LNG's role in post-Fukushima Japanese energy policy

Tomoko Hosoe
FACTS Global Energy
Honolulu

As a result of the disruption in nuclear power operations since Mar. 11, 2011, Japan's demand for LNG as well as low-sulfur fuel oil and crude oil for power generation increased significantly.

Japan's total LNG imports increased by 12% to 78.5 million tonnes/year (tpy) in 2011 and will likely be higher this year as the country continues to face an unprecedented nuclear crisis. The country's Ministry of Economy, Trade and Industry (METI) will emphasize the increasing role of LNG in a new national energy policy that will be announced by July 2012.

Power sector's demand jumps

LNG consumption by Japan's power sector increased by 20% in 2011 as the delayed resumption of suspended nuclear reactors forced utilities to increase thermal power generation. The consumption increased despite the fact that Japan's total power demand fell by 4.7% due to post-Fukushima energy conservation and restricted power supplies. On the other hand, LNG consumption by cities' gas utilities—which accounts for 35% of Japan's total LNG consumption—fell slightly (–0.4%) as commercial demand declined due to energy conservation.

The average utilization rate of nuclear power plants fell to 38% in 2011 from 68% in 2010, according to the Federation of Electric Power Companies of Japan. In addition to Tokyo Electric Power Co.'s (TEPCO) complete closures of its Fukushima Daiichi and Fukushima Daini nuclear plants on Mar. 11, 2011 (OGJ, Mar. 28, 2011, p. 16), Chubu Electric Power Co. shut its Hamaoka nuclear plant in May 2011 in order to take preventive measures—including construction of an 18-m wall around the plant—against possible major earthquakes and tsunamis that may hit the area in the future.

Furthermore, no reactor in Japan that shut for regular maintenance and for stress tests has restarted as local governments demand a new, post-Fukushima nuclear safety standard. As a result, only two of the country's 54 nuclear reactors (a total capacity of 49 Gw) are operating today, but these two reactors will be shut for regular maintenance and stress tests by the end of April.

The power supply shortage threatens widespread problems for businesses, and the biggest concern now is that Japan—especially in the Osaka area—may not have enough capacity to meet peak power demand in July and August this year, unless the nuclear situation improves.

Post-Fukushima energy policy

In the future, the METI will increase the role of LNG in a new national energy policy. The new policy, to be announced by July 2012, will likely give a 30-35% share to natural gas while reducing the share of nuclear to 15-20%. This will trigger the building of additional gas-fired generation capacity and conversion of older capacity to more efficient models. New and efficient coal-fired power plants—integrated gasification combined cycle (IGCC)—are also likely be permitted and built. Meanwhile in the interim, carbon issues will take a back seat.

By late this decade, Japan's LNG demand could exceed 85 million tpy. There are, however, infrastructural limitations on the ability to import more LNG via existing receiving terminals and the power generation capacity.

In Tokyo Bay, for example, 24 million tpy of LNG is the maximum that can be imported by TEPCO. Thus it will soon reach the limits of import capacity in Japan. Building a greenfield gas-fired plant takes 7-10 years, given that obtaining an environmental assessment approval alone requires up to 5 years. Only TEPCO and Tohoku Electric Power Co. have been temporarily exempted from environmental-assessment requirements as some of their plants were damaged by the Mar. 11 disasters.

The government is taking a serious look at restructuring the power industry, which is still partially regulated. It is considering removing in the next 2-3 years the existing regional power supply boundaries, which effectively give the 10 power utilities regional monopolies, by separating power-transmission businesses from power-generation businesses. Under the government's scenario, newcomers (outside the power industry) will enter the power business and consumers will be able to choose their power suppliers.

In terms of future LNG supplies, the new policy will encourage Japan to import LNG from North America, namely the US, on a large scale. The government feels that there is too much dependence on Asia-Pacific production, which accounts for 66% of Japan's total imports, and too much dependence on conventional nonflexible LNG with higher price slopes.

With the new policy, the government expects to see a major push to import less expensive LNG with flexible volumes from the US for energy security and economic reasons. Moreover, the government is asking the US to take into consideration Japan's unprecedented crisis and allow Japan, a nonfree-trade-agreement (FTA) member, to import LNG from the US mainland.

Even when the US is able to export LNG to Japan, there are some gas-quality issues to be resolved. The Japanese utilities are not comfortable with higher volumes of lean gas inside their own systems, as most of them have built their infrastructures based on rich gas for the past 40 years. Lean gas (including diverted Qatari volumes) accounts for only 10% of total imports today. Given there are various technical solutions to this issue, the government can provide incentives to make these projects work if supply security can be assured.

Japanese importers are also looking into possibilities that the calorific value of gas can be increased by US gas suppliers.

As the Japanese power utilities continue to struggle to bring the nuclear reactors on line, there is a dire need for an integrated energy policy in Japan grounded in a new post-Fukushima reality. The ongoing nuclear crisis highlighted to the general public the dangers associated with Japan's ambitious nuclear power targets and its unpreparedness for natural catastrophe risk management. We believe the new energy policy will be the key component in determining Japan's economic recovery and competitiveness.

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