TEPCO’s Black Hole of Nuclear Disaster Cleanup Costs

To March 2016, the total public cost of dealing with the aftermath of the March 2011 nuclear accident at TEPCO’s (Tokyo Electric Power’s) Fukushima No. 1 plant topped JPY4.2 trillion, including costs for radioactive decontamination, reactor decommissioning and compensation payments to affected people and organizations, which translates into about ¥33,000 per capita. Despite strong public resistance to nuclear-fueled electric power since the disaster, the Japanese government continues to make the case for nuclear power accounting for 20-22% of energy output in Japan in fiscal 2030, ostensibly as a means of reducing carbon dioxide emissions and ensuring the country’s energy security.

But estimates of the total eventual cost of the Fukushima nuclear plant cleanup not only keep rising, they are soaring. The latest “all-in” estimate from MEITI put the expected cost at JPY21.5 trillion yen ($186 billion), including reactor decommissioning costs of JPY8 trillion (versus a prior JPY2 trillion), compensation costs of JPY7.9 trillion (versus JPY5.4 trillion), cleanup costs of JPY4 trillion (versus JPY2.5 trillion) and interim storage of radioactive waste costs of JPY1.6 trillion (versus JPY1.1 trillion). This is nearly double the previous estimate in 2014 of JPY11.08 trillion made by Kenichi Oshima, environmental economics professor at Ritsumeikan University, and Masafumi Yokemoto, professor of environment policy at Osaka City University, whose cost calculations were based on data released by TEPCO. The Oshima 2014 estimates were already twice as much as the original estimate by Japanese authorities of JPY5.8 trillion, circa 2011.

As soon as the new MEITI forecasts were announced, concerns were voiced about whether the new JPY8 trillion estimate for decommissioning the plant will be enough. Experts in Japan and abroad calculated the figure based on the Three Mile Island accident in the U.S. in 1979. But it could surge if the process to remove the melted nuclear fuel (to begin in the early 2020s), proves more difficult than expected. The new, much larger estimates have, 1) led to the government/MEITI moving to push some of the cost to the new electric power market entrants and 2) pushing more of the cost ostensibly born by TEPCO onto taxpayers.

Relatively speaking, how much is JPY21.5 trillion? JPY21.5 is 22% of total government tax revenues in 2015, 101% of all corporate income/profit/capital gains taxes during that year, and over 69% of what the Japanese government spends on social security/health care. A raising of Japan’s consumption tax from 5% to 8% only produced a “temporary” tax windfall of some JPY16 trillion. In other words, JPY21.5 trillion is a lot of money, and represents a significant burden not only to TEPCO and its electricity users, but on the government and taxpayers in general as well.

Everyone Pays

Basically, everyone, including TEPCO, other traditional electric power oligopolies, new electric power suppliers, the government and taxpayers are on the hook for expenses related to the cleanup. The original plan was for decontamination and tainted waste disposal costs to be financed by the proceeds from the sale of TEPCO shares held by the Nuclear Damage Liability Facilitation Corp. (NDLFC), which now owns over 54% of TEPCO’s outstanding shares after the electric power utility was effectively nationalized. But while the government was counting on potential proceeds from a TEPCO share sale at JPY2.5 trillion based on a TEPCO stock price of around JPY1,050, TEPCO’s stock continues to trade more like JPY500/share, making the stock issue increasingly less likely.

TEPCO is on the hook for some JPY15.9 trillion yen ($138 billion) of the government’s new cost estimate of JPY21.5 trillion. TEPCO is to pay for reactor decommissioning costs (now seen rising to JPY8 trillion yen) for the Fukushima plant over the course of about 30 years, but a dedicated fund has been set up for this. Normally, a utility is required to charge less for the use of power lines if it logs strong profits in that business, but the government has granted an exception to TEPCO so it can instead put extra profits toward decommissioning. To meet this obligation, TEPCO must boost its earnings potential from the current JPY400 billion yen or so to over JPY500 billion yen. It also needs to expand its market capitalization nine-fold to JPY7.5 trillion yen to raise the JPY4 trillion yen needed for decontamination measures, but is unlikely to be able to do any of this on its own.

TEPCO and the country’s other eight major regional electricity companies, in addition to Japan Atomic Power and Japan Nuclear Fuel, are paying for compensations costs, through the state-backed NDLFC, which handles payments. All the nine major utilities with nuclear reactors together are repaying at a pace of about JPY230 billion yen a year. MEITI and the government also now want independent electricity suppliers that entered the market after its recent liberalization to pay their share, in the form of increased transmission fees paid to the regional utilities for the use of their power lines; to be covered by a separate charge to electricity users.

