IEEJ e-NEWSLETTER No. 2：May 2012

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IEEJ e-NEWSLETTER
No. 2(Based on Japanese ver. No. 104)

Published: May 16, 2012
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

Contents
Summary【Energy Policy in Japan】
1. Discussions at the Fundamental Issues Subcommittee ofthe Advisory Committee for Natural Resources and Energy
2. Reform of the electric power system
3. Current situation concerning the restarting of nuclear power
stations【Our Views on the Global Situation】
4. Change of leading players in wind power: Rumors of TOB of Vestas
5. China Watching: General energy policy of China
6. ME Watching: Middle East unlikely to stabilize soon
7. Russia Watching: Can Russia improve its investment environment
to attract foreign capital?

IEEJ e-NEWSLETTER No. 2：May 2012

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Summary
1. Discussions at the Fundamental Issues Subcommittee of the Advisory
Committee for Natural Resources and Energy
Different energy mix options were discussed. IEEJ Chairman & CEO Masakazu Toyoda
commented that “it is essential to present numerical evidence of the feasibility of the
optimal combination of power sources. With regard to calls for the complete abandonmentof nuclear power, the feasibility of introducing large amounts of renewable energies andenergy conservation must be explained.”
2. Reform of the electric power system
At the Third Expert Committee on Electric Power System Reforms, the diversification of
power supplies and the utilization of distributed energy systems were discussed. Care isrequired in terms of power security, the impact of separating power generation fromtransmission, and of forcing utilities to contribute electricity amid the current power
shortages. By combining appropriate systems, it is essential to design a system that allows
the industry to function stably and efficiently.
3. Latest developments concerning the restarting of nuclear power stations
The nuclear power stations in Japan are facing a decisive moment in the path torestarting. The definition of “plant-hosting communities and municipalities” is becoming
obscure as the governors of Kyoto and Shiga Prefectures issued proposals requesting thegovernment to be cautious about restarting the Ohi Nuclear Power Plants No. 3 and 4 inFukui Prefecture, adding to the complexity of the problem. There is concern about electric
power shortages this summer, and the situation remains unpredictable.
4. Change of leading players in wind power: Rumors of TOB of Vestas
Two major Chinese wind turbine manufacturers are reportedly considering a takeoverbid for Vestas, the world leader in wind turbines. The purchase of Vestas, which is sufferingin the stagnant European market, by Chinese firms would be a repetition of what happenedin the solar panel market in which the Chinese took over the leading role.
5. China Watching: General energy policy of China
In its general energy policy, the Chinese government is setting energy conservation andper-unit GDP carbon-dioxide emission reduction targets for each region, and introducing
subsidies and tax benefits. However, they are having difficulties drawing up the overall
energy supply and demand plan, including renewable energies and nuclear power.
6. ME Watching: Middle East unlikely to stabilize soon
The situation remains volatile in the entire Middle East and North Africa. The outlook for
Iran remains unclear despite the temporary easing of tensions at the P5+1 meeting inTurkey, while the turmoil in Syria is worsening. The presidential election in Egypt could
trigger another demonstration by malcontents.
7. Russia Watching: Can Russia improve its investment environment to
attract foreign capital?
One of the most urgent issues for Russia in remaining a major crude oil and natural gas
producer in the long run is to develop regions including the far east, eastern Siberia and thefar north, where exploration and production costs are high. To attract the large amounts offoreign investment needed for development, Russia must improve its investment
environment, including curbing the spread of corruption.

IEEJ e-NEWSLETTER No. 2：May 2012

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1. Discussions at the Fundamental Issues Subcommittee of the Advisory
Committee for Natural Resources and Energy
Shigeru Suehiro, Manager, Senior Economist
Energy Demand Supply and Forecast Analysis Group
Energy Data and Modelling Center

