
(480)
(369)
(269)
290
(420)
1,231
(973)
Other finance Net finance cashflow Net incr / (decr) in cash
3
(1)
(0)
(1)
6
(116)
(139)
(477)
(370)
(269)
289
(414)
1,115
(1,112)
1
(15)
(30)
12
(106)
967
(1,518)
Sources: Company data, Paul J. Scalise
Slide 18
Dr. Paul J. Scalise
Japan
Political Economy
TEPCO Tariff Rates (2010)
• 16% proposed tariff hike • 25% increase better • Fuel costs expected to increase tariffs • Will TEPCO pass extraordinary losses to consumers?
Retail Electricity Prices in Selected Countries
0.25
Industrial Residential
0.2
Cents per kWh
0.15
0.1
0.05
0
Japan
Korea
Sweden
UK
USA
France
Sources: Key World Energy Statistics, International Energy Agency (2010)
Slide 19
Dr. Paul J. Scalise
Japan
Political Economy
TEPCO Shareholders (%, 1965-2009)
G Fi na nc i ov er nm al I Se cu rit ns tit O ie s & th er Co rp Fo In di or re vi at ig du io ne ns al rs s
en t
ut io ns
Br ok er s
1965 1975 1985 1995 2005 2006 2007 2008 2009
3.9 3.6 3.4 3.3 3.2 3.2 3.2 3.2 3.2
41.5 45.7 50.7 45.0 37.0 36.4 34.3 37.8 35.9
6.7 0.2 1.9 0.7 1.3 1.4 1.0 0.9 0.9
7.3 8.2 10.3 9.9 5.9 5.5 5.6 4.7 4.8
2.7 0.7 4.4 6.1 16.0 20.5 19.3 17.4 17.5
37.8 41.5 29.3 35.0 36.5 33.0 36.6 36.0 37.8
• Individuals largest • Foreign investment ↑ • Volume trading ↑
Sources: Company data, Paul J. Scalise
Slide 20
Dr. Paul J. Scalise
Japan
Political Economy
Spillover: Is nuclear power still viable?
On schedule (siting/const) Planning suspended Construction suspended Offline
Ohma No. 1 (EPDC) Higashidori No. 2 (Tohoku) Higashidori Nos. 1-2 (TEPCO) Higashidori No. 1 (Tohoku) Mihama Nos. 1-4 (KEPCO) Onagawa Nos. 1-3 (Tohoku) Fukushima Dai-ichi Nos. 7-8 (TEPCO) Fukushima Dai-ichi Nos. 1-6 (TEPCO) Fukushima Dai-ni Nos.1-4 (TEPCO) Hamaoka No. 6 (Chubu) Tomari No. 3 (Hokkaido)
•
• • • • • •
Takahama Nos. 1-4 (KEPCO) Shimane No. 3 (Chugoku) Genkai Nos. 12 (Kyushu)
Kaminoseki Nos. 1-2 (Chugoku)
•
Sendai No. 3 (Kyushu)
Currently, 54 operational reactors at 17 sites (stations) in 13 prefectures. Okinawa EPCO only utility without nuclear Permanent shutdown (pre-3/11): 5 Long-term shutdown (pre-3/11): 1 Currently, 30% of total EPCO generation. METI target by 2030: 50%. Useful life: 30 to 40 years. 35% reaching their end now. 2 under construction; 12 in planning stages. Will NIMBY sentiments outweigh practical economic considerations?
Slide 21
Dr. Paul J. Scalise
Japan
Political Economy
METI’s Growing Dilemma
Generation cost by type vs. oil price, 1951-2009 18 16 14 (Yen per kWh) 12 10 8 6 4 2 0 1951 1961 1971 1981 1991 2001
Crude oil price ($/barrel) Hydro (lhs) Thermal (lhs) Nuclear (lhs)
100 90 80 $/barrel 70 60 50 40 30 20 10 0
So urce: TEP CO financial data fo r generatio n/kWh, Energy Data and M o delling Center fo r histo rical o il prices. No te: To tal average generatio n co st is derived fro m the to tal generatio n expenses per kWh generated by fuel so urce.
