Any changes in Japan's energy strategy are likely to have a profound effect on Australian energy exports for many years to come.

On 14 September 2012, Japan's Energy and Environment Council released its long-awaited energy report titled "Innovative Strategy for Energy and the Environment", which called for, amongst other things, the phase-out of nuclear power in Japan by 2040.

Since the Report's release, the Japanese Cabinet has been ambiguous as to whether it will approve the energy policy set out in the Report, stating only that it would "take into account" the recommendations of the Report in formulating its energy strategy. Notably, the Cabinet refused to endorse a 2040 deadline for the phase out of nuclear power.

At this time, neither the Report, nor the Cabinet response, has been officially translated into English; however an English version of the Interim Paper is available.

This article provides an overview of the Report and briefly considers how the recommendations in the Report may affect Australia's export energy sector.

Background

The Fukushima nuclear power plant incident gave rise to a period of deep reflection within Japan about its energy strategy.

On 17 May 2011, some two months after the Fukushima incident, the Japanese Government established the Energy Council. The Energy Council's mandate was to examine Japan's energy and environment strategies from scratch and to develop a policy for a safe, stable, efficient, and environmentally sound supply of energy for the short, medium, and long term.

On 29 July 2011 the Energy Council published its "Interim Compilation of Discussion Points for the Formulation of 'Innovative Strategy for Energy and the Environment'". As its name suggests, the Interim Paper set out a number of discussion points with a particular focus on finding the best mix of energy sources and new energy systems for Japan. The Interim Paper proposes a number of principles upon which any future energy decisions should be based, including: stabilising energy demand; introducing energy saving measures; providing incentives for renewable energy; developing a "strategic" policy on use of fossil fuel; and reducing Japan's dependence on nuclear power.

On 14 September 2012, the Energy Council published its Report.

Details of the Report

The Report is brief and tends more towards high level goals and aspirations than detailed policy. Nonetheless, the Report does identify three pillars upon which the proposed energy strategy is to be based.

The first pillar is a reduced reliance on nuclear power as soon as possible. This is identified as central to the policy espoused in the Report, from which the other two pillars emanate. Significantly, at the heart of this strategy is the proposal to reduce Japan's reliance on nuclear power to zero before 2040.

The second pillar is the so-called "implementation of the green energy revolution". It aims to promote the transformation of Japanese society to green energy with a view to protecting the global environment and encouraging the emergence of new economic growth areas.

The third pillar is the secure and stable supply of energy. The efficient use of fossil fuels is identified as central to this aim, provided however that appropriate measures are taken to increase the efficiency of power generation. The Report also recommends the acceleration of research and development in the sector to identify the "next generation of energy technology".

The three pillars are considered further below.

Pillar 1 – Nuclear power

Prior to the Fukushima incident, Japan derived a third of its electricity from nuclear power and had intended to increase that proportion to more than 50 percent by 2030. Today, nearly all of the country’s 54 nuclear reactors sit idle.

The Interim Paper called for a national discussion about the use of nuclear technology in the mix of energy sources for Japan.

While recognising that there continued to be significant debate on the issue, the Report seems to conclude that there is general consensus within Japan to develop a society that does not depend on nuclear power.

With this consensus in mind, the Report sets a goal to reduce Japan's reliance on nuclear power to zero by 2040. Three broad measures are put forward to achieve this goal:

  • the operational limits for existing reactors are to be strictly applied;
  • existing nuclear power stations are only to re-open once they have been checked and approved by the Nuclear Regulatory Commission; and
  • there is to be no new construction or expansion of nuclear power stations.

As a result of this phasing out of nuclear power, other forms of energy generation would be required to fill the void.

Pillar 2 – Renewable energy

Japan has low energy self-sufficiency and is highly vulnerable to supply shortages. It is perhaps unsurprising then that renewable energy including wind, tidal, hydro, and geothermal are a significant focus of the energy strategy set out in the Report.

The Report acknowledges the economic and institutional challenges of bringing about a "green revolution". However the Report's authors remain positive that these economic and institutional challenges can be overcome by technological innovation and policy guidance.

With this "green revolution" in mind, the Report sets out a multi-faceted implementation strategy which includes (amongst other things): power saving measures; promotion of green vehicles; the introduction of feed in tariffs; and a tripling of the power currently produced from renewable sources.

However it also acknowledges that the green revolution will take time and that other energy sources will be required in the short to medium term.

Pillar 3 – LNG and coal

LNG: The Report recognises that power generated from natural gas will likely play a significant role in the supply of domestic electricity. It also cites natural gas as a relatively green source of power when compared to other sources (presumably coal), but notes that further steps are required to increase the efficiency of natural gas power stations.

While the Report does not consider in detail issues with respect to the stability of LNG supply, it does specifically identify North America as a future partner for the secure supply of natural gas.

Coal: The Report acknowledges that by promoting nuclear power, Japan significantly reduced its dependence on coal-fired power generation. However, in the post-Fukushima landscape, coal is identified in the Report as having an "important role" in the energy mix. Recognising the potential greenhouse effects of coal power generation, the Report advocates the adoption of technological advances to increase the environmental performance of new and existing coal power stations.

Impact on Australia

Prior to Fukushima, Japan relied on coal and LNG for around 60 percent of its electricity generation, with nuclear power accounting for approximately 30 percent. However, according to the Reserve Bank of Australia, post-Fukushima these energy sources account for approximately 90 percent of Japan's electricity generation. Indeed, in May of this year, the Reserve Bank noted that whilst "there has been an expansion of other forms of electricity generation… this is unlikely to fully compensate for reduced nuclear power", stating that "this shift away from nuclear power generation is likely to continue to boost demand for coal and LNG."

Australia is well positioned to reap the benefits of this shift in Japan's energy mix: Australia is a significant energy exporter to Japan, with LNG exports to Japan in 2011 accounting for $10.4 billion of export earnings and coal accounting for $16.6 billion. Indeed, early indicators for these two sectors look positive:

  • Even before the Fukushima incident, Japan was the world’s largest importer of LNG. Now it consumes nearly a third of global output. Japan continues to be a major LNG customer for Australia and accounts for about 70 per cent of LNG exports as at January 2012. Australian LNG exports to Japan (in Australian Dollar terms) jumped 19.2% in 2011.
  • Similarly, Japan is the second largest importer of coal and takes 39.3% of Australia’s black coal exports – the largest share of any export destination country. Australian exports of coal to Japan (in Australian Dollar terms) increased by 12.1% in 2011.

However, there are also some significant constraints to this growth, foremost of which is the utilisation of existing gas-fired power facilities, which are currently close to 80 percent capacity, and long lead times for future gas-fired projects. Further, it remains to be seen what effect exports of natural gas from North America and, to a lesser extent, Russia, will have on Australia's slice of the landed LNG market in Japan.

In the event that the recommendations of the Report are implemented, the Australian LNG and coal sectors are well positioned to benefit from increased Japanese demand power generation. However the corollary is that any decision to phase out nuclear power in Japan will negatively affect demand for Australian uranium – unless other export markets can fill the void.

Conclusion

Although the Report tends towards the aspirational rather than the substantive, the proposed energy policy does prescribe a vision for Japan's future energy use and while the exact rationale for the Japanese Cabinet's reluctance to endorse the Report is not clear, any changes in Japan's energy strategy are likely to have a profound effect on Australian energy exports for many years to come.