Nuclear Outlook: Rosier, But Risks Lingers
BMI View: The landslide election victory by the Liberal Democratic Party (LDP) has brought about a significant change in the attitudes towards nuclear energy, with nuclear generation gaining favour with the new government. However, we believe that excessive optimism towards Japan's nuclear sector could be premature, as there are still several factors that convolute the outlook for nuclear energy in the country - namely the government's standing with the Japanese public, the location of fault lines and the completion of new nuclear safety standards. Therefore, we maintain our long-held view that, while nuclear generation will continue to play an important part in Japan's electricity mix, restarts could be delayed in the near-term.
The landslide election victory by the Liberal Democratic Party (LDP) has brought about a significant change in the Japanese government's attitude towards nuclear energy. Not only the new government is supportive of restarting existing facilities, but on December 31 2012, the new Prime Minister Shinzo Abe also stated that his government will endorse the construction of new nuclear power plants, increasing the likelihood for the resumption of construction works for several nuclear reactors ( see table).
He added that his government will also review the energy policy carried out by its predecessor, the Democratic Party of Japan (DPJ). The DPJ administration had adopted a policy to completely abandon nuclear generation by the 2030s, but, as anticipated by BMI, the LDP believes that this is not a realistic option and does not intend to follow on with this zero-nuclear policy. This suggests a growing possibility for more restarts among Japan's currently idle nuclear fleet. At present, 48 of the country's 50 nuclear reactors are offline due to safety concerns.
|Sources: BMI Key Projects Database, Yomiuri [December 2012]|
|Kaminoseki No. 1||Yamaguchi||Chugoku Electric Power||At planning stage|
|Kaminoseki No. 2||Yamaguchi||Chugoku Electric Power||At planning stage|
|Shimane No. 3||Shimane||Chugoku Electric Power||Under construction|
|Hamaoka No. 6||Shizuoka||Chubu Electric Power||At planning stage|
|Oma No. 1||Aomori||J-Power||Under construction|
|Tsuruga No. 3||Fukui||Japan Atomic Power||At planning stage|
|Tsuruga No. 4||Fukui||Japan Atomic Power||At planning stage|
|Sendai No. 3||Miyagi||Kyushu Electric Power||At planning stage|
|Namie-Odaka No. 1||Fukushima||Tohoku Electric Power||At planning stage|
|Higashidori No. 1||Aomori||Tokyo Electric Power||Construction suspended|
|Higashidori No. 2||Aomori||Tokyo Electric Power||At planning stage|
|Higashidori No. 2||Aomori||Tohoku Electric Power||At planning stage|
This shifting political stance towards nuclear energy has resulted in a sharp rally in the stock prices for Japanese utilities, many of whom have been financially hit by delays in restarting their nuclear energy assets or by the freeze of the construction of new nuclear reactors. The TOPIX Electronic Power And Gas Index (TPELEC), a weighted index measuring the stock performance of key players in the Japanese power and gas sectors, has climbed by more than 16% since the start of December 2012, reaching a multi-month high of JPY331. Meanwhile, Tokyo Electric Power Company (TEPCO), the company at the centre of the Fukushima nuclear crisis in March 2011, has seen its stock surge by more than 66% since the start of December 2012.
However, we believe that this growing optimism towards Japanese utilities could be premature as there are still several factors that convolute the outlook for nuclear energy in Japan:
Government Standing: Although the LDP has secured most of the seats in the lower house elections, they would most likely wish to repeat this favourable outcome in the upcoming upper house elections in July 2013. This could prevent the LDP from making any firm decision on potentially divisive policies, such as the restart of nuclear power plants, until the elections are over.
|LDP Wins Big|
|Japan - House Of Representatives (Lower House) Composition After December 2012 Elections, By Party, %|
Indeed, there remains significant public opposition towards nuclear generation. Mass public rallies opposing the use of nuclear generation continue to take place, and, it worth remembering that, a government-backed survey carried out in August 2012 found that 47% of participants supported a zero-nuclear policy by 2030. In our opinion, this suggests that LDP owes its election victory to its economic policies and the failings of the DPJ administration, rather than to its pro-nuclear stance. The LDP has vowed to carry out fiscal and monetary stimulus measures to lift Japan out of its economic malaise, while a nationwide survey conducted by Japanese newspaper Asahi Shimbun showed that 81% of the respondents believe that the LDP's victory was due to 'disappointment of the DPJ government'.
|LDP Victory Not Mainly About Nuclear|
|Japan- Nationwide Telephone Survey By Asahi, December 2012 (LHS); Government Poll Of Nuclear Power Usage, August 2012 (RHS)|
Fault Lines: It is still unclear which nuclear reactors in Japan are situated on active fault lines. A expert team formed by Japan's new nuclear regulatory agency, the Nuclear Regulation Authority (NRA), has surveyed just a fraction of Japan's nuclear power plant portfolio - less than 15%, according to our estimates. This poses a serious downside risk to the restart or construction of any nuclear reactors as Japanese nuclear safety guidelines (implemented in 2012) stipulate that no reactors and critical ancillary infrastructure can be built on top of active faults, with existing reactors failing to meet the provision required to be decommissioned.
