Tokyo in a power crunch

On March 22, 2022 the Tokyo Electric Power Corporation (Tepco) warned electricity consumers in east Japan about the risk of rolling blackouts from a tight supply situation. The recent M7.3 quake near Sendai had knocked several of Tepco’s thermal power plants offline, which left the company in a difficult situation when a cold spell with snow flakes hit the region of the capital. Demand at times exceeded generation capacity and only the availability of pumped hydro storage saved the day before measures to curb demand such as turning down heating and switching off lights averted an outage.

No doubt this experience will increase pressure to restart more nuclear power stations that have been shuttered since the tsunami and nuclear meltdowns in Fukushima in March 2011. Before the nuclear disaster about 30% of Japanese generating capacity were nuclear; now only about 10% comes from restarted nuclear reactors. The current high prices of natural gas will further enhance the attraction of nuclear, at least in the eyes of anyone whose financial interests are tied to the balance sheet of the utility companies, such as their individual and institutional shareholders.

However, that is not the whole story.

While eastern Japan was in a power crunch, western Japan has ample spare capacity, as did Hokkaido. Why could this power not be used in Tokyo? You would have thought Japan would have learnt its lesson from the 3/11 disaster in 2011 and addressed it in the decade since then, but you would be wrong: Japanese electricity markets are still split between a handful of regional near-monopolies with minimal interchange capacities between them. For example, the Hokkaido grid has a generating capacity of 7.5 GW but only 0.6 GW of interchange capacity with Honshu (8% of the total). Tepco supplies up to 47 GW to customers in its area but can only exchange up to 1.2 GW with major utilities in the west of Japan. This leaves little margin when earthquakes or weather events with a regional impact hit supplies.

By contrast, China has built huge high voltage direct current (HVDC) transmission lines between the industrialized coastal cities on one side and hydroelectric power stations near the Tibetan plateau and solar and wind farms in the arid north on the other. Many of these lines are longer than the distance from Tokyo to Hokkaido, let alone Tokyo to Kansai. The Chinese government understands that if it wants to wean itself from the dependence of dirty coal or imported oil and gas then it will need to vastly increase power transfer capacity from the interior of the country where renewables are available to the densely populated urban areas near the coast lines.

Japan is actually in a similar situation. The elephant in the room that nobody wants to talk about is offshore wind. While European countries and the US are building up tens of Gigawatts of offshore wind power capacity, Japan has very little installed capacity, particularly offshore. The entire conversations seems to be about nuclear vs. solar vs. gas vs. coal, leaving out one of the most promising renewable energy sources available to Japan. So far the regulatory hurdles for erecting and connecting wind turbines in Japan have been high and that has left wind as an also ran compared to much more widely deployed solar. However, solar does not provide power at all hours. Wind would complement it.

Much of the European wind power capacity is installed offshore where wind speeds tend to be high and more consistent than onshore. This is where the largest and most economical turbine models tend to be used. By contrast, almost 99% of Japan’s wind power capacity is still onshore. A cumulative total of only 51.6 MW of offshore wind capacity was installed at the end of 2021 while total installed wind power capacity was 4.6 GW. Meanwhile the UK had 24.7 GW of wind power capacity, Spain 27.1 GW and Germany 62.2 GW. China is in a league of its own with 282 GW, more than all of Europe combined. Japan’s installed wind power base is less than that of small European countries such as Belgium (4.7 GW) that have relatively short coast lines and tiny EEZs: Japan’s EEZ of 4,479,388 km2 is over 1000 times larger than Belgium’s at 3,447 km2!

Japan is really only starting to build up offshore wind capacity, with projects off the coasts of Akita, Chiba and Nagasaki getting under way in the last two years. By 2030 its goal is for 10 GW of offshore capacity either installed or under construction which is still tiny compared to the already installed base of Germany, Spain or the UK.

Unlike fossil fuel or nuclear power stations, wind turbines are not location independent. They will be installed where wind conditions are favourable, where the sea is not too deep and connections to the coastal grid are cost-effective. To make the most of the wind conditions, the grid will need to be greatly expanded to allow large amounts of power to be transferred from regions with plenty of wind to regions with many consumers. This will be quite different from the current model where utility companies try to generate all the power they need within their own region, which is why there is only limited interchange capacity to help out if one company loses a large part of its generating capacity as happened in the recent quake or after 3/11.

