Impact of Japanese Earthquake on Global Energy Markets

9836-14 August 2011

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Table of Contents
Introduction Impact on the Nuclear Energy Market Impact on the Oil Energy Market Impact on the LNG Market Impact on the Renewable Energy Market Conclusion Impact on the Power Rental Market About Frost & Sullivan 5 7 24 34 45 58 60 74

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Introduction

Introduction

The recent earthquake and nuclear crisis in Japan led to ripple effects in the global energy markets. It not only affected the nuclear power market but also other energy markets. This market insight outlines the immediate developments in various energy markets such as nuclear, oil, LNG, and renewable energy both at the domestic and global levels. It also discusses the possible future developments in these markets. As the shutting down of nuclear reactors has led to severe power shortages, especially during summer, this market insight discusses the impact of the crisis on the Japanese power rental market. Short-term development refers to the immediate developments following the earthquake within a horizon of a year, while long-term development refers to a forecast period of 2013-2015.

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Impact on the Nuclear Energy Market

Outline

Developments in the Nuclear Power Market post the Fukushima Crisis

Tracing Short-term and Long-term Effects in the Domestic and Global Nuclear Power Markets

Importance of nuclear power in Japan Nuclear power Drivers and restraints Snapshot Nuclear power developments Short-term developments Domestic and global Long-term developments Domestic and global

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Importance of Nuclear Power in Japan

Before the Fukushima crisis, nuclear power was given paramount importance in meeting Japans energy requirement because of the following reasons:
Absence of natural resources such as oil and gas, which makes the country 96.0% dependent on imports for primary energy supply; even with nuclear power, Japans dependency was estimated at 82.0%. Adopting nuclear power that was highly energy efficient with low greenhouse gas (GHG) emissions throughout its lifecycle served well for Japan, as the country was strongly committed to reduce its CO2 emission levels. Lower generation cost of nuclear power when compared to power generated from renewable energy sources. Presently, there are 15 nuclear power units with a cumulative installed capacity of 20,800 MW in Japan under various stages of construction and commissioning.

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Importance of Nuclear Power in Japan (Contd...)

Japans Energy Policy aimed at making nuclear power contribute upto 50.0% of total power requirements by 2030
Electricity Market: Power Output Composition by Source (Japan), 2005, 2020E, and 2030E 1,200 1,000
Power Output (TWh)

Electricity Market: Power Output Composition by Source (Japan), 2005, 2020E, and 2030E 100.0% 80.0% 30.8% 41.5%

800 600 400 200 0

304.8

434.5 469.5

Power Output

48.7%

60.0% 40.0% 20.0% 0.0%

Nuclear Geothermal Hydroelectric New Energy Coal LNG Oil

2005 304.8 3.2 81.3 5.6 252.9 233.9 107.2 Year

2020 E 434.5 3.4 80.5 57.5 190.5 231.1 48.5

2030 E 469.5 7.5 88.9 90.7 134.6 137.1 36.3

Nuclear Geothermal Hydroelectric New Energy Coal LNG Oil

2005 30.8% 0.3% 8.2% 0.6% 25.6% 23.7% 10.8% Year

2020 E 41.5% 0.3% 7.7% 5.5% 18.2% 22.2% 4.6%

2030 E 48.7% 0.8% 9.2% 9.4% 14.0% 14.1% 3.8%

Source: Electricity Review Japan - Federation of Electric Power companies, Japan

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Nuclear Power Drivers and Restraints

Nuclear power technology expected to grow due to increasing investments to make this technology safer Nuclear safety-related industries likely to witness enhanced demand

Governments relooking at energy policies and reconsidering nuclear power investments Stringent policies/extensive redundant safety features likely to make nuclear power costly Financing for nuclear ventures anticipated to become difficult

Drivers

Restraints

Demand restraints are likely to have a more pronounced impact in the short-term. Safe nuclear power is a key demand driver for technology investments. Nuclear power is most likely to face stunted growth than expected prior to the earthquake.
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Snapshot Nuclear Power Developments

Countries reassessing nuclear safety measures Decommissioning and safety-related activities Fall in stock value of nuclear / nuclear related companies Uncertainty over nuclear demand Effects on overseas projects by Japanese nuclear technology providers Careful considerations power development for nuclear

GLOBAL

Regulatory regimes to be made more stringent Development in other industries for safe nuclear operations Resurgence of nuclear power Rise in costs of nuclear power

DOMESTIC

Energy Policy review New nuclear plans shelved Possibility of nationalization of TEPCO. Huge revenues from decommissioning Credibility of Japanese nuclear reactor builders affected

Japanese nuclear reactor makers and nuclear related industries could lose sales Surge in nuclear safety constructions and construction of back up power facilities

Short-term
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Long-term
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Short-term Developments Domestic

Japanese PM Naoto Kan announced that the country will relook its Energy Policy, which specifies for 50.0% share of nuclear power by 2030. The projected share of 50.0% nuclear power is expected to decline with a majority share to be taken up by renewable power. Besides, there is likely to be increased focus on energy efficiency and reduced use of energy. Japan had 12 new nuclear units at various stages of construction and all the new plants under construction have been put on hold. As an immediate fallout, CHUBU Electric Power Co., Inc. closed down the nuclear reactors in Hamoaka power station that were supposed to be precariously located in a quake prone area after the request of the Prime minister. Planned shutdowns in Q2 2011 is expected to cause up to 75.0% idle/damaged nuclear capacity by August. TEPCO is subject to huge liabilities and the government has directed TEPCO to pay up compensation to the crisis victims. TEPCO has lost a lot of market value and has been taking on huge loans and selling off assets to finance its recovery plans and compensation. The government is expected to take a stake to bail out TEPCO which forms 33.0% of the economy, from the current financial crunch.

Energy Policy Review

New Nuclear Plans Shelved

Possibility of Nationalization of TEPCO

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Short-term Developments Domestic (Contd)

Fukushima plants are to be definitely decommissioned, and there are prospects of large-scale decommissioning as well in the future. Hence. Japanese firms such as TOSHIBA Corporation and Hitachi, Ltd. and other foreign companies such as AREVA and General Electric Company are likely to earn huge revenues. Decommissioning the Fukushima Daiichi plant is expected to cost more than $12.00 billion (Hitachi, Ltd.- General Electric Company proposal).

