Japan s Power Sector and CO2 Pathways

Transcription

1 Japan s Power Sector and CO Pathways From restarted aging nuclear plants to risky coal-fired plant investments and looming CO reduction targets, Japan s power sector faces uncertainty in every direction. Template: Paper Title Here

2 The 0 Great East Japan earthquake and subsequent Fukushima Daiichi Nuclear Power Plant accident triggered a fundamental change in the country s electricity sector, with a three-phase electricity market reform under way that introduces more competition in the energy market. For the government, ensuring energy security remains a policy priority, but it pays equal attention to economic efficiency, environmental protection, and the safety of citizens (3E+S). The challenge for Japan is determining how it will generate the power needed to meet these 3E+S goals, while complying with the carbon dioxide (CO) emission reductions it has committed to under the COP Paris Agreement. The path to the most promising mix of power generation for Japan s future has unexpected turns, crossroads, and potentially risky dead ends. There was a delay to restarting nuclear power plants after the Fukushima Daiichi accident. Even though restarts are now under way, the aging plants are expected to fall short of generating the low CO-emission power required to meet the country s climate targets. Renewable sources of energy are clean but costly in a market that has already seen record-high energy prices. Building new coal-fired plants is also risky if the momentum to limit CO picks up, jeopardizing trillions of yen in business investments even as the country deregulates the electricity generation and power retail sectors. In which direction should Japan, its government, and investors turn to meet the country s future power demand? The answer lies in careful consideration of the ramifications affecting each source of power generation as market conditions and government regulation evolve. The pathways depend on two factors: the extent of nuclear power restart and the capacity of additional coal-fired generation. Sweeping Deregulation, Paris Targets, and a New US President In the past six years, Japan s power sector has undergone drastic changes. After the Fukushima Daiichi accident, the country suspended operations of all its nuclear power plants. In place of nuclear, the country increased its reliance on thermal generation from fossil fuels which, along with a higher renewables feed-in tariff surcharge, caused energy rates to spike. The government also conducted a comprehensive review of its electric power system, resulting in a three-step reform of its Electricity Business Act encompassing an extensive deregulation of its power-generation and power-retail sectors. In 05, the government approved a generation mix target for 030 of 0 to percent nuclear and to 4 percent renewable energy, based on its long-term energy supply and demand plan to meet its 3E+S objectives. These goals formed the basis of Japan s pledge for Intended Nationally Determined Contributions at the 05 United Nations Climate Change Conference in Paris. It agreed to a national CO emission reduction target of 6 percent by 030 from 03 levels, in line with an 80 percent reduction target by 050 for developed countries (see figure on page 3). The Paris Agreement came into effect in November 06, the same month that saw the election of Donald Trump as US president. His reluctance to take measures against global warming has caused worldwide concern about adherence to the agreement. A.T. Kearney believes the Japanese government will follow through with its commitment to reduce CO at least up to the early 00s without significant deviation from the target. This outlook is based on the fact that any country s withdrawal from the United Nations Framework Convention on Climate Change or watering down of the Paris Agreement will be difficult to achieve by 00, the end of Trump s first term.

3 Figure Japan is aiming for an 80% reduction in CO emission by 050 Historical trend and target of CO emission (Mton of CO) Target 030 generation mix of Japan,500, Japan s pledge in INDC 6% reduction compared to CO emission in 03 4% RES 0 % nuclear 600 7% gas Long-term target 80% reduction in developed countries % coal 3% oil Intended Nationally Determined Contributions Long-term Energy Supply and Demand Outlook (July 05) Notes: Mton is metric ton. RES is renewable electricity standards. Sources: Ministry of the Environment; A.T. Kearney analysis Outlook for Japan s Nuclear Power Generation If Japan does not restart enough nuclear plants, it will be difficult for the government to reach its power-generation and CO emission reduction goals. Today, Japan s nuclear power plants have a generation capacity of 50 gigawatts (GW), which can generate about 30 percent of the country s electricity supply but almost all have currently stopped operation. The government s aim to have nuclear generate up to percent of the nation s power by 030 appears to be in line with its overall capacity, but it assumes three things. First, it requires 38 GW of existing nuclear plants to be restarted. Several of those plants are at least 40 years old and will need the government s permission to operate for another 0 years. The Nuclear Regulatory Commission has acknowledged that some of those reactors are located on or near active fault lines, which would take them out of the running. A.T. Kearney analysis indicates that building new, safer nuclear plants to achieve targeted capacity cannot be achieved before 030. So, the generation capacity of nuclear is more realistically set between 9 and 38 GW for the next 3 years (see figure on page 4). 3

