Customers Will Leave the Grid Behind in Droves Over Next 10-15 Years

Rocky Mountain Institute has just published a fascinating study on the future of "grid load defection" in the U.S.A. under likely pricing scenarios.  You can download it here:

http://blog.rmi.org/blog_2015_04_07_report_release_the_economics_of_load_defection

There is now significant concern in the U.S. -- and there SHOULD be significant concern in Japan -- about the likely failure of the traditional utility business model, as revenues decline once customers can self-generate electricity on an economic basis using solar PV and, eventually solar PV + battery storage.

One response is to charge customers a fixed amount for maintaining the grid, even if they reduce their consumption significantly based upon self-generation.  RMI's study suggests that such approaches only prolong the inevitable.  Over the next 10-15 years, almost everywhere in the U.S. a combination of solar PV + battery storage will become economically optimal, causing customers to purchase much less power and pushing down utility revenues.

The RMI study posits maximum potential customer defection in the Northeast U.S. at 50% of residential and 60% of commercial customers by 2030.

They highlight the need for new utility business models and new regulatory approaches to avoid this.  Of course, the faster on-grid electricity prices rise ... the faster defection will occur.  And the faster solar PV and storage costs decline ... well, you get the picture.

According to RMI, "although they could represent significant load loss, customers’ grid-connected solar-plus-battery systems can potentially provide benefits, services, and values back to the grid, especially if those value flows are monetized with new rate structures, business models, and regulatory frameworks."

But there is a major risk of a huge new group of centralized generation "stranded assets".

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Now think about the situation in Japan where on grid power is much more expensive, and the cost is going up much more rapidly, and the current central planning process to decide on "energy mix" is giving a major role for new coal-fired generation and nuclear -- two generation sources that are not currently "economic" and so are just not being built in the U.S. ... and in many cases being mothballed.  What is the likely result?

E.On Spin Off -- An Important Crossroads

This month began with some exciting news for renewables in Germany.

E.On, one of the largest utilities in Europe, announced a corporate split.  The company will divide into (1) traditional generation (coal, nuclear, natural gas), and (2) the rest of the company -- including renewables and both electric and gas distribution.  E.On's announcement was lauded by investors and analysts.  No doubt the investors are focused on E.On's 5.2 billion Euro of write-downs this year, mostly for the now "risky" generating assets, and are delighted to see a separation into a "good" business of stable, low risk cash flows and a "bad" business of risky, mostly fossil fuel generation.

Interestingly, it is the traditional generation business that is seen as extremely risky.  As renewables cut into demand, who is to say whether a new coal plant will ever pay back its cost?  As nuclear is regulated out of existence in Germany, it will become a pure decommissioning operation.  E.On and other utilities say that their traditional business models no longer work.

How long before Japan gets to this point?  Will the "internal" separations of generation and distribution businesses now being mapped out for Japan get anywhere close to this? ... when the businesses remain under holding companies?  How long will these changes be held at bay?

Why are there plans being announced for massive investments into coal-fired generation in Japan?  Yes, the economics are different in Japan than Europe, but as these plans go forward it will put enormous pressure on regulators over future decades to sustain traditional business models.

Leaving Utilities Behind

A New York Times article on September 13, 2014, points to a trend we have mentioned before:  the increasing competitive strength of solar and wind power are now an existential threat to the legacy utilities and their business models.

Electric utility executives all over the world are watching nervously as technologies they once dismissed as irrelevant begin to threaten their long-established business plans. 

On the impact of Germany's Feed-in-Tariff:

By creating huge demand for wind turbines and especially for solar panels, it has helped lure big Chinese manufacturers into the market, and that combination is driving down costs faster than almost anyone thought possible just a few years ago.

The transition creates new businesses, not only in renewable generation.  It requires huge new investments in the power grid ... to be funded how?  It requires highly sophisticated demand response programs, supported by flexible regulation and IT investments.  It requires on grid storage and suppliers of balancing power.

The "energy transition" creates disruption and problems.  The utilities hate it. Big business dislikes it.  The politicians in Germany now are listening to the utilities and big business ... and want to slow down what they have started.

