IEEJ e-NEWSLETTER No. 23:

October 15, 2013ｃ IEEJ 2013○IEEJ e-NEWSLETTER
No. 23(Based on Japanese No. 121)
Published: October 15, 2013
The Institute of Energy Economics, JapanIEEJ e-Newsletter Editor: Yukari Yamashita, Director
IEEJ Newsletter Editor: Ken Koyama, Managing Director
Inui Bldg. Kachidoki, 13-1 Kachidoki 1-chome, Chuo-ku, Tokyo 104-0054
Tel: +81-3-5547-0211 Fax: +81-3-5547-0223

ContentsSummary【Energy Market and Policy Trends】

1.

Discussions on Energy Policies in the Basic Policy Subcommittee

2.

The Second LNG Producer-Consumer Conference3.

Oil Prices Propped Up by the “Long Arab Spring”

4.

Will the New Thermal Power Regulation by the US EPA Accelerate the Development
and Deployment of CCS?

5.

Chinese Solar Industry Required to Undertake Structural Reforms amid Business Recovery

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IEEJ e-NEWSLETTER No. 23:

October 15, 2013ｃ IEEJ 2013
○Summary【Energy Market and Policy Trends】
1.

Discussions on Energy Policies in the Basic Policy Subcommittee
Among meetings held by the Basic Policy Subcommittee, renewables and nuclear were discussed

in the third meeting, strategies for securing resources and the oil and gas supply chain in the fourth
meeting, and reforms of the electric power system and the structure of the energy industry in thefifth meeting.

2.

The Second LNG Producer-Consumer Conference
The Second LNG Producer-Consumer Conference was held. One of the highlights was theannouncement of specific actions by the Japanese government to deal with the Asia premium of LNG
prices.
3.

Oil Prices Propped Up by the “Arab’s Long Spring”
Oil prices have remained high for some time, partly due to the destabilization of the MENA region

triggered by the Arab Spring. The various causes of confrontation in the region will continue to drive
buying in the oil market.
4.

Will the New Thermal Power Regulation by the US EPA Accelerate the Developmentand Deployment of CCS?

The new CO2 emissions standard set by the US EPA placing tough restrictions on coal-fired
thermal power is likely to help reduce CO2 emissions in the short to medium term. However, the riskof putting off the development and expansion of CCS, which is necessary for tackling long-termclimate change, must also be considered.
5.

Chinese Solar Industry Required to Undertake Structural Reforms amid Business Recovery
Buoyed by soaring demand in Japan and China, the Chinese solar panel manufacturers areregaining financial strength. As the glut continues, however, the effect of the policies for
restructuring and strengthening the foundation of the industry must be closely monitored.

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1.

October 15, 2013ｃ IEEJ 2013
○Discussions on Energy Policies in the Basic Policy Subcommittee
Akira Yanagisawa, Senior Economist
Energy Data and Modeling Center

On September 4, 17 and 24, the third to fifth meetings of the Basic Policy Subcommittee were held. Thethemes of the meetings were “the situation surrounding renewable energies” and “the response to theaccident at Tokyo Electric Power’s Fukushima Daiichi Nuclear Power Station and the issues for the future”
at the third meeting, “the medium- to long-term strategy for securing resources based on the changes in theinternational supply-demand structure of energy” and “building a robust oil and LPG supply chain for
securing a stable supply” at the fourth meeting, and “the situation of the electric power industry after thereforms of the electric power system”, “the direction of the natural gas supply chain and the reforms of thegas system” and “the outlook for the new energy industry structure” at the fifth meeting.
The third meeting discussed the problem of excessive emphasis on increasing the introduction of solar
photovoltaic among various renewable energies, in view of the cost of renewable energies and the roles in
the generation mix. The discussion on nuclear power focused on the mechanism of the safety measures;some members commented that the Japanese government should clearly express its intentions on nuclear
policy.
The fourth meeting discussed the strategies for securing resources, particularly oil and natural gas. To
counter the high import prices, measures such as resource development and cooperation with neighboring
countries, diversifying the energy mix, and taking advantage of the Shale Gas Revolution were suggested.
The discussion on oil and LPG supply chains focused on domestic distribution, and confirmed therobustness of liquid fuel supply in case of disaster. The meeting also highlighted the difficulty ofimplementing quick and effective measures for maintaining the infrastructure in depopulated areas,including gas stations which are decreasing in number.
In the fifth meeting, the members agreed on promoting reforms of the electricity and gas systems,
although opinions differed on the pros and cons of the market mechanism and the adverse effect of thereforms on the stable supply of electricity. This area will continue to require careful consideration.
IEEJ CEO and Chairman Masakazu Toyoda commented in the meeting as follows:Regarding the introduction of renewable energies, there is disproportionate emphasis on solar
photovoltaic, and the introduction of geothermal and wind power has not progressed. A system forrebalancing and encouraging geothermal and wind power is needed.