4 Figure NPP capacity will range from 9 to 38 GW in 030 Expectation of operation in 030 Capacity in 030 (GW) Kashiwazaki Kariwa (Tokyo E.) Tomari (Hokkaido E.) Shika (Hokuriku E.) 3 3 Tsuruga (Japan Atomic Power) Ohma (J-Power) Higashidori (Tohoku E.) Mihama (Kansai E.) Onagawa (Tohoku E.) 3 3 Ohi (Kansai E.) Fukushima Daiichi (Tokyo E.) Takahama (Kansai E.) Fukushima Daini (Tokyo E.) Shimane Tokai Daini (Japan Atomic Power) (Chugoku E.) 3 Hamaoka (Chubu E.) 3 Ikata (Shikoku E.) 3 Genkai (Kyushu E.) 3 4 Sendai (Kyushu E.) 9 (37%) 7 plants Resumed and assumed to resume 9 (38%) plants Uncertain 5 (0%) 6 plants Assumed not to be resumed 7 (5%) plants Have been decided to be decommissioned Upper case 38 GW Lower case 9 GW Assumptions A: plants where a governor (local government) has clearly required decommissioning or B: plants having active faults under critical facilities according to review by a panel of Nuclear Regulation Authority (NRA) experts are assumed not to be resumed A: plants that will have been operating for more than 40 years as of 030 or B: plants having active faults near the sites according to review by a panel of NRA experts are classified as uncertain The remaining plants are considered resumed and assumed to resume Note: NPP is nuclear power plant Sources: Newspaper article; A.T. Kearney analysis This estimate is based on the assumption that the average load factor after restart is 70 percent, but the load factor in recent years has been less than that, even before the Fukushima Daiichi accident. After the updated safety standards took effect in July 03, which include new backcheck and back-fit rules, it is even more unlikely that aging nuclear power plants can achieve a load factor higher than the historical average., 3 And if the nuclear plants do not operate as the government intends, the share of low-carbon power supply will be lower than planned, and Japan will not achieve its CO emission reduction target. Coal-Fired Power Plants Enter the Equation Many of the developments insufficient generation capacity, rising energy costs, and intensified competition fueled by deregulation have set the scene for electricity and gas utilities and new entrants from other industries to announce plans for the construction of new coal-fired power plants. While new coal capacity could reach.8 GW if all the proposed plants are constructed, 7 GW is still in the planning phase and can be reconsidered (see figure 3 on page 5). The government does not clearly state the load factor of nuclear power plants, but in the Power Generation Cost Verification Working Group, which the Ministry of Economics, Trade and Industry established in 05, members used a nuclear power-plant utilization rate of 70 percent in their discussion of generation mix. All existing plants must be checked by the regulator if an issue is found in one plant. 3 The back-fit system obliges nuclear facilities that have already been permitted to operate to comply with the latest regulatory standards. 4

