Vol.76 Special Feature: What are Today's Problems? 2012 by Takeo Kikkawa Japan's Electric Industry after the Fukushima Nuclear Accident The nuclear accident at Tokyo Electric Power's Fukushima Daiichi Nuclear Power Plant, in the wake of the Great East Japan Earthquake on March 11, 2011 has prompted Japan to fundamentally review its entire energy policy. With the review still ongoing, levels of public interest in the electric power industry and nuclear power reform are at an all-time high. If such a serious accident can occur, then surely Japan's electric power industry and nuclear power policy need to change. At the same time however, merely condemning the government and Tokyo Electric Power (TEPCO) is no way to bring about constructive reform. With that in mind, the aim of this article is to set out a positive direction for the electric power industry and nuclear power reform. To resolve issues facing any industry, you need to start by applying the right principles and theories, whilst also taking into account the historical context. This article uses the contemporary application of business theory in order to do just that. Following a brief look at the dynamic development of Japan's electric power industry from the 1880s onwards, we will take a look at the best options for restructuring the electric power industry and reforming Japan's nuclear power policy.
History of Japan's Electric Power Industry The history of Japan's electric power industry can be divided into three main eras. (A)Purely private enterprises From 1883 to March 1939, industry revolved around purely private enterprises, which then merged partially with public entities run by local authorities. (B)State control From April 1939 to April 1952, electricity was generated, transmitted and distributed exclusively by the privately owned but state controlled Japan Electric Generation and Transmission Company and nine other suppliers. (C)Nine private power companies From May 1951 onwards, the industry revolved mainly around nine purely private power companies, all of which generated, transmitted and distributed electricity exclusively to different regions. They later merged partially with the government-run Electric Power Development Company and the public-private Japan Nuclear Power Company. (The number of companies increased to ten in October 1988 with the addition of Okinawa Electric Power Company). One of the key characteristics of Japan's electric power industry is that it is has been driven by the private sector more or less throughout. The only exception was the era of state control (B), when nationalist ideologies were forced on the industry as the war intensified. The central feature of the developmental process of Japan's electric power industry - the predominance of private management - becomes even clearer in international comparison. For example, in Europe after World War II, there were many efforts to nationalize electric power companies, and Britain and France actually nationalized their electric power industries over the period of 1946-1948. In Japan during the corresponding period, however, the opposite was observed. It was the reorganization of electric power businesses in 1951 that created the present industrial structure of nine privately managed
electric power companies, with the abolition of the state control introduced under the wartime controls. The scale of operations amongst the nine private power companies is another key difference from the electric power industry in the United States. The industry framework outlined under era (C) has remained largely unchanged since 1951. Japan's nine power companies began to reliably supply inexpensive electricity during the years of high economic growth, from the late 50s through to the early 70s. Despite the fact that each company had a guaranteed monopoly over a different regional market, they continued to actively compete with one another to streamline operations and lower prices. (This has been attributed to tension between the companies and the government, as the latter continued to push towards nationalization.) It would be fair to say that this was a "golden era" in the history of Japan's electric power industry. That golden era came to an end with the oil crisis of 1973. Fearing that oil imports might run dry (as oil-fired thermal power plants generated 73% of the country's power at the time), the nine power companies played their trump card against the oil-using generation and started to focus on developing nuclear power. Due to a deep-rooted mistrust of nuclear power amongst the Japanese public however, the companies had to rely on the government for support (securing locations for nuclear power plants and policy support with back-end issues such as disposing of spent fuel). This signaled an end to any previous tension between the power companies and the government and stopped companies from competing to streamline operations. From 1974 onwards, the power companies began to increase electricity charges across the board. Even in the face of falling oil prices and a strong yen during the mid 80s, electricity prices remained unchanged, making the power companies the focus on intense criticism. This led to the phased deregulation of the electric power industry from 1995 onwards, opening up the sector to new operators and competition between power companies. Electricity charges fell by around 18% from 1995 to 2005 as a result. Complete deregulation however (including the deregulation of the power retail sector in line with demand from household and small users) remains elusive even today.