The estimated cost for radioactive waste storage facilities is paid for by the government (tax payers), but cost projections have risen from JPY1.1 trillion yen to JPY1.6 trillion yen. While MEITI had planned to allocate JPY35 billion/year for 30 years for the purpose, this timeline will likely have to be extended.

Electric power users of course have and stand to bear in the future a significant amount of the costs, through higher electricity rates. The government considers the benefits to the country from the cost of developing renewable energy systems while proceeding with the cleanup to be worth a monthly surcharge of some JPY675 per “standard” household. Compensation costs alone will be worth some JPY18 or more per month, regardless of who sells the electricity. This means the public will be saddled with the costs for a much longer than previously foreseen.

MEITI is talking about approving a plan to allow this JPY18/month charge to recover victim compensation charges of JPY2.4 trillion for the next 40 years, including compensation-related costs dating back to 1996! Around fiscal 2020, the big utilities will be required to release so-called base-load power – i.e., electricity generated from cheap, round-the-clock capacity (typically coal and nuclear plants) — to the Japan Electric Power Exchange. They now sell base-load power through their own retail channels and make only higher-cost output from oil-fired and other peak power plants available on the exchange.

Japan’s retail electricity market became fully deregulated in April 2016, but many of the country’s more than 300 independent power providers have no way of generating electricity on their own and instead depend on exchange-traded electric power supply to supply their customers. These newcomers’ lack of access to cheap base-load power makes for an uneven playing field against the regional utility oligopolies such as TEPCO, which have lost their monopolies but retain a capacity advantage.

MEITI’s new scheme will force the electric power incumbents to provide 30% of new providers’ power needs below cost. In return, METI wants new power providers to share around JPY3 trillion yen ($26.3 billion) in compensation costs with the incumbent oligopolies.

TEPCO Can Remain a Listed Company, but Not in its Current Form

While it has effectively been nationalized through a 54.69% holding by the NDLFC, TEPCO remains a listed company. Aside from the large NDLFC holding, TEPCO employees held 1.33%, the metropolitan Tokyo government holds another 1.20%, and some 200 foreign institutional investors (including foreign pension funds) also hold nearly 10% of outstanding shares even though the utility pays no dividend; ostensibly on the assumption that the Japanese government will do what it takes to keep the company a going concern.

TEPCO CEO Naomi Hirose has heretofore insisted the company can make enough money to clean up the Fukushima Daiichi plant, but compared with March 10, 2011, the day before the disaster, TEPCO’s stock market capitalization has shrunk by Y2.6tn in value. Debtholders however have not suffered losses. The depressed stock price implies TEPCO has borne slightly less than 20% of the total cost, with taxpayers picking up the other Y10.7 trillion, which does not include the cost of shutting down all Japan’s nuclear reactors, and therefore understates the total cost and the proportion paid by the public, as full de-commissioning of the site will take 30 to 40 years.

As costs keep ballooning, the government keeps raising its credit line of interest-free loans to TEPCO, which was recently raised to JPY13.5 trillion from JPY9 trillion; itself significantly higher than the initial JPY5 trillion credit line. The NDLFC receives bonds from the government that are cashed when necessary for lending to TEPCO. Since the government/MEITI now intends to stay involved in the decommissioning and compensation payment programs of TEPCO indefinitely, the de-facto nationalization of TEPCO also looks to continue for the foreseeable future.

The Electric Power Majors’ Demand Problem

In the meantime, TEPCO and essentially all Japan’s electricity majors have a demand problem. Since 2001, both total and peak electric power demand has consistently declined by 10.3% and 22.9% respectively through economic expansions and recessions as Japan’s economy becomes more energy efficient.

Grants from the NDLFC between 2010 and 2015 have reached JPY6,357.1 billion and are debited to the company’s balance sheet. This breaks down into losses of, a) JPY1,349.9 billion in cumulative extraordinary losses booked, b) JPY39.8 billion of decommissioning losses, and c) JPY7,658.4 billion of nuclear damage compensation expenses, some JPY1,301.3 of which was offset by grants and government indemnities. As previously mentioned, including the new MEITI estimates of another JPY2.5 trillion for compensation, TEPCO is on the hook for a total JPY15.9 trillion yen of MEITI’s JPY21.5 trillion estimate, which implies another JPY9.5 trillion in costs not yet accounted for.

Merger of TEPCO Power Distribution and Nuclear Businesses?

To cope with ballooning costs of the 2011 Fukushima disaster, TEPCO may have no choice but to eventually merge its power distribution and nuclear businesses with its peers. The document submitted to the MEITI special group periodically reviewing the problem, TEPCO restructure and integration alternatives include merging its nuclear electricity and electric power distribution businesses with other power utilities. This is the first time such contingencies have been mentioned, while the talk of selling off NDLFC-held TEPCO stock has effectively been dropped.

