IEEJ: December 2011 All Rights Reserved
Special Bulletin
A Japanese Perspective on the International Energy Landscape (69)

December 9, 2011

Japan Should Consider ”Best Fossil Fuel (oil-gas-coal) Mix”
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, Japan
Participants in discussions on Japan's energy policy reform are looking for the “bestenergy mix” to achieve safety and the three Es -- energy security, environment protection andeconomic efficiency. While the points of discussion and priorities regarding the best energy mix may
differ depending on the positions of energy policy experts, there are four key points of discussion -(1) further acceleration and promotion of energy conservation and energy efficiency improvement,(2) large-scale introduction of renewable and distributed energy sources, (3) effective utilization offossil fuels, and (4) utilization of nuclear energy with safety and reliability secured. Energy policy
experts are expected to deepen their discussions on these points based on quantitative, objective andreasonable data and analyses in working out a new energy policy as the key to Japan's nationalstrategy.
While deeper discussions are required on the four points, this paper focuses on the thirdone. The first reason for paying attention to the third point is that the fossil fuel problem has become
very important not only for the short term but also for the medium to long term as fossil fuel demandhas expanded on the spreading suspension of nuclear reactors (only eight of Japan's 54 reactors are
now left operating). The second reason is that we will have to discuss or consider individual fossil
fuels rather than all of them as a whole. Therefore, I would like to present here a view that Japan
should achieve the “best mix of the three major fossil fuels” -- natural gas/LNG, oil and coal.
The first point I would like to make is that the most attention-attracting topic in this respect
is undoubtedly the natural gas/LNG problem. Natural gas is the cleanest among the three fossil fuels
and features stable supply. With these advantages, natural gas is well expected to grow more
important as one of the future energy options. LNG thermal power generation is positioned as a key
alternative electricity source not only for the short term but also for the medium to long term, while
natural gas cogeneration plants are planned as distributed electricity sources. In this way, natural gas
demand is expected to expand.
As Japan promotes the effective utilization of natural gas/LNG amid such expectations, thedevelopment of infrastructure to secure stable LNG procurement and expand LNG consumption will
become a major challenge. I analyzed this point in "A Japanese Perspective on the International1

IEEJ: December 2011 All Rights Reserved
Energy Landscape (61)" and would like to skip the details of this point. In any case, the public andprivate sectors must work together to consider and cooperate in enhancing the bargaining power ofJapan as a buyer to secure sufficient natural gas procurement. As one fundamental measure to thisend, how to manage and reduce LNG demand growth is important. In this respect, relatively
inefficient existing LNG thermal power plants may have to be reformed into highly efficientadvanced combined-cycle plants. It will thus be important to consider and implement measures toenhance the bargaining power on both the supply and demand sides.
The second point is that we must consider positioning oil, based on the characteristics of
its supply and demand as demonstrated after the Great East Japan Earthquake. In this respect, wemust remember how important petroleum products were as an energy source meeting urgent andimmediate needs in the disaster-hit areas. We must also remember that the importance of oil thermal
power generation as “the last resort” or “buffer” is attracting attention as nuclear power generation
declines. The emergency after the disaster has indicated that petroleum products are more flexible
than other energy sources in supply and more convenient for users.
Supporting the supply flexibility of petroleum products is the international oil market thatis the most developed in terms of flexibility and liquidity among energy markets. Another key
supporter is a domestic supply chain including infrastructure to enable flexible supply. Therefore, wemay have to consider how best to take advantage of oil’s characteristics and importance, based on
post-disaster experiences to develop a flexible and resilient energy supply system for theachievement of safety and the three Es. In this respect, we may have to study how to establish adesirable domestic supply chain and how to address challenges regarding its implementation. Thechallenges may include stockpiling of petroleum products.
Lastly, there is the problem of coal. As is well known, coal is disadvantageous in terms ofenvironmental load including carbon dioxide emissions. But coal features economic efficiency,
abundant resources and supply stability and will grow more important when the post-disaster energy
mix is considered.
Given that nuclear power generation as the base load electricity source is bound to decline,
particularly, how to utilize coal as an alternative to nuclear energy effectively and efficiently will
become very important for electricity supply/demand measures. The effective utilization of coal
thermal power generation featuring economic efficiency will also be significant for holding down
electricity cost run-ups. Japan’s effective utilization of the coal option is expected to hold down any
lopsided or excessive demand increase of other fuels such as gas and enhance its bargaining position,
contributing to stable supply of other fossil fuels. Such measures as the promoted introduction ofthermal efficiency-boosting and clean coal technologies are required to address the abovementioned
environmental load. Nevertheless, it may become even more important than in the past to
appropriately position coal in considering a future energy mix.
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IEEJ: December 2011 All Rights Reserved

This brief paper is not designed to discuss or analyze challenges and problems for eachfossil fuel in detail, but to indicate a view that it may become important to consider the “best fossilfuel mix”, based on the characteristics, advantages and challenges for each fossil fuel. As energy
policy reform discussions intensify further after the turn of the year, this view may have to beconsidered seriously.

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