IEEJ e-NEWSLETTER No. 34: March 24, 2014ｃ IEEJ 2014○

IEEJ e-NEWSLETTER
No. 34(Based on Japanese No. 126)
Published: March 24, 2014
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 Market and Policy Trends】
1.

Notable Domestic and Overseas Oil Issues

2.

Discussions at Multilateral Joint Study Group on LNG

3.

Results of the Survey on Solar Power Capacity Licensing【Global Watch】
4.

China Watching: Will 2014 be the Year that Kick-starts New Energy Vehicles?

5.

EU Watching: Challenges Faced by German Energy Suppliers

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IEEJ e-NEWSLETTER No. 34: March 24, 2014ｃ IEEJ 2014○

Summary【Energy Market and Policy Trends】
1. Notable Domestic and Overseas Oil Issues
In Japan, policy discussions are expected to examine the future direction of Japan’s petroleum
industry after the completion of refining capacity rationalization under the “post-Sophistication Act”
era. Overseas, discussions on lifting the ban on US oil exports are gathering attention.
2. Discussions at Multilateral Joint Study Group on LNG
On February 13, the first meeting of Multilateral Joint Study Group on LNG was held. Aiming forsound development of the LNG market, the participants mainly from research institutions of
LNG-related countries discussed issues such as the Asia premium.
3. Results of the Survey on Solar Power Capacity Licensing
The true situation of the soaring licensed capacity of solar power and the delay in actually using it
was revealed. Even after cancellation of delayed projects, it is likely to take another two years forall outstanding projects to start operation.
【Global Watch】
4. China Watching: Will 2014 be the Year that Kick-starts New Energy Vehicles?
The government decided to ease the reduction in new energy vehicle subsidies and extend thesubsidy period. 2014 could be the year that new energy vehicles take off if the construction of
charging infrastructure accelerates.
5. EU Watching: Challenges Faced by German Energy Suppliers
German electricity suppliers are facing a tough management environment due to the impact of thenuclear-free policy and the rapid promotion of renewables. Recognizing the situation, thegovernment is starting to respond by restructuring the ministry in charge of energy policies.

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IEEJ e-NEWSLETTER No. 34: March 24, 2014ｃ IEEJ 2014○

1. Notable Domestic and Overseas Oil Issues
Yoshikazu Kobayashi, Senior Economist, Manager
Oil Group, Oil Subunit
Fossil Fuels & Electric Power Industry Unit
On February 28, the Natural Resources and Fuel Committee of the Advisory Committee for Natural
Resources and Energy launched last November set up a separate Petroleum and Natural Gas Subcommittee
to discuss the future petroleum policy. The March-end deadline for domestic petroleum refining andmarketing companies to introduce a certain ratio of heavy oil cracking units in compliance with the Act on
Sophisticated Methods of Energy Supply Structures is approaching. The Subcommittee will discuss the
future direction of Japan’s petroleum industry after the deadline of the “post-Sophistication Act.”The specific agenda of the Subcommittee will include making the domestic refineries and supply chain
more resilient based on the experience of the Great East Japan Earthquake, making the refineries morecompetitive by strengthening the links between the complexes, and introducing a fair and transparent
wholesale pricing system in the domestic oil market. The discussions are due to be finalized this summer.
Perhaps even more urgent than these issues is for the Subcommittee to discuss how to redesign thedomestic oil industry as domestic demand shrinks, and how the government should respond. Needless tosay, a competitive petroleum industry within Japan is essential to ensure a stable supply of oil. While eachcompany must set its own priorities in its growth strategy, including strengthening the upstream business,entering the downstream businesses overseas, or aiming to transform into a comprehensive energy
company in the domestic market, the Subcommittee is expected to discuss a range of policies to support thegrowth strategies selected by the oil companies.
Looking overseas, discussions on lifting the ban on oil exports have accelerated in the US since thebeginning of the year. As American oil production continues to grow dramatically, the US Congress,
particularly Senator Murkowski (R-Alas.), senior government officials, and industry are stressing that thecurrent law created in the 1970s is obsolete and should be revised.
However, the existing export regulation, which is based on export control laws, is extremely complex
and intricately intertwined with various laws on mineral leasing and Alaskan oil, and thus immense effort
will be required to revise it. Further, in Congress, some prominent lawmakers are opposed to the lifting of
the ban, arguing against “giving in to the oil giants seeking to make big money from exports”. Under suchcircumstances, the pro-export group is apparently seeking ways to lift the ban by presidential decree,instead of the orthodox method of law amendment. However, as this approach would also take time, it isimportant to simplify the procedure. With the mid-term election due in November this year, the Obamaadministration is unlikely to dare to lift the ban immediately as it could push up gasoline prices in the
country, and so it will take time for realistic discussions on lifting the ban to begin. Nevertheless, when theban on US oil exports is lifted, it will greatly affect the international oil situation, and so developments
must be closely monitored.