Potential Solutions Bearing in mind the historical background, how should Japan go about restructuring the electric power industry and reforming its nuclear power policy in the future? Let us start with restructuring. The deregulation of the electric power industry could provide a valuable opportunity to reestablish independent management. It is important to emphasize the logical relationships at play here. Further deregulating the electric power industry will help reestablish independent management at power companies and enable them to grow into robust energy companies, which in turn will reinforce energy security. The key to restructuring the industry comes down to completely deregulating the power retail sector, including household and small users, and establishing fully-fledged competition between power companies. In order to restructure the electric power industry, Japan will have to also restructure supply and demand.there are three key points to consider. (a) Restructuring needs to be approached from the demand side. (b) A distributed power grid needs to be introduced and expanded (with more and more alternative power suppliers generating electricity at the regional level, as well as the power companies, a power supply system needs to be put in place based on shared access to the power transmission network). (c) Power sources need to be optimized in a new way, to reduce Japan's reliance on nuclear power. Viewed in terms of power sources, the history of Japan's electric power industry can be broadly divided into four stages. Japan's main power source was (i) coal-fired thermal power from 1887 to the 1900s, (ii) hydroelectric power from the 1910s to the 1950s and (iii) oil-fired thermal power from the 1960s to 1973, moving away from coal-fired thermal power during the early part of the 60s. This was followed by (iv) a transition towards non-oil-based power sources such as nuclear power, liquid natural gas (LNG) and overseas coal-fired thermal power from 1974 onwards. The accident at TEPCO's Fukushima Daiichi Nuclear Power
Plant should mark the start of a new fifth era in Japan's electric power industry, revolving around power sources that aren't reliant on nuclear power. Moving on to reforming Japan's nuclear power policy, the historical background suggests that there are three possible options. (A) Take control of the nuclear power industry away from the power companies and, in some cases, bring in nationalization. (B) Deal with back-end issues relating to the disposal of spent nuclear fuel by introducing a "once-through" option (burying spent fuel underground) as well as the existing recycling option (recovering uranium and plutonium from spent fuel and reprocessing it back into fuel). (C) Transfer power source development tax breaks from the national government to the local level (local authorities in areas where nuclear power plants are located). Based on the amount of power generated, projections for the year 2030 suggest that Japan will be far less reliant on nuclear power, with 30% of the country's power coming from renewable energy sources, 10% from saved power, 40% from thermal power and 20% from nuclear power. Although the need for nuclear power will have diminished however, there is a strong possibility that Japan will still be using nuclear power in 2030 (Japan isn't likely to end its reliance on nuclear power entirely until around 2050). With that in mind, we need to start thinking seriously about realistic and positive solutions to put an end to nuclear power. Since the Fukushima nuclear accident, there has been a growing consensus that power generation, transmission and distribution should be handled separately, rather than allowing power companies to handle all three operations as one. Separating generation, transmission and distribution would definitely have its advantages, in terms of revitalizing competition in the electric power industry and increasing Japan's reliance on renewable energy. We need to be careful however about rushing into any such separation policy, for the following reasons. First, the people on the ground who actually work to generate, transmit
and distribute power have a high level of morale and are constantly determined to prevent power failures at all costs. This was epitomized by the "Fukushima 50" workers, who received a lot of attention in Europe and the United States too. You can't store electricity. That is why we should treasure the electric power industry's ability to consistently prevent power failures, throughout the generation, transmission and distribution process. Second, separating generation, transmission and distribution would make it difficult to maintain balanced investment. If power were to be generated and transmitted separately for instance, investment would probably favor the more profitable generation industry. Investment in the less profitable transmission industry would suffer as a result. Having gone ahead and separated generation, transmission and distribution, the US state of California experienced an electricity crisis from 2000 to 2001. Many believe that the root cause of the crisis was under-investment in the power transmission sector. Conclusion Whether restructuring the electric power industry, supply and demand or reforming Japan's nuclear power policy, the common factor throughout is that business models in the electric power industry need to undergo a number of historic changes. The first step should be to completely deregulate the power retail sector and establish fully-fledged competition between power companies, both of which are central to restructuring the electric power industry. If we can do that, it would be the first change of its kind in roughly 80 years, since the "power struggle" that raged between power companies from 1907 to 1931. The next step should be to restructure supply and demand, at the same time as restructuring the electric power industry. If we can genuinely approach this from the demand side (a), it would be the first time in the history of Japan's electric power industry. Introducing and expanding a distributed power grid (b) would be the first major reform of its kind in a century, marking a huge departure from the centralized power grid that has been in place since the policy of switching from thermal to hydroelectric power in the 1910s. Reducing Japan's reliance on nuclear power (c) meanwhile would be the first such paradigm shift since the oil
crisis of 1973. The three options for reforming Japan's nuclear power policy, (A), (B), and (C), would also result in a fundamental shift in Japan's existing nuclear power policy, which has been in place since the mid 1950s. Again, this would involve an historic change in business models. Reforming Japan's electric power industry in the wake of the accident at TEPCO's Fukushima Daiichi Nuclear Power Plant will never happen unless business models undergo historic changes at every level. Can Japan's electric power industry make the necessary historic changes? The moment of truth is at hand.