But the public likes it.  The public is willing to pay a renewable surcharge (some of the cost of which is offset by LOWER wholesale peak electricity prices, for which, sadly, there is no visible "discount" on electricity bills).

The transition is here.  And those who ignore it will eventually find themselves left behind.  In some countries, these left-behind players will swiftly be acquired, restructure, or file for bankruptcy protection; creditors will take their lumps, debt be restructured, assets mothballed, and things will move on.  In Japan?  If not handled with extreme care, we may see decades of a "zombie" electric power sector.  We already seem to have a "zombie" electric power sector.

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Update:  Interestingly, but Citigroup and UBS have recently issued research to their clients that highlights the trends mentioned above, and the issues they present for existing electric utilities.  UBS actually sees the changes as a "net positive" for the well-positioned utilities that know how to deal with end-customers and have good distribution systems and plans for how to cope with the new realities.  For generation-heavy utilities ... not so positive.

More Strain on the Utilities

TEPCO and a number of the other utilities reported better financial results for the most recent ended fiscal year.  But the pressure is still on, big time.

-Both Kyushu Electric and Hokkaido Electric are in the process of applying for/taking equity from the Development Bank of Japan, in order to avoid risk of technical insolvency as they continue to lose money. The interesting question will be whether this equity comes with significant strings attached, in terms of a commitment to cooperate fully with the government's regulatory/restructuring initiatives.

-Japan is still a zero nuclear country, with many utility applications pending with the Japan NRA for reactor restarts, but none yet approved.  The nation appears headed to a no-nuke summer again.  Supply will be especially tight in western Japan, where Kansai Electric has made it through the last 2 summers with the Oi reactors 3 and 4 operating, and where Kyushu Electric faces an outage at a major J-Power plant in Matsuura, Nagasaki from which it has taken supply in the past.  

-Even worse for the utilities and their business plans, a Fukui-based district court issued an injunction against the restart of Oi Reactors 3 and 4, on May 21.  KEPCO has appealed the decision, but it could take months or years before the upper court hears the appeal and issues a ruling.  The decision gave legal standing to persons without a broad area (250 kms) of a reactor to pursue litigation in court, undercutting government efforts to limit restart consents to communities within the host prefecture.  The nuclear restart is now a critical part of the government's energy policy, and it is far behind schedule.

-There are now something over 200 companies registered to sell electricity to small, retail end-users as the market liberalizes.  We will probably see a slow but continuous chipping away at both the generation and distribution/sales part of the utilities businesses.

A Nikkei opinion piece on June 3, 2014 notes that the historical environment for the electric utilities has collapsed.  No longer can they be assured of recovering costs and earning a profit if they just follow national policy -- which has included the promotion of nuclear power.  The electricity market may become competitive, and in such case the utilities cannot support or promote a risky endeavor such as nuclear power, where reactor closures can push a utility into sustained losses or even insolvency.   In order for the utilities to be reborn as "normal" private sector enterprises, the article suggests a need to transfer the nuclear power assets to a public corporation that can handle the burdens, the risks and rewards.

Demand Response Comes to Japan

On December 10, a JV was announced between EnerNOC, a U.S. listed company, and Marubeni, a major Japanese trading house.  The JV will provide demand response services to commercial and industrial users in Japan.  EnerNOC already has done a pilot program with Kansai Electric in 2012, and will start a new program with TEPCO via the new JV in 2013.

Some English language reports can be found here and here.

At a Massachusetts-Tokyo trade mission event in Tokyo timed to coincide with the announcement, EnerNOC CEO David Brewster indicated that commercial/industrial demand response systems have the potential to shave 10% off of Japan's peak electric energy demand.  He noted that further regulatory reform will be needed to change electricity contracts -- and provide for "dispatchable" power -- in order to reap the full benefits.

This kind of demand response technology -- that can shut down demand for literally gigawatts in seconds or minutes -- is "low hanging fruit" for Japan.   It can avoid the need for a lot of new centralized generation -- nuclear, coal or otherwise -- and can dramatically ease the implementation of renewables into the electricity grid.

Marubeni seems like an obvious partner for EnerNOC -- they have a long history of involvement with overseas power investments, they have energy trading businesses, and they are familiar with the transition to competitive electricity markets.

