IEEJ © 2014

Economic and Energy Outlook of Japan toward FY2015

– Energy risk casts a shadow over the recovery of the Japanese economy –

25th July 2014

YANAGISAWA Akira, T. Yoshioka, H. Suzuki, R. Ikarii, S. Iwata, Y. Shibata and K. Ito

The Energy Data and Modelling Center

The Institute of Energy Economics, Japan

The 416th Forum on Research Work

IEEJ © 2014

Context

Outlook toward FY2015 • Macro economy and production

activities • Primary energy supply • Final energy consumption • Energy sales • Renewable power generation

Special topics • Sensibility analysis of nuclear power

generation • Impact analysis of rises in oil and

LNG prices • Impact analysis of depreciation of

the yen

1

Background Japanese economy is showing signs of growth due to Abenomics, improvements of people mind, Japanese company’s management efficiency, etc. in greater or less degree. On the other hand, there are some risks about energy situation like unstable electric power supply and demand, soaring fossil fuel costs, high risks at introducing too much solar photovoltaics at renewable energy. In addition to that, there is a geopolitical risk under the tense situation in the Middle East and Ukraine and there are many problems to solve.

It is indispensable to solve these problems for a sustainable growth of Japanese economy. It is suited to use quantitative information for analysing problem we faced or for considering energy mix. We projected Japanese economy, energy supply and demand and analysed the effect for various case toward FY2015.

IEEJ © 2014

Major assumptions in the Reference Scenario

World economy (real GDP growth rates) toward FY2015 United States: 2.5% or more European Union: 1.0% or more Asia: More than 6% despite of slowdown

in China, India, etc.

Taxes Consumption tax (VAT): Raised to 10% in

October 2015 from 8%

Oil, LNG and coal import CIF prices Referring to Kobayashi, Kutani and Sagawa “Outlook on the International Oil, Natural Gas and Coal Situation,” etc.

May 2014 FY2014 FY2015 Oil: $109/bbl 110 108 LNG: $850/t 821 776 Steam coal: $99/t 101 110

Exchange rate JPY102/$ on average throughout the

second half of 2014 and later

Nuclear power generation The first plants restart in early autumn.

The second group restarts in early 2015, followed by other plants with two to six months of interval.

Seven plants restart by the end of FY2014 generating 14 TWh of electricity.

19 plants generate 124 TWh of electricity in FY2015.

Electricity supply and demand Tighter than in the last summer Each electric utility will secure a reserve

capacity of at least 3% by saving and interchange of electricity (based on a government’s report).

Climate conditions Cooler summer and chillier winter in

FY2014 than the previous year. FY2015 is almost similar with FY2014.

2

IEEJ © 2014

Japanese economy will recover gradually

The economy grows by 0.9% in FY2014 with strong investments and exports despite of the rise in tax.

The growth in FY2015 surpasses potential growth rate with recover of private consumption supported by better employment situation.

Real GDP, prices and employments

3

4.3%3.9%

3.6% 3.5%

0.7%

2.3%

0.9%

1.6%

-0.3%

0.9%

0.6%

1.0%

0%

1%

2%

3%

4%

5%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

2012 2013 2014 2015

Totallyunemploymentrate (right axis)

Real GDP(y-t-y)

Consumer price(y-t-y, excl.tax effects)

IEEJ © 2014

Energy saving offsets energy demand increases caused by economic growth TPES decreases slightly before levelling off substantially in FY2015. Oil dips below 200 Mtoe for the first time in 46 years, lowering oil

dependency to 40%. Natural gas hits a new high in FY2014 followed by rapid decrease by 10% in the next year.

Primary energy supply by energy source Primary energy supply

4

514

491

485486

485487

480

490

500

510

520

201020112012201320142015

Mto

e

-8.8

+3.0

+2.7

+1.0

-9.5

-12.1

-3.2

+3.5

+23.2

-20 -10 0 +10 +20

Oil

Natural gas

Coal

Hydro

New energies,etc.

