Japan's Energy Security
Outlook and Implications

• What is the current state of the nuclear energy sector in the United States and Japan, how are they similar, and what is the likely future scenario?
• What is the status of nuclear development throughout Asia, and how might it affect Japan and the geopolitical balance of power?
• How will Japan fulfill its energy demand?
• Will the shift in Japan’s energy mix toward imported fossil fuel, of which demand and cost premium exceed that of nuclear energy, impact the country’s economic performance?
• What important lessons does the Fukushima disaster offer? Are there any opportunities to be realized, and if so, how?

FEATURED SPEAKERS AND PARTICIPANTS

Ronald Cherry
U.S. Department of State

Thomas Gross
Chubu Electric Power Company

L. William Heinrich
U.S. Department of State

Mikkal E. Herberg
NBR

Taro Ishida
The Federation of Electric Power Companies of Japan (FEPC)

James Jensen
Jensen Associates

Samuel Lederer
The Federation of Electric Power Companies of Japan (FEPC)

Edward J. Lincoln
George Washington University

E. Daisy Liu
ConocoPhillips

Meredith Miller
NBR

Jane Nakano
Center for Strategic and International Studies

Julia Nesheiwat
U.S. Department of State

Toshikazu Okuya
Ministry of Economy, Trade and Industry, Japan

Ryan Shaffer
The Maureen and Mike Mansfield Foundation

Masahiro Takizawa
Chubu Electric Power Company

Audrey Taucher
Taucher International

Yoshiaki Ushijima
Japan Bank for International Cooperation (JBIC)

Michael Wallace
Center for Strategic and International Studies

BACKGROUND
The Sweeping Shift in Japan’s Energy Outlook

Nuclear energy has been a core tenant of the low-carbon power generation scale-up needed to meet Asia’s meteoric rise in energy demand, and its outlook is determined by a number of factors. Nuclear power is a reliable source of domestic energy that offers diversity in the energy mix without the corresponding C02 emissions that threaten the environment. Public perception, the development of and adherence to rigorous safety standards, the fear of weapons proliferation, and viable waste disposal, however, will also shape the future of nuclear development. Experts note that as a reliable energy resource, nuclear power offers significant energy security prospects in a context characterized by stagnant global oil supply, increasing resource nationalism, and chronic geopolitical instability in key oil and gas exporting regions.

Since the 1990s, Asia has been the main arena of nuclear energy development programs, and Japan, an early adopter, has led the charge. Over the decades, the nuclear industry in the United States has formed close and important partnerships with that in Japan, and together they have led efforts to establish safety standards and institutions. While the United States is the world’s largest producer of nuclear power, generating nearly 20% of the nation’s energy, the U.S. nuclear sector has been winding down. Only a handful of nuclear power plants have been built over the past 30 years. By contrast, Japan’s nuclear program was until last year set for a scale-up. Nuclear power generated 30% of the nation’s energy in 2010 and was slated to grow to 50% of the energy mix by 2030.

This forecast quickly changed in the aftermath of the tragic earthquake and tsunami disaster of March 2011. The core meltdown at the Fukushima Daiichi nuclear power plant prompted a nuclear emergency, and the subsequent public outcry over oversight and safety standards suddenly and dramatically altered the future of nuclear energy in Japan. The Fukushima nuclear emergency, triggered by a cataclysmic natural disaster, unfolded despite an overall high safety record within the nuclear power industry in Japan, Europe, and the United States. Only the Chernobyl nuclear disaster in the former Soviet Union surpassed the Fukushima incident in severity. The event thus reopened the debate over the safe and reliable use of nuclear energy in Japan and around the world, especially in European countries such as Germany, Italy, and Switzerland. As the one-year anniversary of the Fukushima disaster approaches, the road ahead for nuclear energy in Japan is unclear. Out of the country’s 54 reactors, only three remain operational today, and they are slated to be taken offline by summer 2012.

