Japan’s Nuclear Decisions

By David Wagman

Denver, April 23, 2013 — Japan’s Nuclear Regulatory Agency (NRA) is expected to release this July regulations for restarting the nation’s fleet of nuclear generating stations. Much of that capacity shut down following the March 2011 Fukushima nuclear accident. Those nuclear closures threw domestic Japanese and global energy markets into turmoil as utilities there sought to replace a significant portion of the country’s generation mix.

Nuclear generating capacity made up around 30% of Japan’s total mix in 2010, part of a long-term government goal for nuclear power to make up half of the country’s generation and enhance its energy self-sufficiency. Coal in 2010 comprised around 25%, and liquefied natural gas (LNG) fired capacity stood at around 30%. After the Fukushima accident, nuclear’s share dropped to 11%, coal capacity remained at 25%, and LNG’s share grew to almost 40%. Still more shutdowns cut nuclear’s share to 2% of the mix in 2012. Coal’s share last year was around 26% and LNG grew to 47%. Meanwhile, oil’s share of the generating mix doubled from 8% in 2010 to 16% in 2012.

Increased imports of oil and LNG came at a price, however, and the Japanese trade balance fell from years of surplus to deficit: a 2.6 trillion Yen ($26.2 billion) deficit in 2011 and a 6.9 trillion Yen ($69 billion) shortfall in 2012. Japanese utilities paid around $15.8/MMBtu to import LNG last December. By contrast, the U.S. benchmark price at Louisiana’s Henry Hub was trading at around $3.50/MMBtu. Higher electricity prices led to increased electricity conservation, which helped to dampen the power crisis by reducing demand.

As a result, the NRA’s restart rules will likely be welcomed and the first reactors could return to service as early as this autumn. But at least one hurdle remains if the country’s nuclear power plants are to claw back market share. Local governments need to approve the restarts. Here hesitancy remains as doubts linger over nuclear power’s long-term safety. Nuclear’s return later this year is by no means certain.

Most of Japan’s electric utilities are developing contingency plans to cover what could be the long-term loss of nuclear capacity. One scenario, outlined at a recent conference of energy economists in Boulder, Colo., envisions substituting up to one-third of Japan’s 46 GW of nuclear generating capacity with natural gas-fired capacity by 2020. That would amount to around 15 GW of new gas capacity and some 10.3 million tons of new LNG imports. Most of that prospective capacity—some 8.6 GW—would be added between now and 2015, with the bulk in 2014. The Tokyo, Chubu, and Kansai electric utilities would add the most gas-fired generating capacity.

Japan faces an uncomfortable reality, however. Replacing up to one-third of its nuclear capacity with natural gas won’t be cheap. As a result, Japanese industrials are looking to partner with several proposed North American LNG export projects, which propose tapping the continent’s low-cost and seemingly plentiful shale gas resources to meet demand in the global market. Those Japanese firms aim to secure stable LNG supplies and possibly reduce import prices. Mitsubishi and Mitsui are involved in Sempra Energy’s proposed Cameron, LA, export facility; Sumitomo and Tokyo Gas are involved in Dominion’s proposed Cove Point, MD, export project; and Osaka Gas and Chubu Electric Power are involved in the proposed Freeport, TX, export facility. Other industrials are participating in shale gas fields in Canada as well as in the northeastern and south central United States.

The economic aftershocks of Japan’s earthquake and tsunami continue to echo across North American energy markets. The Obama administration has yet to decide whether or not to allow LNG exports, which Japan desires. By contrast, Canada is moving forward to approve and build export terminals in British Columbia. U.S.-based industrials hope to protect low-cost shale energy resources as feedstock for expanded domestic manufacturing. Shale gas developers argue that any domestic price spikes are likely to be short lived and will spur still more gas production, some of which has been shut in due to low prices. Many power generators for now may be content to remain on the fence, since U.S. power demand is generally flat and the pressure to build new generating capacity is nonexistent most places.

Japan’s nuclear decision in the coming months will be telling for the long-term prospects of global energy markets and domestic U.S. natural gas alike.