Economic and Energy Outlook of

Japan through FY2018

Energy supply and demand structure significantly changes

The Institute of Energy Economics, Japan

AOSHIMA Momoko, Y. Yorita, M. Tsunoda, H. Arimoto, C. Onda, Y. Shibata, A. Yanagisawa, S. Suehiro, K. Taguchi and K. Ito

IEEJ：September 2017, All Rights Reserved.

25 July 2017

The 426th Forum on Research Work

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1

FY2017-2018 Data

FY2017: $51/bbl

FY2018: $52/bbl

+1.4%

+1.1%

-0.2 Mtoe

-3.0 Mtoe

9 units

10 units

63 GW

68 GW

+3.8 TWh

+0.0 TWh

+0.4 Bcm

+0.3 Bcm

-2.9 GL

-3.0 GL

Crude oil price

(import CIF price)

Economic growth Primary energy supply

Restarted nuclear reactors Renewable energy power

generation capacity

Electricity sales

City gas sales Fuel oil sales Energy self-sufficiency ratio

11.9%

12.8%

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Global economy

▌ In the U.S. economy, the employment market will sustain recovery, encouraging private consumption.

▌ The European economy will feature brisk private consumption, being supported by investment and export recovery.

▌ The Asian economy will sustain relatively high growth due to export recovery and brisk private consumption.

Import CIF prices

June 2017 FY2017 FY2018

▌ Crude oil: $52/bbl 51 52

▌ LNG: $432/t 399 395 ($8.3/MBtu 7.7 7.6)

▌ Steam coal: $103/t 93 87

Sources: Morikawa “Outlook for International Oil Market,” Kobayashi “Outlook for Gas Market” and Sagawa “Outlook for International Coal Market”

Foreign exchange rate

June 2017 FY2017 FY2018

▌ JPY111/$ 115 115

2

Major “assumptions”

Nuclear power generation

▌ A total of nine nuclear power plants will have been restarted by FY2017. In the year, they will operate for an average eight fiscal months and generate 55.6 TWh.

▌ By the end of FY2018, a total of 10 nuclear power plants will have been restarted. In the fiscal year, they will operate for an average nine months and generate 65.6 TWh (accounting for 7% of total power generation).

See pp. 24-26 for an analysis comparing impacts of three different nuclear power plant restart cases – Reference Scenario, Low Case and High Case.

Electricity supply and demand

▌ We expect that Japan will secure the generation reserve margin of 3% required for stable nationwide electricity supply.

Basic Policy Subcommittee on Electricity and Gas

Air temperature

▌ Summer in FY2017 will be as warm as in the previous year and winter will be as cold as in the previous year.

▌ In FY2018, summer will be cooler (-0.5°C) than

in the previous year and winter will be as cold as in the previous year.

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The Japanese economy will grow by more than 1%

for the fourth straight year

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▌Real GDP growth and its breakdown ▌Industrial production

▌ Industrial production in FY2017 will exceed the FY2013 level inflated by a demand increase before a consumption tax increase, hitting a nine-year high.

▌ The Japanese economy will moderately grow on brisk domestic demand, despite decelerating exports.

98.9

98.4

97.5

98.6

101.1

102.5

96

98

100

102

104

2013 2014 2015 2016 2017 2018

20

10

=1

00

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Primary energy supply will fall slightly, with non-

fossil energy supply increasing

▌ Primary energy supply in FY2017 will fall slightly on progress in energy conservation, despite economic expansion. In FY2018, primary energy supply will decline on slow production recovery.

4

▌Primary energy supply ▌Primary energy supply changes by energy source

▌ Power generation will influence supply. LNG and oil will reduce their shares of the power generation as nuclear and new energy expand their shares.

▌ The energy self-sufficiency rate will rise back beyond 10% for the first time since the Great East Japan Earthquake.

Note: The heat value has been revised since FY2013.

515

474

467 466 465462

460

470

480

490

500

510

520

2010 2014 2015 2016 2017 2018

Mto

e

-6.5

-3.7

0.0

+0.2

+2.0

+7.8

-8 -4 0 +4 +8

Oil

Natural gas

Hydro

Coal

New energy, etc.

Nuclear

Year-on-year changes(Mtoe)

2017 2018

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Energy conservation will have to be combined with

decarbonation to cut CO2 emissions ▌ After falling below the level before the Great

East Japan Earthquake’s impact, energy-related CO2 emissions will continue to decrease. FY2018 emissions will slip below 1,100 Mt for the first time in 25 years excluding FY2009 when emissions fell exceptionally due to the Lehman Shock.

5

▌CO2 emissions ▌ CO2 emission changes and breakdown by

energy source

▌ Energy conservation’s contribution to the CO2 emission reduction will slightly decrease.

▌ Decarbonation’s contribution to the CO2 emission reduction will gradually expand. In FY2017, nuclear and renewable energy’s contribution will be nearly two times as high as that by energy conservation.

