Japan electricity sector disruption – new business models and deregulation overdue

Japan electricity regional operators’ income peaked about 10 years ago

Japanese electricity companies’ business models face massive disruption by technology innovation and the Fukushima nuclear accident

With the annual general shareholder meetings completed and financial results published, we have analyzed the financial results of Japan’s 10 regional electric power companies (plus several other Japanese electricity companies, including J-Power) in detail.

We find that each of Japan’s electrical power companies has its own particular circumstances, and some are coping better than others, while of course Tokyo Electric Power Company is a special case due to the incalculable costs of the Fukushima nuclear accident, and due to possible changes in case of a change of Japanese Government policy regarding TEPCO.

Our financial analysis shows, that revenues of Japan’s electricity sector have increased substantially, due to increased electricity costs. On the other hand, revenues of Japan’s electricity companies overall have been declining steadily since a peak around 2005, i.e. ten years ago.

Switching off nuclear power generation contributes to financial problems, but is clearly not the root cause

From our analysis it is obvious that the financial profitability issues of Japan’s electricity sector have started about 10 years ago, long before nuclear reactors were switched off due to the Fukushima accident – while of course the switch-off of nuclear power does contribute to a worsening of the financial situation in the last 3 years.

Clearly, the electricity deregulation which is now on track with regulatory and legal changes, was long overdue, and in my opinion is more due to the declining profitability of Japan’s electricity sector, than immediately triggered by the Fukushima accident. The financial data clearly show that a change of business model for Japan’s electricity sector is needed.

Japan electricity: Combined annual operating income of Japan's regional electric power companies
Operating income of Japan’s electricity sector has been falling continuously since the peak in 2005

Chugoku Electric Power Company as an example

Our analysis shows that each of Japan’s 10 regional electricity companies have different financial circumstances.

We discuss Chugoku Electric Power Company which serves the area around Nagoya in the middle of Japan as an example. The Figure below shows that Chugoku Electric Power Company’s income peaked around 2004-2005, about ten years ago, and since then has been continuously falling, with net income dropping into the red for the first time for Financial Year 2008 (ending March 31, 2009), about two years before the Fukushima nuclear disaster. An important point to consider is that only about 10% of the electricity generation capacity of Chugoku Electric Power Company is nuclear power, which is one of the lowest ratios of nuclear power in Japan. It follows logically, that switching off this 10% of nuclear generation capacity has a much lower impact than for other regional power companies, where the nuclear contribution was about 30%.

Japan electricity: income and margins of Chuo Electrical Power Company have been continuously falling since their peak around 2004
Japan electricity: income and margins of Chuo Electrical Power Company have been continuously falling since their peak around 2004

We conclude that the peak around 2004-2005 in profitability followed by a long decline in profitability indicates a deep rooted need for change of business models which was exacerbated but not directly caused by the Fukushima nuclear accident. Japan’s Government is now reacting to this fact by deregulating the electricity sector.

Japan electricity: Why do current business models need to change?

  • Japan’s regional electricity companies enjoyed monopoly power within their regions, where the electricity prices were regulated by Government, and in exchange electricity companies could enjoy a financial model where they could charge costs + profits to customers. There was no competition and little incentive to reduce costs
  • Japan will now follow the global trend from top-down electricity grids with large central generation facilities and a top-down distribution grid to more de-centralized, localized smart-grids, driven by technological progress, and the emergence of renewable energy.

Renewable energy Japan – research report

Japan’s energy sector – research report

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Fukushima Daiichi nuclear

What will happen with Japan’s nuclear power stations?

by Gerhard Fasol

Watch The Economist interview on Japan’s energy policy.

Read our report on Japan’s energy sector,
and our report on Renewable energy in Japan.

Many times, often several times a day, I get asked about what will happen with Japan’s nuclear power stations – today alone twice. So here is the answer I usually give – please note that I am Physicist, and I know a lot about the Physics of nuclear power, and although I have personally avoided working in the nuclear physics field (which is much wider than nuclear power), I do not have a personal opinion for or against nuclear power:

Quick answer: it is impossible for anyone, including the Prime Minister of Japan, to know with any certainty.