News Flash -- First Electricity Industry Reform Legislation Passes

The first of 3 proposed electricity industry reform bills passed into law yesterday, Wednesday Nov 13.

There are lots of reports in the Japanese press about what all this might come to mean, but for now let me just note the occurrence of the event, which could be a watershed in Japan's economic history.  

For the Reuters English report, see here.

UPDATE December 2, 2013:  Work gets in the way of blogging.  My apologies for not following up on this news flash, but I intend to do so ... eventually.  At this rate, it may not happen before the year-end break.

TEPCO Potential Split into Generation, Transmission and Retail Subsidiaries

Just last week, we commented that it would be a wasted opportunity if the main TEPCO restructuring were to go ahead as a split of TEPCO into "good" and "bad" companies, in order to hive off the Fukushima decommissioning and compensation burdens, shift them onto the taxpayers and provide comfort that the work will have adequate expertise and funding.

So it was a relief to read in Friday (November 8) press reports that TEPCO indeed is planning a further restructuring, as part of the quid pro quo for additional public help with Fukushima.

The restructuring will divide TEPCO's main businesses into 3 subsidiaries under a common holding company -- a fuel and traditional generation company, a transmission company, and a retail company.  Such an organizational separation is not contemplated by current Japanese law, but would be permitted under the electricity reform legislation expected to pass the Diet next year with support of the ruling LDP.

Division of utility assets into separate entities under a holding company is not the last step in reorganization, but it is essential.  And if implemented it will show the way for Japan's other electric utilities and their financial institutions.

A related announcement involves a plan to eliminate 10 of TEPCO's 80 regional branch offices. Apparently 1000 out of 4000 related jobs would be eliminated, while the remaining employees would be reassigned.

Retail Competition -- New Entrants to Access Usage Data

METI indicated recently that it plans to require the incumbent electric utilities to provide new entrants with access to electricity user consumption data.  The data is needed in order for new entrants to run simulations and prepare pricing offers, so that retail customers to make comparisons among providers based upon actual consumption.

The government is still working on how to deal with issues about protection of personal information, in light of Japanese hyper-sensitivity about sharing such information.

TEPCO Procurement Reform

TEPCO has indicated that it plans to dramatically reform its procurement methods.  It will expand by a factor of 4 -- from 15% to 60% -- the portion of its material and construction purchasing that is subject to competitive bidding, and open the bidding process to further participants rather than the "usual suspects" approach where relationships are favored over pricing.

According to Nikkei, TEPCO's annual outside purchasing is approximately $20 billion per year.  It expects to save $1 billion in annual costs once the new structure is in place, over the next 2 fiscal years.

This decision was forced upon TEPCO by its current financial predicament, its government ownership, negotiation with its banks and delays in its nuclear restart.  In the absence of such extraordinary factors, TEPCO would not have done it -- since the entire "mura" derives great benefits from the money that leaks out to affiliates, subcontractors, former employees/directors and other friends ...  But the system is one reason why Japanese electricity is so expensive, and why it costs 2X or 3X for TEPCO to do something as compared to the cost in Europe or the U.S.  The consumers are the victims; the system is not transparent, intentionally.  But TEPCO's current crisis is forcing change.

The big question now is will the utilities will take similar measures?

Further Electricity Deregulation coming down the pike

Although the first of three proposed electricity deregulation bills was delayed by this summer's Upper House election, progress on the topic continues within METI and its advisory councils.

The METI electricity system reform subcommittee's working group on "system design" held its second meeting on September 19, 2013.  According to materials presented by the ministry at that meeting, retailers of electricity will be subject to a registration (rather than a full approval/license) system.

The registration will allow for greater new entrants than approval/license system, but will still allow for the ministry to sanction retailers who fail to perform their contracts with customers.  In contrast, companies wishing to engage in transmission business will need to apply for licenses and go through a more rigorous approval process.

Retail competition is targeted for residential and small commercial users in 2016.  Prices will remain regulated for some 5-7 years until 2020-22, in order to protect consumers.  There is a lot more detail (in Japanese, of course) in these proposals to work through -- essential reading for anyone trying to understand what is being planned.