Huge Revenues from Decommisioning

Impact on the Credibility of Japanese Nuclear Reactor Makers

Japan had been promoting nuclear power exports on a large scale. The joint venture (JV) called International Nuclear Energy Development of Japan that was formed between the utility companies and domestic reactor makers aimed to sell technology for nuclear power plant construction, operation, and maintenance to overseas markets with the help of the government. This JV is likely to lose credibility, and it may become difficult to compete with stronger competitors from Russia, South Korea, France, and China.

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Short-term Developments Global

As a fallout of the crisis, several developed countries immediately announced a review of their existing nuclear projects. Countries such as the United States, Finland, France, and the United Kingdom announced that their plants are safe; however, they are still assessing their safety. Italian nuclear plans are likely to be abandoned following a popular referendum in which there was 90.0% opposition to nuclear power. Germany has shut down seven of its existing plants, and President Merkel has announced a nuclear phase out by 2022. However, power-deficit countries in Asia Pacific such as India, China, Pakistan, and Vietnam announced that they would go ahead with the construction of their nuclear power plants. AREVA and General Electric Company have undertaken the required measures to decommission nuclear reactors in Japan. AREVA has proposed to set up a contaminated water treatment system in Fukushima. Similar safety-related activities create revenue generating opportunities for nuclear safety-related firms in Japan. Following the crisis, there was an immediate fall in stock values of nuclear/nuclear-related companies. It has been stabilizing since the third week of May. However, in the long-term, stocks of nuclear companies are likely to regain their pre-crisis value, as it would be highly difficult to completely do away with nuclear power.
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Countries Reassessing Nuclear Safety Measures

Decommisioning and Safety-related Activities

Fall in Stock Value of Nuclear/ Nuclear-related Companies

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Short-term Developments Global (Contd)

Fall in Stock Value of Nuclear/Nuclear-related Companies: AREVA - French Nuclear Reactor Maker

Source: Yahoo Finance

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Short-term Developments Global (Contd)

Fall in Stock Value of Nuclear/Nuclear-related Companies: EDF French Utility Mainly Dependent On Nuclear

Source: Yahoo Finance

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Short-term Developments Global (Contd)

Fall in Stock Value of Nuclear/Nuclear-related Companies: CAMECO Nuclear Energy Company

Source: Yahoo Finance

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Short-term Developments Global (Contd)

Fall in Stock Value of Nuclear/Nuclear-related Companies: TEPCO Japans Utility Company

Source: Yahoo Finance

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Short-term Developments Global (Contd)

Japan is the worlds third-largest generator of nuclear power, with over 54 reactors and accounting for 12.0% of uranium produced globally. Several uranium mining projects have been delayed due to the current impasse in going ahead with nuclear plans by different nations. With Germany deciding on a nuclear exit policy, German nuclear reactor makers are apprehensive about continuing with their operations in other markets. Reports suggest that RWE may sell its U.K. nuclear arm. French nuclear specialist EDF and German E.ON are also uncertain about their planned nuclear reactor constructions in the United Kingdom. Similarly, nuclear reactor makers, especially those in Japan (TOSHIBA Corporation (which made the Fukushima reactors), Hitachi, Ltd., and MITSUBISHI HEAVY INDUSTREIS, LTD) face reduction in orders. However, TOSHIBA Corporation has not reported order cancellations so far. Japan nuclear technology joint venture has collaborations with nine countries for promotion of peaceful uses of atomic power. Collaborating nations such as Vietnam, Kazakhstan, China, and Turkey have decided to pursue their nuclear power plans. However, Japan is likely to lose its competitiveness in bidding for projects in the future. It is likely to become difficult for the joint venture to continue promoting nuclear exports because of the negative views over the existing policy.

Uncertainty over Nuclear Demand

Effects on Overseas Projects of Japanese Nuclear Technology Providers

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Long-term Developments Domestic

Nuclear reactor makers in Japan face a severe challenge in terms of reputation while bidding for future projects. Although currently there has been no cancellation of orders, Japanese reactor makers could slightly lose out to Frances AREVA and Chinas Dongfang Electric co in the long-term. However, the development of newer technologies and incorporation of safety measures could help the current nuclear incumbents TOSHIBA Corporation, Hitachi, Ltd., and MITSUBISHI HEAVY INDUSTREIS, LTD. to recover in the long-term. Nuclear-related industries such as steel forgings and nuclear machinery also face downtrend. Hence, Japanese nuclear OEMs/operations need to do more convincing. As Japan is located in a seismically active zone, utilities have been considering safeguarding their nuclear power plants with safety constructions. Nuclear safeguard constructions are likely to witness an uptrend. CHUBU Electric Power Co., Inc. is considering breakwater construction and similar anti-tsunami measures for its Hamoaka power station. Current shutdown of nuclear plants could also prompt the construction of new backup power capacities and recommisioning of mothballed thermal power plants to safeguard against future energy security issues.
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Nuclear Reactor Makers and Nuclear-related Industries in Japan Likely to Lose Sales

Surge in Nuclear Safety Constructions and Development of Backup Power Facilities

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Long-term Developments Global

International regulations are likely to govern nuclear power plants, as they are vulnerable to cause a significant global damage. Expansions in nuclear power plants in developed countries are expected to be carefully considered, and stringent regulations would be strictly enforced. Companies are likely to exercise caution before diversifying into nuclear business. For instance, Siemens AG has been reconsidering its joint ventures with AREVA and Rosatom. Regulations must meet safety challenges to survive combinations of extraordinary events beyond their design basis - including natural disasters, terrorist attack, and as-yet unimagined disasters and difficulties in their locality. Countries are likely to reconsider the ability of individual companies to handle such emergency situations. There is a growing preference to set up institutions that are equipped to handle such situations on a collaborative basis. It is predicted that the current crisis is likely to drive the Japanese robotics industry to develop robots that can operate in nuclear emergencies. Similar developments are likely to take place in other technology-intensive industries to facilitate not only safe nuclear power generation but also smooth operations during emergencies.
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Careful Considerations for Nuclear Power Development

Regulatory Regimes to be Made More Stringent

Development in Other Industries for Safe Nuclear Operations

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Long-term Developments Global (Contd)

Low-cost renewable power and grid parity seems unlikely within the next two years in several countries. Besides, alternative technologies such as clean coal, integrated gasification combined cycle (IGCC) and carbon capture and storage (CCS) are currently not viable economically. Moreover, nuclear safety standards are being continuously upgraded. (Daiichi reactors were 40 years old and had outdated safety features). As a result, existing reactors are likely to be replaced by new ones that have additional safety features. All these indicate that nuclear power would continue to contribute significantly to the worlds energy mix over the long-term. Nuclear material projections also reiterate the resurgence of this technology as they anticipate only a marginal reduction in the demand for nuclear materials in the long-term. Increasing costs of installing nuclear reactors increased regulations, more redundancies to improve safety requirements, and insurance costs (currently, it is only 5.0% of the total cost) could eventually lead to nuclear power becoming costlier. Its competency as a low-cost alternative to generate clean power will be re-valuated. This is likely to result in increased capital and operational expenses for nuclear reactor operators. Financing of nuclear power is likely to become more costly due to increased uncertainties.