Long answer: Japan is a democracy. Japan currently is quite polarized for or against nuclear power. Everyone knows that some Japanese leaders including the Prime Minister Abe, are in favor of nuclear power. On the other hand, many outstanding opinion leaders are strongly against nuclear power in Japan, these include Nobel Prize Winner Kenzaburo Oe, and also the former Prime Minister Koizumi. Currently we can observe the evolution of a democratic process in Japan to reach a consensus on the future of nuclear power stations in Japan. This process is different for every single nuclear power station, and it is impossible for anyone to make predictions.

Obviously the owners of the nuclear power stations hope to restart their power stations as quickly as possible, and they are supported by many industrial leaders and the current Prime Minister. They need to obtain the agreement by the newly established nuclear power regulator, which was newly established because the Parliamentary Committee which investigated the Fukushima nuclear disaster established that the cause for the nuclear disaster was “regulatory capture”. This committee was chaired by Kiyoshi Kurokawa, and you can read one of his speeches “Groupthink can kill”, and watch YouTube movies explaining the results of his committee here.

Sofar none of the nuclear power station was cleared by the new nuclear safety agency, and no one knows when the safety inspection program will be concluded for any of the nuclear power stations, nor which stations will be cleared to restart (in principle) and to which the nuclear safety agency will refuse the clearance.

However, clearance by the nuclear safety agency is by far not enough. In addition, in Japan, nuclear power stations need the agreement of the local communities, i.e. the local mayors and Province (Ken, Prefecture) Government Prefects. As an example, the world’s largest nuclear power plant is Kashiwazaki-Kariwa, it is currently owned by the Tokyo Electric Power Company to supply Tokyo with electricity, and it is located approximately 80 km from the Prefecture capital city Niigata-shi, which has about 1 million inhabitants. The current very outspoken Governor (Government Leader) of Niigata-Prefecture, Hirohiko Izumida (泉田 裕彦), has clearly stated his opposition both to the restart of the Kashiwazaki-Kariwa nuclear power station, and secondly he has also stated that he considers Tokyo Electric Power Company unsuited to manage a nuclear power station. Read and watch a video of Governor Hirohito Izumida here. I have read speculations that as a consequence it might be thinkable that ownership and/or management of the Kashiwazaki-Kariwa Nuclear Power station could be transferred to a different power company to overcome this local resistance. But it is not possible for anyone to predict how this will play out.

It is my understanding also, that in Japan it is not clearly defined which local authorities have to agree before a nuclear plant can operate, and which distance from the nuclear power station is still close enough that agreement of local authorities is needed. In my understanding also it seems to be unclear which type of local authorities have veto power: The Prefect (i.e. the chief of the Prefectural Government), cities, towns, villages etc. There seems to be much uncertainty here, which did not exist in the past, or which did not come out into the open in the past.

Another factor is the local geological situation for each nuclear power station. In Japan there are legal requirements that nuclear power stations need to be located away from active geological faults. Recently there have been investigations by geological experts about the geological conditions near the nuclear power stations, but my understanding is that many questions are still unsettled at least for some of the nuclear power stations.

Still another factor are the courts. Traditionally Japanese courts have rejected all complaints against the operation of nuclear power stations, but I hear that recently some court complaints against the operation, or against the restart of nuclear power stations have been successful. Court decisions also cannot be predicted by anyone.

So in summary: No-one can possibly predict what will happen with Japan’s nuclear power stations. When pushed, I sometimes say that a possible scenario will be that about 10 out of Japan’s approx. 50 nuclear power stations might be restarted in about 3 years from now. However, no one can know this for sure, and no one can assign a probability to any outcome.

There have been enquires by some non-Japanese/foreign media, which interviewed a number of experts, asked them to estimate the probability for each of Japan’s nuclear power plant, and then took some kind of average of these experts opinions. I was also asked to participate in this experts’ enquiry, but I refused to participate, and said that simply no one can know with any precision at all.

Watch The Economist interview on Japan’s energy policy.
Read our report on Japan’s energy sector,

and our report on Renewable energy in Japan.

Copyright 2014 Eurotechnology Japan KK All Rights Reserved