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Discussions at Multilateral Joint Study Group on LNG
Tetsuo Morikawa, Manager
Gas Group, Coal & Gas Subunit,
Fossil Fuels & Electric Power Industry Unit
At the Second LNG Producer-Consumer Conference in September 2013, the IEEJ announced the launchof the Multilateral Joint Study Group on LNG which aims to achieve an in-depth understanding of thenatural gas market and contribute to the sound development of the LNG market. The first meeting of theStudy Group was held on February 13 at the IEEJ, attended by fifteen members mainly from the research
institutions of LNG-related countries and the IEA, and fifteen observers from the governments of LNG
exporting and importing countries/regions. The key points of the discussions are summarized below.
First, the discussions reconfirmed that importing countries increasingly need flexible LNG supply,
due to the large fluctuations in gas demand especially for electricity generation, the Asia Premium on LNG
and the rising need to address such premium. The large fluctuations in demand are attributed to , forexample, demand seasonality and the timing and extent of nuclear restart and development in Japan. The
discussions revealed that many participants consider that the destination clause of LNG contracts impedes
supply flexibility. Thus, there are high expectations for American LNG, which has no destination clause.
Second, in relation to the Asia Premium, the participants share the notion that the price level and therationality of the pricing system are separate issues. Importers hope American LNG to lower the pricelevel and improve supply flexibility. However, since the actual purchase price of the US LNG and its
competitiveness against the oil-linked LNG import prices will depend on the market situation at a given
time, and there is a growing sense of realism that a particular pricing system will not necessarily lead tolower prices.
Third, the importance of policies was highlighted particularly in relation to natural gas development.
Specifically, it was recognized that Australia’s measures for easing the high-cost structure of LNG projects
and the rationalization of regulations such as infrastructure-sharing, and the US’s policy of permitting
hydraulic fracturing and exports to non-FTA countries significantly affect not only the supply and demandof natural gas in those countries but also the LNG market. Further, as policies are important such as
regulatory price reforms for reflecting the import cost on domestic prices, deregulation policy for
improving the liquidity of the domestic gas market, and dealing with the destination clause, policies are justas important for importing countries too.
The second meeting of the Study Group is scheduled in July 2014, and its results are due to be reported
at the LNG Producer-Consumer Conference this autumn. It is hoped that the Study Group will continue tohost constructive discussions for building mutually beneficial relationships between exporters andimporters, and for the sound development of the LNG market.

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IEEJ e-NEWSLETTER No. 34: March 24, 2014