Resurgence of Nuclear Power

Rise in Nuclear Power Costs

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Impact on the Oil Energy Market

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Outline

Developments in the Oil Energy Market post the Fukushima Crisis

Tracing Short-term and Long-term Effects in the Domestic and Global Oil Energy Markets

Importance of oil energy in Japan

Oil energy Drivers and restraints

Snapshot Oil energy sector developments Short-term developments Domestic and global Long-term developments Domestic and global

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Importance of Oil Energy in Japan

Electricity Market: Electricity Generation Capacity Composition by Source (Japan), 2009 Generation Capacity (GW) 48.85 46.38 37.95 61.57 46.20 Generation Capacity (%) 20.2 19.2 15.7 25.5 19.1
Oil 19.1% Nuclear 20.2%
Hydropower

Others 0.3%

Fuel Type Nuclear Hydropower Coal LNG Oil Others (Renewable energy and so on) Total

19.2%

Coal 15.7%

0.53

0.3
LNG 25.5% Note: Others include renewable energy, and so on.

241.48

100.0

Source: Electricity Review Japan - Federation of Electric Power companies, Japan

Oil is used for 19.1% of the electricity generated in Japan. In 2005, oil accounted for a major part of the countrys primary energy supply, at 43.0% of the total 588.0 million kls of crude oil equivalent. Among the OECD countries, Japan has the highest oil share in terms of primary energy supply.
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Importance of Oil Energy in Japan (Contd)

Oil-fired plants are the major sources of peak load supply to maintain a consistent supply of electricity.
Electricity Market: Combination of Power Sources (Japan), 2010

Source: Electricity Review Japan - Federation of Electric Power companies, Japan

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Oil Energy Drivers and Restraints

Crude/Fuel oil consumption likely to increase as utilities operate oil-fired plants to tackle power shortages Crude oil consumption set to rise as the nation rebuilds its power infrastructure

Economic slowdown leading to minimum activity in industrial/transport sectors is likely to reduce the oil demand Shutdown of large refining capacities leading to lesser crude oil consumption Large-scale usage of LNG lessens oil demand

Demand Drivers

Demand Restraints

Short-term impact of drivers and restraints is more pronounced than that in the longterm because of the reduction in refining capacity rather than the drive for additional power.

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Snapshot Oil Energy Sector Developments

Volatility in oil exports from the Middle East

GLOBAL

Global increase of refinery utilization rates and margins

Dampened effects on oil prices

Likely status quo in terms of oils importance to energy mix

DOMESTIC

Increase of oil-generated power Increase of crude oil and oil product imports Rethink on scaling refining capacity down of

Resumption to current situation in terms of power plants/refining capacities Possible increase in backup refining capacity/number of oilfired power plants

Short-term
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Long-term
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Short-term Developments Domestic

As the nuclear reactors that were affected by the earthquake/tsunami were shutdown, a large amount of power is being generated from other fuel sources to compensate the loss. As a result, thermal-based power generation rose by 6.3% in Q2 2011. Oil consumption for power had doubled Y-o-Y in April and May 2011. This is expected to triple if nuclear facilities remain closed. Although this increase is not very significant, a full closure of nuclear power can increase crude consumption by 400,000 tons.

Increase of Oilgenerated Power

Increase of Crude Oil and Oil Product Imports

Crude oil that was imported for refining purposes declined in April and May 2011, as some of the refineries were shutdown. However, they are increasingly being consumed in oil-fired power plants. Moreover, imports of crude oil and oil products are expected to increase as the country rebuilds its economy, especially the transportation and industrial sectors. As refining capacities are mainly looking at producing fuel oil, import of other oil products is expected to increase. Decision taken to scale down the refining capacity by 600,000 bpd consumption may be reconsidered or deferred, as the nation seeks to rebuild its capacity to meet the increasing power needs through oil fired plants.

Rethink on Scaling Down of Refining Capacity

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Short-term Developments Global

Volatility in Oil Exports from the Middle East

Japan depends on the Middle Eastern countries for almost 90.0% of its oil requirements. However, closure of refineries in the country partially reduced crude oil imports in Q2 2011. However, from Q3 2011, as the country rebuilds its economy, crude oil imports are set to increase. As the Japanese refinery capacities are recovering slowly, it may result in global shortage of oil derivatives such as diesel, fuel oil, and kerosene, of which the country was a net exporter. In the short-term, to compensate for the Japanese refinery capacity, refineries in other countries are likely to increase utilization rates, and requirements may be fulfilled with increased margins. Price rise in global markets as a result of increased exports of crude oil and oil products to Japan may be muffled because the overall crude oil usage by the country may not increase significantly. The 2010 global oil demand was 88.0 million barrels per day; Japans additional oil requirements of 200,000 would represent less-than 1% increase in global demand. As oil price is controlled by a large number of external factors, the impact of Japans supply and demand is quite insignificant.

Global Increase of Refinery Utilization Rates and Margins

Dampened Effects on Oil Prices

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Long-term Developments Domestic

As Japan rebuilds the economy, power plants and oil refining capacities would be established over the long-term. Once they are operational, the situation would return back to the pre-Fukushima state. Japan has been relying more on LNG for power requirements; hence, oil-powered plants and oil refining capacities are not likely to witness drastic changes in terms of demand. After facing the current turmoil in terms of energy shortage and fall in crude oil products, Japan is also faced with infrastructure shortcomings in terms of processing and transportation of oil. Japan may try and build up oil transportation fleet that has been found severely lacking, or it may explore other options to build up disasterresponse infrastructure. There is also a possibility for building up spare oil-fired power plants and oil refining capacities.