5 Figure 3 Additional coal capacity could reach.8 GW, with 7 GW of projects that can be reconsidered Progress in environmental assessment Capacity (GW) High Unnecessary Environmental assessment isn t required because of fuel conversion or middlesize plants without large impacts on the environment.3 Probability of construction Completed Ongoing IGCC USC Small plants Environmental assessment has already been completed, and most are under construction A more efficient method than USC is adopted, and both plan to start construction in 06 Environmental assessments are ongoing, including 5 projects. This category would be installed when 5 projects obtain approval Small plants will be unable to be built by NECA unless they use biomass or utilize heat for other purposes GW projects GW Low Not yet submitted Assessment request hasn t been submitted, and detailed plans are unclear.5 New development by Nippon Paper Mills (5 MW) and fuel change by Kansai Electric s Ako (two units of 600 MW). If the regulator judges that the plant doesn t have a significant effect on the environment, environmental assessment will not be required. Notes: IGCC is integrated gasification combined cycle. USC is ultra-supercritical. Sources: Ministry of the Environment; A.T. Kearney analysis Existing coal-fired plants operating at 80 percent load factor (assuming base-load operations) would supply 30 percent of total power, which would exceed the government s target of 6 percent. Should all the proposed coal plants be constructed and operated at 80 percent load factor, coal-fired power generation would comprise up to 37 percent of the generation mix, further deviating from the government s target and surpassing planned maximum CO emission by one million tons by 030 (see figure 4 on page 6). This will result in Japan overshooting its emission target by 0 percent in 030, assuming entities in other, non-power sectors achieve their emission reductions. Prompted by this scenario, Japan s Ministry of the Environment opposed the approval of five new coal-fired plants in However, it later revised that position to allow the environmental impact assessment phase to proceed on a conditional basis in the wake of two developments: the launch of the voluntary Electric Power Council for a Low Carbon Society (ELCS) by a group of existing power companies and new entrants, with a target to achieve Japan s emission targets; and a reform of the Energy Conservation Law and the Sophisticated Methods of Energy Supply Structures Law. 4 The five plants are Nishi-Oki plant and (. GW), Chiba Odegaura plants and (total of.0 GW), Ichihara (.0 GW), Takeuto (. GW), and Akita Gulf Coast and (.3 GW). Total capacity could top 6.6 GW. 5

6 Figure 4 If all of the coal development plans come online, the total coal capacity will be 6.3 GW by 030 Coal capacity in 030 by year of commercial operation start (GW) GW 9.9 GW 5.7 GW 4.9 GW.8 GW Existing plants New plants 6 40 or more years of age years of age 9 or fewer years of age 4 Small capacity Large capacity Note: The Ministry of Economy, Trade and Industry assumes that the average operation of a coal plant is 40 years, although it could actually be longer. Sources: Public data sources; A.T. Kearney analysis These efforts, while commendable, will not be enough for Japan to sufficiently reduce greenhouse gases. First, the Energy Conservation Law stipulates that the average efficiency of all thermal power plants owned by each operator should be at least 44 percent. But major electric and city gas utilities, which are now proceeding with the construction of new coal-fired power plants, currently have in their portfolios a number of liquefied natural gas (LNG) combined-cycle power plants with thermal efficiency that already exceeds 50 percent. So, constructing coal-fired plants with thermal efficiency in the range of 30 percent can still enable these companies to meet the overall thermal efficiency target, even though CO emission will increase. In addition, the Sophisticated Methods of Energy Supply Structures law requires electric power retailers to meet a specific ratio of non-fossil power supply. It does not directly control coal-fired power. So even if the share of power supply from fossil fuels were suppressed and if there were no further regulatory constraint on coal power or CO, retailers would favor coal-fired power at the expense of LNG-fired power given that the latter has a higher marginal cost. Furthermore, ELCS is a voluntary framework for promoting individual efforts to reduce CO. It does not restrict the actions of businesses with conflicting interests. A.T. Kearney doubts it will be effective in limiting coal-fired generation, especially if defending market share becomes more important in a deregulated market. 6