TEPCO Turn-around Effort

September 25 (Wednesday's) evening NHK newscast had coverage of the President of TEPCO meeting with Governor Izumida of Niigata Prefecture to present paperwork including details about plans to make the TEPCO Kashiwazaki Kariwa ("K-K") reactors safer and apply for a restart of reactors 6 and 7.  The last meeting between these two, a few months ago, featured the Governor on camera screaming, loudly, at the much smaller, weaker looking TEPCO president, angry because TEPCO was taking steps to apply for a restart of Reactors 6 and 7 before obtaining the Prefecture's approval.

This time, TEPCO signalled well in advance that it would NOT apply for a restart of the reactors before "gaining the understanding" of Niigata Prefecture.  Also, a flurry of press stories has reported in recent days on TEPCO's dismal finances, the pressure from its banks and bondholders, and the importance of a reactor restart as part of its financial rehabilitation plan.

Instead of a shouting match, the Governor asked why Niigata should trust TEPCO to do things any differently than in the past.  TEPCO President Hirose mumbled something about TEPCO being "reborn" ("Shinsei TEPCO") and having taken the Government's money, ... then pointed out that TEPCO is now planning to install extremely expensive filtered vents that would allow venting of the reactor buildings without release of significant radioactive materials.  Had these vents been in place at Fukushima Dai-ichi, TEPCO would have vented the buildings and avoided the hydrogen buildup which contributed to the problems there -- at least the most visible sign of catastrophe, with hydrogen explosions sending radioactive material high into the atmosphere.

(The K-K 6 and 7 reactors are relatively new, commissioned in 1996 and 1997, respectively, and are "advanced boiling water reactors."  The other reactors at K-K were commissioned between 1985 and 1994 -- also nowhere near as old as Fukushima Dai-ichi 1 and 2, but there are concerns about potential earthquake faults on site that run directly under or very near reactors 1-5 and their turbine buildings.  The K-K complex suffered various types of damage in a 2007 earthquake and the first of its reactors did not reopen until 2 years later.  Also, estimates of earthquake intensity from nearby faults has been increased significantly in the post-2011 reassessment, so it is not clear that the current designs would be sufficient, even absent the on-site faults.)

NHK followed this theme (based on talking points from the central government and TEPCO?) and indicated that reopening the K-K 6 and 7 reactors could add billions to TEPCO's bottom line annually (the NHK report said 240 to 350 billion yen -- 2.4 to 3.5 billion dollars -- annually), helping to avoid another rate increase, more government bailout money, etc.

A story in this morning (Thursday's) Nikkei reports that TEPCO has a refinancing of some debt approaching this autumn, and the financial institutions are indicating that in order to participate they will significantly increase the interest rate charged unless either (1) TEPCO has applied for a restart of K-K 6&7 reactors, or (2) TEPCO has further increased its electricity rate.  The TEPCO management is bending over backwards to try to avoid another rate increase so quickly after its 2012 increase, and so has everything riding on a restart of the reactors.

To put this in perspective, the K-K reactors 6 and 7 each have maximum power output of 1315MW.   Even if they do restart in the next year or two, after very expensive upgrades, TEPCO is very unlikely to achieve a restart of any of the rest of its reactors over that time-frame.  TEPCO's pre-March 2011 nuclear reactors consisted of:

1.  2812MW -- Reactors 1 to 4 at Fukushima Dai-ichi.  These were catastrophically damaged and will be a burden for many decades and, of course, never restart.

2.  1884MW -- Reactors 5 and 6 at Fukushima Dai-ichi.  These were not damaged, but are on the same site and will be decommissioned.  Prime Minister Abe officially requested earlier this month that TEPCO decommission these.

3.  4400MW -- Fukushima Dai-Ni reactors 1 to 4.  This facility is down the coast 20-25 kms from Fukushima Dai-Ichi.  It is highly likely these will never be restarted.

4.  8212MW -- Kashiwazaki-Kariwa (or Kariba) reactors 1 to 7.  Again, the restart of reactors 6 and 7 remains very uncertain and very expensive, while reactors 1 to 5 have additional problems and earthquake concerns that will make them more difficult, if not impossible, to restart.

