IEEJ e-NEWSLETTER No. 16: June 28, 2013 All Rights Reserved

IEEJ e-NEWSLETTER
No. 16(Based on Japanese No. 117)
Published: June 28, 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

Contents
Summary

Our View of the Global Situation

1. China Watching: Accelerating the Development and Demonstration of CCUS Technology

2. ME Watching: Signs of Change in the Regional Development

3. Russia Watching: Will the Japan-Russia Summit Meeting Kick-Start the Developmentof the Russian Far East and Eastern Siberia?

4. EU Watching: European Natural Gas-Fired Thermal Power Facing Difficulties

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IEEJ e-NEWSLETTER No. 16: June 28, 2013 All Rights ReservedSummary
1. China Watching: Accelerating the Development and Demonstration of CCUS Technology
The Chinese government has begun to accelerate the development and demonstration of carbon capture,utilization and storage (CCUS) technology. The aim is to develop this promising technology into aninternationally competitive and strategic new emerging industry, while acquiring a powerful tool for carbon
reduction and a core industry in sustainable development. Steady progress is awaited.

2. ME Watching: Signs of Change in the Regional Development
With Europe and the US reluctant to act decisively despite the suspected use of chemical weapons in Syria,
the situation is likely to drag on. Iran’s presidential election will be centered on conservative candidates. As
social unrest spreads in Iraq and Tunisia, the strategic goal behind Prime Minister Abe’s Middle East tour isgathering attention.

3. Russia Watching: Will the Japan-Russia Summit Meeting Kick-Start the Developmentof the Russian Far East and Eastern Siberia?
With a summit meeting at the end of April, Prime Minister Abe became the first Japanese prime minister in
10 years to make an official visit Russia. The two countries confirmed the importance of energy and thedevelopment of the Russian Far East and Eastern Siberia in promoting bilateral relations. Russia is strongly
expected to improve its investment environment in order not to miss the growing momentum.

4. EU Watching: European Natural Gas-Fired Thermal Power Facing Difficulties
With huge quantities of North American coal pouring into Europe due to the shale gas revolution in the US,
and with European coal-fired power plants operating at full capacity, natural gas-fired power plants are on theverge of being decommissioned and shut down for the long term. If the situation does not change, this could
result in a shortage of adjustment power for dealing with fluctuations in supply and demand, and could hamper
the expansion of renewable energies.

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IEEJ e-NEWSLETTER No. 16: June 28, 2013 All Rights Reserved

1. China Watching: Accelerating the Development and Demonstrationof CCUS TechnologyLi Zhidong, Visiting Researcher
Professor at Nagaoka University of Technology
In the “Work Plan for Controlling Greenhouse Gas Emissions During the Twelfth 5-year Plan ” releasedin December 2011, the State Council announced that China will develop carbon capture, utilization andstorage (CCUS) technology, the intellectual property rights to which are owned by the country, andimplement the carbon capture demonstration experiments in the coal-thermal power and coal chemistry,
cement manufacturing, and steel industries, and integrated CCUS pilot projects. Accordingly, the Ministryof Science and Technology drew up the “Twelfth 5-year Plan for CCUS Technology Development” inFebruary, and the National Development and Reform Commission released the “Notice concerning thePromotion of the CCUS Demonstration Pilot Activities” in April, emphasizing the country’s intention toaccelerate the development and demonstration of CCUS technology.
To date, China has been developing CCUS technology and running demonstration projects at Huaneng’s
Beijing Gaobeidian Thermal Power Plant, Shidongkou Thermal Power Plant of Shanghai, Shenhua’s coalliquefaction factory in inner Mongolia, Zhongyuan Oilfield and Jilin Oilfield, with help from developedcountries such as Japan and Australia and international organizations such as the Asian Development Bank,and has accumulated much know-how. In 2011, China took a first step toward exporting the technology bysigning an agreement with the US to conduct a demonstration experiment at AEP’s coal-fired thermal
power plant which uses Huaneng’s CO2 capture technology. There are, however, universal issues with
CCUS technology such as high cost, high energy intensity, and safety, limiting large-scale commercialutilization.
In response, the “Twelfth 5-year Plan for CCUS Technology Development” aims to achieve
breakthroughs in the core technology by 2015, significantly lower the cost and energy intensity, and build a
300,000 to 500,000-tonne integrated experiment base for Post-Combustion Capture CCUS. At the sametime, integrated pilot experiments for 60,000-tonne Pre-Combustion Capture and 100,000-tonne
Oxygen-enriched Combustion Capture CCUS will also be actively promoted. According to the “Noticeconcerning the Promotion of the CCUS Demonstration Pilot Activities”, the government has decided topromote capture experiments in coal-intensive industries such as coal-thermal power and projects forenhanced oil recovery and storage through the injection of CO2 in oil fields (CCUS-EOR), andpreferentially to subsidize low-cost CCUS pilot projects that hold intellectual property rights. Schemes
including tax incentives, loans and support for land use will also be provided, and CCUS’s potential for
long-term development, problems, risks and impacts will be evaluated to clarify its position and role in thelong-term strategy for preventing global warming and the mid- to long-term energy strategy. Further, theCommission will also improve the technology and its safety standards, and actively participate and lead theformulation of international standardization.