The sweeping shift in Japan’s energy outlook brings with it a breadth of new challenges, with broad implications for its energy security, economic growth, and climate policy goals. In losing 30% of its emission-free power-generation capacity, for example, Japan would be severely challenged in meeting GHG reduction goals. The retreat of the United States and Japan from the nuclear sector also signals a significant transition in the geopolitical balance of power, as other Asian nations march forward. China is in the lead, planning the construction of 200 reactors by 2030, with India, South Korea, Vietnam, and Turkey following suit, not to mention Iran. Among the competing concerns that arise in a post-Fukushima landscape, the question of improving and maintaining strict safety and security standards moves to the fore. Japan’s concerns for nuclear safety will require that it take an active role in promoting global standards. Yet as other Asia-Pacific nations shift nuclear power development programs into high gear, a wholesale nuclear shutdown in Japan would not immunize the country from the effects of nuclear disaster in neighboring countries. Relinquishing its active role in the nuclear sector may have unintended consequences for Japan, as it may open itself up to new uncertainties and risks.

THE UNCERTAIN ROAD AHEAD
Japan’s New Energy Landscape and Key Challenges in the Aftermath of Fukushima

Japan’s historic commitment to a robust nuclear energy program is largely due to its lack of domestic fossil fuel resources, which has resulted in a heavy dependency on imported and costly oil, natural gas, and coal. As a reliable domestic power resource, nuclear energy also afforded Japan greater flexibility and became important for political, economic, and security considerations. Prior to the Fukushima disaster, 30% of Japan’s power came from its energy program, which was slated to scale up to 50% by 2030.

The earthquake and tsunami inflicted a tragic loss of life and overwhelming destruction of infrastructure, manufacturing, transport, and housing. The shutdown of Japan’s nuclear power program adds to an array of significant existing challenges. “The collateral impact of potentially abandoning this power-generation program is extensive,” said Herberg. “This creates an electricity crisis, but also a profound national energy security crisis.”

Energy analysts predict that Japan’s short-term energy outlook holds few surprises, but there remain uncertainties about the future role of nuclear energy in the national energy mix. Japan will most certainly return to importing all of its oil, gas, and coal at a premium cost dictated by an uncertain global energy market. This raises concerns for Japan’s energy security, especially within the current geopolitical context. The Arab Spring, which has led to turmoil and volatility in global energy markets, has accompanied a spike in oil and gas prices arising from increased tensions between Iran and the United States and the European Union. Recent sanctions against Iran cast a long shadow on the future free flow of oil and gas through the Strait of Hormuz.

Japan will have to increase imports of coal, long considered abundant and cheap. Yet this energy source is in increasing demand in many Asian countries, leading to much higher coal prices. “The higher cost and limited availability of thermal fuels will be the main sources of friction,” said Herberg, adding that Japan’s push on liquefied natural gas (LNG) will likely lead to a 20-million-ton per year increase at an annual cost of $45 billion.

Herberg also noted that Japan’s immediate need to replace its nuclear power production capacity takes place in the context of China’s rise as the world’s leading energy consumer. China often competes for energy resource imports on a state-to-state basis and wields considerable influence as the world’s largest market. Analysts note that they predict a constrained LNG market through 2015.

As Japan seeks sources for its natural gas supplies, Japan could benefit from its close ties to the United States, which is experiencing an unprecedented boom in shale gas production. However, Herberg noted that while Japan sees the United States as a very important potential incremental LNG supplier, Tokyo is concerned about the reliability of future U.S. supplies, which may be influenced by shifting political winds in American energy policy.

In a post-Fukushima Japan, Herberg predicts a boost to renewable energy sources and a growing emphasis on energy efficiency, clean coal processes, and carbon capture and storage (CCS). However, the scale-up will take time, and reliance on fossil fuel will remain considerable for the foreseeable future. Also, greater reliance on LNG and coal will undermine efforts toward meeting C02 reduction goals.

For the long term, many questions remain for Japan’s ability to fill the large gap left in its energy mix. Several roundtable participants pointed to various factors at play: geopolitical turbulence, demographic and population shifts, and the evolution of Japan’s economy and manufacturing base, among others.

JAPAN’S NEW ECONOMY
Headwinds from Unexpected Directions

Lincoln remarked that the Japanese economy grew at an annualized rate of 5.0%, or a rate of 1.4% in the third quarter of 2011. While he described the short-term impact of Fukushima on Japan’s economy as “subdued,” other participants found this view sanguine. Regardless, reconstruction after the disaster has provided a short-term economic bounce, which is to be expected in any post-disaster economic scenario. There was consensus that the longer-term economic outlook is subject to change based on the energy mix choices facing Japan.

