Buoying the black stuff

In late February, JERA Power – a joint venture established in 2015 by Tokyo Electric Power (Tepco) and Chubu Electric – raised a ¥272 billion project loan to finance the 1300MW Yokosuka coal-fired power project in Japan. Lead arranged by Development Bank of Japan (DBJ), SMBC, Mizuho and MUFG, the deal comprises an 18-year ¥251.6 billion tranche and a seven-year ¥20 billion VAT facility.

With the debt priced at around 150bp over Tibor plus fees, and state-owned DBJ backing, it would be reasonable to expect JERA’s PR department to go into overdrive – but it hasn’t. The only mention of Yokosuka on JERA’s press release site – nestled among the statements about the Formosa 1 and Gunfleet Sands offshore wind projects, new LNG business and battery storage in the UK – is notice of the project’s environmental impact statement, and only when you go into the documentation does the word coal appear.

For such a big deal to be played down is symptomatic of Japanese government-led hypocrisy over coal-fired power. The country that played host to the Kyoto Protocol is the only G7 economy still planning and developing coal-fired power plants. And Japan has turned coal-fired power technology into a major export via heavily supported financing backed by JBIC and NEXI – between 2016-2018 JBIC lent $5.165 billion to coal-fired power projects in Indonesia alone according to TXF Data.

Coal is a politically divisive fuel – as the ongoing battle to develop the Adani-sponsored Carmichael mine project in Australia illustrates. But it is also the cheapest feedstock available for many emerging economies, particularly those with large domestic supplies. Consequently, even OECD restrictions on ECA financing for coal-fired power, which came into force in 2017, include numerous get-out clauses for lending to emerging markets and cutting edge ultra-super critical (USC) coal-fired technology projects.

Japan’s USC tech is the cleanest in the world, and for coal-rich emerging markets is probably the best, if not the cheapest, of the bad environmental choices available. But even USC generates 50% more emissions than gas-fired technology, so the choice of coal-fired power over cleaner, albeit more expensive, LNG-fired power by a G7 economy is at odds with Japanese government green rhetoric at best, particularly given Japan imports most of its coal.

There are signs of diminishing political support for coal-fired power in Japan. On 28 March Japan's Minister of Environment, Yoshiaki Harada, announced that his Ministry would no longer "in principle” sign off on new thermal coal plants or plant refurbishments. But given final authority for new development rests with the Ministry of Economy, Trade and Industry (METI), the statement may yet prove hollow.

In 2016 the Japanese government approved around 43 new coal-fired schemes totalling 20.5GW of capacity. The Yokosuka project is typical of how Japan justifies the continued development of coal-fired domestic power. The Yokosuka plant will replace ageing facilities previously owned by Tepco: six 350MW oil-fired units that became operational between 1964 and 1970; one 144MW gas turbine that has been operating since 2006; and a 30MW emergency gas turbine unit, available since 1971. The new plant, which is split into two 650MW units due for completion in 2023 and 2024 respectively, will therefore be cleaner than the facilities it replaces.

In fairness to METI, the Fukushima disaster in 2011 and subsequent mothballing of the nuclear sector meant Japan still needed coal-fired power. And pro-coal energy security and diversity of supply arguments made by the Japanese government are valid. But Japan’s 2030 renewables programme is still very unambitious compared with other G7 economies.

METI is predicting a Japanese energy mix of 20-22% nuclear (a restart programme began in 2015), 22-24% renewables, 26% coal and 27% LNG by 2030. The reality may prove very different. When Japan halted nuclear energy its reliance on fossil fuel-fired power jumped from 65% to 84% of the energy mix, with coal at 32% in 2016 and renewables just 15%. Many experts question the ability of METI to deliver its 2030 plan, claiming the technical and safety costs of the nuclear restart make the planned 22% nuclear part of the 2030 energy mix unrealistic, and therefore planned renewables growth will be insufficient to make up for the probable shortfall in that nuclear ratio. Should the nuclear and renewables shortfall become a reality, and based on current policy, coal’s share of the Japanese energy mix could very easily rise rather than thin as planned.

A significant reason Japan remains pro-coal is its geography, which makes land- and sea-based renewable energy development difficult; for example, solar is twice as expensive in Japan as it is in Europe because of the limited amount of suitable land. Japan has significant offshore wind potential – the seventh longest coastline in the world and capable of producing 1600GW of offshore wind – but 80% of prospective sites are in deep water.

The Japan Wind Power Association is predicting development of 6GW of offshore fixed turbine wind and 4GW of floating turbine by 2030. Operational demonstration projects include the fixed 2.4MW Choshi and Chiba, 2MW Goto and Nagasaki, the 2MW Kitakyushu and Fukuoka, and the 14MW floating Fukushima project (although the largest 7MW turbine has been decommissioned due to cost of maintenance). Planned commercial-scale projects include Japan Wind Developments’ 1000MW Tsugaru and 800MW Mutsu schemes.

Floating offshore wind turbines could provide the answer to Japan’s deep-water problem. Ideol and Macquarie’s Acacia Renewables signed a MOU in 2018 on developing Japan’s first utility-scale commercial floating offshore wind project and construction is scheduled for 2023.

But floating offshore wind is still in its infancy and costs, for now, are high. Consequently, despite Minister Harada’s recent promise to not sign off future coal-fired power developments, practicality and cost of power are likely to mean new coal-fired schemes continue, albeit with a low PR profile.

According to a report by Kiko Network, a Japanese climate change NGO, 50 new Japanese domestic coal-fired plants have been proposed since 2012, with eight already operational. Among the 50, plans for seven units were scrapped at the planning stage due to local opposition and management decisions in response to changing business conditions, but as of 30 September 2018, plans and assessments for 35 units were still going ahead. Japan’s hunger for coal-fired power show no signs of diminishing any time soon – and with strong export markets for its USC technology, the country is also likely to continue to indirectly promote coal-fired power beyond its borders well into the future.

 

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