Deliberations by the Fundamental Issues Subcommittee on the revision of the Basic Energy Plan are stillongoing. Both the 18th (April 11) and 19th (April 16) meetings discussed the energy mix options, including
the combination of power sources.
In the 18th meeting, the five energy mix options which were formulated by summarizing the options
proposed by the participants were discussed. The five options can be summarized as follows: Option A - tolet the end-users decide the optimal combination of energy without citing numbers; Option B - to abandon
nuclear power completely as soon as possible (0% nuclear power, 35% renewable energies); Option C - toreduce the dependency on nuclear power (20% and 30%, respectively); Option D - to keep nuclear power
generation as a core power source (both 25%); and Option E - to maintain the ratio of nuclear power
generation at the current level (35% and 25%, respectively).
The discussion on the options was characterized by a dichotomy between nuclear power and thefeasibility of renewable energies. In response to opinions indicating that “options C through E are
unrealistic since the ratio of nuclear power would only be 10% or so in 2030, assuming that the plants aredecommissioned after 40 years of operation”, several participants countered that “the plant life can beextended to 60 years based on the government’s proposition” and that “it is technically possible to achieve
the percentages both in terms of plant life and availability based on international standards”. Someparticipants questioned the feasibility of introducing large amounts of renewable energies, requesting“specific means for renewable energies to achieve a ratio of 35%”. Requests for “an either/or discussion
between the two options” was countered by many who stated that a broad range of options should bepresented. One participant questioned the feasibility of “denuclearization while staying under the nuclear
umbrella of the United States”.
In the 19th meeting, the discussion on the options continued, focusing on thermal power and renewableenergies. While many supported the shift to LNG for thermal power, there was discussion on the challenges
in securing a stable supply of gas, and an opinion that “carbon-dioxide reduction should be done abroad”(through the transfer of coal-thermal technologies to other countries). Regarding renewable energies, thebearing of costs including those of transmission lines were discussed. The “extent of feasibility” ofrenewable energies will continue to be an important topic in the upcoming discussions.
The opinions of IEEJ Chairman & CEO Masakazu Toyoda expressed at both meetings can besummarized as follows: For the discussion on the optimal combination of power sources, it is essential topresent numerical evidence of feasibility. With regard to calls for the complete abandonment of nuclear
power, the feasibility of introducing large amounts of renewable energies and energy conservation must be
explained. Japanese citizens will not understand pretentious discussions.
Each option will be quantitatively analyzed using economic models to evaluate its
impact on economy.
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2. Outline of the discussions on reform of the electric power system

Junichi Ogasawara, Senior Economist, Manager
Electric Power Group, Electric Power & Coal Unit

At the Third Expert Committee on Electric Power System Reforms held on April 3, the diversification of
power supplies and the utilization of the dispersed energy system were discussed. Among the topics raisedin the preceding meetings, the following topics were discussed in this meeting: Topic 3: revision ofregulations in the power generation area and revitalization of the wholesale electricity market; Topic 4:
utilization of the distributed energy system including renewable energies, co-generation and on-site power
generation, and measures to promote users’ choice; and Topic 5: ensuring large-scale power supplies andreserve capacities, and a mechanism to promote the necessary investments. Although the participants
expressed a broad range of opinions, they were not summarized due to lack of time. As a member of theCommittee, I summarize my key views below.

Regarding the measures taken in Europe and the US to promote competition as was introduced in themeeting, my view is that a certain level of reliability is needed to win users, and in that sense, systems
such as VPP (virtual power plant) that utilize the excess power supply of general power utilities aredesirable. However, separating power generation from transmission and forcing utilities to provide power
to the electric power exchange under the current power shortage situation resembles the design of thepower market in California, which experienced a crisis. In order to prevent a similar problem, we musttake into account the experience of California in deciding how to act.

Among the different distributed energies, co-generation, which takes little time to build, is important as ameans to prevent supply shortages. However, as most of the electricity from co-generation that is sold isexcess power with low power value, it is necessary to enhance its value by using individual co-generation
systems aggregated together, enhancing their control functions by adding smart features, and combining
with other electricity demands.

The target reserves to be secured is 8 to 10% in the mid- to long-term, and 3% on a day-to-day basis. To
secure the necessary installed capacity (kW), paying incentives (capacity payment) for owning power
supplies and building a capacity credit market based on prior supply security commitment are effective.
Although there is no consensus among experts on what mechanism the government will finally adopt tosecure reserve capacity, forcing utilities to provide power sources to the power exchange will discourage
the general power utilities from having excess supply, and may result in power shortages in the long-term.
In that case, the government should perhaps ultimately be involved in securing reserve capacity. It is
important to design an appropriate system by combining the systems above.

