Charting a course for solving the energy issues

(Photo caption: Masakazu Toyoda speaking as a panellist during the Singapore International Energy Week 2012.)

2012 was a year filled with uncertainty. In politics, it was election or power rotation year in major countries such as the US, China, France, Russia, South Korea and Japan. As a result, these countries inclined to be inward-looking and short-term oriented, and could not focus on the mid to long term or at the global level.

In geopolitics, the Arab Spring and Iran's alleged nuclear development programme destabilised the Middle East and caused oil prices to remain high. In Asia, territorial disputes between Japan, China and South Korea, particularly between Japan and China, threatened not only politics but also the economy.

Regarding the economy, the turmoil caused by the Euro crisis, the growing budget deficit of the US and the slowing growth of emerging countries such as China and India suppressed the global economy. In addition to these factors, the Japanese economy was adversely affected by tensions with China.

Under such circumstances, the Fundamental Issues Subcommittee of the Advisory Committee for Natural Resources and Energy still has not reached a conclusion on the revision of the appropriate energy mix despite meeting about 30 times last year for discussions. In COP18, which met to discuss the framework for tackling climate change, the basic arrangements for discussing the new framework from 2020 onwards were completed, although the overall state of confrontation between advanced and developing countries remains unchanged.

What will 2013 be like chart a course for solving the issues under the new administration. Below are the key points concerning energy and the environment.

Nuclear energy: The first point is restoring trust in nuclear power. It is important to steadily restart those nuclear power stations that are shown to be safe by the Nuclear Regulation Authority, which was established with an independent regulatory commission last September. Furthermore, Japan Nuclear Safety Institute (JANSI),

which was established by the electric utilities, needs to take a proactive approach toward raising the safety level of nuclear power stations like the U.S. Institute of Nuclear Power Operations (INPO).

According to our calculation, restarting 26 of the nuclear power stations (such as those that have submitted the results of stress tests) in 2014 would lower the electricity fuel cost by 1.8 trillion yen, and hence the electricity generation cost by approximately 2 yen/kWh.

LNG cost in Asia: Second is solving the Asia premium issue of LNG. The price of imported natural gas is currently about US$3/MMBtu in the US and US$16-18/MMBtu in Japan, making natural gas for existing Japanese projects three to four times more expensive than in the US, even when taking into considerations the cost

of liquefaction and transportation of about US$6. As the LNG market expands, the supply and demand balance of LNG is no longer in line with that of crude oil. It is increasingly important to promptly revise the oil-indexed pricing system of LNG, while LNG importers are promoting joint procurement and development.

Renewable energy: Third is wisely promoting renewable energies. The Feed-in Tariff (FIT) system launched last July has made a good start mainly for solar power. On the other hand, in Germany and Spain, the governments are quickly suspending or revising their systems in order to control the rise in electricity tariffs caused by the growth in installed capacity of renewable energies and accumulated purchasing cost. As a late adopter of the FIT system, Japan should carefully monitor the successes and failures of the early adopters as Germany, and make rational decisions in running and revising the system.

Energy conservation: Fourth is to advance energy conservation measures. The 3/11 nuclear accident provided an opportunity to strengthen Japan's energy conservation policy, particularly in the household and business sectors. It is important to encourage the use of HEMS and BEMS. Energy conservation for buildings still

has much room for improvement compared with Europe and the US. It is also essential to enact the once-discarded amendment of the Act on the Rational Use of Energy as soon as possible.

Competition: Fifth is to strengthen the competing power of the energy industry. We are still halfway through the electric power system reforms. While it is important to build a market-based system that benefits consumers, it must be designed to prevent insufficient investment which has occurred in the past due to system reforms in Europe and the US. Furthermore, we must not forget to look overseas as well as within Japan in strengthening our competing power. The energy industry, including the gas and oil businesses, should develop into a comprehensive energy industry that can compete in the international market and not confine itself to the shrinking domestic market.

Climate change: Sixth is to take the initiative in tackling climate change. COP18 raised questions about the validity of the UN negotiation process as the countries participating in the Second Commitment Period account for only about 14 percent of total emissions, and the demand for CDM may shrink as they will not be used by the countries not participating in the Second Commitment Period, such as Japan. Japan must collaborate with the US and others in taking the initiative and developing a realistic post-2020 framework in which the key countries can participate, including the US and China, and which is based on emission intensity CO2/GDP) so that it does not hamper economic growth. Japan must also revise its own 2020 goal into a realistic one.

North East Asia cooperation: Seventh is to promote collaboration between Japan, China and South Korea and between Japan and Russia. While these ties tend to be hampered by territorial issues, collaboration between these four countries of North East Asia is urgent in light of energy security, nuclear security, abolishing the Asia premium of LNG, and promoting energy conservation. We must use diplomatic wisdom to promote cooperation on energy despite the territorial issues.