1,139

1,235

1,1491,136

1,1131,096

1,000

1,100

1,200

1,300

2010 2013 2015 2016 2017 2018

Mt

-80

-40

0

+40

+80

+120

2011 2013 2015 2017

Ye

ar-

on

-ye

ar

ch

an

ge

s(M

t)

Energy conservation Renewable energy

Nuclear Switching from fossil fuels

Economic growth CO2 emissions

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Electricity sales will end their rapid fall

▌ Electricity sales will stop declining after their rapid fall following the Great East Japan Earthquake.

▌ However, future growth will be slow.

6

▌Electricity sales ▌Electricity sales changes by user category

▌ Electricity sales will be driven by those to high voltage and extra-high voltage industrial users as production expands.

▌ Electricity sales to lighting service users will slowly decrease on progress in energy conservation.

Note: Data lose continuity as data through FY2015 are based on old standards.

927

851

838

854 858 858

820

840

860

880

900

920

2010 2014 2015 2016 2017 2018

TW

h

-0.4

-0.2

+1.4

+3.0

-2 -1 0 +1 +2 +3 +4

Lighting service

Low voltage

Extra-high voltage

High voltage

Year-on-year changes(TWh)

2017 2018

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Fossil fuels’ power generation share, though still

being high, will gradually fall ▌ A cumulative total of 10 nuclear power plants will have been restarted by the end of FY2018. New

energy power generation will expand capacity to 68.3 GW as FIT approval facilities launch operation.

▌ Fossil fuels’ share of the power generation will still exceed the FY2010 level before its sharp increase following the Great East Japan Earthquake. However, their share has been gradually falling since the FY2013 peak and will drop to 75%. LNG’s share will slip below 40%.

7

▌Electric utilities’ power mix

Note: FY2010 data are for general electric utilities under a former classification. Data lose continuity as data through FY2015 are based on old standards. The hydro category covers

small and medium-sized plants with capacity at 30 MW or less, which account for an estimated 50% of hydro power plants.

(25%) 30% 31% 30% 30% 30%

(29%)

46% 43% 41% 39% 37%

(8%)

11%9% 10%

9% 9%(29%)

0%1% 2% 6% 7%

(9%)9% 9% 8% 8% 8%

(1%) 3% 4% 6% 7% 8%

0%

20%

40%

60%

80%

100%

2010 2014 2015 2016 2017 2018

Others

New energy, etc.

Hydro

Nuclear

Oil, etc.

LNG

Coal

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City gas sales will hit a record high for the third

straight year

▌ City gas sales hit a record high in FY2016 and will continue to do so in FY2017 and FY2018, while decelerating growth.

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▌City gas sales volume ▌City gas sales changes by user category

▌ Sales to industrial users will drive overall sales growth, increasing on growing production of steel, chemicals and machinery and on fuel switching for industrial furnaces and boilers.

39.3

40.239.9

41.5

41.942.2

39

40

41

42

43

2010 2014 2015 2016 2017 2018

Bil

lio

n m

3

-0.02

-0.01

+0.02

+0.41

-0.1 0 +0.1 +0.2 +0.3 +0.4 +0.5

Commercial

Other users

Residential

Industrial

Year-on-year changes(billion m3)

2017 2018

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Fuel oil sales volume will fall for the sixth straight

year ▌ Fuel oil sales will decrease by nearly 6 billion L in

two years through FY2018, slipping below 70% of the peak of 246 billion L reached in FY1999.

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▌Fuel oil sales volume ▌Fuel oil sales changes by category

▌ Fuel oil C sales for power generation will decline as nuclear power plants are restarted, with new renewable energy facilities launching operation.

▌ Gasoline sales will continue to decline on the diffusion of fuel-efficient vehicles, slipping below 51 billion L for the first time in 24 years.

196

183181

177174

171

188

172 172170

168166

160

170

180

190

200

2010 2014 2015 2016 2017 2018

bil

lio

n L

Total fuel oil sales

Excluding fuel oil C for power generation

-1.1

-0.9

-0.4

-0.3

-0.2

+0.1

-1.5 -1.0 -0.5 0 +0.5

Fuel oil C

Gasoline

Fuel oil A

Kerosene

Diesel oil

Naphtha

Year-on-year changes(billion L)2017 2018

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▌ Diesel oil is the only major fuel oil scoring a sales increase from FY2010 before the Great East Japan Earthquake seriously affected energy demand.

▌ Through FY2018, diesel oil will post slower sales decreases than other fuel oil products.

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In-depth analysis |

«1» Diesel oil demand trend ▌ Growth in home delivery demand will partially offset a

fall in diesel oil sales for cargo transportation.

▌ Increasing foreign travelers’ use of sightseeing buses, reconstruction after the Great East Japan Earthquake and the Tokyo Olympics will help expand diesel oil sales.

