A warning to Japanese investors in Japanese

During the 20th century, the lowest cost electric power system was relying on uranium and fossil fuels. The larger the power plants, the lower the cost per kWh produced.

There were different roles for different fuels: Coal and uranium fuels were cheaper than gas or oil, but, on the other hand, the power plants using uranium and coal are more expensive than the oil- and gas-plants.　As a result, the expensive plants were built to be operating as much as technically possible, while the less costly oil- and gas-plants were built to operate only when demand was as high enough to justify burning more expensive fuels.

Under these conditions, closing down a coal- or uranium-fueled plant would provide an opportunity to build another similar plant that could operate throughout the year.

In this century, however, industrial development has provided new ways of producing lower cost electricity for the consumers.

Wind power is the lowest cost option, when new production capacity is desired, in most parts of the world. Solar has become a profitable way for customers to produce their own electricity in many places, and when air-conditioning is the peak load solar may be competitive with peak load power also among power generating companies.

What will happen in Japan´s power system as this development continues can be learned from countries, like Denmark and Germany, where subsidies started development early.

What we learn is that solar and wind power offers electric power with no cost of fuel. When they produce they outcompete even the cheapest uranium or coal fuels. As a result these capital intensive, inflexible and fuel dependent plants are so often out-competed from the supply system that they are no longer profitable.

Flexibility is often better with small thermal plants, and as a result they have kept profitable while many large plants have been permanently closed.

This comes with benefits to consumers. Electricity prices have dropped to record low levels in the parts of Europe and the US where renewables have been added to the power supply systems. While household in Germany still pay dearly for the early, then expensive, solar installations, consumers in countries are just enjoying the benefits of renewable investments as Germany brought down the costs. Swedes now pay 2/3 of the consumer price compared to Japan – and then half of that price is electricity tax and consumption tax going into the government budget!

While consumers enjoy competition and successful renewable energy technologies, the resulting low and fluctuating prices are painful for the electric power companies. In the last few years European power companies have had to write down the value of coal and nuclear power plants. Most embarrassing has been that some new coal fired power stations have lost their value before even starting commercial operation!　Tens of trillion yen of value have been lost among large power plants facing competing, cheaper renewable electricity generation.

In the United States, “Energy Future Holdings” was a company formed around big coal fired station that under 20th century perceptions were considered competitive “base load” power – something at the time believed to be competitive and financially safe.

However, as Texas has seen the largest wind power installations in the US and recently also significant solar power, prices have fallen and “base load” is no longer economically stable. In April 2014 the company went into bankruptcy.

In Japan, policy makers have taken the side of the large power companies against the interest of households and electricity consuming manufacturing industries. But slowly, competition is coming into the Japanese power market as well.

Those who consider investing in large, inflexible power plants should learn from other countries where economic efficiency has gone further. The value of fossil investments may be lost, as wind and solar electricity provide lowest cost power and flexible, often small, generators supplies the remaining demand.