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3. Latest developments concerning the restarting of nuclear power stations

Tomoko Murakami, Group Manager
Nuclear Energy Group, Strategic Research Unit
The nuclear power stations in Japan are facing a decisive moment in the path to restarting. Among thefifty commercial nuclear power plants in Japan (excluding Units No. 1-4 of the Fukushima Daiichi Nuclear
Power Station), none is in operation after the shutdown of Tomari Unit 3 of the Hokkaido Electric Power
Company (912 MW) on May 5. The government has started attempts to persuade the Japanese public andthe nuclear plant-hosting municipalities by pointing out “various inconveniences including disruption of theJapanese economy if the plants are not restarted”. So far, two steps have been taken toward restarting,namely (1) stress tests on the safety measures taken after the Fukushima Daiichi accident and (2) evaluationof the stress test results by the Nuclear and Industrial Safety Agency (NISA) and the Nuclear Safety
Commission of Japan (NSC). However, the third and final step, that is, making a political decision andgaining the consent of the plant-hosting municipalities, is the most difficult challenge.
Regarding the Kansai Electric Power’s Ohi Units 3 and 4, which are currently the focus of the issue ofrestarting, on March 23 the NSC evaluated that both the process and the results of the stress tests
implemented at the plant were adequate. Subsequently, government leaders including Prime Minister Noda
expressed the “need to restart the plants promptly”. Meanwhile, Governor Nishikawa of Fukui Prefecture,
which hosts the Ohi nuclear power plant, has been requesting “the establishment of a new safety standard
based on the lessons of the Fukushima Daiichi accident” since last year as a pre-requisite for restarting. In
response, NISA presented a 30-item safety improvement measure as a provisional safety standard under thePrime Minister’s instructions, for which the Nuclear Safety Task Force of Fukui Prefecture indicated its
intention to give general approval.
Nevertheless, the situation remains uncertain, as the neighboring municipalities of Kyoto and Shiga
Prefectures claimed that the provisional safety standard had been drawn up too quickly and the decision torestart was premature. On April 23, Senior Vice Minister Makino of the Ministry of Economy, Trade andIndustry visited Kyoto Governor Yamada and Shiga Governor Kada to request their understanding of thegovernment’s view that the plant should be restarted, but the governors maintained their cautious stance.
Regarding the restart, Mayor Hashimoto of Osaka City is also becoming more critical, adding to thecomplexity of the issue. Deciding the scope of the local communities and municipalities whose approval isneeded for the restart is becoming a decisive factor for restarting the plants.
Looking back, the conditions for restarting have never been clear. The issue became complicated whenstress tests, which in Europe are used to demonstrate the robustness of nuclear plants when hit by extreme
incidents, were adopted as a requirement for restarting the plants after a periodic inspection. The new
nuclear regulatory agency, which was planned to start in April, has not yet been established. The safety
regulators approved the restart without any permanent, clear standard, and left the final decision to thepoliticians. The matter has been made worse by the unclear distinction between political judgment and theconsent of municipalities. Nevertheless, the summer when electricity supplies will tighten is rapidly
approaching. Japanese policy chiefs must remind themselves that the whole world is watching how Japandeals with this issue.
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4. Change of leading players in wind power: Rumors of TOB of Vestas

Hisashi Hoshi, Board Member, Director
New and Renewable Energy & International Cooperation Unit
In mid-April, there was dramatic news in the wind power generation market. According to a report, twomajor Chinese wind turbine manufacturers, Gold Wind and Sinovel, are considering a takeover bid forDenmark’s Vestas, the global leader in wind turbines. The news was surprising, but sounds credible.
A major factor behind the rumored takeover bid could be the plummeting share price of Vestas.
Following two downward revisions of revenues (in October 2011 and April 2012), the share price of Vestas
has fallen nearly 60%. As the governments in Europe and the U.S. are revising their subsidies to renewableenergies in particular, and at the same time, the spread of wind power generation suddenly slowed, thecompany made matters worse by moving against the market direction and expanding production capacity in2009 through an increase in capital.
Meanwhile, the Chinese companies have reasons to be attracted to this established wind power firm. The
Chinese wind power market has been expanding rapidly, adding nearly 20 GW of new capacity each year
during the last two years. However, the Chinese government recently shifted policy in order to control theunruly expansion, including depriving local governments of licensing rights. While China is expected tomaintain its size as a wind turbine market, the upward trend is clearly leveling off. For China to grow while
keeping its vast production capacity, the brand and overseas sales network of Vestas is extremely attractive
for the two Chinese companies.
Another attraction of Vestas to China might be its technology. The Chinese government is planning toincrease its offshore wind power capacity by 5 GW by 2015 and 30 GW by 2020. The on-shore wind
power facilities built so far are located inland with good wind conditions, such as Inner Mongolia, and theNorth East region, but require long transmission lines to carry the power to consumers in the eastern part ofthe country. In comparison, good wind conditions and shorter distances to consumers make offshore wind
power the optimum means of power generation for China, but the country has suffered a string of problems.
For example, in an offshore (shallow waters) project in Jiangsu Province, each turbine is reportedly
breaking down once every two months on average. Chinese manufacturers therefore want to purchase thetechnology and experience of Vestas, which has almost a 40% share of the total offshore wind turbine
installations.
The truth remains unclear as Vestas has declined to comment on the report, and comments from the
Chinese are not available. Furthermore, the two Chinese companies may not have the muscle needed forthe takeover bid, as their businesses are also having difficult time due to intense competition.
In photovoltaic power generation, we have already witnessed that Chinese Suntech Power
took the world’s leading position in the industry, while the former champion, Q-cells ofGermany, went bust this April..