▌Fuel oil sales volume ▌Diesel oil sales changes by use

Diesel oil

Naphtha

Fuel oil A

KeroseneFuel oil C

Gasoline-8

-4

0

+4

+8

+12

2010 2012 2014 2016 2018

Ch

an

ge

s fr

om

FY

20

10

(bil

lio

n L

)

-0.20

-0.03

0.00

+0.00

+0.02

-0.3 -0.2 -0.1 0 +0.1

Freight

transportation

Commercial

Power generation

Industry

Passenger

transportation

Year-on-year changes(billion L)

2017 2018

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Effects of nuclear power plant restart

▌ Progress in the restart of nuclear power plants will boost economic growth through a cut in fossil fuel import value and in power generation costs and contribute to climate change measures by helping reduce CO2 emissions.

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Nuclear power generation (TWh)

Electricity unit cost (JPY/kWh)

Fuel import value (JPY trillion)

CO2 emissions (Mt-CO2)

LNG import volume (Mt)

▌Effect of differing paces for restarting nuclear power plants [FY2018]

Real GDP (JPY trillion)

Note: Data other than nuclear power generation represent comparison with the Zero Operation Case. See p. 15 of the report for the

definitions of the Reference Scenario, Zero Operation Case, Low Case and High Case.

(Units restarted by

FY2018-end)

Low Case Reference Scenario High Case

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(Attached table) Effect of differing paces for

restarting nuclear power plants [FY2018]

12

changes from the Zero Case

Low Case Reference High Case

Cumulative number of [End of FY2017] [0] [5] [9] [9] [+5] [+9] [+9]

restarted nuclear reactors End of FY2018 0 5 10 17 +5 +10 +17

Average period for operation(months) 0 10 9 8 +10 +9 +8

Power generation by nuclear (TWh) 0 31.6 65.6 99.4 +31.6 +65.6 +99.4

Power supply composition ratio 0% 3% 7% 10% +3p +7p +10p

Electricity unit cost1 (JPY/kWh) 6.1 5.9 5.8 5.6 -0.1 -0.3 -0.5

Fuel cost 3.8 3.7 3.5 3.4 -0.1 -0.3 -0.5

FIT purchasing cost 2.3 2.3 2.3 2.3 - - -

Total fossil fuel imports (JPY trillion) 15.2 15.0 14.7 14.5 -0.2 -0.5 -0.7

Oil 9.0 8.9 8.8 8.7 -0.1 -0.2 -0.3

LNG 4.0 3.8 3.7 3.5 -0.1 -0.3 -0.5

Trade balance (JPY trillion) 1.5 1.7 2.0 2.2 +0.2 +0.5 +0.7

Real GDP (JPY2011 trillion) 536.1 536.3 536.6 536.9 +0.2 +0.5 +0.8

Gross national income per capita (JPY thousand) 4,361 4,363 4,365 4,367 +2 +4 +6

Primary energy supply

Oil (GL) 197.3 195.1 192.8 190.8 -2.2 -4.6 -6.6

Natural gas (Mt of LNG equivalent) 90.0 86.8 83.4 79.9 -3.1 -6.5 -10.1

LNG imports (Mt) 86.8 83.7 80.3 76.7 -3.1 -6.5 -10.1

Self-sufficiency rate 9.9% 11.3% 12.8% 14.3% +1.4p +2.9p +4.4p

Energy-related CO2 emissions (Mt-CO2) 1,126 1,111 1,096 1,081 -15 -30 -45

Changes from FY2013 -8.8% -10.0% -11.3% -12.5% -1.2p -2.5p -3.7p

1. Sum of fuel cost, FIT purchasing cost and grid stabilising cost divided by total power generation.

Nu

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Zero

Case

Low Case Reference

Scenario

High

Case

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(Reference) Progress in electricity and gas system

deregulation

4.1%

0%

5%

10%

15%

20%

0

20

40

60

80

20

14

/1

2014/4

20

14

/7

20

14

/10

20

15

/1

20

15

/4

20

15

/7

20

15

/10

20

16

/1

20

16

/4

20

16

/7

20

16

/10

20

17

/1

Low voltage High vollage

Extra-high voltage Share (extra-high voltage)

Share (high voltage) Share (low voltage)

Share (whole)

0

0.05

0.1

0.15

0.2

0.25

0

3,000

6,000

9,000

12,000

15,000

20

14

/4

20

14

/8

20

14

/12

20

15

/4

20

15

/8

20

15

/12

20

16

/4

20

16

/8

20

16

/12

20

17

/4

Large gas business operators Gas tube business operators

Residential Commercial

Industrial Other uses

Total

13 Source: Agency for Natural Resources and Energy “Electricity Survey Statistics”

▌Electricity supplier switching rate trend ▌City gas supplier switching rate trend

Source: Agency for Natural Resources and Energy “Statistical Survey on Gas

Industry Production”

▌ Retail sales were fully deregulated for electricity in April 2016 and for city gas in April 2017.

▌ As of March 2017, 4.1% of low voltage users had switched electricity suppliers. As of April 2017 when gas retail sales were deregulated, only 0.0017% of users had switched gas suppliers.

▌ Supplier switching rates for electricity and gas differs sharply from region to region.

100 million kWh TJ

Contact :report@tky.ieej.or.jp