Aldrich, Platte, and Sklarew: What’s Ahead for Abe’s Energy Agenda?

The ruling Liberal Democratic Party (LDP) won a major victory in the Upper House election on July 21, and gained control of both houses of the Diet together with its coalition partner New Komeito. The LDP has been historically pro-nuclear and may push more strongly for nuclear power after the election. However, power sector reforms, renewable energy development, and uncertainty over plutonium use may dampen the LDP’s ability to push an overly pro-nuclear energy policy.

Two sweltering summers have passed since the Fukushima Dai-ichi nuclear accident halted Japan’s nuclear reactors and raised major questions about the fundamentals of Japanese energy policy. Consumers and businesses continue to conserve energy while gas imports have skyrocketed to offset the forty-eight reactors still offline.

On July 8, four Japanese power utilities submitted applications to the country’s new nuclear regulator, the Nuclear Regulation Authority (NRA), to restart a total of ten nuclear reactors at five power plant sites. Additional restart applications likely will follow soon. While these restart applications are the highest profile issue in Japan’s energy sector, other important energy policy questions loom. Japan will have to address the potential impact of resurrected proposals for structural changes to the power sector, post-3/11 renewable energy incentives, and a tenuous plutonium policy.

Japanese authorities have long struggled to balance the desire to protect domestic firms with the need to respond to foreign pressure to open markets. For example, the initial push for major change in the financial markets began more than twenty years ago during the set of reforms known as the “Big Bang” under then prime minister Ryutaro Hashimoto. Japanese electricity sector deregulation began in the mid-1990s and stalled in 2005 after the Enron debacle and rolling blackouts in New York and Canada sparked concerns over price and electricity supply stability.

Deregulation also posed a threat to nuclear power development, since competition among service providers could encourage shifts toward supply sources with cheaper startup costs. Utilities further feared that reduced electricity rates predicted under deregulation would prevent them from recovering the stranded costs associated with high startup investments in nuclear power. In the post-Fukushima era, the Japanese government has renewed discussion of deregulation as a means of enabling renewable energy entry into the power market and distributed generation to foster local energy supply stability.

These discussions began in earnest last November when a power sector reform committee reconvened; the Abe cabinet approved the Policy on Electricity System Reform nearly half a year later in April. The structure of the electricity market was set soon after World War II when the American Occupation put regional monopolies in place for the power utilities, and retail electricity rates have been strictly regulated by the Ministry of Economy, Trade, and Industry (METI). The policy adopted by the Abe cabinet would significantly alter this nearly half a century-old system in a three-stage reformation.

First, a new centralized, independent operator, the Organization for Nationwide Coordination of Transmission Operators, will coordinate supply and demand and plan regional interconnection power lines. Second, the wholesale and retail markets will be fully liberalized to allow for free competition among suppliers, establishing wholesale trading markets for electricity. Third, generation, transmission, and distribution will be legally unbundled, and retail electricity rates will be fully liberalized. If the policy recommendation is followed, these three stages will be implemented in 2015, 2016, and between 2018 and 2020, respectively. While these reforms could enable new entrants to supply power to the grid, namely renewable energy producers, questions have arisen regarding the impact of reforms spread over a relatively long time frame.

The reforms also face political challenges, as the most recent Diet session closed at the end of June without adopting the first stage of the reforms. The reform legislation passed the Lower House, but not the Upper House. In addition, several reporters for major media outlets have mentioned a rumor that the private utilities agreed to various deregulatory measures in exchange for central government support for nuclear restarts. Whether true or not, this argument underscores the belief in the current leverage held by the central government over the now vulnerable electricity companies. The debate over power sector reforms will resume this fall when the government plans to resubmit the bill to the Diet.

The structural reform movement is taking place against a backdrop of other changes in renewable energy development. Following the central government’s introduction of feed-in tariffs in July 2012, METI approved 1,780 megawatts of clean energy projects. Local governments and public-private partnerships also are creating innovative energy projects that promote local energy supply security and economic revitalization. Examples include the Kanagawa Smart Energy Plan, which focuses on increasing solar power while reducing and shifting peak power demand. Another project, the public-private partnership “Kesen Regional Future City,” was selected by the Cabinet Secretariat to receive federal funding. It includes construction of a solar-powered electricity supply coupled with a locally distributed energy storage system, as well as development of a lithium-ion storage battery industry.

Meanwhile, the Fukushima accident has posed challenges for Japan’s most controversial renewable energy source: plutonium. The government’s plan was to use the country’s plutonium stockpiles, some forty-four tons recovered from reprocessing spent nuclear fuel, in existing reactors, but that is now uncertain as the NRA reviews restart applications. Per contracts between Japanese power utilities and British and French companies, Japan continues to receive shipments of mixed oxide (MOX) fuel that contains both uranium and plutonium, most recently a June 27 delivery of MOX from France to Kansai Electric Power Company’s Takahama nuclear power plant. Restart dates and future MOX use remain uncertain for Takahama and other reactors that planned to use MOX fuel.

There has been no official change to Japan’s plutonium policy, but the inability to use plutonium in reactors would present a major problem for both the Japanese government and nuclear plant operators. The government is under pressure from domestic antinuclear activists and some nonproliferation advocates in the United States to abandon plutonium use, but the British and French governments certainly want Japan to uphold their contracts and take back the reprocessed fuel.

As the Abe cabinet proceeds with promised Abenomics reforms this fall, balancing economic recovery with perceived energy security concerns will become a priority. Discussion of regulatory reforms in the energy sector will proceed amidst continued investment in renewables, supported by METI’s efforts. The government will face continued pressure from large industrial users to restart nuclear reactors, but anti-nuclear voices in the public and media will continue calls to reduce reliance on nuclear power and end the MOX and reprocessing programs. The Abe cabinet officially has postponed big decisions on energy policy for several years, but short-term decisions on regulatory reform, renewables promotion, and reactor restarts will shape the crafting of a new basic energy plan and Japan’s energy future.

Daniel P. Aldrich is associate professor of political science at Purdue University and is currently a Fulbright Research Fellow at Tokyo University; James E. Platte is a nuclear generation intern at the Nuclear Energy Institute and a former CFR International Affairs Fellow in Japan; and Jennifer F. Sklarew is a PhD candidate at George Mason University’s School of Public Policy and is currently a Fulbright-Hays DDRA Fellow in Japan.