Energy mix: The final point is revising the mix of energy sources. Apparently, the new administration is planning to approach this issue carefully. It should take time for the new scheme for nuclear safety to restore public trust as it has just been launched, and carefully determine the potential and limits of renewable energies.

Hasty decisions could misguide the future course of the country. Meanwhile, the absence of guidelines on energy investment may hamper appropriate and adequate funding. It is necessary to determine an appropriate time frame for consideration.

Below are further key points for 2013:

International oil situation: The growth in non-OPEC supply due to increased production in the US and the limited growth in oil demand due to the world economic slowdown will ease the supply and demand balance of oil in 2013. The average price of Brent Crude is estimated at US$105, plus or minus US$10. However, the price could fall due to the European credit risks, or rise due to geopolitical risks such as the situation in Iran.

Domestic oil situation: The oil industry is facing a major turning point with the diversification of energy sources and greater awareness of energy saving, and must urgently establish a two-fold system of petroleum products business for "defense" and overseas business development for "offense".

Electricity business: [For Japan,] the near-term key issues in 2013 will be applications to raise electricity tariffs, the formulation of a new safety standard by the Nuclear Regulation Authority, the restarting of nuclear power plants, and the handling of fundamental policies towards electric power system reforms. The government will have to manoeuvre skillfully to convince the public while maintaining the sustainability of the electric utility businesses.

Natural gas: The key points for the international natural gas market in 2013 are the progress of export licensing of the US LNG projects, the progress of new LNG projects in Oceania, and the degree of economic slowdown in Europe. Measures to ease the supply and demand balance and discussions on the pricing system are essential in order to abolish the Asia premium.

Nuclear power: The Nuclear Regulation Authority is expected to screen the nuclear power plants for restarting based on the new safety standard they will establish by July 2013, but the prospects remain uncertain. Meanwhile, new nuclear power stations are continuing to be constructed particularly in Asia, and the direction of the nuclear policies of China and South Korea requires close attention.

Asian coal market: In 2012, the coal market remained sluggish due to the loosening of supply and demand balance from the latter half of 2011. This loose balance is caused partly by the US shale gas revolution (replacement of coal by gas and the consequent expansion of coal exports). The trend of the coal market in 2013 will depend largely on the recovery of the global economy.

Renewable energies: The introduction of solar power has increased rapidly since the launch of the Feed-in Tariff (FIT) system. Meanwhile, the new administration has not yet revealed its energy policy. With the FIT system, which clearly has those who benefit and those who pay, it is essential to set a clear capacity target for renewable energies. The establishment of the energy mix and a renewable energies capacity target by the new administration is keenly awaited.

Energy conservation: With the increased importance of energy conservation, ambitious goals have been set by Japan's Innovative Strategy for Energy and the Environment, and specific policies and systems are now being built for implementing the goals. The once-discarded Bill to Partially Amend the Act on the Rational Use of Energy continues to be important. Outside Japan, countries are strengthening energy conservation by taking appropriate measures for their respective situations.

Activities related to global warming in 2013: The course of emissions negotiations remains uncertain due to the differences in views between developed and developing countries, as the international community shifts its focus toward building the post-2020 framework against global warming. The new administration of Japan faces the difficult task of setting a global warming strategy, including a GHG emission target for 2020, despite the need to focus on the economy and energy policies.

Energy and environmental issues of APEC: The Asia Pacific Energy Research Center (APERC) will complete the APEC Energy Demand and Supply Outlook (fifth edition), promote political cooperation for improving the efficiency of energy utilisation and the supply of low-carbon energies, and also start investigations for dealing with emergency situations concerning oil and gas to strengthen the energy security of the APEC countries.

Middle East: It is proving difficult to contain the instability that caused the Arab Spring, and monarchies will face challenges to their authority in 2013. With the confrontation between Islamism and secularism, greater unification of the Kurdish people and tensions related to Iran and the Persian Gulf, the path to stability in the Middle East and North Africa remains elusive.

China: The Xi-Li leadership will start. Whether they can maintain stable growth of over 7 percent and how far they can improve "the quality and efficiency of growth" require close attention. Measures for achieving a low-carbon society, such as energy conservation and expanded use of non-fossil energies, will be promoted. We expect that the new administrations of Japan and China will restore good bilateral relations.

Russia: Struggling with economic development of the Far Eastern and East Siberian regions in Russia, and viewing China as a potential threat to its eastern policy, Russia is strengthening its efforts to attract Japan and improve bilateral economic ties. Tokyo must strengthen its strategy in the area in a well-balanced manner based on the importance of both China and Russia for Japan.

Masakazu Toyoda recently served as the Special Envoy on East Asian Affairs to the Prime Minister, and as Special Adviser on Climate Change at Japan's Ministry of Economy, Trade and Industry (METI), where he also held the position of Vice Minister for International Affairs. The IEEJ Chairman and CEO was a speaker at Singapore International Energy Week (SIEW) 2012 in October.

By: IEEJ Chairman & CEO Masakazu Toyoda