So out of the total nameplate capacity of 17.3GW of nuclear generation, TEPCO is working toward a possible restart of 2.63GW -- just 15% of the total.

The TEPCO restructuring problem was the subject of an analysis piece in Nikkei Wednesday morning as well, by Chuo University law professor Junji Annen.   Prof. Annen notes that TEPCO has ultimate compensation obligations from the Fukushima Dai-ichi accident of between 5 and 10 trillion yen, that the nuclear compensation body has provided 4 trillion yen (40 billion dollars) of funding (3 trillion of grants/subsidies and 1 trillion yen of capital); that TEPCO raised rates significantly; and yet TEPCO still had an aggregate loss of 700 billion yen (>$7 billion) for the two years ended March 31, 2013.  The loss was recorded despite TEPCO's ability to book the 3 trillion yen (>$30 billion) of the government subsidies as extraordinary income, so the actual situation is far, far worse.  Prof. Annen notes that both a cap on TEPCO compensation obligations (as opposed to government clean-up efforts) AND a reactor restart at K-K are essential for TEPCO's near-term survival, while the longer-term solution will involve some kind of restructuring that divides TEPCO into a "good" and "bad" company.  The "good" company will be freed of impossible burdens, but would pay a share of its profit to fund the "bad" company and meet a portion of such obligations.

UPDATE:  One day after this post, the Niigata government has given TEPCO its "conditional" support for TEPCO to at least proceed with filing its application with respect to K-K reactors 6 and 7.  The prefecture has apparently taken the view that this is not a "final" approval, which will be subject to satisfaction on various safety issues, but only a nod to allow TEPCO to make its filing.

By Friday, the group of all major (and some minor) Japanese banks that faced an upcoming TEPCO refinancing had indicated that, given the restart application for K-K reactors 6 & 7, they would NOT require TEPCO to file for a rate increase and, at least tentatively, that they plan to participate in the refinancing.

On Saturday, the 28th, TEPCO's President was interviewed by Nikkei Shimbun and stated that, in light of the prospect that these reactors might be operating in 2014, TEPCO plans to announce a restructuring plan later this year that would not include further rate increases, and hopes to avoid a loss for the fiscal year that ends March 31, 2014.

A look at TEPCO's implementation of its current restructuring plan does not offer high hopes.

The current plan had proposed restarting K-K reactors 6 & 7 by April, 2013, six months ago.  It also contemplated decommissioning only Fukushima Dai-ichi Reactors 1 through 4, whereas now 5 and 6 also must be decommissioned.  Now, TEPCO hopes to squeeze out additional 10-year cost reductions of 140 billion yen, following its current plan of 336 billion yen in reductions.  And TEPCO also plans to establish an arm to participate in deregulated portions of the electricity market, as Chubu Electric and Kansai Electric also have announced.  Maybe TEPCO will be able to reduce customer outflow if it "counterattacks" in the home regions of other utilities?

We should know before too long if the hope for a profit in the current TEPCO fiscal year is more "happy talk" to support Abenomics and improve the economic mood--a thank you present for well-orchestrated government support to bring Niigata's governor and the financial institutions into line for the time being--or if it can actually be achieved (and, if so, whether it involves the same kind of accounting magic that limited the last two years' losses to 700 billion yen).

UPDATE:  Reuters had a good article today (October 7, 2013) on the TEPCO turnaround effort -- the public relations and the reality.  As one analyst indicates, "it's all kabuki ... It's very much an orchestrated presentation".  I hope my blog post gives some sense of the way these things are done in Japan, at least at the public level.

Also the Yomiuri mentions that the LDP is now seriously considering a "good bank bad bank" approach to TEPCO, hiving off the legacy problem of decommissioning its reactors and dealing with the Fukushima mess.  Since TEPCO does not have the resources to deal with its legacy issues, this is perhaps inevitable.  But if and only if it is done in a manner that ensures the "good TEPCO" will move forward faithfully to implement a competitive market in electricity, including separation of generation, transmission and distribution. 