It is important to clarify the need for and the role of nuclear, and to respond to public anxiety about itssafety. In the US, there are incentives for encouraging voluntary efforts for ensuring safety; it is not
sufficient to merely preach “the importance of voluntary efforts”.

We should be aware that US’s commitment to stability in the Middle East will weaken due to theShale Gas Revolution. It is important to continue to ensure stability through cooperation in technology,
health-care and education. It is essential to maintain the goal of doubling the ratio of Japan’s domestic
and self-developed energies in the next Basic Energy Plan as in the previous Plan, and for thegovernment to provide funding and support for human resources.

The public sector must help eliminate the Asia premium of LNG prices, such as seeking to ban theDestination Clause in collaboration with other Asian countries based on the experience of the EU. To
make the oil industry stronger, the industry must evolve into a comprehensive energy industry; thepolicy of escaping from the dependence on oil must be reviewed.

Many countries are facing various problems due to the deregulation of electricity; supply stability
cannot be achieved merely by deregulation. With its low energy self-sufficiency rate, Japan mustdesign its energy system with great care. The deregulation of gas should concurrently help eliminate
the Asia premium.
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2.

October 15, 2013ｃ IEEJ 2013
○The Second LNG Producer-Consumer Conference
Tetsuo Morikawa, Manager
Gas Group, Oil and Gas Unit

The Second LNG Producer-Consumer Conference was held on September 10 in Tokyo, gathering morethan 1,000 participants from 50 countries and regions. Like last year, the conference was attended not only
by executives of buyers and sellers of LNG but also by ministerial-level representatives of both exportingand importing countries. The key points of the discussions are summarized below.
First, Japan announced a variety of specific actions to deal with the Asia premium of LNG prices. In hisspeech, METI Minister Motegi welcomed the initiative proposed by the IEEJ to establish a multilateral
LNG research group of various research institutions of LNG-related countries, in addition to the start of astudy on the joint purchase of LNG by Japanese and overseas power companies and bilateral joint studies
between Japan and Europe, and Japan and India, that have already been announced. Mr. Ueda,
Director-General of the Agency for Natural Resources and Energy, spoke about the impartial review ofelectricity tariffs factoring in the efforts of the power companies to reduce fuel costs, and the establishmentof a 1 trillion yen debt guarantee system by JOGMEC for projects that would help lower the import price ofLNG. Many commented in favor of a pricing system based on the actual supply and demand of natural gasand LNG, but the discussion did not agree on an actual roadmap for setting up a hub in Asia.
Second, while all buyers questioned the level of LNG prices and the pricing system, reactions of thesellers differed. Most traditional sellers avoided giving a direct answer or defended the petroleum-linked
pricing system, whereas the newer sellers generally reacted positively to the buyers’ requests. In particular,
Freeport LNG, which signed a liquefaction agreement with Japan and Korea the day before the Conference,described its Henry Hub-based pricing system as “based on the request of customers”.
Third, the prospects for a major increase in new LNG supplies are becoming increasingly realistic. There
has been measurable progress this year in the new Russian LNG projects of Vladivostok, Sakhalin-1 andYamal such as the participation of Japanese and Chinese companies, and in the China-Russia gas pipeline
negotiations. Furthermore, in addition to Freeport, the US government granted non-FTA export approval tothe Cove Point Project the day after the Conference. Moreover, as reported in the August issue of the IEEJ
Newsletter, in addition to the 110 million tonnes/year of liquefaction capacity of new projects in Australia
and the US, there will be additional liquefaction capacity from LNG projects being planned in countries
like Canada, Russia and Mozambique, totaling nearly 100 million tonnes/year. These vast additional
capacities are expected to put downward pressure on LNG prices towards 2020. On September 24, Prime
Minister Abe visited Canada, and announced plans to launch ministerial-level talks for securing LNG fromCanada in the near future.
While not directly related to the discussions, the fact that several governments and companies arestarting to use this Conference as a forum for announcing new policies and agreements shows the growing
importance of this Conference for the participants.