Resumption to Current Situation in terms of Power Plants/Refining Capacities

Possible Increase in Backup Refining Capacity/Number of Oil-fired Power Plants

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Long-term Developments Global

No Significant Longterm Effect

Global long-term effects are likely to be very limited considering that countries seeking to replace nuclear power are expected to focus more on renewable energy sources. Oil is a high-emission fuel, and as countries rework their energy mix, most would prefer to increase LNG-based power plants to reduce their emissions. However, some countries may still find oil relevant if gas sources cannot be tapped.

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Impact on the LNG Market

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Outline

Developments in the LNG Market post the Fukushima Crisis

Tracing Short-term and Long-term Effects in the Domestic and Global LNG Markets

Importance of LNG in Japan LNG Drivers and restraints Snapshot LNG market developments Short-term developments in the LNG market Domestic and global Long-term developments in the LNG market Domestic and global

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Importance of LNG in Japan

Electricity Market: Electricity Generation Capacity Composition by Source (Japan), 2009 25.5% of the electricity generated in Japan is based on LNG sources. LNG-fired thermal power plants are largely considered because of their capability in reducing CO2 emissions, thereby meeting the Kyoto protocol standards. Japan is the worlds largest importer of natural gas, importing 192,000 tons per day. A majority of Japans LNG is used in the power sector, followed by the industrial sector. Over the last few years, the country has witnessed a rapid growth in LNG usage in these two sectors.
Nuclear 20.2% Oil 19.1% Hydro 19.2% Others 0.3% Coal 15.7%

LNG 25.5% Note: Others include renewable energy, and so on.

Source: Electricity Review Japan - Federation of Electric Power companies, Japan

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LNG Drivers and Restraints

Most of the facilities that were shutdown because of the earthquake were oil-fired while only one LNG fired plant was shutdown. LNG import terminal survived the earthquake. Hence, it was the ideal and cleaner alternative. Easy availability of LNG

Decline of economic activity following the natural disaster leading to lesser power requirements. Transportation infrastructure for LNG not yet developed; has to be transferred only through tankers.

Demand Drivers

Demand Restraints

As a replacement to nuclear power, LNG has been largely preferred over oil and coal. This is expected to set a precedent for the long-term requirements as well.

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Snapshot LNG Market Developments

Japanese utilities shifting to LNG increasingly LNG projects in emerging countries such as Russia, China, and India poised for growth Expansion in support infrastructure of the LNG supply chain liquefaction and regasification Efforts will be taken to ensure high efficiency of gas turbines Development of LNG transmission network to reduce LNG costs Utility companies likely to intensely scout for overseas LNG projects

GLOBAL DOMESTIC

Rise in LNG imports

Japan buying Pricey Spot cargoes of LNG Short-term LNG power solutions Tightening of Asia Pacific basin LNG exporters benefit due to increase in demand LNG supplies are diverted to Japan LNG logistics experiencing a sharp increase in prices and supply Acceleration of gas projects

Short-term
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Long-term
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Short-term Developments Domestic

Japanese Utilities Increasingly Shifting to LNG
LNG terminals were least affected by the earthquake. Only one LNG power plant was shutdown/damaged. In addition, LNG is considered a cleaner source compared to coal/oil. Hence, Japanese utilities are mainly to shifting to LNG in the short-term. In the period immediately after the earthquake, utility companies redirected LNG imports to TEPCO and affected places, leading to reduction of imports. However, LNG demand gained steam and the April Y-o-Y demand increased by 8.8%. LNG import in May grew by 28.0% Yo-Y. A similar trend is likely to be observed in the following few months as Japan struggles to minimize power outages throughout the summer. In order to ensure that LNG power sufficiency is met, Japan is increasing its gas turbine capacity through short-term power solutions such as mobile gas turbines. This ensures quick delivery and installation of LNGpowered capacity. TEPCO recently contracted APR energy to supply mobile gas turbines. Thailand has given two 122 MW gas turbines to TEPCO. These gas turbine units were decommissioned by the Electricity Generating Authority of Thailand and lent for emergency use in Japan during the summer.

LNG Imports in April Rose by as much as 8.8% YoY

Short-term LNG Power Solutions

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Short-term Developments Domestic (Contd)

The desperation to minimize power outages in the aftermath of the nuclear plants shutdown by power utilities has led to Japans excessive dependence on spot cargoes of LNG in addition to existing contracts. The period has witnessed tightening of the spot market, leading to procurement of pricey spot cargoes from new suppliers such as Nigeria. Prices have gone up from less than $10/mm BTU to more than $13/mm BTU.

Japan Buying Pricey Spot cargoes of LNG

Increase in Power cost

As a result of the large-scale shutdown of nuclear plants, power has to be generated from LNG/coal. The surge in demand for LNG/coal has led to an increase in its prices, leading to a rise in power cost for domestic requirements. If the current situation of nuclear plants closure continues, then an additional 20.0 million tons of LNG may be required that can cause the spot prices to increase further. As a result, power cost is likely to accelerate.

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Short-term Developments Global

The LNG market in the Asia Pacific basin has undergone tightening due to the sudden surge in the Japanese LNG demand. With a majority of Japans LNG supplied by countries such as Malaysia and Australia through long-term contracts, spot cargoes from Indonesia, Qatar, and Russia are catering to Japans increased LNG demand. The tightening of the LNG market has driven the prices.

Tightening of Asia Pacific basin

LNG Exporters Benefit due to Increased Demand

The rising prices of LNG have supported demand and benefited LNG exporting countries, mainly Qatar and Russia. LNG exporting firms in these countries are embarking on rapid expansion measures to tap new LNG resources with a renewed vigor, following the increased demand and price. Qatar has especially benefitted to a significant extent, as its huge tankers have been used to transfer large shipments of LNG during the current LNG shortage period in Japan.