Japan needs to start building high capacity long distance HVDC power lines like China has in order to enable a transition to zero carbon electricity. The fragmented power markets dominated by local utility companies are an obstacle to this transition as the interests of the regional companies seeking profits from existing investments in their area are not aligned with the interests of the consumers who want reliable green energy regardless of where it comes from.

Japan quickly needs to remove regulatory obstacles to expanding wind power and then invest to build a HVDC backbone to connect renewable power generation with consumers.

Hokkaido wind power for Japanese energy

Nikkei reports (“Japan pushes for undersea cables to solve wind power puzzle”, 2022-01-02) that the government is allocating 5 billion yen (about US$43 million) in its supplementary budged for a feasibility study for a 4 GW high voltage direct current (HVDC) link between the power grids of the northern island of Hokkaido and the main island of Honshu, where most of Japan’s population lives. This would be by far the biggest HVDC link ever built in Japan. The Japanese government wants to generate 45 GW of power from offshore wind in 2040, up to about a third of which (14.65 GW) is to be produced in Hokkaido. The development plan lists several promising offshore areas along the southwest coast of Hokkaido.

For this power to be available to consumers outside the northern prefecture, it would need to be exported via a HVDC link. This is the preferred technology for shifting large amounts of power over long distances, especially between AC grids not synchronized with each others or operating on different frequencies. Since 2019 there have been two 300 MW HVDC links between the two islands. Their combined capacity is to be doubled to 1.2 GW by 2028.

Japan has relatively little capacity for transferring power between its regional grids. This is because its grids used to be operated by regional monopolies that had little incentive to ever import or export power. This lack of interconnect capacity became a major problem following the power shortage after the 2011 Tohoku earthquake and tsunami when less affected areas could not help out the most affected region. There is a conflict of interest between the local utility companies and the country as a whole. Tepco owns a lot of nuclear power stations, expensive infrastructure with huge sunk costs. It would rather generate power from these plants than pay another supplier from outside its area for renewable energy. However, many of these power stations have yet to be restarted since their shutdown following the Fukushima meltdowns. By restricting how much power can be imported from other grids, Tepco can put pressure on regulators to allow it to restart more reactors to ensure a stable supply of power. On the other hand, expanding interconnect capacity would ease the pressure. Which side will the Japanese government take?

A related issue is the variable output of renewable power sources. Long distance transmission will make it easier to compensate for local weather patterns by shifting power between different regions, which allows a larger share of renewable energy to become part of the mix without having to resort to either energy storage or peaker plants (e.g. gas turbines to cover peak loads). That again means Tepco loses leverage to maintain coal and other fossil fuel powered generating capacity as insurance against shortfalls of renewable energy.

China, one of Japan’s main economic rivals in the world, has pursued a completely different course. Over the past decade it has aggressively expanded long distance HVDC links to stabilize its grid. Japan operates a single HVDC link of at least 1 GW, a 1.4 GW link between Honshu and Shikoku that started operating in 2000. All other links are only in the several 100 MW range and most of those are not long distance lines but back-to-back local interconnects, for example between the 50 Hz grid of eastern Japan and the 60 Hz grid of western Japan near Nagoya. By contrast, China has built over 20 HVDC links over 1 GW, mostly with a capacity of 3 GW or more. Many of the biggest projects cover distances of 1,000 to 2,000 km. This allows China to supply it coastal megacities with hydroelectric power from its southeastern mountains or from other power sources from its arid central parts. China is the world leader in wind power. Its windiest parts are along its border to Mongolia and on the Tibetan plateau. Large scale HVDC is key to China’s energy policy for the 21st century.

An alternative to shifting power long distance is to use it to locally generate hydrogen from water (“green hydrogen”) and feed it into pipelines or use it to make ammonia. This makes some sense for applications that already use hydrogen, such as the fertilizer industry or for carbon free alternatives to existing technology, such as direct reduction of iron ore for steel making without using coking coal. However, it makes little sense to use green hydrogen for power generation: if you convert electricity to hydrogen which you then use to generate electricity, more than 70 percent of energy is lost in the process while less than 30 percent remains. By contrast, batteries are 90 percent efficient. Therefore, if excess wind or solar power is used to produce hydrogen, that resource should best be used by industries that directly consume hydrogen, until all fossil fuel currently used for such purposes has been replaced.

If Hokkaido had a surplus of hydrogen from wind power, it would make more sense to have it consumed by steel works and fertilizer plants built in the prefecture rather than sending it through a pipeline to Honshu.