But merging with peers may be easier said than done. Since similar arrangements are already in place in the fuel and thermal power businesses, a merger of nuclear operations could be a difficult sell. Since power distribution will likely continue to generate stable revenue, other electric power utilities appear to be in no rush to integrate here either.
In addition, TEPCO’s revenue and earnings outlook is significantly affected by whether it can restart its Kashwazaki-Kariwa nuclear power station. Niigata Prefecture, where the plant is located, recently elected an anti-nuclear governor.

Going Cold Turkey on Nuclear Power Would be Even More Expensive

But while the clean-up costs and compensation for victims of the Fukushima nuclear power disaster are beginning to look like a black hole, going “cold turkey” on nuclear power generation would present an even greater burden to Japan’s economy.

a.Cost of Alternative Electric Power Generation is Still too High
After the Fukushima Daiichi nuclear accident, Japan’s energy self-sufficiency fell to just 6%. A well-balanced electric power source mix is essential to simultaneously achieve safety, stable supply, economic efficiency and environmentally suitable power supply to facilitate sustainable economic growth.

Trying to wean itself from its dependency on nuclear power generation while at the same time investing heavily in developing alternative electric power generation sources is a very expensive proposition for Japan. According to 2014 government estimates, nuclear power generation costs JPY10/kWh (kilowatt hour), while even coal is JPY 12.3/kWh, LNG JPY 13.7/kWh, and solar (non-residential) JPY 24.3/kWh. The FY2014 Energy White Paper (to March 2015). showed that, as Japan went cold turkey on nuclear power generation, the percentage of power from fossil fuel had rose from 62% to 88% over four years, and increased fuel costs electricity generation by over JPY9 trillion. It was thus not surprising that household energy expenses increased an average of 13.7% over these four years.

Japan’s Feed-in Tariff Act (FIT) for renewable electricity supply is already increasing the electricity cost to consumers separate and distinct from the related clean-up costs of the Fukushima disaster. If all approved FIT renewable electricity supply capacity of 87 gigawatts (79.9 gigawatts of which is solar) is put in operation, the cumulative cost to consumers over 20 years will be a cool JPY56 trillion, while lighting service costs alone would be over JPY850 billion a year.

b.Nuclear Power to Remain an Important Component of Japan’s Electricity Supply
Claims that the Japanese government is “coddling” or propping up inefficient, oligopolistic electric power majors overlook much of the economic facts of life. As a resource-poor country, Japan has been and will continue to be negatively affected by the threat of supply interruptions and fluctuations in the price of fossil fuels in world markets.

This vulnerability prompted Japan to increase the role of nuclear energy, a quasi-domestic power source, in the aftermath of the Arab oil embargo in the 1970s. Post Fukushima disaster, Japan is aiming to reduce an historically high level of nuclear power generation as much as possible through a) increasing energy efficiency/conservation, b) further introduction of renewable energy sources, and c) enhanced thermal power and coal-fired power generation.

The fact is that nuclear power generation remains an important component of this energy strategy—not necessarily by choice, but out of necessity. A joint MIT-Japan White Paper flatly stated that both nuclear power and renewable electricity will need to play a key role in the transition to low carbon system. Immediately after the 11 March 2011 Fukushima Daiichi nuclear plant disaster, all 48 of the country’s nuclear power plant reactors (which provided some 30% of total electric power supply and was planned to increase to 50% by 2030) were shut down. Japan’s energy self-sufficiency (primarily nuclear power) plunged to just 6%. By maintaining some nuclear power plant capacity, Japan aims to improve its self-sufficiency ratio to over 24% by 2030.

The Institute of Energy Economics, Japan (IEEJ) also observes that an important economic role of nuclear power in the past was to reduce extreme dependence on imports, and that this policy had saved Japan from sending ¥33 trillion ($276 billion) of national wealth overseas. The forced, dramatic shift to fossil fuel-fired electricity after the Fukushima disaster pushed up electricity generation fuel costs by nearly JPY4 trillion. In its July 2016 forecast, the Institute assumed that seven nuclear plants would be restarted by FY2017 and that a total of 19 operating nuclear power plants would save Japan some JPY4.7 trillion in imported fuel costs, while lowering CO2 emissions by some 11%. As the following changes in Japan’s electricity supply mix show, however, Japan needs to achieve a dramatic increase in both nuclear and renewables electricity supply capacity over the next 10 years to achieve a more sustainable electricity supply mix.

This Post was written by Darrel WhittenReading Advisors LLC