It is highly likely that the Chinese players will take aleading role in the wind turbine industry as well.
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5. China Watching: General Energy policy of China
Li Zhidong, Visiting Researcher
Professor at Nagaoka University of Technology
The Chinese government announced its 12th Five-Year Plan in March, 2011. As the targets of its binding
energy policies, it plans to reduce per-unit GDP carbon-dioxide emissions by 17% between 2010 and 2015,
reduce energy consumption per GDP by 16%, and increase the ratio of non-fossil fuel energy to 11.4%.
This report describes the progress so far.
In August last year, the State Council of China announced the “Comprehensive work Plan for Energy
Conservation and Emission Reduction” and the “Work Plan for Greenhouse Gas Emission Control”.
Based on the “principle of common but differentiated responsibilities”, the 31 regions of China weredivided into five energy conservation groups and nine carbon-dioxide emission reduction groups according
to economic development criteria, etc., and each region was assigned a goal to meet in order to achieve theoverall target. Then, in December, twelve ministries and agencies, including the National Development andReform Commission, formulated the “Action Plan for Energy Conservation and Low Carbon Activities for
17,000 Key Enterprises”. As of 2010, there are 17,000 factories and businesses with energy consumption of
more than 5,000 tce (Ton of coal equivalent), accounting for 60% of the national energy consumption. The
Action Plan aims to reduce energy consumption by 250 million tce in five years by assigning energy
conservation targets to these 17,000 enterprises , and introduces a rigorous censure system. Further, inFebruary this year, the Ministry of Industry and Information Technology formulated the 12th Five-Year
Plan for energy conservation in industry, whose energy consumption accounts for more than 70% of thenational energy consumption, setting a target reduce energy consumption per-unit Value Added of 21%,
which is greater than the national target.
Support measures have also been established. In March last year, the National Development and Reform
Commission and the Ministry of Finance decided to expand the financial assistance available for improving
the efficiency of electric machinery, which consumes 60% of the country’s electricity and 80% of that inindustry. They also announced in June that any company that successfully reduces its energy consumption
by 5,000 tce or more per year will receive a subsidy of 300 to 360 Yuan/tce jointly from the central andlocal governments. The Ministry of Finance decided in March this year to cut the vehicle tax onenergy-saving cars to 50% and that on new energy cars, such as electric vehicles, to zero. Further, theNational Development and Reform Commission has been taking the initiative to run a national low-carbon
experimental projects in eight cities and five provinces since July 2010, as well as an experimental
project for introducing regulations on the total amount of emissions and the trading system for carbon
emission quotas in five cities and two provinces since November last year.
As explained above, the policy measures focusing on energy conservation are progressing steadily, butmany issues remain. Policy measures defined in the 12th Five-Year Plan, such as adjusting the sale price ofcoal-fired electricity, which is the main power source, to fairly reflect the generation cost, and raising thecoal resource tax, still have no prospects for realization. Regarding the development of renewable energies,
while individual measures such as project bidding, setting a standard purchase price (equivalent of FIT) for
photovoltaic electricity and waste-generated electricity, and increasing the surcharge rate are progressing,
the formulation of the overall plan is lagging. Regarding nuclear power, although safety measures havebeen strengthened following the Fukushima Daiichi accident and in addition to starting up new plants, thepolicy of “promoting construction with safety as a pre-requisite” was affirmed at the National People’s
Congress in March this year, future plan is still under consideration. Consequently, the creation of an
overall energy demand and supply plan is not progressing smoothly. A new empowered comprehensive
government agency with strong authority and adjustment functions needs to be established.
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6. ME Watching: Middle East unlikely to stabilize soon
Koichiro Tanaka, Board Member
Director of JIME Center