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Short-term Developments Global (Contd)

European supplies of LNG are being diverted to Japan on a large scale. This indicates that European countries are likely to depend on alternate sources such as coal and renewables for power generation. The spot cargo price increase led to the diversion of supplies to Japan. This may be curtailed soon because of the subsequent price rise in Europe/the United States as well. This may lead to higher LNG prices worldwide. The increasing demand has led to a sharp spike in the LNG spot freight rates. Freight rates for spot or short-term charters have risen up to $79,000 a day from $40,700 a year earlier, while long-term rates have climbed up to $78,000 a day. LNG tanker fleet have also grown over the past month, as prices and demand have surged. Gas projects in Russia, Australia, and other LNG-rich countries are likely to accelerate due to strong demand. This is more pronounced in projects with existing Japanese partnerships such as the Sakhalin or Vladivostok in Russia. Japan and Russia have agreed to explore the feasibility of Vladivostok to be expanded from a 5.0-million MT/year to a 10.0-million MT/year project. Similar ventures are planned by Japan in Qatar and other resource-rich countries.
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LNG Supplies are Diverted to Japan

LNG Logistics Experiencing a Sharp Increase in Prices and Supply

Acceleration of Gas Projects

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Long-term Developments Domestic

With Japanese reliance on nuclear power likely to reduce in the aftermath of the nuclear crisis, it is expected that LNG sources will be optimally utilized. This is likely to result in increased R&D efforts to improve the efficiency of gas turbine technology by leading original equipment manufacturers. The need for high efficiency is also driven by Japans commitment to achieve maximum power generation with minimum GHG emissions. Despite the less-developed LNG pipeline transportation system because of the mountainous terrain, LNGs contribution is likely to increase in the countrys energy mix over the long-term. Power transmission across utilities is limited by linkage capacity, as utilities operate at different frequencies. This means that LNG power production and pipeline delivery must be close to the utilities to avoid extra transportation costs. Hence, despite terrain constraints, Japan may evaluate developing gas transmission lines to reduce LNG power costs. Japanese firms are keen to assume stake in overseas LNG projects post the nuclear crisis. Sensing this, Russian firms have been actively scouting for Japanese involvement in off-shore exploration and production projects. Japanese utilities are likely to enter into joint ventures for overseas LNG and shale gas projects with a renewed vigor.

Efforts will be taken to Ensure High Efficiency of Gas Turbines

Development of LNG Transmission Network to Reduce LNG Costs

Utility Companies Likely to Intensely Scout for Overseas LNG Projects

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Long-term Developments Global

LNG firms such as Reliance Gas in India, Petrochina in China, and Gazprom in Russia are likely to be well positioned for growth, given the support offered by the rising LNG spot prices. Over the long-term, the global LNG demand is likely to increase by 25.0 million MT/year from the earlier estimates of 401.0 million MT/year, due to global nuclear slowdown. This means an opportunity for these firms to sell their spot cargoes at a much higher price in a tight market. Global expansion of LNG demand is set to augment the LNG supply chain support infrastructure. It could lead to fast-tracking of investment decisions in LNG infrastructure. With LNG tanker fleet becoming more expensive, it is likely to result in an expansion of the fleet around the world in order to cater to the increasing demand. Gas transmission lines are likely to become more extensive. Facilities such as regasification and liquefaction, which are vital for LNG trade among nations, are expected to expand.

LNG Projects in Emerging Countries such as Russia, China, and India Poised for Growth

Expansion in Support Infrastructure of the LNG Supply Chain Liquefaction and Regasification

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Impact on the Renewable Energy Market

45

Outline

Developments in the Renewable Energy Market post the Fukushima Crisis

Tracing Short-term and Long-term Effects in the Domestic and Global Renewable Energy Markets

Renewable energy (RE) in Japan RE Drivers and restraints Snapshot RE market developments Short-term developments in the RE market Domestic and global Long-term developments in the RE market Domestic and global

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Renewable Energy in Japan

RE has not been a significant part of Japans energy mix. RE, hydropower included, is used for 10.0% of the electricity generated in Japan. Japans RE market growth has been flat, as the RE policies have not been sufficiently examined or implemented. The country has been the leading global supplier for solar products. Japan produces about 2.7 GW of solar modules and cells that account for 10.0% of the world supply. In Japan, there has been more emphasis on adopting solar photovoltaics (PV) than other types of RE sources. Traditionally, solar has received precedence over wind and geothermal energy in terms of government support. Feed-in-tariff schemes exist for solar PV and not for other types of RE. The country has been pursuing a vision of 20.0% power generation from RE sources by 2020. This is likely to be achieved through growth in the solar and wind power sectors.

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RE Drivers and Restraints

In the aftermath of nuclear power crisis, renewable energy has become highly relevant with its very less emissions and low safety concerns. Increasing cost of nuclear power could make RE more comparable in terms of price.

Longer development time in terms of technology development and installation It is more of a long-term plan than a short-term plan.

Demand Drivers

Demand Restraints

Long-term impact is likely to be very high, as RE is more of a long-term energy source. Its advantage as a cleaner source of energy is a key demand driver.

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Snapshot Renewable Energy Developments

Government policy shift

GLOBAL

Alternative energy stocks surge Diversification by power systems businesses Renewable power likely to cost less Supply chain of major solar power equipment firms disrupted Major rethink on Japans renewable energy policies Feed-in-tariff legislation for renewable sources is receiving more mileage

Large-scale R&D in renewable power support infrastructure

Acceleration of smart grid system implementation

Possibility of achieving grid parity with RE sources

DOMESTIC

Japans vision of 20.0% renewable power generation capacity by 2020 likely to gain fruition Widespread adoption of solar and other RE sources

Short-term
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Short-term Developments Domestic

Manufacturing plants of major solar companies such as Sharp Corporation, Sanyo, and KYOCERA Corporation are located in the western part of the country, and they were not affected by the earthquake. However, their supply chains have been disrupted. Polysilicon manufacturing units of major firms such as M.Setek have been affected directly by the earthquake; facilities of other firms have been affected due to power shortage. The world polysilicon supply has not been significantly affected because of this shortfall in production, as their share is quite low. However, prices may have risen due to market speculations or increasing demand in wake of countries seeking a higher share of solar power. Wafer production from Japanese manufacturers has been affected. This has led to Japanese solar module manufacturers having to turn to alternate sources based in China for their supplies, at higher prices. The margins for wafers have been increasing, and they have been predicted to rise further, due to capacity constraints in wafer production, especially as demand for solar wafers is expected to increase as nations are turning towards renewable energy sources.