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China has submitted a voluntary action target to the United Nations to reduce CO2 emissions per unit ofGDP by 40% to 45% from 2005 levels by 2020, and plans to achieve this solely by energy conservationand expanded use of non-fossil fuels. Although the domestic demand for CCUS is still not high, China iscommitted to developing the technology with the view that if the international framework on climatechange beyond 2020 can be agreed, CCUS markets will emerge not only in developed countries but also
within China. The target is to develop CCUS into an internationally competitive, strategic and newemerging industry ahead of other countries to acquire both a powerful tool for reducing CO2 as well as acore industry in sustainable development. Steady progress is awaited.

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IEEJ e-NEWSLETTER No. 16: June 28, 2013 All Rights Reserved

2. ME Watching: Signs of Change in the Regional Development
Koichiro Tanaka, Managing Director &Head of JIME Center
Despite the growing consensus that chemical weapons have been used in Syria, once referred to as
the “red line” by President Obama, the international community including Europe and the US has not acted.
Although there has been some progress in mutual understanding between US and Russia on their responses
to the Syrian issue, with the Assad administration and the rebels continuing to refuse to negotiate with eachother, the discussions planned to be held in Geneva in June are unlikely to make much progress toward
ending the fighting and the killing. As the Assad administration has recently been regaining lost groundwith the help of Lebanon’s Hezbollah, which has acknowledged its involvement in the battles in Syria, thesituation could continue for longer than expected.
Meanwhile, in Iran, which is suspected of dispatching its Revolutionary Guards to Syria like theHezbollah, attention is currently focused on the presidential election. At the center of the presidential race
are conservative candidates such as Mayor Mohammad-Bagher Ghalibaf of Tehran and the chief nuclear
negotiator of Iran Saeed Jalili, due to the disqualification of the former president Akbar Hashemi
Rafsanjani and the current presidential aide Esfandiar Rahim Mashaei at the preliminary screening ofcandidates. There is no progress in the P5+1 nuclear talks even though Iran’s uranium enrichment
capability has advanced, and there are continuing calls for taking tough action against Iran. The US
Congress continues to deliberate bills to tighten sanctions, and has stirred tensions by adopting a resolution
acknowledging the legitimacy of Israel’s “attacking Iran for self-defense”.
In Iraq where the provincial elections have finished, there have been an increasing number ofterrorist incidents stemming from sectarian differences, posing a threat to public security in the relatively
peaceful southern city of Basra, clouding the outlook for the future. This insecurity is rooted not only in thesituation in Syria, but also the emergence of an Iraqi “Arab Spring”, with Sunni residents demanding morerights.
In Tunisia, conflict between the transitional government led by the Muslim Brotherhood-led
Ennahada and the Salafists is intensifying, and the security authorities are leaning toward confronting theAnsar al-Sharia which has ties with Al Qaeda. In Bahrain, which is struggling to deal with the Shi’ite
popular movement, lawmakers are urging the government to stop the U.S. ambassador in Bahrain frominterfering in domestic affairs and meeting government opponents.
The visit by Prime Minister Abe to the three Middle Eastern countries accompanied by a large
economic delegation is intended to secure a stable supply of energy for Japan, as well as to pave the wayfor exporting commercial nuclear power plants to the Middle East and the Gulf countries. Europeancountries and the US are monitoring the role of Japan in the Middle East, and view the recent moves as partof Japan’s Eurasian Strategy to counter the expanding influence of China in that region.