7 Paving the Way to a New Power-Generation Mix How will the nuclear power restart and the addition of new coal-fired plants contribute to Japan s surpassing its CO emission target? And how much of each power supply source will be dispatched? A.T. Kearney modeled daily 4-hour cycles in 030, focusing on marginal cost and locations for each power plant. We assumed that dispatch would be carried out in ascending order of marginal generation cost and simulated CO emission based on emission factor and the operating level of each power plant. Where nuclear power is restarted to the presumed upper limit ( percent of generation mix), CO emission intensity is 0.4 CO kg per kwh. In an alternate scenario, where nuclear generation achieves the lower limit (5 percent of generation mix), CO emission intensity is 0.45 CO kg per kwh. In both scenarios, CO emission intensity would exceed the government s goal of 0.37 CO kg per kwh by 4 and percent respectively (see figure 5). 5 Figure 5 CO emission and coal s share of the 030 power-generation mix could significantly exceed the government target Simulated CO emission of power sector and coal-fired plants output by case in 030 (Coal output level ) High nuclear case [0.4 COkg/kWh] Low nuclear case [0.45 COkg/kWh] Government target case [0.37 COkg/kWh] Market liberalisation and competitive pressures are driving generation companiesto pursue more coal in their portfolio (CO emission level ) As relative values, with government target case being 00 Source: A.T. Kearney analysis 5 We based our calculations on several other assumptions as well. We assumed that within each power company s allotted franchise area, the company would meet demand in the order of nuclear, hydro, and renewables, such as solar. When the power supply exceeds demand, typically during daytime hours when solar-power output increases, we assumed solar would take precedence over other forms of power. Next, we assessed demand beyond the franchise area nationwide, calculated the interconnected current flow, and computed the dispatch order for thermal power based on marginal fuel cost. In this simulation, we assumed the renewables capacity would align with the government s target, along with LNG and coal. In other words, capacity includes all planned power plants. For nuclear, we used the government s maximum target of percent of generation share and the minimum target of 5 percent, to account for instances where a facility s restart capacity or load factor may not reach the government goal (see figure 6 on page 8). 7

8 Figure 6 Assumptions differ greatly for high and low nuclear cases Assumption Calculation output Parameter set in this study Capacity Load factor Generated electricity Share of nuclear Upper case 38. GW 70% 34 TWh % Upper % In upper case, nuclear share is %, in line with government s target Lower case (low capacity) Lower case (low load factor) 8.9 GW 70% 6 TWh % 38. GW 60% 00 TWh 9% Lower 5% In lower case, nuclear share is 5% Cases of ) low resumption and ) low load factor are considered If both factors are low, an even lower share can be possible, but it seems unrealistic Divided by,065 terawatt hours of generated electricity, which is government assumption Sources: Long-term Energy Supply and Demand Outlook; A.T. Kearney analysis Risks of New Large Coal-Fired Power-Plant Construction A.T. Kearney expects Japan to remain committed to its CO reduction targets, in which case investment in new coal capacity will not be capital efficient because of the need for extensive suppression of existing coal plants to meet Japan s CO targets. Analysis of the 7 GW coal plants under development shows that while the initial investment will be about 3. trillion yen, they will contribute to a decrease in fuel costs of only 0. trillion yen a year. The benefit is small because the government will have to limit the load factor on older coal plants, which have a heat rate that is slightly less efficient, to accommodate generation from the new plants to meet the country s CO commitment (see figure 7 on page 9). One way to mitigate increased CO emission from the additional coal build would be to use more renewable energy. However, with costs for renewable energy such as photovoltaics still expected to be high in Japan based on the government s analysis, even the lowest resulting CO abatement costs would be very high (see figure 8 on page 9). 6 For the lowest CO abatement cost, an offset mechanism such as emission trading may appear to be the most rational alternative. Yet this presents issues too. It does not contribute to Japan s economy and may become objectionable to the international community should Japan rely upon it solely to meet its obligation. It is worth noting that with the Kyoto Protocol, only a fraction of Japan s CO reduction target was achieved through offsets. Taking a balanced approach utilizing a range of low-carbon tools, including renewables investment, natural gas, some measure of offset mechanism - when combined with some limitation on coal generation level - is likely the most prudent path to ensure carbon risk and energy security, though it will increase the energy cost to some extent. 6 We based our analysis in figure 8 on the Japanese government s assumption of a photovoltaic generation cost of 8 to 4 yen per kwh in its target generation mix for 030. The Ministry of Environment assumes the lower photovoltaic cost in 030 to be 3 yen per kwh. Even then, the CO abatement cost would be,535 yen per ton of CO, higher than the United Nations Climate Change Conference scenario of $00 per ton for 450 parts per million. 8