The situation in the Middle East and North Africa remains mixed, with some temporary improvements
but also increased mid- to long-term uncertainty and instability.
Iran resumed nuclear talks with the P5+1 countries in Istanbul after a 15-month hiatus. To prevent an
Israeli military attack on Iran, the suspension of 20% uranium enrichment by Iran became a main topic ofdiscussion, in which Iran’s goal was the lifting or easing of increasingly harsh economic sanctions. As
Iran’s preliminary announcement of a “new proposition” met the intentions of European countries and the
U.S. who wish to avoid armed conflict, the parties announced that the discussion was “constructive andfruitful” even though there was no substantial progress in the objectives of any of the parties. The parties
also agreed to continue trying to resolve the problem through diplomacy during the next meeting in
Baghdad in late May.
It is not clear whether the meeting will succeed. Many parties and individuals may attempt to destroy thisframework which has cooled the tension, including Israel, the U.S., the GCC, and even Iran. Meanwhile,
President Ahmadinejad, whose influence is rumored to be weakening since losing the legislative election in
March, visited the island of Abu Musa in the Persian Gulf, to which the UAE stakes a claim. This triggereda strong reaction from the GCC, which is already highly concerned over the nuclear issue.
The turmoil in Syria is entering another phase as both the Syrian government and the opposition
accepted a proposal for a cease-fire from Kofi Annan, the UN-Arab League envoy to Syria. The cease-fireshould reduce the killings and pave the way for a soft landing, but eventually shorten the term of the Assadregime. However, the Syrian military continued its attacks on the opposition after the cease-fire deadline,
leading to strong accusations against Syria by the international community. Consequently, Russia andChina, which had preferred to remain cautious, finally agreed to support the denunciation of Syria by the
President of the UN Security Council, and agreed to significantly increase the number of UN truce
monitors. At a meeting of the Friends of Syria Group, which is a coalition of the willing, there were calls
for strong economic sanctions through the Security Council, especially from Europe, the U.S. and Turkey,
which is a neighbor of Syria, and the tide is turning against Assad. Thus, the cease-fire is accelerating thedownfall of the Assad administration.
In Egypt, the High Election Commission rejected the candidates closely related to the previous
administration, as many had expected. However, the disqualification of a prominent Muslim Brotherhood
member and another Salafist candidate due to superficial reasons is causing controversy and concern thatthe malcontents may call another angry protest.
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7. Russia Watching: Can Russia improve its investment environment
to attract foreign investment?
Shoichi Itoh, Senior Researcher
International Strategy Analysis Group, Strategy Research Unit
On May 7, a ceremony will be held to inaugurate Vladimir Putin for his third term as president. When
he took office as prime minister four years ago, he faced the urgent task of rebuilding the Russian economy
which had been severely struck by the global financial crisis that had started in the autumn of that year. The
real GDP in 2011 ended up slightly higher than that in 2008 only because oil prices remained high since thesummer of 2010.
The collapse of Lehman reminded the Russian government of the need to correct its energy
resource-dependent economic system and to reduce its economic vulnerabilities in order to attract foreign
investment. However, Russia has little choice but to depend on the oil and natural gas industries to support
its economy for the time being. The new challenge for Russia is to gradually expand the scale ofdevelopment in the east (the far eastern region and eastern Siberia) and the far north (including thecontinental shelf area) of the country, where exploration and production costs are high, in order to maintaincrude oil and natural gas exports at current levels. To explore these less-developed regions, large-scaleforeign investment and technological support are essential. One example of such investment is theestablishment of a joint venture by Rosneft and Exxon Mobil announced on April 16 for joint developmentin the Kara Sea (a part of the Arctic Ocean) and the Black Sea.
Drastic improvement of the investment environment is essential to promote foreign investment in the
country not only in the energy sector but also the entire Russian economy, as Putin frankly acknowledgedin his last annual report as prime minister at the lower house on April 11. The need to secure transparencyof the legal system and to simplify the complicated and time-consuming administrative procedures of thecountry is widely acknowledged. In addition, widespread corruption, which was highlighted during thelower house election last December as the biggest source of dissatisfaction of the Russian people, is one of
the most serious deterrents to foreign investment.
Eradication of corruption was a major policy when the Medvedev administration was launched in 2008, butefforts have virtually faded away. According to an international comparison of the corruption of public
institutions released annually by Transparency International, an NGO headquartered in Berlin, thetransparency of the Russian bureaucracy as of 2011 ranked 143rd among more than 180 countries (while
China ranked 79th). As the next President, Putin announced that stronger measures against corruption are
one of the administration’s public promises, and immediately after the presidential election, signed agovernment order for the current President and the next Prime Minister Medvedev to combat corruption.
Whether the measures are effective this time will determine the reputation of Russia’s investment
environment.

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