Supply Chain of Major Solar Power Equipment Firms Disrupted

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Short-term Developments Domestic (Contd)

Major Rethink on Japans Renewable Energy Policies

There has been a major rethink on the Japanese energy policy, which focused on nuclear power and fossil fuels as the pillars of the countrys future energy supply. The disaster has led the political and administrative machinery to consider the importance of RE and energy savings as additional pillars to ensure future energy security. The Japanese Prime Minister has announced that a target of 20.0% generation capacity using RE sources by 2020 would be set in place.

Feed-in-Tariff Legislation for Renewable Sources is Receiving More Mileage

Japan has a feed-in-tariff mechanism in place for solar power. This has led to a phenomenal growth in the number of solar PV installations across the country. However, the absence of regulatory framework with respect to tariffs has led to poor development of wind and geothermal power sources. Legislative proposal that recommends a fixed power purchase price for RE has been in the Diet, and developments in other RE sectors would largely depend on its approval.

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Short-term Developments Global

Worldwide, governments have been forced to tread the green path. Germany has decided to exit nuclear power generation by 2021, and it is keen to pursue RE as a way forward. Feed-in-tariffs for RE in Italy have persisted despite earlier plans to end the system. Similarly, in other European countries such as Spain, the United Kingdom, and France, subsidies are being continued, and they are unlikely to be withdrawn until 2020. Other emerging nations such as China, India, and Russia are aggressively pursuing to expand RE capacity in their energy mix.

Government Policy Shift

Alternative Energy Stocks Surge

Alternative energy stocks have witnessed a sharp rise in their stock values post the nuclear crisis. Investor sentiments in the RE sector have gone up tremendously and sustained at high levels. This could be largely attributed to fear of nuclear power worldwide and a recognizable decline in interest in nuclear power as a panacea to all energy problems.

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Short-term Developments Global (Contd)

Alternative Energy Stocks Surge
EDF - French utility with Re Portfolio Trina Solar Chinese Solar PV Manufacturer

Source: Yahoo Finance

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Short-term Developments Global (Contd)

Alternative Energy Stocks Surge (Contd)
Vestas Danish Wind Systems Manufacturer

Source: Yahoo Finance

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Short-term Developments Global (Contd)

A large number of power systems businesses are looking to increase their stake in the RE sector. Firms have bid for/acquired RE solution providers or companies supplying infrastructure for RE growth. The crisis has created a perception that RE is one of the best sources to obtain emission-free and minimum risk power. A huge public/government support has driven companies to invest in this sector.

Diversification by Power Systems Businesses

Renewable Power Likely to Cost Less

Large-scale government support in terms of feed-in-tariff regimes, subsidies, and setting up market mechanisms for cleaner operations are likely boost renewable power generation. This, in turn, is expected to decrease the financial risks involved with renewable power. Technology investments and incentives would also make this technology much more safer and reliable. Due to reducing finance and technology risks, renewable power projects are likely to receive loans and insurance at a low cost. This is likely to reduce RE power generation costs and help achieve grid parity at the least-possible time.

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Long-term Developments Domestic

The urgent requirement to replace nuclear power would, in turn, increase the demand for other energy sources, including renewables. Moreover, the use of RE sources is expected to increase as the country faces immense pressure to adhere to emission norms. Renewed interest in RE is likely to be supported by government policies and NGOs. The countrys target to raise the share of renewable power to 20.0% by 2020 is expected to gain fruition. With government support and firms initiative, RE is likely to be adopted on a large-scale basis. So far, roof-top solar PV systems have been widely adopted in Japan. However, with the introduction of feed-in-tariff, other types of RE are likely to be installed on a huge scale, both in urban and rural areas. With a focus on generating maximum power from RE sources, it is likely to become a focal point in the countrys domestic energy mix.

Japans Vision of 20.0% Renewable Power Generation Capacity by 2020 Likely to Gain Fruition

Widespread Adoption of Solar and Other RE Sources

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Long-term Developments Global

RE is expected to garner wide support from governments globally. This is likely to encourage firms to invest in RE significantly. RE support infrastructure and related systems are poised for large-scale development. A huge uptrend is expected in the R&D of support infrastructure in generation, transmission, distribution, and storage of renewable power during the long-term. Smart grid implementation is highly crucial for the optimal use of RE. The smart grid infrastructure requires modern equipment and latest technologies. Investment decisions pertaining to smart grid infrastructure are likely to accelerate, so that firms can capitalize on the growing demand for RE and use it for transferring power generated from a remote RE facility to the main utility grid. Technology advancements and process improvements in the RE sector have been carried out mainly to achieve grid parity. Expected increase in volume and widespread adoption of RE technologies can bring the benefits of economies of scale and the advantage of time. This, combined with growing investments and adequate support infrastructure, is likely to help RE achieve grid parity by 2015 and beyond. Moreover, reducing the cost of project finance and insurance is likely to decrease the initial capital expenditure required for RE power plants.
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Large-scale R&D in Renewable Power Support Infrastructure

Acceleration of Smart Grid System Implementation

Possibility of Achieving Grid Parity with RE Sources

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Impact on Energy Markets

Energy Market: Impact of the Earthquake in Key Energy Sectors (Japan), 2011-2015 Impact of Japanese Earthquake Relook on policy Technology development Infrastructure growth Government support / Investments Supply constraints Increase of demand Effect on prices
Key: Very High High Medium Low No Impact
Source: Frost & Sullivan

Nuclear Energy

Oil Energy

LNG

Renewable Energy

Impact of the Japanese earthquake and nuclear crisis is expected to be very high in the renewable energy (RE) and nuclear power sectors. The impact on the LNG sector would be higher than that on the oil sector, as LNG is a cleaner fuel of the two and is expected to replace nuclear both in the short- and long-terms.
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Impact on the Power Rental Market

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Power Rental Market Overview (Pre-Fukushima Crisis)

Power Rental Market: Revenue Forecast (Japan), 2005-2015 CAGR: 2.5%
25.0 8.0

6.0 20.0 4.0 15.0 Revenue Growth Rate (%) Revenue ($ Million)

2.0

10.0

0.0

(2.0) 5.0 (4.0)

0.0 Revenue ($ Million) Revenue Growth Rate (%)

2005 16.7

---

2006 17.3 3.4

2007 17.9 3.5

2008 17.5 (2.1)

2009 16.8 (4.0)

2010 17.1 1.6

2011 17.6 2.9

2012 18.1 3.3

2013 18.8 3.8

2014 19.7 4.6

2015 20.8 5.6

(6.0)

