Japan is considering a landmark change to its energy policy, and like any major change it is one that brings with it great challenge and opportunity. However, it is becoming increasingly apparent that in this moment of progressive revolution, Japan’s decision makers are unable to rely on objective input from financial analysts, commentators and even business organisations —all of which appear to be pre-occupied with pro-nuclear preconceptions.
Recently, the heads of the Japan Business Federation (Keidanren), the Japan Chamber of Commerce and Industry, and the Japan Association of Corporate Executives demanded the government retract its zero nuclear target. They claimed electricity charges may double, forcing production overseas and massive employment losses.
We already know solar will be at grid parity in Japan by 2015. Are we to believe that with their drive and technical expertise Japanese firms cannot innovate a smooth transition to a nuclear-free society by 2040, when countries like Germany are well on the way to implementing their zero nuclear ambitions by 2022?
Apparently so, if one listens to financial analysts and commentators, who often seem to be of the view that restarting nuclear reactors, extending their lifespans, and building new plants is the only way forward. This lack of objectivity also seems to drive the misguided perception that nuclear power is favourable for Japanese utilities, and renewable energy is not important for their future, when the opposite is more accurate.
The Ohi restart: analyst expectations and reality
The opinions of analysts often have a large impact on individual share prices, and can become self-fulfilling prophecies. This can prove dangerous when opinions become disconnected from reality. Preconception can not only undermine an analyst’s ability to correctly predict and advise on market trends, but also reduce confidence in one market sector (renewables), while the analyst-championed solution (nuclear) underperforms.
The spring discussion and June decision by Prime Minister Yoshihiko Noda to restart Kansai Electric’s (KEPCO, 9503:TYO) Ohi reactors is an important example of this. Moody’s called the restart encouraging, while analysts at Reuters and the Financial Times recommendation lists were also generally positive. However, these opinions all proved to be misinformed guesses, illustrated by the decline in KEPCO’s share price.
At the end of May, before the reactor restart, KEPCO’s share price closed at YEN1,134. Around the restart decision, it began to fall, and in September it tumbled below YEN500 before the government’s zero nukes strategy was announced. Additionally, in September the company announced that it would not pay dividends for the first time in 30+ years.
Restarting reactors simply has not lead to a jumpstart of KEPCO’s share price, and the situation is equally gloomy for virtually all Japanese utilities, which experienced drops in their share price of 19 to 43% between the June restart and the September energy-strategy announcement.
Preconceptions of nuclear economics
The assumption that nuclear power is good for Japanese utilities remains alive and well, and many commentators appear to believe it will be good in perpetuity. In truth, new builds were a clear no-go on competitive electricity markets such as the US and Europe long before Fukushima, and Japan’s coming market deregulation will make this a domestic reality. Even if it does not, an increasingly anti-nuclear public will. Most global new-build projects also assume very significant government support, which is not a realistic assumption given Japan’s indebtedness and Europe’s sovereign debt crisis.
The ever-growing financial impact of the Fukushima Daiichi meltdowns on the national economy has unsettled investor enthusiasm for nuclear power, as has the expense of additional safety improvements and life extensions. As Moody’s summarised it: “the overall costs for operating nuclear plants in the environment after the March 11 earthquake while unclear is expected to increase substantially. … Such changes could substantially erode or even eliminate the economic benefits of nuclear power.”
What analysts seem to miss: renewable energy and utilities
Many financial analysts and commentators are simply not acknowledging the impact of renewables, both for Japan and specifically for KEPCO and the other utilities. In just two months, Japan’s new Feed-in-Tariff (FiT) system generated applications to build 1.6 GW of renewable capacity — more than any single one of the country’s 50 nuclear reactors. Deployment of renewables has also steamed ahead, with 560MW – 20% of the government’s total aim for nine months – brought online.
The FiT ensures 44-51% return on investments, and it is already kick starting a renewable energy boom that will create a whole new market for Japan, including significant new employment opportunities. Japan will spend YEN84 trillion on energy efficient technology, six trillion on cogeneration systems, and plans are afoot to pump about 34 trillion into renewable energy, including but not limited to, solar and wind energy.
Analysts, commentators and business organisations seem to forget the obvious question: how much of this investment can KEPCO and other utilities grab? Utilities that do not try to move with the times and get on board this investment train will be left behind.
Business leaders know better than anyone that as one market door closes, another one opens. Dismissing the government’s landmark decision without serious and objective deliberation is not helpful for Japan’s economy, or for KEPCO and other utilities trying to find a way out. It only ensures that the tens of thousands protesting outside the Prime Minister’s office will now refocus their anger on business groups standing in the way of a nuclear-free future.
(Gyorgy Dallos is Greenpeace International's Senior Energy Investments Advisor)