Market Forces Rising

Nikkei Shimbun carried an interesting story in mid-June about the evolving role of Tokyo Electric (TEPCO) with the "electric industry village" now that TEPCO is majority owned by the government's Fukushima accident compensation fund.

TEPCO was traditionally the leader of the 10 regional electric utilities.  It was the biggest by revenue, personnel, profit and visibility, and it took the lead on most matters of policy, with the other companies generally following behind and stepping into line.

Recently, however, TEPCO has been different.   It seems that one condition to the (first -- more to come) bailout was that TEPCO act as a positive force for change in the industry, in line with METI/government policies.  Initially, the group of electric utilities became leaderless.  Now, however, others are stepping up, and TEPCO is positively excluded from some of the discussions among the group presidents (which are commonplace, and are conducted via the Denki Jigyou Rengo Kai -- a group housed within the Keidanren Building and formed of the presidents of the utilities.  Needless to say, this group does not support major structural reforms of the industry, and so excludes TEPCO from some of its recent meetings.

How can TEPCO have an impact?  One recent example is through procurement reform.  From planning solar PV projects, we know that the prices we are told for construction of 66kV interconnect lines/towers in Japan is some significant multiple of what it would be in Europe, and the reason seems to be that the work has traditionally been doled out to affiliates/subsidiaries of the utilities (and their friends).

According to the Denki Shimbun July 4, 2013, TEPCO has recently announced that it has reformed its procurement of construction of transmission facilities, implementing a new competitive tender system.  In its first series of tenders, TEPCO saved 30-40% over the prices it would get previously.  Still higher pricing than elsewhere, but a big difference.  And a huge change if it carries over into the amount that we need to pay in planning larger solar PV projects.

Apparently, the other electric utilities are concerned they will be found out as not trying hard enough to obtain market-based pricing, and are struggling how to respond.  ...

Separation of Generation and Transmission

It is now election season in Japan, with an upcoming poll for the House of Councillors.  I happened to watch the leaders of the major (and minor) parties briefly on one of Japan's Sunday morning talk shows, and was pleasantly surprised to hear Prime Minister Abe specifically mention electricity reform and "separation of electricity generation and transmission" (発電、送電の分類) again as one of his growth measures.

Not only is this one of his list of Abenomics growth measures, but it is getting prominent attention.  It must play well as a counter to the chorus of voices that it is too early to restart the nukes, before the Fukushima accident has been cleaned up.

First Electricity Reform Bill To Pass ... after Election

Japan's House of Representatives on June 13 2013 passed the first in a set of legislation intended to reform Japan's electricity system.  The legislation is headed to the House of Councillors, where it is also expected to pass.

The reform is to proceed in 3 arrows (just like the "three arrows" of Prime Minister Abe's economic policy, Abenomics).  I guess the LDP government is made up of archers.  The first "arrow" is as follows:

First, by the beginning of 2015, a new entity will be established that is responsible for the wide-area transmission grid.  This entity will be responsible for balancing demand across the country and will help to resolve the regional balkanization issues.  As I understand it, the existing transmission assets will remain under the ownership of the regional utilities, but the new entity will become the active player in running the grid, and will be tasked to address issues such as increasing the ability to transmit electricity in between east and west Japan (50 and 60 hz regions), as well as from areas such as Hokkaido that can support much greater renewables (wind and solar) generation than local demand requires.

There are lots of details to work out before we know whether this grid operator will be set up so as to function in a truly independent manner, or will just be a captive of the existing utilities, but at least the issues of independence are being highlighted.

Also, the law will place an obligation upon the utilities to provide access to their transmission/distribution grid, at regulated prices, for "self-consumption" of electricity.  This will allow a major industrial or commercial user to generate electricity at one location and consume it at a second, remote location.

Lastly, there is provision in the law for a more flexible system of demand control measures.  Apparently under current law the ministry can only issue "orders" to reduce consumption, violation of which involve serious penalties.  The new structure will allow more flexible arrangements, as companies have complained about the legal risk they face when they try, yet fail, to comply with a demand reduction request.

