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Energy Company Bailouts Warning from Japan

Since the Fukushima earthquake in 2011 Japan, a perennial energy exporter, mining and monetizing its abundant natural resources has experienced a fundamental change in its world energy status.

In response to the earthquake and the Fukushima nuclear accident, 50 reactors were and continue to be shut down. Those 50 reactors across nine regionalized utility companies (similar to the old UK regional set up, but in private hands) provided the backbone of Japan’s energy production with 30% of all generation coming from indigenous nuclear plant.

The utilities themselves have suffered hugely, prevented from accessing their generation facilities they have had to import oil and gas supplies in unprecedented quantities to mitigate the shortfall and keep the Japanese economy functioning.

In total it is reported that the utilities have suffered £425m of operating losses since 2011.

But that doesn’t tell the whole story.

Consumers have seen significant energy price increases, the Japanese economy has carried a huge import cost burden leading to a record trade deficit and perhaps most worrying of all the utilities have had to turn to the government, via state owned banks, for bailouts to continue operating.

Two things strike home immediately, Japan’s sudden demand for imports has had to be filled from somewhere, LNG and oil supplies have been re-directed from their previously core markets to fulfill the needs of a premium paying captive market that Japan has become.

In turn this ‘re-distribution’ of resource has limited supply elsewhere, creating the classic ‘global complex’ impact of an event in one part of the globe impacting the energy prices in another, apparently unconnected, and thousands of miles distant territory.

UK Nuclear Energy

The second take-out is the parallels with the UK (beyond the earthquake propensity). We ourselves are going through a period of nuclear shut-down and decommissioning, albeit for different reasons, we are entirely reliant on imports for our coal needs with our indigenous mines now able to be counted on one hand (that is despite record demand for coal), and while the solution favoured by many, renewables, show potential they are intermittent and heavily subsidized.

We’ve just come to terms with apparently rock solid institutions, the banks, being bailed out, given economic crutches and failing across the spectrum, albeit of issues of their own making.

The political, commercial, economic and strategic pressure on utilities is rising.

Whilst again in many ways this has been brought upon themselves they are undoubtedly operating in a fraught and uncertain market with investment desire and capability equally in question.

Whilst no-one is expecting bailouts being required for the vertically integrated Big 6 energy suppliers any time soon, the market backdrop, recent experiences of the financial sector and the lessons from Japan serve as a timely reminder that businesses need to be viable for markets to work and for services to be delivered at affordable costs.

The UK energy industry may not have that latter element covered right now, and the desire for re-nationalised energy utilities is only marginally behind that of the rail networks, but in reality things could be a whole lot worse for economy and consumers alike.

A mature and pragmatic plan for energy generation is required involving all energy sources, however unfashionable or maligned, until such point that investment, and return, can be made to facilitate a long term, secure, indigenous energy supply fit for the next century.

We can’t get there without some pain, but we can avoid the most extreme pain.

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