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IEEJ e-NEWSLETTER No. 16: June 28, 2013 All Rights Reserved

3. Russia Watching: Will the Japan-Russia Summit Meeting
Kick-Start the Development of the Russian Far East and Eastern Siberia?
Shoichi Itoh, Manager, Senior Analyst
Global Energy Group 2, Strategy Research Unit
On April 29, Prime Minister Abe became the first Japanese prime minister in 10 years to make anofficial visit Russia, for a summit meeting with President Putin. The two leaders announced the “Joint
Statement on the Development of Japan-Russia Partnership” which praises the progress in cooperation in
many areas specified in the “Japan-Russia Action Plan” signed when former Prime Minister Koizumi
visited Russia in January 2003, and advocates promoting peace treaty negotiations based on all thedocuments adopted so far.
Regarding energy, the two leaders reconfirmed that energy is a core area of economic cooperation
between the two countries, and agreed on the importance of expanding cooperation in oil and gas in theRussian Far East and Eastern Siberia under mutually beneficial conditions, including supplying energy atcompetitive prices considering market conditions.
To fully develop energy in the Russian Far East and Eastern Siberia, it is necessary not only todevelop oil and gas fields but also to build much socio-economic infrastructure over a vast geographicalarea. This will boost economic development of the area, which is at the top of Putin’s list.
How prepared is Russia for the development of the Far East and Eastern Siberia? On May 7, in a
meeting convened to check the progress of presidential orders attended by members of the Medvedev
cabinet and the head of the President’s Office, President Putin complained that of the 3.8 trillion rubles(approx. 123 billion USD) of federal funds needed by the Ministry of Finance for investing in the national
program for the socio-economic development of Far East Russia, only 296 billion rubles (approx. 9.5billion USD) had been secured. As the Russian economy appears to be slowing (with GDP growth for 2013
Q1 of -0.1% quarter-on-quarter), it is clearly necessary to attract private funds, including foreign
investment (expected to cover approx. 70% of the overall investment from the start).
The key point of the summit meeting was that it highlighted the cooperation concerning the Russian
Far East and Eastern Siberia. The summit also emphasized the importance of mutually beneficial projects
related to energy, agriculture, infrastructure and transportation, and the leaders also agreed to establish a
consultative body on acceleration of public-private partnership between the countries for furthercooperation. Prime Minister Abe’s visit to Russia was accompanied by a economic delegation of around
120 people, the largest in the history of bilateral relations. Russia needs to improve its investment
environment so as not to miss the growing momentum.

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IEEJ e-NEWSLETTER No. 16: June 28, 2013 All Rights Reserved

4. EU Watching: European Natural Gas-Fired Thermal Power
Facing Difficulties
Wataru Fujisaki, Senior Researcher
Global Energy Group 1,
Strategic Research Unit
Due to the Shale Gas Revolution, the Henry Hub price of American natural gas remains low at 3–4
USD/MMBtu. Natural gas has become cheaper than coal in the US and so coal power plants are being shut
down and natural gas power plants are being used instead. As a result, vast quantities of excess coal havepoured into European markets from North America since 2011, and coal prices in Europe have remained
around 70 euro/tonne, down 25% from the beginning of 2011. Thus, contrary to the US, Europe is boosting
the use of coal, which is cheaper than natural gas, and the operation of coal-fired thermal power plants.
There are even plans to build new coal power plants in Germany.
In addition, the continuing slump in the price of emissions allowances under the European Union
Emissions Trading System (EU-ETS) due to the European economic crisis and debt issues is causing
electricity producers to choose coal as a power source, since it is more economic even when the cost ofpurchasing emissions allowances is factored in.
As the demand for electricity drops due to the economic slowdown in Europe, full-scale operationof coal power stations and rapid expansion of government-subsidized offshore wind power, the utilization
factor of natural gas power plants is plunging. It takes at least 3000 hours of operation each year to recoup
the investment in a natural gas plant, yet some plants are operating only for a few hundred hours, and manyare on the verge of decommissioning or long-term shutdown.
Despite the growing importance of natural gas power as an adjustment power source to keep theelectric system stable, if the situation continues, electricity producers will no longer be able to keep theirpower plants running, which could hamper the expansion of renewable energies in the future.
To solve this problem, it has been proposed to build a capacity market in Europe which directly
finances the electricity producers that have thermal power plant capacity. This allows the cost of
maintaining adjustment power sources to be paid directly through the market, giving electricity producers
an incentive to retain these power sources. It is also expected to support the expansion of renewableenergies including wind power, whose electricity output cannot be controlled, by securing a flexible powersource.
As for the new funds needed to implement this system, it is difficult to charge consumers by simply
raising the retail electricity price, as the rising FIT tariff is pushing the consumer burden close to the limit.
Energy policymakers including the European Commission must handle the difficult task of implementing
the policy while maintaining the stability of the electricity grid, expanding the use of renewable energies
and reducing the burden on consumers.

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IEEJ e-NEWSLETTER No. 16: June 28, 2013 All Rights Reserved

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