The second "arrow" is retail electricity competition, with electricity sales to small/residential users to be liberalized by 2016.  The third "arrow" is separation of generation and transmission functions by 2018 to 2020.  These last 2 arrows are not in the current legislation, as I understand it, but will be proposed in 2014 and 2015.  The utilities are still fighting a hard battle against the separation of generation and transmission, given its impact upon their current organization and financial structure.  The utilities hope that by 2015 they will have been able to restart substantial numbers of nuclear plants, there will be a comfortable margin of excess electricity supply and the demand for reform will dissipate.  We shall see.

There will be a difficult fight ahead, and the LDP's dominance if, as expected, they win a landslide in this summer's upper house election, will give the incumbent utilities a somewhat stronger hand politically.  But the utilities have failed to present a credible vision of what Japan's future electricity system would look like, of how it will respond to changes in technology, to a changing energy mix and a changing economic environment.  And like it or not, the utilities will not restart significant number of nuclear reactors over the next 12-18 months, and electricity rates will be going up, not down, the press will occasionally remind us all about problems at Fukushima, and this reform will be difficult to stop.

UPDATE 2013 6 27:

Yesterday, the Upper House of the Diet passed a non-binding censure motion against Prime Minister Abe, promoted by several small opposition parties and, at the last minute joined in by the DPJ, a last "in your face" gesture before the upcoming Upper House election.  The Upper House is still controlled by the DPJ and other opposition parties, and one result of this turn of events is the failure of the Upper House to act on the electricity reform bill.  This and other legislation will need to wait until later in the year, after the election in which the LDP is widely predicted to win in a landslide.

Disguised Bailouts – Evidence that Electricity Deregulation (and Re-regulation) is Going to Happen

As recently as March, there were growing concerns about whether the LDP government, heavily influenced by the business community in general and the electric utilities specifically, would follow through on plans to introduce retail electricity competition and, eventually, a degree of separation among electricity generation, transmission and distribution functions needed for an environment that will support the existence of competitive supply and distribution companies.  In other words, would the current system of dominant regional electric utilities fight off attempts at reform, as they did in the late 1990s when similar reforms went forward in Europe, North America, Australia and many other places?

Several announcements last week lead me to conclude that, this time, the system will end up being reformed.  These announcements represent massive potential transfers to the utilities, to help them solve the problems they will face if systemic reform goes ahead.  Thus, in Japan, reform of a powerful industry involves placing the costs of past mistakes upon the ratepayers and the taxpayers, rather than driving the utilities into insolvency, creating distress among their lenders (all major Japanese financial institutions), etc., etc.

First, and perhaps most important, METI has floated plans to revise the utility rate base accounting in order to allow utilities to avoid massive write-downs and instead recover, spread over a number of years (approximately 10 years) in their electricity charges, the cost of decommissioning reactors prior to conclusion of their 40-year planned operating life.  This sets the stage for the utilities to end the “kabuki” play of spending money trying to reopen reactors that, in fact, are very unlikely to meet the new regulatory standards.  Of course, in Japan, these things take time--too much time.  And this is a massive disguised bailout by the ratepayers, and one that does not require any direct pound of flesh, such as a change of utility management.  

That said, it is a necessary and welcome step.  And as between the ratepayers and the taxpayers, it is better that the ratepayers bear the burden, since high and increasing charges by incumbent utilities will actually make it easier for new entrants, for investment in conservation and renewables, etc.

Second, the Nikkei reported that METI is proposing legislation to make it easier to provide governmental aid to a retail electricity provider that faces financial difficulties, adding some “catch all” circumstances to what had been narrowly permitted aid.  This is reported as an effort to help assure continued retail service to customers in the event that retail distribution companies suffer financial difficulties after introduction of competition.  Again, a disguised bailout, on stand-by, which seems intended to assure the incumbent utilities and retail customers.

Third, Chubu Electric and TEPCO have announced plans for a large new thermal plant in the TEPCO service area.  Chubu Electric plans to use its share of the generated power to serve customers in Kanto – TEPCO’s service area.  This is the first sign of mutual competition at the wholesale level.  Of course, the regional utility structure in Japan is akin to the regional "baby bells" in the United States after AT&T was split up, so it is quite unlikely these companies will be the source of real competition in each other's service areas, except for limited large customers with whom they have existing relationships.