Nuclear

Year-to-year changes (Mtoe)2014 2015

IEEJ © 2014

Final energy consumption neither increases nor decreases in total, but... TFEC stays in around 331 Mtoe for three years in a row. It is less than

before the earthquake in FY2010 by 4%. Whilst industry records a new high after the earthquake, energy

conservation in transport continues. Buildings will cease to fall. Final energy consumption by sector Final energy consumption

5

344

334

330

331331 331

325

330

335

340

345

201020112012201320142015

Mto

e

-0.8

-0.1

-0.1

-0.7

-0.1

+0.9

-1.5 -1.0 -0.5 0.0 +0.5 +1.0

Transport

Residential

Commercial

Industry

Year-to-year changes (Mtoe)

2014 2015

IEEJ © 2014

Increases in electricity sales become distinct

The sales increases for three years in a row although they are less than before the earthquake by 5-6% due to electricity saving.

“Power,” mainly for industry, hits a new high after the earthquake. “Lighting,” mainly for household, turns to increase in 3Q2015.

Electricity sales by use Electricity sales

6

927

879

871 871 873877

860

880

900

920

201020112012201320142015

TWh

-1.8

+0.3

+0.3

+2.7

+0.4

+3.3

-2 0 +2 +4 +6

Lightingcontracts

Power contractsfor small-scaleindustrial users

Power contractsfor commercial

users

Large-scaleindustrial users

Year-to-year changes (TWh)

2014 2015

IEEJ © 2014

LNG-fired power generation accounts for 50% in FY2014 Share of coal-fired generation also increases to 29%. Thermal power

generation in total, however, is slightly below than the peak in FY2013. LNG generates 20% more electricity in FY2015 than before the

earthquake although share of thermal power generation shrinks to 76%. Power generation mix for utilities

7 Note: Electricity purchased is not included.

23% 24% 25% 28% 29% 27%

32%43%

48%49% 50%

42%

6%

13%

17% 13% 10%

6%31%

12%2% 1% 2%

15%

8% 9% 8% 8% 9% 9%

0%

20%

40%

60%

80%

100%

2010 2011 2012 2013 2014 2015

New energiesHydro

Nuclear

Oil, etc.

LNG

Coal

IEEJ © 2014

City gas sales rewrite the record high for the fifth straight year Sales for industrial uses increase for the sixth straight year of growth,

topping 20 billion m3. The industrial share of city gas reaches 55%. Whilst other uses hits the highest except for just before the

earthquake, residential keeps a long downward trend in principle. City gas sales City gas sales by use

8

35.3

35.9

36.3

36.7

37.5

38.0

35

36

37

38

39

2010 2011 2012 2013 2014 2015

Bill

ion

m3

+0.1

+0.8

+0.1

+0.1

+0.4

-0.2 0 +0.2+0.4+0.6+0.8+1.0+1.2

Others

Commercial

Residential

Industrial

Year-to-year changes (Billion m3)

2014 2015

IEEJ © 2014

Fuel oil sales decrease by 6 GL a year

Whilst naphtha and diesel oil sales show relatively firm, heavy fuel oil C for power generation diminishes.

Gasoline drops to 53 GL, which is the lowest level since FY1996. The total sales may fall below 180 GL for the first time in a half of century by FY2016.

Fuel oil sales Fuel oil sales by products

9

196 196198

194

188

182

188

181

178 179

176173

170

175

180

185

190

195

200

201020112012201320142015

GL

Total fuel oil

Fuel oil other than heavy fuel oil Cfor electric utilities

-3.3

-0.8

-0.6

-0.6

-4.5

-0.8

-0.6

-8 -6 -4 -2 0

Heavy fuel oil C

Gasoline

Heavy fuel oil A

Kerosene

Naphtha

Diesel oil

Year-to-year changes (GL)

2014 2015

IEEJ © 2014

Business plan, which may include regrouping refineries, will be submitted by October The current petroleum market is tightened due to capacity reduction

to meet the law “Sophisticated Methods of Energy Supply Structures.” Additional capacity reduction by 400 kb/d may be needed to meet the

new standard (draft) depending on measures. Crude oil throughput and refinery capacity

10

3.453.333.18

4.47

3.95

0

1

2

3

4

5

2005 2007 2009 2011 2013 2015

Mb/

d

Heavy fuel oil for electric utilitiesOthers

Refinery capacity

Crude oil throughput

IEEJ © 2014

Both introduction of renewables and their burdens on consumers increase dramatically

11

Installed capacity of renewable power generation increases to 54.9 GW, or 16% of total capacity, by the end of FY2015 generating 10% of power.

Cumulative burdens related to FIT amount JPY63 trillion over 20 years for 89 GW of authorised capacity, which correspond to JPY3,600/MWh.

