Japan Traders Eye $200 Billion Power Market Post-Fukushima

Japan’s Traders Target $200 Billion Power Market
Fish lamps are silhouetted against a sunset at a fishing port in Oma Town, Aomori Prefecture, Japan. Opportunities in Japan’s power business will hinge on what the government does with Tokyo Electric. Photographer: Kiyoshi Ota/Bloomberg

Japan’s trading companies own enough electricity capacity to supply more than 40 percent of the country’s homes. Problem is, their generators aren’t in Japan.

Mitsui & Co., the second-largest trading house, says that may change as the Fukushima nuclear disaster forces a review of electricity monopolies set up after World War II. It’s an opportunity rivals Marubeni Corp. and Sumitomo Corp. are also looking at, along with Tokyo Gas Co.

Japan’s 10 regional utilities dominate production, transmission and distribution of power throughout the country, generating combined annual revenue of 15.7 trillion yen ($200 billion), according to data compiled by Bloomberg. The government review of the industry includes plant sales and law changes to spin off transmission businesses from power plants.

“It’s an investment opportunity for these guys and they are all interested,” Penn Bowers, an analyst covering Japanese trading houses and utilities with CLSA Asia-Pacific Markets in Tokyo, said in an interview. “Trading companies are big, old businesses. They see deregulation and they can throw a lot of capital on it.”

Japan’s five biggest trading houses, with operations from energy and mining to computers and cars, have about 4.54 trillion yen in cash and control more than 26,000 megawatts of capacity around the world. The companies said they plan to add at least 12,400 megawatts in North America, Southeast Asia, Europe and Africa within four years. One megawatt powers about 800 U.S. households.

Easier in China?

In Japan, they together own 300 megawatts of capacity. When Mitsui researched markets 10 years ago it was easier to enter the power business in China than in Japan, Yasutaka Fukumori, deputy head of strategy at Mitsui’s infrastructure unit, said in an interview in Tokyo in October.

“In Japan, it’s a question of whether power transmission will be unbundled and the government and the public have to sign off on that,” Fukumori said. “If a market for independent power producers were to develop, we’d like to be actively involved.”

Marubeni has been the most aggressive of the five companies in accumulating power capacity. It owns 8,700 megawatts of generation and is targeting 11,000 megawatts by March, half the capacity of Tohoku Electric Power Co., Japan’s fifth-largest utility.

Marubeni Power

“Originally we exported generators and equipment from Japan and then started to get engineering, procurement and construction contracts,” Marubeni said in an e-mailed response to questions. “In the 1990s, we started to join independent power producer projects.”

Marubeni expanded into gas and coal-fired generation in Indonesia, the United Arab Emirates and Vietnam while building a 450-megawatt renewable energy portfolio, including a stake in the world’s biggest offshore wind farm in the U.K. Marubeni started power transmission and distribution businesses in 2010.

The company in June entered a joint venture to build a 220-megawatt geothermal plant in Sumatra, Indonesia. Two days ago it announced an order with Toshiba Corp. to build a 55-megawatt geothermal plant in the same country.

Geothermal plants tap underground deposits of hot water and steam, pumping it through pipes to turn turbines and generate electricity. Indonesia has the world’s largest untapped store of such volcanic energy.

Japan has nearly a tenth of the world’s active volcanoes yet Marubeni has just 80 megawatts of capacity, all in hydropower, in its home market because the country’s utilities dominate supply. Other trading houses tell a similar story.

Nuclear Disadvantage

“It’s not so easy to identify suitable sites and compete against vertically integrated power utilities, which have power generation assets that include nuclear,” said Takahiko Ishiga, a spokesman for Itochu Corp. The bulk of Itochu’s 2,734 megawatts of power assets are in the U.S. In Japan, it has a 21-megawatt wind farm.

Difficulty in entering Japan’s electricity market is not limited to domestic companies. Merrill Lynch & Co., now part of Bank of America Corp., quit electricity trading in Japan in January 2009, less than two years after entering because it failed to meet targets. In 2000, U.S.-based Enron Corp., which collapsed the following year, scrapped plans to build a 2,000-megawatt station in Aomori, northern Japan.