Note: All figures are rounded; the base year is 2008. Source: Frost & Sullivan
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Power Rental Market Overview (Pre-Fukushima Crisis) (Contd)

The Japanese power rental market in 2008 was estimated at $17.5 million; it is forecast to grow at a compound annual growth rate (CAGR) of 2.5% and reach a size of $20.8 million by 2015. However, the earthquake in March 2011 and the impending power crisis significantly altered the existing market dynamics, especially in the short and medium terms. The forecast has to be drastically changed to factor in the recently signed power rental contracts. Market Characteristics Power rental equipment was mainly used for continuous or prime power application, which accounted for more than 90.0% of power rental revenues, while 8.0% was contributed by peak-shaving power application, and 2.0% was contributed by stand-by power. Well-developed power infrastructure is the reason for very low prevalence of power rental segment in emergency or stand-by power application. The market is highly fragmented, and rental companies compete on a diverse range of rental equipment. Market penetration by multinational companies has been traditionally low. The major power rental firms are local companies such as Aktio Corporation and Nikken Corporation.

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Japanese Power Rental Market Value Chain

OEMs
Include the main generator local OEMs such as Yanmar Energy Systems, Kawasaki Heavy Industries, and Meidensha Corporation and generator multinational OEMs such as Caterpillar that distribute to the power rental market through dealers and power rental companies located in Japan. OEMs operate in the power rental market through their exclusive dealers and distributors. This constitutes 25.0% of the distribution structure (2008). Many OEMs deal in the sales of generator sets with no presence in the rentals market. The direct distribution channel, where independent rental companies purchase generator sets from generator OEMs and rent directly to end users, forms a majority of distribution channel (65.0%) in Japan. This is dominated by local power rental companies such as Aktio Corporation and Nikken Corporation. Rental equipment is also distributed through innumerable agents and small private companies that are locally based. They customize the package and rent the equipment to fit the end users requirements. This accounts for only 5.0% of the distribution.

OEMs Exclusive Dealers Independent Rental Companies

Agents/Partners

End user

Power Rental Market Revenue Split by End User in North Asia (Japan and South Korea) (2008 estimates)

Construction Events and Entertainment Utilities Industries Telecom

68.0% 17.5% 7.0% 4.5% 3.0%

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Supply Side: Drivers and Restraints

Power Rental Market: Key Market Drivers and Restraints (Japan), 2011-2015
Impact legend High

Supply Driver
Medium Low

Impact Due to the Earthquake

High demand Increasing power rental costs

Supply Restraint Difficulty in part availability for OEMs Damage of supply chain and other means for production Government policy changes

Impact Due to the Earthquake

Source: Frost & Sullivan

The supply side was largely hampered due to non-availability of parts for equipment manufacture and damage of the transportation and distribution network in the earthquake-affected areas of the country. The problems were exacerbated by a high demand that drove up supply initially but left raw material inventory dry even when there was more demand for the power rental equipment.
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Demand Side: Drivers and Restraints

Power Rental Market: Key Market Drivers and Restraints (Japan), 2011-2015
Impact legend High

Demand Driver Increasing demand for temporary power Disaster recovery planning

Impact Due to the Earthquake

Medium Low

Inadequate Grid coverage Major shift towards deferring capital expenditure

Demand Restraint Increasing rental costs for prime power application Well developed power infrastructure in unaffected areas

Impact Due to the Earthquake

Source: Frost & Sullivan

The Japan earthquake caused a major impact on the demand drivers and restraints of the power rental markets in the Asia Pacific. On the whole, the demand went up tremendously due to the increasing impact of drivers and reducing impact of restraints.
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1 Changes across the Value Chain End Users

Shortterm impact Long-term impact

Huge Scope in the Reconstruction Segment

The disaster has led to large-scale destruction, and reconstruction efforts are likely to significantly increase the demand for rental power. It has been estimated that reconstruction costs could be as high as $183.0 million. Some of the huge losses to the industry could have been averted with emergency power supply systems (EPSS) and adequate disaster preparedness. Despite TEPCOs assurances that there would be no blackouts, the food manufacturer Yakult rented power from Nikken Corporation. Utilities have lost majority of their power generation facilities, and some have been forced to shutdown nuclear reactors. Stop gap arrangements to avoid power outages have led utilities to seek rental power. Moreover, until the damaged infrastructure is put back in place and utilities resume normal operations, there is likely to be more demand for rental power due to the uncertainty.

Companies Seek Emergency Power Supply Systems

Utilities Striving to Avoid Power Outages

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Changes across the Value Chain OEMs Exclusive 2 Dealers and Independent Rental Companies
With local rental companies running out of generators due to excessive demand, power outages had to be countered with rental services provided by overseas firms. Usually, the Japanese power rental markets dominated by local firms due to the reluctance of end users to look beyond domestic market services. However, rental services were sought from Aggreko and APR Energy by TEPCO to tackle the power shortages. Aggreko mobilized 200 MW for a minimum of one-year term, and APR Energy was contracted to supply 203 MW for TEPCO. Despite the peak equipment utilization during February/March 2011 and lean fleet on account of the financial crisis, rental firms such as Nikken Corporation and Kanamato had good emergency recovery plans, and they were able to recover in quick time to serve the market. Despite the emergency preparedness of rental companies, shortage of generators from OEMs and increased lead time in supply hampered businesses. This creates a need to review disaster recovery preparedness of rental companies. This factor is likely to increase the demand for generator sets.
Short-term impact Long-term impact

Entry of Multinational Companies in the Market

Disaster Preparedness of Power Rental Firms Likely to be Reviewed

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Changes across the Value Chain OEMs Exclusive 2 Dealers and Independent Rental Companies (Contd)
Short-term impact Long-term impact

Rise of Rental Prices

Following the earthquake, rental rates went up by 20.030.0%. Pre-disaster, competition was not intense, and hence, rental rates were low. However, following the disaster, huge demand for power rental increased the rental rates. This was also attributed to the high fuel cost associated with transporting and operating the equipment. In the short-medium term, rental rate is expected to remain high. However, in the long-term, as grid power supply stabilizes, prices are likely to decrease. The heightened awareness about disaster counter measures has led to a high demand for generators in Japan. Firms are attempting to include EPSS in their operations. Generator dealers have been trying to capitalize on this demand by forming alliances with rental corporations that provide a market for the generators with low initial costs and an extensive distribution network. For instance, the Japanese dealer of South Korean generator manufacturer KD Power formed an alliance with ORIX Rentec Corporation to cater to the high power rental demand.
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Strategic Alliances between Generator Dealers and Rental Companies