Should some of the nuclear plants be found on active faults, there would be serious financial ramifications for Japanese utilities. Not only would they have to shoulder the costs of decommissioning the nuclear plants (or public backlash for increased tariffs to pay the cost), but also the cost of constructing alternative generation capacity to meet electricity demand. As such, we believe that they would vehemently contest these claims by conducting alternative surveys, which would delay the surveys of other nuclear reactors and their potential restarts. Indeed, the NRA survey team has already determined that the Tsuruga and Higashidori nuclear power plants are located on active faults, but their respective owners - Japanese utilities Tohoku Electric Power and Japan Atomic Power (partially owned by Kansai Electric Power) - are still contesting the team's assessment.
Nuclear Standards: The regulations surrounding the use of nuclear reactors are also in a state of flux. The NRA is still drafting the new safety standards for nuclear plants and it remains to be seen if Japan's existing nuclear fleet is able to meet these standards. Should the reactors fail to meet these standards once they are formally adopted by the NRA in July 2013, they will have to undergo improvements before being allowed to restart, or potentially be decommissioned. Both scenarios would most likely incur financial penalties for the affected utilities.
This lack of regulatory clarity is highlighted by the situation surrounding the Ohi nuclear power plant owned by Kansai Electric Power. In June 2012, two of the plant's reactors (Ohi No. 3 and No. 4) received approval by the DPJ government to be restarted and have been operational since July 2012. However, both reactors now face the prospect of being shutdown as they could be located on an active fault. The NRA survey team is currently conducting studies on the plant site and they are not expected to be completed anytime soon.
Even if formal and comprehensive standards are set, the NRA's lack of experience - the authority was formed in September 2012 - could lead to revisions in the standards. For example, the NRA said in mid-December 2012 that there were mistakes in its radiation projections for each of Japan's nuclear power plants. These mistakes required a redesign of the plans for nuclear disasters. NRA's lack of experience could also make it susceptible to the needs of various interest groups (i.e. government, utilities), who hold considerable influence in the power industry. This could not only make it difficult for NRA to remain objective and enforce its proposed safety standards, but could also jeopardise the agency's credibility with the Japanese public. As highlighted above, there remains significant public opposition towards nuclear generation. If the NRA does not appear to be making its decisions independently, we doubt it would able to convince the public that its approval for the restart of certain nuclear reactors is in the public's interest.
|On Track To Recover|
|Japan - Nuclear Capacity, Megawatt (MW) and % of Total Capacity (RHS)|
View On Track
Given these factors, we believe that our outlook for Japan's nuclear generation sector remains on track to be realised. Over the medium-to-long term, nuclear generation will continue to play an important part in Japan's electricity mix as the country prioritises economic considerations and the cost of fuel imports over public sentiment towards nuclear energy.
A point evidenced by the fact that opinions among local governments are starting to sway in the favour of nuclear generation (a complete reversal from the negative opinions voiced in 2011) as the prolonged suspension of nuclear reactors is dampening economic activity in the regions that are reliant on nuclear energy for electricity. According to a recent survey carried out by the Japanese newspaper Yomiuri, 54% of Japanese mayors would approve the reactivation of nuclear reactors or approve them conditionally after the NRA has confirmed their safety.
|Economic Considerations Prevailing|
|Japan - Survey On Local Governments Opinions On Nuclear By Yomiuri, January 2012 (LHS)|
That said, the restart of existing reactors and the resumption of construction works for several nuclear reactors is far from certain, with several inflection points likely to delay the greater use of nuclear generation in the short-term, and especially over the next six months. Most notably, we believe that any major decision on the greater use of nuclear generation will take place in the summer season (July-August 2013). Not only are the inflection points highlighted above likely to be resolved by summer, but a seasonal increase in electricity demand - the summer season has typically resulted in higher demand for electricity - could push the various players (i.e. LDP government, Japanese utilities, interest groups, and the NRA) to adopt a firm stance on the use of nuclear energy.
At present, we are forecasting Japan's operational nuclear capacity to grow by 350% year-on-year to reach 10.6GW by the end of 2013. We highlight the substantial growth is largely due to base effects, following an estimated decrease in nuclear capacity of 86.39% and 64.58% respectively in 2011 and 2012. We then anticipate that Japan's nuclear capacity will peak to 23GW by the end-2015, far below the capacity used before the Fukushima nuclear crisis in 2011. This figure does not include any new build at the moment, owning primarily to the substantial risks highlighted above.