Analysis: Energy policy chaos threatens Japan's economy

TOKYO Thu Aug 4, 2011 4:16am EDT

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TOKYO (Reuters) - Political disarray over Japan's energy policy will make it tough for Tokyo to avert a total nuclear shutdown next summer and presents a long-term threat to the world's third-largest economy.

The March 11 earthquake and tsunami triggered a meltdown at the Fukushima power plant that shattered the public's confidence in the safety of the country's nuclear fleet. Scandals over the government's cozy relationship with the power industry have exacerbated the concern.

Japan sacked three officials over the scandals on Thursday, but it was unclear if this was enough to help repair public confidence in Tokyo's ability to govern the industry.

The disasters look to have dealt a definitive blow to the future of nuclear energy in Japan.

Prime Minister Naoto Kan has called for gradually weaning Japan off its dependence on nuclear power, a U-turn on the 2010 energy policy that sought to boost nuclear capacity to supply 50 percent of Japan's energy needs by 2030. In that plan, nuclear was seen as a cheaper and cleaner alternative to fossil fuels.

But the unpopular Kan, fighting to stay in his post, has given no detail on how he plans to build enough capacity to substitute nuclear supply, nor how to make alternative supplies economical.

"The issue is the uncertainty over policy," said Naohiko Baba, chief Japan economist at Goldman Sachs.

"Because of an unclear direction about nuclear power plants, companies can't make their investment plans while utilities can't make a decisive shift to other power sources from nuclear power. The uncertainty over the energy future heightens the possibility of companies leaving Japan."

Instead of rebuilding generation capacity, utilities may freeze even the investments necessary to maintain capacity, until they see clarity from Tokyo on the fate of their reactors and government energy priorities.

Uncertainty over the cost and availability of future energy supply may push Japanese companies overseas and stall foreign companies from investing.

"The confusion is expected to last for at least another half year, while the current anti-nuclear public sentiment doesn't provide an environment for an objective debate over the issue," said Xiao Minjie, chief economist at FuNNeX Asset Management in Tokyo.

"The uncertainty over the outlook of the energy policy, together with the rising yen, are pushing Japanese companies to shift operations overseas."

COSTS

Japan is already getting an indication of the potential cost to the country of a long-term shift away from nuclear power.

The number of Japanese nuclear plants supplying power to the grid is slowly falling as plants are shut down for regular maintenance. Local government officials, wary of public opprobrium, have refused permission for the plants to restart.

The government estimated on Friday that if all of Japan's 54 reactors went offline by May 2012 the nation would face a 10 percent power shortage next summer and electricity costs would spike up 20 percent.

The drag on economic growth from higher energy costs caused by greater use of costly imported fuels while nuclear electricity output dwindles would be substantial, economists say.

Nomura Securities estimated in a recent report that Japan's industrial production would be reduced by an annual 1 percent in fiscal 2012/13 if all nuclear power plants stop operating.

The impact, however, would vary across industries.

While electricity accounts for just about 3 percent of total costs of Japanese industry, this can range from 1.5 percent for the automotive industry to nearly 60 percent for recycling, processing and base metals industries.

The aluminum industry, which is a big user of electricity, has coped with power restraints by diversifying operation bases across Japan but if this persisted, it would become more difficult to fend off the damage, Masateru Yoshihara, chairman of the Japan Aluminum Association, said.

Analysts believe Japan will be able to cope with that with a mix of government-prescribed and voluntary power savings the way those saving so far spared the economy and the public the pain of rolling blackouts this summer.

But there is a limit to how much more power can be saved, and those savings also have a cost, analysts say.

"The uncertainty is adding to the existing problems and hurting sentiment," said Ken Koyama, a director at The Institute of Energy Economics for Japan (IEEJ).

"Japan may be able to weather the power shortage by energy conservation, but that could lead to an undesirable consequence of shrinking economic activity and industries leaving Japan."

Koyama said there was limited scope for industries, which account for about 40 percent of electricity demand, to conserve more energy, and such efforts would have to be relied from households and offices, which each accounted about 30 percent.

Utilities have already spent hundreds of millions of dollars on fuel imports than previously planned. Kyushu Electric Power Co used an additional million barrels of oil in April-June and an extra 230,000 tonnes of gas (LNG) in the same period against a planned 550,000 tonnes.

Japan, the world's third-biggest nuclear power user, has only 16 of its 54 reactors on line, supplying less than a third of the total commercial nuclear generating capacity of 48,960 megawatts. The share of nuclear power in Japan's power supply tumbled to about 18 percent in June from about 30 percent before the disasters struck.

Those 16 functioning plants are all scheduled to go into maintenance by May next year, which would leave Japan without nuclear supply unless the government can convince local governments and their population that restarts would be safe.

The government last month ordered stress tests on all of the reactors to check their ability to withstand extreme shocks to allay safety fears. The measure was intended to help build public confidence in the plants, but instead sent the message to the population that the government was unsure just how well the plants could withstand natural disasters on the scale of those in March.

The announcement also removed any incentive local politicians may have had to move ahead with quick restarts, deferring the decision instead until the results of the tests.

In its energy policy review last week the government said it would work to bring those reactors that passed the tests back on the grid, but so far neither the government nor the Nuclear Safety Agency have said how long the tests could take, nor how long after that plants could restart.

Some analysts advocate redesigning Japan's energy policy to focus on new nuclear power, rather than no nuclear power.

Ed Batts, corporate partner at global law firm DLA Piper, said the Fukushima disaster highlighted both the need for shored up safety planning at existing plants and for an aggressive push for modern nuclear technology to meet growing energy demand.

"While common-sense demand management (conservation), such as building design, is a crucial part of an energy strategy, it will not alone be sufficient to supply our collective needs," Batts said. ($1 = 77.965 Japanese Yen)

(Editing by Tomasz Janowski and Simon Webb)

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