Although green hydrogen or ammonia can be used as fuel in thermal power plants in place of coal or LNG, it would be a terribly wasteful use. Because of the huge conversion losses, we would need three times more wind or solar power to end up with the same amount of usable electricity than if we used grid-scale battery storage to absorb any surplus and make it available when needed. This advantage makes grid-scale battery storage a strategic technology.

Most existing Li-ion batteries depend on relatively scarce resources such as cobalt, nickel and lithium. Lithium-iron-phosphate (LFP) batteries only require lithium and widely available materials, while sodium ion batteries use only readily available raw materials. Japan will need to invest in high capacity long distance HVDC links as well as in battery storage to speed up its transition to a carbon neutral economy.

METI and Japan’s exit from the Carbon Economy

On the eve of COP26, the UN Climate Conference in Glasgow, Scotland, the Japanese government took out a full page ad in the Japan times to talk about “beyond zero”, a series of events and initiatives related to Climate Change. It struck me that none of them were specifically about renewable energy, the essential ingredient for a carbon-free economy.

The title of “Tokyo Beyond Zero Week” already had me confused: It reminded me of the Toyota bZ4x, a battery electric SUV that is the first mainstream battery electric vehicle for the Japanese market that Toyota has announced. Toyota has become notorious for bucking the Battery electric trend by plugging hybrids and hydrogen fuel cells, despite hydrogen fuel from renewable sources being 3 times less energy-efficient than battery electric vehicles. The bZ4x is too little, too late when Toyota is telling potential customers that they should really be buying hybrids like the Prius or hydrogen fuel cell vehicles like the Mirai.

METI, the Japanese Ministry of Economy, Trade and Industry has been sponsoring vehicles based on hydrogen fuel cells using hydrogen made from Australian brown coal (lignite), with the resulting CO2 emissions sequestered using “carbon capture and storage” (CCS) and the hydrogen shipped to Japan in cryogenic tank ships developed by Japanese shipyards with METI funding. Essentially it’s a massive pork barrel project, designed to pay industry players to go along with a Rube Goldberg project that will not be economically viable. It’s a way of keeping ecological laggards such as Toyota and the huge Japanese shipbuilders and trading companies relevant. Some of the initiatives sponsored by METI are:

  • LNG (Liquified Natural Gas) Producer-Consumer conference
  • International Conference on Carbon Recycling
  • International Conference on Fuel Ammonia

There is no place for LNG in a zero carbon economy. “Carbon Recycling” aka CCS is a fig leaf to keep burning fossil fuels. Ammonia may be a necessary fuels for ships and airplanes, but if it’s made from coal it won’t be green energy.

Why is the METI ad not talking about offshore wind and geothermal power, two of the most important energy sources for green baseload electricity? It’s because they are primarily concerned about creating and maintaining business opportunities for Toyota, trading companies making profits from fossil fuel imports and other companies wedded to the fossil fuel industry and not about how to get Japan ready for the zero carbon age.

I find this very sad. As a country with limited fossil fuel resources, Japan could become a prime player in the post-carbon era, developing new technologies to help other countries move beyond fossil energy sources. Japan has huge opportunities in offshore wind, onshore wind, solar and geothermal but its government has been largely turning a blind eye to them because those energy sources can not be controlled by its big trading companies. Likewise, its biggest automobile manufacturer is a laggard in battery electric vehicles which is determined to sabotage the switch to BEVs.

What’s the Deal with Son and Trump?

President-elect Trump got plenty of headlines out of his recent meeting with Softbank president Masayoshi Son, boasting afterwards:

“Masa, a great guy of Japan, he’s pledged that he’s going to put $50 billion into the United States because of our victory. He wasn’t investing in our country — $50 billion. Fifty thousand jobs — 50,000 jobs he’s going to be investing in. He is a great guy.”
Donald Trump, in Fayetteville, N.C., 2016-12-06

Clearly, Trump is hoping to get some mileage out of this meeting with Son, but what’s in it for Softbank? Why is he meeting up with the next president and not just with business leaders?

It’s unlikely the surprise victory for Trump was much of a factor in the announced investment plans. Three weeks before the election, when most pundits were still expecting a Clinton victory, Softbank already announced it was setting up a $100 billion dollar investment fund, with Saudi Arabia supplying the biggest share of the funds. Given the size of it and the special role the US plays for technology startups, it is unlikely most of it wasn’t meant to be invested there anyway. So take any claims that Son will be investing in the US only because Trump won with more than a pinch of salt.