“There are headwinds,” said Lincoln of Japan’s economy. A strong yen is working against the much-needed Japanese export growth. Additionally, economists see weakness in European import markets. This raises concerns that Japan may begin to experience trouble finding a reliable, consistent destination for its goods. Lincoln pointed to other indicators that highlight Japan’s economic doldrums. In the week of January 25, 2012, Japan registered its first trade deficit in 30 years. Many Japanese manufacturers and industries have also begun to transition to offshore locations, a trend caused by shifts in the country’s demographics but perhaps accelerated by the current energy crisis—though this trend, if it continues, will temper the nation’s energy demand.

Demographics and a predicted sharp population decline, Lincoln noted, will have the most dramatic impact on Japan’s economic equation and energy demand projections. By 2050, the Japanese population is expected to decline by 25%, dampening its expected energy demand. Even if the country’s population decline is not quite this severe, it will nevertheless limit economic growth and energy use, implying that Japan will not add to Asia’s growing energy needs.

There are additional factors to consider in a post-Fukushima society. Lincoln cited the significant behavioral change among Japanese citizens and businesses in the effort to implement broad energy conservation measures in the wake of the disaster. This may be an important platform for implementing more ambitious, far-reaching energy efficiency measures. This shift comes in tandem with a strong and lasting public reaction that continues to steer Japan’s nuclear policy today. “The Japanese public mistrusts the government,” stated Wallace. Going forward, observers expect that the Japanese public and civil society will seek to be consulted as a key stakeholder as the country charts its future course for energy.

JAPAN AND THE UNITED STATES
Much to Lose, More to Gain?

Roundtable attendees turned to the most salient discussion question: What do Japan and the United States stand to lose if a nuclear shutdown occurs in both countries? The impacts are not felt just on the economic and energy security level. Climate change policy, which rests on a foundation of reducing C02 emissions, will be strongly challenged without the zero-emissions benefits of nuclear power. Yet perhaps most importantly, nuclear nonproliferation efforts are at greatest potential risk, compounded by a seismic shift in the geopolitical balance of power.

Historically, Japan and the United States have worked as close allies in the nuclear sector. In furthering safety and institutional standards, together they have also provided the backbone to global nonproliferation efforts. The production of clean, reliable energy comes with a “the connectivity to weapons,” which Wallace identified as the “dark side of every nuclear power program.”

Wallace described the U.S nuclear power industry today as “winding down,” largely displaced by significant investment costs and risk-averse investors, low return on investments, and the new abundance of cheap natural gas. A post-Fukushima Japan has precipitated the downward journey of nuclear energy within the established leadership in the sector. The toll will be further felt in its own economy.

“You cannot export nuclear technology when you are shutting it down,” noted Wallace.

The discussion examined the outlook for global nuclear expansion, which is rapidly underway. Without viable national nuclear power programs in the United States or Japan, their influence will fall away as these leaders cede the opportunity to form critical safety and security standards, Wallace stated. On the demand side, emerging nuclear-powered nations will quickly step in to fill the void and take the lead in nuclear developments as they seek to fulfill their own growing energy demands. Nuclear expansion plans are underway across Asia, spanning from Turkey, where Russia will build, operate, and own four new plants, to China, which plans to quadruple its nuclear power capacity by 2030.

Wallace pointed to key trends that define nuclear expansion in Asia and beyond. Countries with nuclear programs in the hands of private industry, such as Japan, Germany, the United States, Italy, and Switzerland are winding down. At the same time, nuclear programs in China, India, Russia, and South Korea, which are operating under state ownership, are moving forward aggressively. “This would allow those countries to set the standards for safety,” Wallace cautioned.

Experts around the table agreed that these developments unleash a radical shift in the geopolitical balance of power. In the sphere where the United States and Japan once led, Russia, China, India, and South Korea will become the key players. The rapid expansion of the nuclear industry also raises key concerns for nuclear weapons proliferation. Without a role in the nuclear industry, the United States and Japan would have less to leverage against emerging threats.