Fourth, the latest “Abenomics” announcements of government growth plans clearly mention the introduction of competition in the electricity area as part of Prime Minister Abe’s growth strategy.  This seems a stronger endorsement than anything I have seen in the past.

Lastly, I went to a seminar last month on the future of Japan’s electricity industry.  One of the speakers is an ex-utility executive who now leads a research center at Tokyo University on smart grid implementation in Japan.  He was very clear that while he had once thought the concept unrealistic, he now believes the smart grid is coming, along with distributed generation and separated generation, transmission and distribution functions.  There is no alternative.

  

Huge Storage Battery Planned for Hokkaido to support renewables

Hokkaido has the best wind resources in Japan.  It also has the most readily available land for solar PV projects.  Unfortunately, it has a population of only 5.4 million persons, less than 5% of Japan's total.  Like much of Japan, population is not growing.

There is a huge bottleneck now of potential solar PV projects in Hokkaido, far more than the demand at the local electric utility, Hokkaido Electric.  As of March end, 2013, Hokkaido Electric had authorized interconnection for 400MWp of large scale solar PV projects, against applications of 1.56GW peak.  

Thus, in late April, 2013, METI issued a request for public comments on a suggested modification to the curtailment rules that would, initially at least, affect only Hokkaido and would permit greater flexibility in curtailment, in order to make it possible for the utility to accommodate additional projects.  We hope that the resulting rules will encourage diversity in project design, rather than making Hokkaido projects uneconomic and unfinanceable.

As an additional step, METI announced a 20 billion yen ($200 million) subsidy for Hokkaido Electric to implement a massive storage battery.  The battery project will include 60MWh of electricity storage.

The kind of investments needed to transform the electric system in Japan will not be feasible using such one-off subsidies.  Nor will they be feasible if just added as a burden on the existing utilities without a real unbundling of generation, transmission and distribution.

The Empire Strikes Back

What does the LDP's election victory in December 2012 mean for Japanese energy policy?

The LDP platform made a bow toward phasing out nuclear power (Japan should “strive to build an economy and society that does not rely on nuclear power”), but stated that any decision about future energy mix is only to be made “within the next ten years”.  Meanwhile, post-election, Prime Minister Abe made a number of statements that sound like a nuclear power booster, indicating that Japan should build new reactors, and the government should strive to obtain “public understanding” to do so.

How much of a change is this?  The official policy change is very subtle.  But Abe’s tone is far less reluctant.  He notes, rightly, that any new reactors to be built use an advanced design, and should be safer, more reliable, longer-lived and cheaper than old ones such as Fukushima Daiichi, and sounds almost eager to push ahead with nuclear power.

Then again, will the Japanese people really trust statements about nuclear safety … statements remarkably similar to what they were told in the past, but which were disproved by the Fukushima accident?  Prime Minister Abe seems to think that an election victory gives him a mandate to promote nuclear power.  But a pro- (or at least slightly less anti-) nuclear position was not why he won the election.  Indeed, the LDP’s platform on the issue was almost indistinguishable from the DPJ.  And the LDP’s coalition partner, Komeito, has a clear anti-nuclear stance.  Asahi Shimbun exit polls indicate that 78 percent of voters favor either an immediate or gradual move AWAY from nuclear power.  Only 15 percent oppose such a move.  And cabinet representatives have gotten some rough treatment on television and in other public venues when the discussion turns to nuclear's future.

My prediction is that Mr. Abe will have as much success in promoting nuclear power as George W. Bush did in privatizing social security using the “political capital” he felt he had accrued in defeating John Kerry in 2004.

And the government must work with the new, more independent Nuclear Regulatory Authority, which has recently discovered likely “active” seismic faults under two groups of reactors that otherwise would be top of the list for potential restart.

Fortunately, regardless of how the nuclear discussion plays out, everyone, including the LDP, supports a continued investment in renewable energy, and diversification of sources (and reduced cost) for fossil fuels.

As for other reforms of the electricity system -- we shall see.  There is some good news in that METI advisory committees are moving ahead with plans to split generation, transmission and distribution.  Apparently they are adopting a proposal to operate these functions in separate subsidiaries of the large utilities.