Softbank already made a huge investment in the US under Trump’s predecessor, President Obama. In 2013 Softbank acquired US mobile carrier Sprint for $22 billion. However, its plans to acquire smaller carrier T-Mobile were thwarted by the FCC. And this is the likely background for the recent meeting and announcement:

Analysts said Son may be seeking to improve the chances of a merger between Sprint and T-Mobile. Sprint and SoftBank abandoned an effort to buy T-Mobile in 2014 after the Federal Communications Commission signaled the deal might violate antitrust laws.

Trump will be responsible for appointing the next FCC chairman. Speaking from the lobby of the Trump Tower on Tuesday, Son said that he wanted to celebrate Trump’s election “because he would do a lot of deregulation.”

“SoftBank’s original plan may come true with the new FCC chairman,” Naoshi Nema, analyst at Cantor Fitzgerald, said in a note.
The SoftBank investment Trump touted looks pretty great for SoftBank (LA Times, 2016-12-07)

By flattering Trump’s ego, Son is hoping to gain political influence to pull off a plan that was shot down by the FCC because it would be bad for competition and bad for consumers. With fewer players in the market, mobile plans will go up in price. Most likely a merger of Sprint and T-Mobile would would also lead to “synergies” (aka layoffs) as the companies would share infrastructure and other resources. Sprint already laid off thousands of employees to save billions of dollars under Softbank. But never mind reality when headlines of “50,000 new jobs” sound much better! 😉

This is not how a market economy should work in a country operating under the rule of law. Trump has not even taken office yet and the US is already starting to look like a Third World country, where the key to doing well in business is to cozy up to the president.

Abenomics and the Pension Bubble

Last week it was reported that the Japanese Government Pension Investment Fund (GPIF) had made a record annual return of over 12 percent last year. Considering the rapidly aging population in Japan and the related problem of how to finance pensions for large numbers of retirees with a shrinking active workforce, this may have seemed very welcome news. However, if you look a bit closer, it isn’t all what it seems.

The GPIF owes the record return mainly to increasing share prices of Japanese companies, of which it is holding stocks. The Nikkei 225 recently reached its highest level in about 15 years and it wasn’t all because Japanese exporters profited from the weakening yen. Another big factor was the decision of the Abe government to have the GPIF shift its asset allocation from government bonds to stocks. It reduced the bond target from 60% to 35% while increasing the stock target from 9% to 25%. Most of the above-target bonds have since been sold to the Bank of Japan (BoJ), which under “Abenomics” will buy up any volume of government bonds.

With the money from the bond sales the GPIF could go on a buying spree, while individual investors have actually been selling more shares than they bought. The GPIF has been sucking up shares like a vacuum cleaner with money basically printed by the Bank of Japan and this extra demand has inflated market values for shares, whether held by the GPIF or by banks, insurance companies or private investors. Beating deflation was a major declared goal of Abenomics, but so far the stock market is the only part of the economy where the government has succeeded in that goal (albeit only by some impressive stage magic by the Bank of Japan and the GPIF).

Will this recent on-paper gain shore up public finances for pension payments and health care for the elderly? Not really. The stock market can be a tricky beast. Just ask the Chinese, who had experienced an even more impressive stock market bull run until their bubble burst!

If the GPIF holds 25% of its assets in shares and it needs to pay pensions, it can only do so by selling shares at whatever the market rate happens to be at the time, which will directly influence those market rates. And if it needs a lot of cash because there aren’t many workers relative to pensioners it will need to sell a lot of shares. Share prices went up because the GPIF was a huge buyer; if it were to become a huge seller, the opposite would happen. This is even true if the GPIF were to reduce its share allocation before the pension problem will reach its peak.

If the real economy tanks, it will hit tax revenues and the stock market at the same time: With the GPIF heavily invested there, the government finances and the pensioners will be doubly exposed.

For the GPIF to do well out of stock sales it will need a huge number of individual buyers, as it keeps liquidating its portfolio. But who is going to invest in stocks when they know the market will keep on getting flooded with sell orders for years to come?

Instead of addressing the real problems, the government of Shinzo Abe has been using smoke and mirrors to con the public. While pensions are no more secure than before, a lot of stock market investors have made a mint out of the BoJ-financed buying binge, enriching wealthy Abe supporters.