“The foundation to control the dark side of nuclear energy is starting to come unglued,” warned Wallace.

As nuclear energy expands around the globe, unstable nation states such as Nigeria have also voiced their interest in developing domestic programs. This prospect prompts considerable concerns and feeds into the broader question of setting global safety and security standards. If nuclear power generation is largely in the hands of emerging economies that lack the experience or expertise in managing a nuclear program, would they also be equally equipped to prevent nuclear proliferation? Without the United States and Japan, alongside key European countries anchoring the sector, who should set the standards for safety and security? How can we ensure that a rigorous framework is implemented and adhered to and operates effectively? Are the countries that once led in the field of nuclear power, such as the United States and Japan, prepared to accept China as the world’s number one developer of nuclear energy and technology? More importantly, how would we address a scenario where conflict-ridden states such as Nigeria possess their own nuclear power reactors, with the plutonium by-products this creates?

THE ROAD FROM FUKUSHIMACan Tough Lessons Drive New Possibilities?

Participants noted broad consensus on a key point: It is in addressing the threat of proliferation and the opportunity to set safety and security standards that the United States and Japan have the most to lose and the most to gain. The possibility of future nuclear accidents is real, and the need to formulate a proper response is urgent. By proactive engagement and forging closer cooperation, the United States and Japan have a platform to set a new “gold standard” in safety culture and act as key interlocutors to ensure and enforce a code of security, safety, and effective emergency response.

What models exist for this role, and how might they serve to address this issue in a changing nuclear energy arena? Wallace pointed to what he described as the most important possible solution: industry and government engagement through organizations such as the U.S.-based Institute of Nuclear Power Operations (INPO). INPO, established in 1979 as a direct response to the Three Mile Island incident, has empowered industry to promote safety, excellence, and efficiency in their operations. In the future, as a financial executive argued, the INPO, IAEA, and other bilateral and cooperative regulatory entities must play a leading role in ensuring the safety of nuclear power plants in emerging nations. The United States and Japan must spearhead such capacity-building organizations to ensure that emerging nuclear energy nations are operating with as much expertise as possible.

Wallace emphasized the unfortunate waste that will result from a complete shutdown of Japan’s fully operational plants. What can be done for Japan to reclaim its nuclear power program? Participants acknowledged that historically, the cooperation that existed between industry and Japan’s government has largely left the public out of the dialogue in determining an energy policy and safety oversight. Today the government must establish clear pathways and structures to engage the public; yet to date, it has had little experience doing so. Several participants noted that the Japanese people need more time to recover from the disaster as well as policymakers to engage them positively in a new path forward.

TESTING THE WINDS
Steering a Coherent Policy Forward

“Japan, despite closing its own plants, must be aware that the wind blows from West to the East; therefore, problems in China will directly impact Japan,” Wallace claimed. This is one of a myriad of additional factors that come into play when assessing the implications of a potentially nuclear-free Japan. As Japan looks to its neighbors, it must remember that a nuclear shutdown on its own shores would not immunize it from the effects of nuclear disasters in the region. Nuclear contamination can move in all directions. With this possibility in mind, Japan as well as the United States may be prompted to reconsider what would be required to exert pressure on China and other countries for a safe and secure nuclear scale-up.

An industry expert took the discussion further: “When we look at China, we see that the emerging middle class is more vocal, and they might be emboldened by what they saw in Japan.” Noting that there are increasingly environmental undertones in the discourse in China, this industry expert posed the question: “Could public opinion lead to a scenario where a nuclear slowdown occurs in China?”

Final considerations focused on how the nuclear landscape will evolve and the appropriate foreign policy approaches to take. “It is possible that we are seeing a shift to the ‘Balkanization’ of the nuclear industry,” said Herberg. “This resembles some of the trends in the international oil market, where the rise of national oil companies and more and more oil trade driven by strategic state-to-state deals may be Balkanizing the existing highly integrated and transparent markets.” Moreover, while the United States and Japan may stand together on many issues, American foreign policy with Iran is one that will present specific difficulties for Japan, as it strives to secure resources for a clear and urgent need for reliable oil and gas imports. While the region does offer considerable energy resources, political uncertainty prevails, and the question remains: How will Japan meet all of its energy needs?