Japan's NPS Construction Costs (1970-2011)
¥600,000 ¥500,000 (Yen per kW) ¥400,000 ¥300,000 ¥200,000 ¥100,000
¥600,000 ¥500,000 ¥400,000 ¥300,000 ¥200,000 ¥100,000
(Millions)
y = 4871 + 1 .5x 02738 R 2 = 0.5264
¥0 ¥0 1970 1976 1979 1985 1993 1997 2010
So urce: Denryo ku shinsetsubi yo ran (vario us years)
• Thermal power competitiveness? • LNG competitive advantage • Load factors: 85% ↑ • Subsidies difficult • NIMBY • Negative media image?
Slide 22
Dr. Paul J. Scalise
Japan
Political Economy
Spillover: Can renewables now succeed?
Renewable energy locations Under construction Planning stage
• • • • • • •
Notes: DPJ=Democratic Party of Japan; LDP=Liberal Democratic Party
•
Currently, 2,015 MW (0.71%) of total capacity in Japan. More off-grid (2,000 MW) than on-grid (12 MW) capacity. Varied technologies with range of applications On-grid projects were uneconomical without substantial subsidies No DPJ or MOF subsidy support METI supports nuclear power only Pre-3/11 slated additional 100 MW in solar/wind projects Will crises change the dynamic?
Slide 23
Dr. Paul J. Scalise
Japan
Political Economy
Estimated FY2011 New Entrant Costs
Construction Costs per Kilowatt by Generation Type ¥800,000 ¥700,000 ¥600,000 ¥500,000 ¥400,000 ¥300,000 ¥200,000 ¥100,000 ¥0
Hydro Geothermal LNG Oil Coal Nuclear
Sources: Company data, trade press, Paul J. Scalise
Item Source Oil LNG Coal
¥724,808
¥415,277 ¥339,752 ¥213,354
¥368,748
¥334,067
• • • • •
Capital cost per kW (¥1,000) Pre-tax nominal WACC (%) Plant life (years) Fuel price (¥/net kWh) Load factor (%) Tax rate Required post-tax ROI (%)
Avg. reported projects (A) (B) Japan standard © Includes thermal efficiency © Assumed © Japan standard Calculated from assumption
415.3 2 20 11.3 45 39.5 1.7
222.6
349.4
7.8
1.5
Components of new entrant pricing Required ROI (%) Fixed costs Variable costs Total costs Estimated new entrant tariff
Source: Paul Scalise estimates
F=Computed from above data G=Personnel+depreciation+rent H=Fuel+operations+variable mantenance I=G+H I+F
1.7 6.7 11.3 17.9 19.6 3.6 7.8 11.4 13.1 5.6 1.5 7.1 8.8
• • •
Oil: ¥19.6/kWh↑? LNG: ¥ 13.1/kWh↑? Coal: ¥ 8.8/kWh↑? Renewable generation costs ↓? Transmission and distribution costs the same. Wind: ¥14/kWh Solar: ¥30~45/kWh Geo-thermal: ¥10
Slide 24
Dr. Paul J. Scalise
Japan
Political Economy
Renewables: strengths and weaknesses
• Generation costs are slowly becoming competitive with conventional power • Rising fossil fuel prices helps renewables • But… • Wind: avian dangers, questionable topography • Geo-thermal: best sites in national parks • Hydro: best sites already captured • Solar: On-grid versus off-grid costs
Dr. Paul J. Scalise
Slide 25
Japan
Political Economy
Political Risk
Whither the Kan Cabinet and the Democratic Party of Japan?
Slide 26
Dr. Paul J. Scalise
Japan
Political Economy
Spillover: Can the DPJ really lead?
