March 23 (Bloomberg) -- Japan’s taxpayer, not the nuclear industry or insurers, will cover most of the cleanup cost from the worst accident since Chernobyl, a financial rescue that may spur moves by nations to make companies assume more liability.
Tokyo Electric Power Co., in its 13th day fighting to avert a meltdown at its Fukushima plant 220 kilometers (135 miles) north of Tokyo, at most is required to cover third-party damages of 120 billion yen ($2.1 billion) under Japanese law. Should the government declare the magnitude-9 earthquake and tsunami that flooded its reactors an “exceptional” act of God, the utility may be off the hook in paying compensation that may be demanded by injured workers, farmers and shareholders.
While nations including the U.S., Germany, India and China ordered plant safety checks after the March 11 accident, some governments may seek to transfer more financial responsibility to plant operators, which worldwide plan to build or relicense more than 100 reactors, according to researchers who follow the nuclear industry.
“Governments now will review burden-sharing in insurance coverage, just like after an oil spill or bank crisis,” David Robinson, senior research fellow at Oxford Institute for Energy Studies in Oxford, England, said in an interview.
The Japanese government may pay as much as 1 trillion yen to compensate businesses and individuals for damages from the nuclear accident, or eight times the maximum cost for Tokyo Electric, the Tokyo Shimbun reported on March 12, without saying where it got the information.
Quake, Tsunami Damages
The overall damages from the record earthquake and tsunami are as much as 25 trillion yen, an amount almost four times the hit imposed by Hurricane Katrina on the U.S., Japan’s government estimated today.
India, the world’s second-largest market for new reactors, with five under construction, passed a law last year to hold atomic-power equipment suppliers partly liable for damages from accidents, even in the case of operator error.
“That’s very controversial, and the current accident is going to strengthen India’s resolve not to capitulate to vendors,” said Chris Gadomski, a nuclear analyst for Bloomberg New Energy Finance in New York.
Japan, already the developed world’s most-indebted nation, will have to sign the blank check, in keeping with international conventions that call for a taxpayer bailout for most of the expense of a nuclear catastrophe, regardless of fault.
Japanese authorities rated the Fukushima accident a 5 on the 7-step scale for nuclear incidents of the International Atomic Energy Agency, under which each extra point represents a 10-fold increase in the seriousness.
At Pennsylvania’s Three Mile Island in 1979, one reactor partially melted in the worst U.S. accident, earning a 5 rating. Its $975 million repair and cleanup took 14 years to complete, according to a March 14 report by Mikka Pineda, a research analyst for Asia-Pacific at Roubini Global Economics.
The Japanese plant, with potential damage to several of its six reactors, is “useless beyond repair,” and the generation capacity must be rebuilt, she said.
The disaster has sparked a debate about the financial risks of extending the lives of old reactors that may lack more robust designs, said Mark Hibbs, an atomic policy analyst in Berlin at the Carnegie Endowment for International Peace. Plants in Japan, Korea, Taiwan and the U.S. may be affected, he said.
“These were risks that most investors considered to be very small,” Hibbs said in an interview. “Investors will be taking a much closer look at the design of what reactors are built to withstand. Some projects will not find approval.”
Since 2007, the U.S. Nuclear Regulatory Commission has received applications to build 26 reactors. Owners of 19 U.S. reactors are seeking permits to extend the plants’ operating lives by as much as two decades.
The Chernobyl accident in the former Soviet Union was rated a 7. Its cleanup continues 25 years later as governments balk at spending taxpayers’ money and Ukraine says it can’t foot the bill alone.
The cost of resettling inhabitants, sealing off Chernobyl’s contaminated area and paying medical claims may rise to $235 billion, according to an estimate by Belarus. The neighboring country suffered the most after the 1986 explosion that spewed radiation across Ukraine, Belarus, Russia and northern Europe.
A new debate over liability may be “inevitable” in the U.S. Congress though it’s unlikely that changes will be made, Patrick Hughes, an energy analyst at Height Analytics in Washington, said in an e-mail.
BP Plc’s oil spill in the Gulf of Mexico prompted similar questions last year. So far, policy makers have been unable to agree on how much oil companies should pay in case of a spill. U.S. law caps liability at $75 million. BP separately agreed to set up a $20 billion fund to compensate spill victims.
“A pre-emptive strike against safe nuclear plant operators and contractors may prove even more difficult to advance,” Hughes said.
Some analysts said they don’t expect any liability overhauls after Fukushima that would affect the 61 reactors under construction worldwide and dozens more up for license renewals.
Chernobyl prompted an overhaul of nuclear liability laws to help streamline compensation and litigation, and spread the financial burden. The measures channel third-party liability for nuclear accidents to plant operators regardless of fault and limit their exposure by setting caps on payouts and restricting claims to a specific timeframe.
A 2004 amendment to the Paris Convention, which covers most western European nations, raised the operator’s liability to 700 million euros from 15 million International Monetary Fund special drawing rights ($23.9 million). It hasn’t been ratified by enough states, however, to take effect.
Japan raised an operator’s liability to 120 billion yen from 60 billion yen in 2010. U.S. nuclear companies must buy insurance to cover the first $375 million in cleanup costs.
In most countries, responsibility for general accident damages beyond those caps falls to industry insurance pools and eventually to the state. U.S. utilities contribute to a pooled fund of about $12.6 billion, according to the Nuclear Regulatory Commission, and taxpayers may be asked to pick up any remaining costs.
“Twelve billion dollars is not going to look like much coverage if you start talking about a catastrophic accident,” said Charles Ebinger, director of Energy Security Initiative at the Brookings Institution, a Washington-based group that researches and analyzes U.S. public policy.
Private Insurance Pool
Japanese atomic-power operators are required to buy both government and private insurance, according to the Science & Technology Ministry, which oversees the nuclear co1mpensation law. The private insurance pool has an exclusion for earthquake and tsunami-related accidents so it won’t pay out this time.
Regardless of the final expense of coverage, the “open-ended” liability for governments is elusive, said the Oxford Institute’s Robinson.
“Most governments have effectively hidden the reality of costs from the public,” Robinson said.