Fukushima Fallout Continues To Threaten Nuclear Revival

BMI View: The nuclear crisis in Japan has escalat ed substantially after the country's Nuclear Regulation Authority announced it would upgrade the severity of the crisis at the crippled Fukushima plant from a level 1 'anomaly' to a level three 'serious incident' - a move that will weigh even more heavily on our already bleak outlook for Japan's nuclear sector and many utilities' hopes of restarting shuttered reactors . Furthermore, we reiterate that TEPCO's continued inability to deal with the p roblems at the crippled plant will almost certainly drag on its finan cial position for years to come - and will only get worse as long as the company fails to contain the crisis .

With the disaster at the Fukushima plant escalating after it was reported that large amounts of radioactive water from a storage tank have been leaking into the earth and possibly the sea , the situation has not only worsened for operator Tokyo Electric Power Company (TEPCO) , but the company's apparent inability to deal with the problem also weighs on our already-bleak outlook for the broader nuclear industry in Japan. Furthermore, with Japan's Nuclear Regulation Authority (NRA) also stating on August 21 that it did not believe TEPCO could deal with the situation, and Reuters quoting Japan's Chief Cabinet Secretary Yoshihide Suga as stating the situation was 'deplorable', the outlook for TEPCO has grown bleaker still as it struggles to contain the human and financial costs of the crisis .

To place this intensification of the situation in the context of our broader outlook for the Japanese power sector , t hese latest developments align with our view that Boiling Water Reactors (BWRs) - like the one at the Fukushima - will not come back onli ne anytime soon. As such, they underscore our belief that if any of the country's 50 shuttered nuclear reactors (Japan has 52 nuclear reactors - two are currently operational) are to come back online, they will pressurised water reactors (PWRs) , which are perceived to be safer ( see 'Utilities Pursuing Nuclear Restarts', July 15 ). Consequently, we maintain our view that two-to- three PWR reactors, such as those operated by Kansai Electric at its Oi plant, may still come online at end-2013 or early-2014 , but note that downside risks are growing due to heightened concerns about nuclear safety.

P erhaps m ore worrying , is the impact that this situation is having on global perceptions about the safety of nuclear facilities , the broader nuclear industry in Japan and the financial position of many of the country's utilities - not to mention Japan's reputation as an exporter of nuclear technology to the world. W e have already seen China and South Korea voice concerns about the situation in recent days - not wholly surprising based on historical animosity, but indicative of growing concerns about the situation and fears about radiation leaking into the Pacific Ocean.

Losses Mounting For TEPCO
TEPCO - Net Income and EBIDTA (US%), 2005-2013

Meanwhile, for Japan's utilities , and TEPCO in particular, the situation will likely prove even more costly . With the shutdown of reactors having left many utilities reliant on importing fuel to power thermal plants - this has had a deleterious impact on many of their balance sheets. Furthermore, Prime Minister Shenzo Abe's moves to weaken the Japanese Yen have also pushed up the prices of imported fuels - exacerbating the problem. For TEPCO, which is already burdened with huge (and seemingly escalating) clean-up and compensation costs, the situation is even bleaker. Thus far TEPCO has spent JPY960bn (US$9.8bn) on attempts to decommission the plant and JPY5trn on fossil fuels - with the company registering net losses for each of the last three years. Notably, at the end of July, the utility reported a net profit for the April June quarter of its financial year - but this was due to government subsidies to help meet the clean-up costs. Furthermore, a TEPCO spokesperson told the Wall Street Journal on August 14 that the company has to repay debt of JPY800bn (US$8.4bn) in October and will need to borrow JPY300bn (US$3.07bn) in December if it wants to stay afloat.

To combat the situation, we have already seen TEPCO raise industrial electricity prices by 15% in April 2012 and household electricity prices by 8.5% in autumn 2012. With debt repayments looming large, and the company attempting to secure credit from Japanese banks, we note that it has now proposed raising rates by an average of 8.5% in January 2014. Aside from the fact this passes the cost burden onto bill payers, an unpopular move, we also highlight that raising electricity prices may damage the competitiveness of some Japanese businesses - undermining some of the goals of 'Abenomics'. To this end, we have seen a number of Japanese utilities hike prices aggressively in recent months.

Further complicating matters for TEPCO, although the utility has proposed restarting its Kashiwazaki-Kariwa nuclear station in northern Japan in an attempt to bring in net income of JPY107bn (US$1.1bn) from its 29mn customers in the metropolitan Tokyo area - we see as very unlikely after the governor of the Niigata Prefecture said he opposes the plan.

However, while the risks to Japan's power sector are to the downside, we do note that that TEPCO's financial predicament could potentially help open up the sector to greater competition - a relatively positive development in otherwise difficult circumstances. With President Abe trying to break the monopolistic hold that Japan's domestic utilities have on the country's energy sector, in order to encourage completion and bring down prices, we believe he may find it easier to achieve this hugely difficult task at a time when many of the country's utilities are struggling with huge debt burdens. To this end, we have already seen Chubu Electric move into TEPCO's traditional Metropolitan area ( see 'Chubu Electric: Tokyo Expansion Indicative Of Growing Competition', August 13) and we believe that in its current financial predicament, TEPCO may struggle to fend of other moves into its traditional supply areas - especially if Abe manages to achieve greater deregulation.

This article is tagged to:
Sector: Power
Geography: Japan

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