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Changes across the Value Chain Original Equipment 3 Manufacturers

Short-term impact Long-term impact

Increased Sales for Multinational Generator Makers

Some of the major generator OEMs in Japan include YANMAR Co., Ltd., Komatsu and MITSUBISHI HEAVY INDUSTRIES, LTD. Because of the earthquake, generator OEMs were unable to serve the growing demand due to parts shortage and disruptions in their supply chain. As a result, multinational generator OEMs such as Caterpillar and Cummins were able to increase their market share in Japan. The demand for generator sets from dealers was 5-6 times high because of the power rental demand. Moreover, the two different power frequencies used in Japan further augmented demand. However, parts shortage, supply chain disruptions, and damage of tierone facilities led to low production output from OEMs. Japanese manufacturers had to lose sales despite increased demand. This could trigger OEMs to seek alternate suppliers in accessible locations to prepare themselves for future emergencies.

Lost Sales

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Revenue Forecast Post-Fukushima Crisis

Power Rental Market: Revenue Forecast (Japan), 2008-2015 CAGR: 75.9%
450.0 400.0 400.0 Revenue Growth Rate (%) 350.0 Revenue ($ Million) 300.0 250.0 200.0 200.0 150.0 100.0 0.0 50.0 0.0 Revenue ($ Million) Revenue Growth Rate (%) 2008 17.5 --2009 16.8 (4.0) 2010 17.1 1.6 2011 99.4 482.2 2012 264.3 166.0 2013 395.7 49.7 2014 386.4 (2.4) 2015 287.5 (25.6) (100.0) 100.0 300.0 500.0

Note: All figures are rounded; the base year is 2010. Source: Frost & Sullivan

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Revenue Forecast Post-Fukushima Crisis (Contd)

The power rental market in Japan witnessed a steep hike in 2011, and it is likely to remain high during the forecast period because of the following reasons: The revamp in disaster recovery plans by companies including power rental firms that have witnessed a need to improve their emergency responses Large-scale investments in reconstruction efforts during the forecast period Hampered transmission and distribution networks before complete rebuilding occurs Entry of multinational companies in the power rental market Increase of rental revenues due to the heightened demand Capital expenditure likely to be deferred, as firms are yet to fully recover from the disaster

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End-user Demand Trends Post-Fukushima Crisis

Power Rental Market: Changes in End-user Demand Trends (Japan), 2010 and 2011 Demand from the construction and industrial sectors is set to increase post the Fukushima crisis. Pre-Fukushima Crisis, 2010
Industries 4.5% Utilities 7.0% Telecom 3.0%
Utilities 7.0%

Post-Fukushima Crisis, 2011

Telecom 2.0%

Industries 6.0%

Events and Entertainment 17.5%

Events and Entertainment 12.0%

Construction 68.0%

Construction 73.0%
Source: Frost & Sullivan

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Market Share Analysis Post-Fukushima Crisis

Power Rental Market: Changes in Market Share Trends (Japan), 2008 and 2011 Growing demand and inadequate equipment supply from local rental companies pave way for the entry of multinational power rental companies in Japan post the Fukushima crisis. Pre-Fukushima Crisis, 2008
Aktio Corp 26.0%

Post-Fukushima Crisis, 2011

Aktio Corp 20.0% Others 39.8%

Others 56.0%

Nikken Corp 15.0%

Nikken Corp 18.0%

APR Energy 12.6%

Aggreko 12.6%

Note: Others include Okumura Denki Co., Chiyoda-Kiden Co., ICC Group, and so on.
Source: Frost & Sullivan

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About Frost & Sullivan

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Who is Frost & Sullivan

The Growth Consulting Company

Founded in 1961, Frost & Sullivan has over 45 years of assisting clients with their decisionmaking and growth issues Over 1,700 Growth Consultants and Industry Analysts across 32 global locations Over 10,000 clients worldwide - emerging companies, the global 1000 and the investment community Developers of the Growth Excellence Matrix industry leading growth positioning tool for corporate executives Developers of T.E.A.M. Methodology, proprietary process to ensure that clients receive a 360 perspective of technology, markets and growth opportunities Three core services: Growth Partnership Services, Growth Consulting and Career Best Practices
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What Makes Us Unique

Exclusively Focused on Growth Global thought leader exclusively focused on addressing client growth strategies and plans Team actively engaged in researching and developing of growth models that enable clients to achieve aggressive growth objectives. Industry Breadth Cover the broad spectrum of industries and technologies to provide clients with the ability to look outside the box and discover new and innovative ideas. Global Perspective 32 global offices ensure that clients receive a global coverage/perspective based on regional expertise. 360 Perspective Proprietary T.E.A.M. Methodology integrates all 6 critical research methodologies to significantly enhance the accuracy of decision making and lower the risk of implementing growth strategies. Growth Monitoring Continuously monitor changing technology, markets and economics and proactively address clients growth initiatives and position. Trusted Partner Working closely with client Growth Teams helping them generate new growth initiatives and leverage all of Frost & Sullivan assets to accelerate their growth.
TM o

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T.E.A.M. Methodology

Frost & Sullivans proprietary T.E.A.M. methodology, ensures that clients have complete 360 Degree Perspective from which to drive decision-making. Technical, Econometric, Application, and Market information ensures that clients have a comprehensive view of industries, markets and technology. Technical Real-time intelligence on technology, including emerging technologies, new R&D breakthroughs, technology forecasting, impact analysis, groundbreaking research, and licensing opportunities. In-depth qualitative and quantitative research focused on timely and critical global, regional, and country specific trends, including the political, demographic, and socioeconomic landscapes. Insightful strategies, networking opportunities, and best practices that can be applied for enhanced market growth; interactions between the client, peers, and Frost & Sullivan representatives that result in added value and effectiveness. Global and regional market analysis, including drivers and restraints, market trends, regulatory changes, competitive insights, growth forecasts, industry challenges, strategic recommendations, and end-user perspectives.

Econometric

Application

Market

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Global Perspective

1,700 staff across every major market worldwide Over 10,000 clients worldwide from emerging to global 1000 companies

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