9 Figure 7 Investment in new coal capacity may not be capital efficient Investment in new coal Investment effect Without stopping investment in new coal-fired plants,.8 GW is assumed to be constructed additionally (as mentioned on previous page) Investment for new coal plants Go No go Capacity of new coal-fired plants High Probability of construction Low Progress in environmental assessment Environmental assessment isn t required because of fuel conversion or middlesize plants without large impacts on the Unnecessary environment Environmental assessment has already Completed been completed, and most are under construction A more efficient method than USC is IGCC adopted, and both plan to start construction in 06 Ongoing Environmental assessments are ongoing, including 5 projects. This category USC would be installed when 5 projects obtain approval Small plants will be unable to be built by Small plants NECA unless they use biomass or utilize heat for other purposes Not yet Assessment request hasn t been submitted submitted, and detailed plans are unclear Capacity (GW) GW.8GW projects.8.5 Regulation on coal plants Fuel cost (trillion yen/yr) Hard Age <= 30 80% Age <= 40 50% Age > 40 0% Relatively mild Age <= 30 80% Age > 30 60% 3.8 Investment 3. trillion yen to be required for investment in.8 GW 0. trillion yen of total fuel cost decrease in the case of new constructions leading to strict regulation Calculated at 50,000 yen/kw Given that generated electricity in each case is different, fuel cost is calculated from average generated electricity of four cases. Sources: Power Generation Cost Analysis Working Group, newspaper article; A.T. Kearney analysis Figure 8 Cost of different measures for CO reduction Unit cost for CO reduction Assumptions Major parameters Suppression of coal-fired plants Further installation of RES Assumes that by suppressing coal-fired plants, same volume of LNG-fired plants will operate Calculates fuel cost increase to reduce t of CO through conversion from coal to LNG Assumes that by installing PV, same volume of LNG-fired will reduce operation Calculates difference between FiT price and variable cost of LNG-fired plants Coal LHV 40% Gas LHV 5% PV Gas LHV 5% Fuel cost 4.0 /kwh Emission 0.87 kg-co/kwh Fuel cost 8.5 /kwh Emission 0.36 kg-co/kwh FiT price 8-4 /kwh Emission 0 kg-co/kwh Fuel cost 8.5 /kwh Emission 0.36 kg-co/kwh 6,667 Utilization of global offset mechanism Forecast price to trade CO, according to World Energy Outlook by IEA New policies scenario 450 scenario 37 $/ton-co 00 $/ton-co,000 4,070 $=0 ( /CO-ton) In line with government s assumption World Energy Outlook 05, before reflecting Paris Agreement Notes: LNG is liquefied natural gas. FiT is feed-in tariff. IEA is International Energy Agency. LHV is lower heating value. RES is renewable electricity standards. Source: A.T. Kearney analysis 9

10 The country must reconsider the construction of new coal-fired plants for other reasons as well. Implementing load-limitation regulations on existing coal plants could be challenging because of the potential violation of property rights. In addition, utilities may not have recovered their investments for these plants, so a compensation mechanism would be required. Now Is the Time to Act Addressing global warming is an international political issue. Considering Japan s standing in the international society, it is unlikely the country will deviate from its climate commitment from next year until the early 00s, when a final investment decision about coal-fired construction is expected to be made. The risk remains that nuclear power plant generation remains below the government s target even in 030. Amid these two uncertainties global momentum on CO reduction and the uncertainties related to nuclear restart proceeding with the construction of new coal-fired power could result in a waste of trillions of yen and investment risks to businesses involved in the construction. To ensure that Japan can meet its Paris Agreement Commitments operational constraint on existing coal-fired plants will be required, which could result in a different set of issues, such as a legal challenge against the government on the basis of property infringement. If Japan tries to offset the increase in CO emission from coal generation by increasing renewable energy, it could risk having to raise customers electricity prices. As Japan looks to transition to a competitive power market, it needs to act urgently to ensure the constraint on coal-fired generation is adequate to meet its climate commitment. Author Hiroshi Sasamata, partner, Tokyo hiroshi.sasamata@atkearney.com 0

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