There are no easy answers to the pension problem. As the age pyramid changes and inverts itself, lots of things will have to change. For one, the retirement age needs to increase to re-balance the number of workers vs. pensioners. Japan will need to open its doors more for immigration. We’ll all have to work more years and the sooner the changes are made, the less painful it will be later. More emphasis will have to be put on covering the minimum needs of retirees vs. tying payments to previous income levels and contributions. Wealthier pensioners will have to make bigger sacrifices. The necessary steps will be painful and controversial, but they are unavoidable. Smoke and mirror “Abenomics” are no way around that.

Romney’s energy self-sufficiency fallacy

Mitt Romney, the Republican candidate for US president, recently made headlines by proposing that under his policies the US could become independent of energy imports by 2020. To make this claim slightly less incredible (the US uses 20% of the world’s petroleum while holding only 3% of its proven reserves), he included Canada and Mexico in his plan, effectively widening the scope to all of North America. The essence of his plan, which was received favourably by conservative media, are policies to boost hydrocarbon output (oil and gas production). The aim of the policy is to create jobs in exploration while keeping energy costs low for consumers, boosting the economy.

Let us assume that government policy could actually significantly boost oil and gas production. What effect would that have on the US and world economy in the next decades?

There was a time when the US was largely self sufficient on petroleum. Output was growing rapidly until the 1940s. However, new discoveries could not keep up with the rate of depletion of old wells. Production in the contiguous 48 states peaked in the early 1970s. The US became increasingly dependent on imports for oil supplies.

Worldwide hydrocarbon reserves are limited. There will come a point when worldwide production will peak (some believe it has already been reached) and from then on, rising oil prices will ensure that consumers reduce their demand to match available declining production.

Let us assume that, thanks to Mr Romney’s policies, oil and gas production in North America will magically rise enough to cover the entire amount currently being imported from the Middle East, South America and elsewhere (an assumption that is extremely optimistic according to experts). The amount currently imported will then become available as extra supplies to China, India, Brazil, Europe, Japan and other countries, keeping energy costs low for them and allowing them to compete more effectively with US manufacturers over the next decade.

At some point those new oil wells, shale gas wells and tar sand pits will run dry too. What then? By then oil will be a far more scarce resource, with more cars, motorcycles and power stations in China, India, Brazil, Thailand, Malaysia, etc. burning it than today, as those economies will have been rapidly growing. At that point the US will have to revert to buying oil from Saudi Arabia again, whose reserves are estimated to be more long-lasting than North America’s. It will have no reserves left to replace those premium price imports then. Every dollar saved on import substitution in the next couple of years could cost US consumers 10 dollars then.

Imagine a world in which the price of oil were to double every decade. The oil in the ground in North America won’t go away unless it is pumped up and used. Why would you want to consume it while it’s worth only $70 a barrel instead of when it’s $140 or $280 a barrel? In a world of rising prices it pays to be a buyer early and a seller later.

Perversely, one of the beneficiaries of US policies on oil could be Iran. Economic sanctions linked to the country’s suspected nuclear weapons program have depressed Iranian oil sales. The more slowly Iranian oil reserves are depleted, the more Iran will benefit economically from these reserves when they are eventually used after oil prices have gone up.

Top 10 employers list, made in Japan

A recent survey amongst Japanese third year university students indicates that relatively few aim to join the well known companies producing the export products “made in Japan” that, economically speaking, put the country on the world map during the 20th century.

According to the list published in Nihon Keizai Shimbun (2009-02-23), five of the top ten companies that students would like to work for were banks or insurances. There were also one airline (All Nippon Airways, #3), one travel agency (JTB, #5) and two railway companies.

Only one electronics company made it into the top ten (Panasonic at #4, unchanged from 2008) and no car manufacturer at all. The ranking clearly reflects the hit that Japan’s export industries have taken during the global economic downturn. Industrial icons such as Toyota (#46), Honda (#60), Sony (#22), Sharp (#37) dropped sharply from last year’s survey, when three of these were in the top 10 – Toyota (#3), Sony (#5) and Sharp (#6) while Honda at least made #22 then.

As an engineer I may be a bit biased, but I can’t help feeling sad when companies that make stuff for customers worldwide are seen as less interesting to work for than companies that domestically move money around.

Japan depends almost entirely on imports for primary energy resources and domestically produces little more than one third of the food that the Japanese eat. It will always have to depend on exports to pay for vital imports. The more bright minds that concentrate on competing globally, the better for the country.