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Results of the Survey on Solar Power Capacity Licensing
Hisashi Hoshi, Board Member, Director
New and Renewable Energy & International Cooperation Unit
The news had been expected, but still came as a surprise. In mid-February, METI announced the resultsof its survey on the capacity of solar power licensed under the Renewable Energy Act, and the amount ofcapacity actually put into operation. The increase in operating capacity has long lagged far behind thesoaring licensed capacity, leading to criticism of electricity producers for holding their projects until panel
costs drop further, thus maximizing profits. In addition to the paucity of projects that have actually begun
operating (only 8% of the licensed capacity surveyed), the survey revealed that substantial number ofprojects have failed to secure land and/or solar equipments . Among the 13 GW of capacity covered by
the survey (more than 400 kW, licensed in FY 2012), excluding those projects that have already begun
operation, only 30% had secured both land and equipment, with 22% of the projects having neither.
The delay in launch is not without reason; it is due to the limit on the maximum installability of solar
power facilities in Japan. Solar power capacity took many years to reach 5.6 GW before the Renewable
Energies Act came into effect, yet as much as 1.7 GW were introduced in only nine months from when the
FIT system was introduced in July 2012 to the end of the fiscal year. In retrospect, this must have been the
maximum installable capacity of Japan at that point. Therefore it is unavoidable that the licensed 20 GW ofcapacity has not fully been put into operation. There is a limit on the speed with which the inverters andracks that support the panels can be supplied, not to mention the panels themselves, and skilled workers
cannot be recruited so easily.
However, there is little sympathy for those electricity producers who still had not secured sites or fixed
equipments, or both, by the time the survey was conducted several months after licensing. They haveclearly taken the easy approach of taking advantage of the generous licensing requirements and securinghigh purchase prices without solid business prospects.
For those projects without land and equipment, METI plans to conduct hearings in March, anddepending on the results, to cancel licenses. Hearings will also be conducted by August for the projects
without either the land or the equipment, and licenses will be cancelled as appropriate. Unsurprisingly,
METI plans to set up a working group to review licensing processes.
What will happen now? As a result of the hearings, about 5 GW of licensed capacity could be cancelled,though more than 10 GW will still remain. Meanwhile, currently, about 500 MW is being put into
operation each month. As major investments for expanding the supply capacity are unlikely due touncertainty over renewables policy, the pace of launch is likely to remain as it is, in which case it will takeabout two years until the existing current licensed projects (over 10 GW) are put into operation.
As the discussions on the energy mix advance, the direction of introduction of renewable energies,
including solar power, should become clearer. Only then will it become necessary to maintain andencourage investment. The evolution in system design and predictable policies are keenly awaited to gain aclearer image of the introduction of new capacity.
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IEEJ e-NEWSLETTER No. 34: March 24, 2014ｃ IEEJ 2014○

4. China Watching: Will 2014 be the Yearthat Kick-starts New Energy Vehicles?
Li Zhidong, Visiting Researcher
Professor at Graduate School, Nagaoka University of Technology
According to the China Association of Automobile Manufacturers, in 2013, China produced 22.17
million cars and sold 21.98 million, up 14.8% and 13.9% from the previous year, respectively, ranking thelargest in the world for the fifth consecutive year. The production and sale of new energy vehicles (NEVs),
including electric vehicles (pure EVs) which run only on electricity, plug-in hybrid vehicles (PHEV) which
run mostly on electricity, and fuel cell vehicles (FCVs), were 17,533 units and 17,642 units, respectively,
up 39.7% and 37.9% from the previous year. Cumulative sales of these cars up to 2013, however, remain at
45,400 units, far behind the government’s target of 500 thousand units by 2015 and 5 million units by 2020.
Under these circumstances, in January, Prime Minister Li Keqiang and Vice Premier Ma Kai madeback-to-back visits to NEVs production facilities, and announced that the government will not change its
target or relax its support measures. Accordingly, in February, the Ministry of Finance and the National
Development and Reform Commission (NDRC) released the “Notification on the Further Promotion andApplication of New Energy Vehicles”. The reduction in subsidies for NEVs, which were set at minus 10%
for 2014 and minus 20% for 2015 from 2013 levels by the policy “Regarding the Continuous Promotion
and Application of New Energy Vehicles” released last September, were eased to minus 5% in 2014 andminus 10% in 2015. For a pure EV, this is equivalent to a subsidy of 57,000 yuan for 2014 and 54,000 yuan
for 2015, from 60,000 yuan (1.02 million yen: 1 yuan = approx. 17 yen) for 2013. At the same time, it wasalso decided to continue the subsidy policy after 2015. The government is committed to develop the newenergy vehicle industry and expand its market.
The selection of model regions for the NEV promotion project is also in progress. At the end of January,
the Ministry of Finance and the NDRC newly selected 8 cities and 4 urban areas, including Shenyang City,
as model areas. Combined with the first group of 23 cities and 5 urban areas selected in November last year,
including Beijing and Shanghai, as many as 86 cities have now been selected. The government has imposeda target of introducing at least 10,000 units in each metropolis and focus region by 2015, and at least 5,000
units each in other cities and regions. As 84 of the 86 model regions have a population of more than 1
million, the target, if achieved, will mean the introduction of 850 thousand units by 2015 in the model
regions alone. Further, the PM2.5 problem, which is an urgent issue in most model regions, could also
accelerate the introduction of new energy vehicles. For example, Beijing City is offering NEV buyers thesame amount of subsidies as the government, and helping to build charging stations at least every 5
kilometers by bearing 30% of the investment cost by charging station construction companies, aiming to
introduce 40,000 units by 2015 and 170,000 units by 2017.
Going forward, the demand for new energy vehicles in the public sector is likely to grow steadily, as thegovernment has obliged the purchase of NEVs for at least 30% of all new and replaced vehicles for public
transportation, official services, postal services and city cleaning. Meanwhile, for general users, NEVs havebecome less expensive thanks to the central and local government subsidies, but the greatest concern is thelack of charging infrastructure. The government plans to address this issue by offering incentives to themodel regions, and so the amount and conditions will be fixed shortly, which should accelerate theconstruction of infrastructure, particularly by municipalities. If this happens, annual sales of new energy
vehicles could break through the 100 thousand unit mark. For China, 2014 could be the year that kick-starts
the expansion of NEVs.
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IEEJ e-NEWSLETTER No. 34: March 24, 2014ｃ IEEJ 2014○