Cumulative burdens by FIT (for authorised as of March 2014)

Installed capacity of renewables

7.3

18.2

28.6

6.6

7.6 8.6

3.34.1

3.50

5

10

15

20

25

30

2011 2012 2013 2014 2015

GW

As of the end of fiscal year

Solar PV for non-residence

Solar PV for residence

Wind

Biomass

Surcharges43.9

Surcharges(for operating)JPY7.5 trillion

Power grid [batteries]

+18.1Power grid

[backup by fossil fuel-fired power generation]

+1.4

JPY63.4 trillion

IEEJ © 2014

A risk for the recovering Japan: Expanding gaps of energy costs Massive use and high prices of fossil fuels result in heavy burden of

import spending, which is comparable with just after the oil crises. Although the burden reduces slightly in FY2015, the situation may not

be improved significantly depending conditions. Ratio of net import spending of fossil fuels against nominal GDP

12

3.8%

5.9%5.7%

5.1%

2.7%3.0%

1.8%

1.3%

0.8%

Just after the first oilcrisis, 4.9%

Just after the second oil

crisis, 5.9%

0%

1%

2%

3%

4%

5%

6%

2010 2011 2012 2013 2014 2015

JapanChinaUnited States

IEEJ © 2014

Japan – a vulnerable country against rises in international energy prices

Impacts by rises in oil and LNG prices

Real GDP and gross national income reduce by 0.2% and 0.3%, respectively due to price rises of oil by $10/bbl and of LNG by $50/t.

The impacts reach also non-energy intensive industry and household.

Topic 2

13

Brent price 115

106

108

104

106

108

110

112

114

116

2/6 16/6 30/6 14/7

$/bb

l

+0.2%

-0.3%

-0.3%

-0.2%

-0.8%

-0.2%

-0.0%

-0.4%

-0.8%

-0.4%

-0.3%

-0.5%

-0.8%

-0.2%

-0.2%

-1.0% -0.5% 0.0%

Fuel oil sales

City gas sales

Electricity sales

Transport

Industry

Buildings

Final energy consumption

Oil

Natural gas

Coal

Primary energy supply

Consumer prices

Industrial production

GNP per capita

Real GDP

IEEJ © 2014

Depreciation of the yen is a centaur: it stimulates economy and raises prices

Depreciation of the yen by JPY10/$ expands Japanese economy by 0.4% although the effect is obscure compared with the past.

Effects by economic expansion and by price rises offset each other, resulting in almost no changes in energy consumption in total.

Impacts on exports by depreciation of the yen by JPY10/$

Topic 3

14

Impacts by depreciation of the yen by JPY10/$ (FY2015)

-0.5%

+0.2%

+0.2%

+0.0%

+0.3%

+0.7%

+0.4%

-0.5% 0.0% +0.5%

Fuel oil sales

City gas sales

Electricity sales

Primary energy supply

Consumer prices

Industrial production

Real GDP

Metal products

Chemicals

Others

Transport equipment

Electrical Machinery

Machinery

0

200

400

600

800

0% 20% 40% 60%

Incr

ease

s in

real

exp

orts

(JPY

2005

bill

ion)

Ratio of price down

Last time

This time

IEEJ © 2014 15

To cope with rigorousness and rapidness in nuclear power plant assessment brings huge merit

Fossil fuel import spending decreases by JPY1.4 trillion if nuclear power generation increases by 120 TWh. Real GDP and gross national income increase by 0.14% and 0.23%, respectively.

Power generation cost decreases by JPY1,600/MWh, reducing the risk of further electricity price hike.

Topic 1

Impacts of nuclear power plants’ restart

Nuclear power generation

(TWh)

Power generation

cost (JPY/kWh)

Fossil fuel import

spending (JPY trillion)

CO2 emissions (Mt)

LNG imports (Mt)

Contact: report@tky.ieej.or.jp

8.2

13.0

12.3

11.3

10.7

10.2

8

9

10

11

12

13

14

2010 2014 201518.1

27.326.7

25.825.324.8

18

20

22

24

26

28

30

2010 2014 2015

288

0

42

124

162

210

0

50

100

150

200

250

300

2010 2014 2015

71

91

89

80

77

70

65

70

75

80

85

90

95

2010 2014 2015

1,123

1,193

1,171

1,133

1,115

1,095

1,080

1,100

1,120

1,140

1,160

1,180

1,200

1,220

2010 2014 2015

No Operation

Low-level

Mid-level

High-level

Full Operation