•
60 50
Party Support (%)
• • •
LDP DPJ
40 30 20 10 0 200320042005 2006 2007 2008 2009 2010 2011
•
•
Notes: DPJ=Democratic Party of Japan; LDP=Liberal Democratic Party Sources: Nikkei Shimbun, Paul J. Scalise
Both major parties lack mandate DPJ now falls below LDP in support Lack of leadership, stability, and ideas DPJ and Kan Cabinet waffle on national energy policy Renewables or nuclear or back to conventional power? Whither DPJ Greenhouse Gas Emissions pledge?
Slide 27
Dr. Paul J. Scalise
Japan
Political Economy
Conclusions
• • • • • • • • • • • • • Conventional wisdom might be wrong Crisis and blackouts might cost Japan $65-$125bn in 2011 (Barclays Capital) Industries impacted: mining, storage facility services, railways, pulp/paper, steel, chemicals, breweries, computer chips, autos, auto-parts, semiconductors. Companies: Asahi Beer, Nissan, Renesas, Toyota, Tokyo Steel Quarterly GDP figures likely revised downward in 2011 TEPCO bankruptcy risk minimal Expect deteriorating returns in 2011-2015. Electricity prices will rise. Nuclear power likely to remain stable Renewables to achieve marginal on-grid growth Alternatives energy options bleak Japan’s future to be decided in committee Kan Cabinet is living on borrowed time
Slide 28
Dr. Paul J. Scalise
Japan
Political Economy
Paul J. Scalise (D.Phil., Oxford, 2009) is Non-Resident Fellow at the Institute of Contemporary Asian Studies, Temple University, Japan Campus, and Contributing Analyst to Oxford Analytica, the Economist Intelligence Unit (EIU), and Eurasia Group. Starting in September 2011, he will take up the post of Japan Society for the Promotion of Science (JSPS) Fellow at the Institute of Social Science, University of Tokyo. Dr. Scalise spent several years with such financial institutions as Dresdner Kleinwort Wasserstein Japan Ltd. and UBS Global Asset Management as a Tokyo-based research analyst of Japanese energy and transportation companies, having been ranked by investors Greenwich Survey’s number one Japanese utilities analyst in 2001 among all UK financial institutions, 3rd for Euro zone. His forthcoming book Agendas and Uncertainty: Japan’s Electric Power Restructuring in a Neoliberal World is based on his doctoral dissertation. Grants, scholarships, and fellowships from the Toshiba International Foundation, the Japan Foundation Endowment Committee, the Social Science Research Council and elsewhere have generously supported his work. Dr. Scalise’s articles have appeared in more than six languages in numerous publications, including Newsweek, Foreign Policy, Asian Wall Street Journal, International Herald Tribune, Asahi Evening News, World & I, The Oriental Economist, Japan Forum, and other scholarly journals and book chapters. He authored the article on Japan’s national energy policy in The Encyclopaedia of Energy (Elsevier Academic Press 2004). He holds a bachelor’s degree in political science, cum laude, from Marist College, a master’s degree in Japan Studies and International Economics from the Johns Hopkins University, School of Advanced International Studies (SAIS), and a doctorate in Comparative Political Economy from the University of Oxford. Among his professional activities, he served as professorial lecturer at Sophia University in Tokyo, Japan, and Senior Associate at C a m b r i dge Energy Research Associates in Boston, USA.
Contact Information:
Institute of Contemporary Asian Studies Temple University, Japan Campus Minato-ku Minami-Azabu 2-8-12 Tokyo 106-0047 Location: www.tuj.ac.jp/maps (English) Mobile tel: +1 (732) 814-1612 ICJS home page: http://www.tuj.ac.jp/icas/index.html Upcoming events: http://www.tuj.ac.jp/events/index.html personal page: http://www.tuj.ac.jp/icas/fellows.html e-mail: scalise@tuj.ac.jp
Slide 29
Dr. Paul J. Scalise