Owning atomic plants is not the advantage it once was as public opposition to nuclear power grows in Japan following the meltdown of three reactors at Tokyo Electric’s Fukushima Dai-Ichi station after the March 11 earthquake and tsunami.

While atomic power provided about 30 percent of Japan’s energy before the crisis, more than 80 percent of the country’s reactors are now idled for repairs and safety checks. As more go offline for scheduled maintenance, Japan will have no nuclear reactors running by April unless the government authorizes restarts.

In its annual review of energy policy in October, the first since Fukushima, the government approved a white paper calling for reduced reliance on nuclear power.

Forefront Investors

Less nuclear output would diminish the cost advantage utilities have, providing openings for new entrants, according to CLSA’s Bowers. Trading houses will probably be at the forefront of any new investment, he said.

Opportunities in Japan’s power business will hinge on what the government does with Tokyo Electric, once the country’s biggest utility and now surviving on bailouts to stay in business and pay compensation claims.

The company said last month it plans to sell some thermal power plants to raise cash for compensation payments related to the Fukushima disaster. More than 160,000 people were evacuated because of radiation and compensation claims may run to 4.5 trillion yen, according to government estimates.

Tepco may ask the government for a capital injection to avoid collapse under the weight of compensation claims, President Toshio Nishizawa said on Dec. 13.

Owning a stake in Tepco may allow the government to separate the utility’s generation plants from transmission and distribution, the Mainichi newspaper said on Dec. 8.

Tariff Attraction

While Tepco considers power plant sales potential buyers are starting to line up. Tokyo Gas president Tsuyoshi Okamoto said on Nov. 15 the company would consider buying Tepco’s generation assets.

Mitsubishi Corp., Japan’s largest trading house by market value, hasn’t detailed its strategy for energy investment in Japan, though plans to almost double power generation capacity to 6,000 megawatts by 2015. The company had an application to build its first domestic power plant rejected in 2009.

“We see a future in both fossil fuels and renewable energy,” spokesman Takashi Shiwaku said.

One advantage for new entrants is feed-in tariffs introduced in August to promote renewable energy. The tariffs require utilities to pay a higher price for electricity produced from renewable energy.

‘Guaranteed Business’

“If you have a feed-in tariff and the power companies have to buy it, it’s a guaranteed business,” CLSA’s Bowers said.

Osaka Gas Co., which has expanded into wind generation in Japan, is “monitoring the situation with great interest,” said Tatsuki Nakaniwa, a manager for its affiliated business.

The government plans to fix the tariff from July 1, which will indicate the profitability of running solar, wind or biomass plants. Japan’s richest man and Softbank Corp. mobile network founder Masayoshi Son has said he’d invest as much as 20 billion yen with partners in clean-energy as long as the government guarantee access to the grid.

The tariffs will be the trigger for Sumitomo’s power expansion, Hidenori Kunioka, chief executive of the trading house’s Summit Energy Corp., said in an interview.

Sumitomo owns two wind and three thermal projects in Japan, selling electricity to supermarkets and other businesses as part of a limited deregulation introduced in the 1990s.

Real Deregulation

In theory, those changes allow commercial users accounting for about 60 percent of demand to choose their suppliers, from the regional utilities and the roughly 30 power companies that entered the market since 2000.

In practice, only 2.8 percent of the market has shifted to the new entrants, according to Bloomberg New Energy Finance, while the government hasn’t extended the options to residential users that make up the remaining 40 percent of consumption.

“Before the earthquake, we didn’t have any customers who said they didn’t like nuclear power, or who didn’t want to buy power from utilities that operated nuclear reactors,” Summit Energy’s Kunioka said. “Now electricity is scarce, so we expect that there will be more business opportunities.”

With the nuclear power plants offline, power shortages next summer may be more severe than this year, when the government asked users to reduce consumption by 15 percent.

Until the government fixes the feed-in tariff and picks a new energy policy the role of the utilities and nuclear power remain unclear.

Prime Minister Yoshihiko Noda has said that some idled reactors will need to restart to keep the economy going. The government has also said it won’t allow Tepco to go bankrupt, while there’s no time set for a decision on breaking up the electricity monopolies.

“There’s indecisiveness, meaning our investment decisions will also be delayed,” Summit Energy’s Kunioka said. “I would like to tell the government: Hurry up and make up your mind.”

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