5. EU Watching: Challenges Faced by German Energy Suppliers
Wataru Fujisaki, Senior Researcher
Global Energy Group 1
Strategy Research Unit
As the soaring residential electricity tariffs caused by the increase in renewable energies become aproblem in Germany, the energy suppliers are also facing various challenges. The key points of the
discussion with the German utility E.ON last month are summarized below.
First is the handling of the nuclear fuel tax. In 2010, Germany introduced a nuclear fuel tax in exchange
for extending the operating periods of existing nuclear power plants. However, in the following year, 2011,
Germany passed revisions to the nuclear power law for shutting down the nuclear power plants by 2022 instages. In response to this turnaround in policy, energy suppliers including E.ON and RWE are demandingthat the authorities abolish the nuclear fuel tax as it is no longer rational following the change in policy toabandon nuclear power. However, the government has no intention of doing so, claiming that “the tax is
not directly linked with the operation periods of nuclear plants”. The energy suppliers are now sufferingfrom the double burden of worsening finances due to the shutdown of their nuclear power plants, and the
new nuclear fuel tax. Sharing of the cost of decommissioning nuclear plants by utilities, which could
significantly worsen their finances, is also being discussed with the government.
Second is the issue of securing adjustment power sources. Renewable energies such as solar and wind
power require adjustment power sources to compensate for the drastic output fluctuations caused by windand sunlight conditions, to ensure a stable supply of electricity. However, the availability ratio ofadjustment power sources such as natural gas thermal has dropped significantly due to the increase in coal
thermal and the rapid growth of renewable energies. It is becoming difficult for energy suppliers tomaintain reserve capacity which may need to be used for only a few dozen hours per year, and E.ON has
been forced to shut down its latest gas turbine combined cycle plant which was launched just two years
ago.
Third is the issue of passing on the costs of the renewable energy surcharge. In Germany, constructionof the transmission network is lagging far behind the rapid growth of renewable energies, and thus theelectricity produced in the north cannot be sent to the industrial south. Hence, the electricity that has beenpurchased must be sold cheaply in the electricity market, sometimes at a loss. These costs are ultimately
passed on to consumers through the renewable energies surcharge, but recently, the government may ask
the suppliers to reduce or defer imposing the surcharge in order to control the residential electricity tariffs.
Due to such circumstances, the share price of E.ON, one of the world’s top utilities, tumbled from morethan 40 euros in 2007 to below 15 euros in 2013, losing more than 60% of its value. Aware of this situation,
the new coalition government unified the departments in charge of energy policies, which had been divided
between the Federal Ministry of Economics and Technology and the Federal Environment Ministry, andlaunched the Federal Ministry of Economics and Energy. The transfer in leadership for formulating theenergy policies from the Environment Ministry, which is leading the battle against global warming andpromoting the nuclear-free policy, to the Ministry of Economics and Energy, which considers the domestic
industries of Germany, is a sign of possible change in Germany’s energy policy, and must be observed
closely.

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IEEJ e-NEWSLETTER No. 34: March 24, 2014

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