The earthquake and tsunami in Japan in early March has resulted in a nuclear crisis that could have the gravitas to impact the global energy mix over the long term. At the same time, tensions in the Middle East highlight the volatility of fossil fuels supply and the importance of relative energy self-sufficiency. The ability of Japan to contain its nuclear crisis unfortunately remains in question and the worst-case scenario has been sending chills down the spines of policymakers throughout the world. Germany has already resolved to take seven of its 17 nuclear reactors offline for safety checks and has fuelled talk of complete nuclear energy abandonment. Elsewhere, China has suspended approval of new nuclear plans, halting its nuclear development programme which currently accounts for 40% of the world’s planned reactors.
From parliaments to household living rooms, Japan’s current nuclear problem has served as a fan to the flame for critics of nuclear energy, but others have been staunchly defending this source of energy and its safety record. The reaction to Japan “has been pretty hysterical” commented Tim Guinness, CEO and Chief Investment Officer of Guinness Asset Management when we spoke in the wake of the devastating earthquake. That said, he believes the disaster is going to affect the development of nuclear capacity for at least the next five years as markets and governments digest the events.
Consequences for Japan
The short and long-term impact of the nuclear crisis on Japan’s own nuclear demand and supply has understandably been in the spotlight, particularly due to the country’s reliance on nuclear energy prior to this disaster. Japan had previously been looking to extend its nuclear programme due to its perceived vulnerability when importing coal and gas, Thomas Grieder, Asia Pacific Energy Analyst with IHS Global Insights recently pointed out. “Japan is one of the Asia Pacific states with the largest nuclear capacity, along with South Korea, and with public opinion changed it will be difficult to continue this momentum,” he added.
Dr Ian Mortimer, co-manager of the Guinness Global Energy fund, argues that in estimating the potential impact of Japan’s nuclear situation it is worth revisiting the fallout of the country’s previous earthquakes in 1995 and 2007. Mortimer notes that there are a number of differences between the economic environments surrounding these incidents: Japan’s public sector debt is higher in 2011 and its economic growth is slower, while the Bank of Japan has moved to inject liquidity into the system this time round. In the long term, “the difference in economic environments may indeed lead to different conclusions,” Mortimer says. However, “it is still reasonable to look at past episodes, such as Kobe and the 2007 quake, to gain an insight into what might happen in terms of demand for oil, coal and natural gas – if just to get a grip on the orders of magnitude of changes that might occur in the near term.”
In the aftermath of Japan’s 2007 earthquake, the Kashiwazaki-kariwa nuclear plant was shut down and the resultant drop in nuclear production, which Guinness Asset Management calculates was similar in size to the loss of capacity in the current crisis, was then compensated for by the thermal alternatives of coal, liquefied natural gas (LNG) and oil. “Adding demand to the gas and thermal coal markets will invariably tighten,” commented Tim Guinness, adding that the impact on oil could be less obvious. “Increased reliance on oil will likely be counterbalanced by a dip in overall energy consumption.”
Looking at more long term scenarios, Grieder highlights the country’s long-running experience of dealing with such natural disasters. “If anyone in the world knows how to build reactors that can withstand earthquakes, it’s the Japanese,” he said, adding that “Japanese companies will learn from this disaster and continue to be big players in the market going forward.”
Economics of Nuclear Energy
With multiple governments speaking in favour of exercising caution in building civil nuclear capacity going forward, questions have arisen as to the impact of more safety measures on the cost and speed of nuclear reactor construction. The Japan incident is likely to have a bearing on the way reactor reinforcements and contingency plans are designed, on the frequency and cost of facility monitoring, and possibly on the location of nuclear power plants. But whether increased costs in relation to tighter safety regulation will affect the overall economic case for such energy production is less clear cut. “I am not sure that this will fundamentally change the economics of nuclear energy, since once the upfront cost of construction is paid, it becomes really financially attractive to maintain going forward,” commented Grieder.
In the long run, nuclear energy economics are likely to convince governments, particularly those of rapidly growing economies, to eventually “reconcile the thought of relying on nuclear energy in the long term,” said Grieder.
It is useful to consider the amount of pressure energy demand puts on national energy politics. Tim Guinness expects that the slowdown in nuclear power rollout will be most pronounced in developed markets. However, he says it’s worth remembering that the top three countries in terms of planned nuclear capacity are China (77 reactors planned), Russia (24) and India (23). Guinness’ guess is that all 124 of these will be completed, despite approvals being held up in the short term.
“The effect the crisis has on emerging market countries could have a much greater impact,” Guinness’ colleague Mortimer pointed out. The International Energy Agency (IEA) has forecast growth in nuclear power of 160GW by 2035, of which half is expected to come online in the next 10 years, driven to a significant extent by India and China. As yet there have been no significant comments from either China or India but any changes they make to their policies will be far reaching, believes Mortimer.
Nuclear Fears as a Luxury
The Chinese are much more “rational” in their interpretation of the disaster, Guinness explained: “They have an objective to grow their economy which creates a great need for energy and they will take the rational decision.” Grieder agrees. He believes that “most governments in Asia will come back to the realisation that they can meet future power consumption growth, while mitigating C02 emission and reducing their own vulnerability to energy imports by building nuclear generation capacity.”
The divergence in the interpretation of nuclear scares between developed and developing markets comes down to the need to address competing objectives. That is, some nations can afford the ‘luxury’ of nuclear fears: however overarching nuclear fears may be, the gravity of their impact is not absolute. The developed markets of Japan, Europe and the US have already attained a high standard of living and can therefore afford the luxury of allowing nuclear fears and worries to have a big influence on policy. They can afford more caution, explained Guinness. Russia, China and India, however, are likely to be less cautious because of the different pressures their expanding economies and increasing energy demands create, he added.
At the same time, Grieder points out, the West is equally worried about Chinese companies buying up fossil fuel resources, given that before Japan was struck by an earthquake there was a reasonable amount of support from the developed nations in favour of China building its own civil nuclear programme.
Going Forward
Grieder and Guinness converge to the idea that in the short term, the reaction to Japan’s nuclear situation is somewhat irrational and is one that is heavily based on emotion. Energy markets are likely to see a tailwind for energy sources other than nuclear.
In the short term, natural gas and alternative energy, as low carbon substitutes, are likely to be direct beneficiaries. “I think we will see gas prices in Europe strengthen as LNG demand increases in Japan and cargoes are diverted away from Europe in response,” reiterated Mortimer.
Coal, which has traditionally met a significant amount of the Asia-Pacific region’s energy demand, is less attractive due to its high carbon footprint and higher price in the aftermath of Australia’s floods. However, coal’s cost remains at almost a third of its pre-credit crisis peak. “Coal's relative abundance, low cost and well established generation infrastructure make it one of the most cost-effective alternatives,” commented Daniel Wills, Senior Analyst at ETF Securities. Mike Tian, senior equity analyst with Morningstar agrees. "Incrementally, we expect the nuclear disaster to prompt existing plants to run harder and new plants to be built, especially in the emerging world," he wrote.
But longer term, energy experts believe the overriding case for nuclear energy has not been fundamentally changed by recent events in Japan. Debate is likely to continue as to the desirability and safety of nuclear power, but those developing nations that need to find cost-effective low-carbon methods of fuelling their economies can’t afford to rule out nuclear energy. With fossil fuel reserves continuing to diminish and governments searching for cleaner and more attractive alternatives, Japan’s disaster is unlikely to sway the global energy debate away from nuclear energy, particularly in the energy-hungry emerging markets.
