IEEJ：September 2016ｃ○ IEEJ 2016

Special Bulletin
A Japanese Perspective on the International Energy Landscape (288)September 9, 2016

Thinking about Various Risks for Electricity Supply Security
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, JapanOn September 8 at the Tobata campus of the Kyushu Institute of Technology, the Instituteof Electrical Engineers of Japan held a general meeting of its Society B, including a panel discussion
on risks involving the electricity system. I had an opportunity to take part in the discussion as apanelist. Based on interesting arguments and issues given at the discussion, I here would like to think
about various risks for electricity supply security.
First, problems at the international energy market positioned in the upstream of the energy
supply chain have traditionally become risks for electricity supply security. These risks arepotentially important as far as Japan depends on power generation fuel supply from the internationalenergy market. Supply from some regions may be disrupted for some reasons. For the international
market works, however, it is difficult to assume any case where fuel supply would be totally stopped.
As indicated by the past experiences, however, supply disruptions or a tightening supply-demandbalance can cause substantial increases in fuel prices that could affect electricity supply security.
Specific cases of this kind include two oil crises in the1970s. In the latest case of this kind,
fuel price spikes (and needs for additional fuel imports to make up for the suspension of nuclear
power generation as discussed later) triggered substantial electricity price hikes accompanied byvarious economic problems in nearly four years from 2011 when crude oil prices remained above$100 per barrel. Responses to such overseas risks may include reducing dependence on imports,
diversifying energy and import sources, and enhancing oil reserves and other emergency response
capabilities.
Second, supply interruption or destabilization in the electricity supply chain poses directrisks and threats to electricity supply security as a matter of course. Risks of this kind are various
and diverse, including those caused by natural disasters, artificial or non-artificial facility or
infrastructure accidents, structural market problems, institutional designs and others. Given thatelectricity is a special good for which demand must be met by supply at any instance, these risks
have potential to immediately trigger major problems with electricity supply security, particularly interms of physical supply availability.

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As a case where a natural disaster was combined with an accident to cause a major
problem with electricity supply security, the Great East Japan Earthquake and Tsunami triggered theaccident at the Fukushima Daiichi Nuclear Power Station. The disaster and accident caused massive
losses in nuclear and other power generation capacity. Particularly, electricity supply shortages
became a grave matter of concern in eastern Japan. The situation is still vivid in our memory.
Just after the disaster, rolling blackouts were implemented temporarily. Later, electricity
consumption cuts and the full operation of substitute electricity sources (fossil fuel power plants)
were required. These measures successfully prevented any large-scale blackouts. However, Japan
had to procure massive fuel for fossil power generation. Price hikes in the international fuel market
were coupled with the massive additional fuel procurement to boost fuel costs for power generationand electricity costs. Based on experiences with the oil crises, Japan has traditionally focused on
responses to overseas risks. However, the events in 2011 indicated that any accident in key domestic
electricity supply facilities and infrastructure could cause a grave situation.
As a risk that could affect the electricity supply chain, cyberattacks have recently attractedattention. As the computerization of our economic society has made progress, electricity plays evengreater roles in the society. At a time when the computerization of the electricity supply system has
accelerated, it may be natural for cyberattacks to attract attention as a risk for electricity supplysecurity. In December 2015, a cyberattack by hackers triggered a large-scale blackout affecting morethan 200,000 people in Ukraine. In response to growing concern on cyberattacks, the Group of
Seven industrial countries and others are tackling an important challenge to enhance initiatives
regarding the cyber attack issue and energy supply security. Surely, cyberattacks will become a key
issue when we think about future electricity supply security.
Market structure and institutional design problems have also attracted attention as risks
that could affect electricity supply security while being characteristically different from theabovementioned risks. One such problem derives from the expansion of power generation with
supply intermittency including solar photovoltaics and wind power generation facilities. If
intermittent electricity supply expand their share in total power generation, how to maintainelectricity supply security in response to a sharp rise or decline in supply from such intermittent
sources will become a problem. If it is difficult to adjust electricity supply even by taking fulladvantage of buffers in the existing system, power suppliers will have to enhance electricity grids,
expand electricity storage functions or adjust renewable energy power generation. Even if thesemeasures are taken to adjust supply and demand to secure stability in physical supply-demandbalance, we will have to pay attention to relevant costs increase.

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Electricity market deregulation may put market players under pressure to rationalize andstreamline their business operations. In a competitive market, uncertainties may grow about whether
future demand could be secured. Under such situation, decisions to invest in electricity facilities andinfrastructure with long lead-time and high upfront investment are not easy to make. When
wholesale electricity prices decline in a deregulated market, negative effects may emerge on facility
development and maintenance. To address the problem, the introduction of a capacity mechanism tosecure sufficient supply capacity has been realized or considered. Countries in the world are still
exploring measures to secure stable electricity supply.
At the panel discussion in which I participated, I got an opportunity to discuss risks fromvarious angles. The stable supply of electricity as an indispensable good for maintaining economic
and civic livelihood will remain important in the future. We will have to analyze various risks forelectricity supply security and consider responses to such risks while watching other important
challenges such as safety, carbon emission cuts and liberalization.

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