Nuclear disater: Japanese utilities will increase demand for LNG by about 10 per cent

Paul Boughton
Expected rise in gas imports to Japan following the Fukushima nuclear crisis. energy analyst Tom Grieder reports.

Australian firm Santos' chief executive officer, David Knox, has stated that Japanese utilities will increase demand for LNG by about 10 per cent for three or four years to offset the closure of the Fukushima Daiichi nuclear power plant (NPP). He also stated that the Fukushima Daiichi crisis could be very significant for the LNG industry if it means that some NPPs are not constructed around the world.

The Fukushima Daiichi crisis will undoubtedly have a significant impact on Japan's LNG demand. At Fukushima Daiichi, four reactors will be permanently shut down and decommissioned, with a decision on Units 5 and 6 dependent partially on the opinion of local communities. The reopening of the Fukushima Daini NPP—which has achieved cold shutdown status—could be delayed for months or even years while safety checks and repair works are carried out, depending on the damage caused to reactors, which recorded higher pressure and temperature readings following the disaster and an electrical board fire. Indeed, a previous earthquake in 2007 which damaged the giant Kashiwazaki-Kariwa NPP, led the whole plant to be completely shut down for 21 months.

Following the earthquake, Tokyo Electric Power Co. (TEPCO) reportedly closed 8,475MW of thermal power capacity, of which 3,275MW has been resumed as of today (7 April). LNG-fired units at Higashi Ohgishima, Goi, Yokohama, and Chiba with a combined capacity of 1,975MW were quickly brought back into service, although a number of large coal-fired units at Hirono, Hitachinaka, and Kashima power stations remain closed and are likely to require extensive repair work. While other smaller coal-fired power plants are being reactivated to increase electricity supplies, it is likely that the pace of repair work will now slow, as TEPCO has been concentrating on restoring the least damaged units first.

LNG will become a primary generation source to offset capacity closures. IHS CERA has identified a maximum of 9GW of spare gas-fired generation capacity owned by TEPCO and Tohoku Electric, based on 2010 utilisation rates. This capacity is probably being drawn upon to meet demand going forward. TEPCO has moved to import 10 gas-fired turbines by ship from General Electric to help offset nuclear capacity closures and enable the utility to supply the Kanto region with electricity. TEPCO would like to set up these turbines at existing plant sites before the July-September peak demand season, suggesting the company's gas demand will increase significantly from that period.

Relatively minor damage to LNG receiving terminals in the Tokyo Bay region will help strengthen LNG as a substitute generation feedstock of choice. Re-gasified LNG will probably be transported via the Tokyo Line and Shizuoka Line across Japan to Niigata prefecture and then into the afflicted Fukushima and Miyagi prefectures. LNG feedstock prices are more competitive against crude oil or fuel oil due to lagged indexation, while there are potential supply difficulties associated with sourcing low-sulphur fuel oil off the regional market. The relatively fast pace of restoration of city gas infrastructure in afflicted areas—which was around 32 per cent on an accumulated basis by 31 March 2011—is likely to support increased demand for LNG as restoration work is completed by mid- to late-May 2011.

Outlook and implications

Over the longer term, the extent of Japan's incremental LNG demand will depend on the impact of the crisis on electricity companies' generation build plans, and on how the government chooses to respond to the crisis.

Initial signs following the Fukushima Daiichi crisis suggest Japanese utility companies are moving to boost gas-fired generation. TEPCO has requested additional LNG supplies and gas-fired turbines from GE, while Siemens AG has offered additional gas-fired generation units capable of providing between 2,000MW and 3,000MW of electricity to Japan, which could become operational within 12 months. In the aftermath of the crisis, Hokkaido Electric Power Co. (HEPCO) has announced plans to construct a gas-fired power plant in Hokkaido with an installed capacity of up to 590MW. Although the plant is only likely to be completed by 2020/21, it could play a role in meeting long-term demand growth in the north-east following TEPCO's scrapping of plans to build a seventh and eighth reactor at the Fukushima Daiichi facility.

However, Japan's Ministry of Economy, Trade, and Industry (METI) is also investigating long-term plans to increase power supplies by bolstering grid-conversion capacity, which would allow more power to be transferred from the 60Hz transmission grid to the 50Hz grid in north-east Japan. Key uncertainties relate to how much conversion capacity the government plans to install and what technologies will be used. Experts suggest additional grid-conversion capacity could be installed more quickly if voltage source converter (VSC) technology is used, but if traditional high-voltage direct current (HVDC) technologies are selected, installation could take between 12 and 24 months. To some extent these plans pose a downside risk to Japan's LNG demand, as additional converter capacity would allow capacity from different types of power plants to be transferred into the north-east, undermining the long-term role additional gas-fired capacity would otherwise play in substituting nuclear power in the north-east.

Finally, the extent of Japan's incremental LNG demand depends on how government nuclear policy is affected by the Fukushima crisis. The Japanese government has decided to suspend discussions on its civil nuclear policy until the reactors at Fukushima are brought into cold shutdown status. However, chief of the Atomic Energy Commission (AEC), Shunsuke Kondo, has already stated that Fukushima will have a "major impact" on government policy.

It seems certain that safety standards will tighten and that reactors in Japan will need to be able to withstand long-term loss of power and natural disasters beyond their design parameters. Some NPPs already located on fault lines—such as the Hamaoka NPP—might even risk being shut down or else require extensive retrofit work. While this work is ongoing, reliance on LNG as a flexible, relatively clean, and increasingly plentiful generation feedstock will increase. Increased capital costs associated with reactor construction as a result of these changes could make financially stricken Japanese utility companies like TEPCO and Tohoku more reluctant to implement NPP expansion strategies going forward.

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