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3.

October 15, 2013ｃ IEEJ 2013
○Oil Prices Propped Up by the Arab’s Long Spring”
Yoshikazu Kobayashi, Manager
Oil Group, Oil and Gas Unit

Oil prices have remained high for some time. Although the Brent price dropped below $100/bbl in April,
it gradually rose again and has remained around $110/bbl since July. The continuing high price of oil
combined with the depreciation of the yen will significantly affect Japan’s economic recovery.

On a global demand and supply basis, there has been a glut of oil for more than 18 months. Althoughsome attribute the price hike to disruption of the oil supply since the beginning of the year, the global
excess supply persists due to rising production in the US and Saudi Arabia. Oil prices would surely fall
were it not for the political unrest in the Middle East and North Africa, particularly Egypt, Libya and Syria.
In particular, the supply of more than 1 million B/D from Libya has been affected by a workers’ strike at
the oil exporting terminal, causing locally tight supply and demand for light oils such as Brent.

Meanwhile, Syria and Egypt, though both are oil producers, export very little to the international market,
and so disruption of oil exports from these countries has little or no effect on the physical market balance.
However, the sectarian strife in Syria spreading to neighboring Iraq, and Egypt’s domestic turmoil affecting
the Suez Canal, a strategic sea link, are commonly recognized as possible “oil supply disruption” scenarios
among the market players, driving buying in the futures market. Currently, international oil prices are
greatly affected by the expectations of the players in the futures market, and the events successively
occurring in the Middle East are boosting expectations that oil prices will continue to rise, thus keeping
prices high. In late August, the futures market reacted to the looming possibility of a military strike on
Syria, causing oil prices to surge, but then settled down when an agreement was reached on the disposal ofchemical weapons and the threat of a military strike receded. However, the situation remains uncertain.

The continuing political volatility in Egypt, Libya and Syria was triggered by a series of popular
movements that began in 2011. Egypt and Libya are still searching for a new political governance toreplace their ousted regimes, while Syria has been mired in a civil war between the government and therebel forces for more than two years. The “Long Arab Spring” continues to bedevil the international oilmarket.

International oil prices are affected by not only the situation in the MENA region but also the global
macroeconomic situation and the monetary policies of the US. However, the wide-ranging causes ofconfrontation of sectarian, ethnic and regional origin behind the current unrest in the MENA region arelikely to persist and cause oil prices to remain high.

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4.

October 15, 2013ｃ IEEJ 2013○

Will the New Thermal Power Regulations by the US EPA Accelerate
the Development and Deployment of CCS?
Hiroki Kudo, Assistant to Managing Director
Global Environment and Sustainable Development Unit

On September 20, the US Environmental Protection Agency (EPA) announced a new CO2 emissions
standard for new thermal power plants. The regulation of CO2 emissions from thermal power plants by theEPA is a highlight of the climate change policy of the second Obama administration, and there is keeninterest in the level of the standard, and its feasibility.
The CO2 emissions standard for new coal-fired thermal power plants was set at 1,100 lbs (pounds)/MWh, similar to that for large gas-fired thermal power plants (1,000 lbs/MWh). This is an extremely toughfigure considering that the CO2 emissions of the most efficient coal-fired thermal power plants today areapproximately 1,800 lbs/MWh.
Together with this strict emissions standard, the EPA has set some flexibility for the operation of theplants: a plant may be evaluated based on its net CO2 emissions provided that they build and operate a CCS(carbon capture and storage) facility on the premises. Though already in the demonstration phase in somecountries and in use in oil fields for enhanced oil recovery, CCS is not a realistic choice due to the highinitial cost.
Adding the construction of CCS to the new requirements suggests political will to encourage CCS
technology. However, with gas-fired thermal power gaining competitiveness thanks to the increase in shalegas production, deployment of CCS could disadvantage the new coal thermal plants in the short to medium
term.
Facing opposition even from the Democrats in Congress representing coal-producing states, the newstandard will likely face domestic political opposition. President Obama expressed commitment to thestandard when he announced the Climate Action Plan in June, clearly conscious of Congress. However, asopposition to the standard has mounted with the announcement of the actual figures, it could become amajor campaign issue for the midterm election.
Regarding preventing global warming, the new standard will certainly encourage the shift from coal togas for economic reasons, and help reduce CO2 emissions in the US in the short to medium term. However,in the long term, it could discourage the development and deployment of CCS technology. Like otherdeveloped countries, the US aims to slash GHG emissions by 2050, for which CCS technology is essential.
However, focusing on short-term measures could make it difficult to achieve the long-term target. The
possible consequences of the new EPA regulation highlight the importance of the time factor in designingpolicies to achieve the ultimate goal to counter climate change, in other words, how best to develop anddiffuse technologies that will become necessary in the future.
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5.

October 15, 2013ｃ IEEJ 2013
○The Chinese Solar Industry Required to Undertake
Structural Reforms amid Business Recovery
Hisashi Hoshi, Board Member, Director
New and Renewable Energy & International Cooperation Unit

The major Chinese solar panel manufacturers are regaining financial strength. All major companies,including the global leader, Yingli Green Energy, expect shipments to exceed production capacity. Panel
prices have increased 23% since the beginning of the year, a turnaround from a market which had lost over
60% of its value in the past two years. Some top companies even expect to return to profitability for thefirst time in two years.
Behind this dramatic comeback of the major Chinese manufacturers, many of which had deficits of tensof billions of yen last year, is the soaring demand in China and Japan, driven by the recently introduced
Feed-in Tariff (FIT) system in both countries. This has led to the explosive growth of solar power in bothmarkets, with 9-10 GW and 5-8 GW of new capacity expected in China and Japan in 2013, respectively.
Will the Chinese panel industry continue to stabilize? On the demand side, given the limited space formega solar power in Japan, the current pace is not likely to last long. On the other hand, China aims to add
35 GW by 2015, and a further 10 GW each year beyond 2014. Yet European countries are reviewing theirsystems for installing new capacity and will not be as lively as before.
On the supply side, the world has 60-70 GW of production capacity, yet estimated global demand is only
34 GW for this year. Although this is the highest ever, the glut of supply remains. The panel industry willremain under downward market pressure.
The Chinese government has decided to strengthen its solar power industry. The new rule announced by
the Ministry of Industry and Information Technology (MIIT) on September 17 prohibits solar power firms
from expanding their production capacity without technological improvement, and requires them to spend
3% of sales or at least 10 million yuan (160 million yen) each year on R&D. The rule also sets a minimum
production capacity for each area, and requires any company that fails to meet the minimum to expand its
capacity based on the requirement for technological improvement. Furthermore, the rule defines a baseline
for the conversion factor of panels, and new facilities will be subjected to a stricter baseline than existing
ones. Any facility failing to meet this new rule will be required to achieve the goal through a merger andtechnological innovation under government supervision.
The government policy to encourage restructuring of the industry will boost structural reform of China’s
solar power industry and have various implications on the global solar panel market. The reform could
enable Chinese products to gain essential competitiveness in quality and scale, and make them a stronger
threat for Japanese manufacturers in the Japanese market where they now have a 30% share.
Will the new rule be effective? The solar power industry has been protected by regional governments
and has provided jobs and tax revenues, so the regions are expected to provide some opposition. Both theimpact on the global market and changes in regional politics must be closely monitored
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October 15, 2013

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