Japan doubles down on coal power as trading houses curb investment

[TOKYO] As most developed economies turn their back on coal, Japan is burning record amounts for electricity generation and plans to use even more of the dirtiest fossil fuel to fill the gap after the Fukushima disaster paralysed its nuclear sector.

But as Prime Minister Shinzo Abe's government pushes coal power, both at home and through exporting technology abroad, some of Japan's powerful trading houses are cutting or freezing coal investments over concerns about the environmental fallout.

With networks spanning the globe, trading houses such as Mitsui & Co are closely attuned to international developments that might hit future profitability.

An Oxford University study warned that billions of dollars of Japanese coal assets could eventually have to be written off if coal becomes uneconomic, although the government and utilities have so far brushed off such questions.

Mitsui, however, plans to cut its investment exposure to coal by a third within three years, citing environmental concerns after the UN climate agreement in Paris last year.

"Considering the result of COP 21 (Paris talks) last year, we plan to reduce thermal coal assets," Mitsui President Tatsuo Yasunaga told a recent analyst meeting.

The output of thermal and coking coal from mines Mitsui has stakes in was about 13.5 million tonnes in the year to March 2016, or about 7 per cent of the 190 million tonnes Japan imported last year.

Another trading house, Sojitz, also said it would limit investments in coal due to environmental issues.

Japan recently gave environmental approval to three more coal-fired power plants out of 45 planned, even after Tokyo agreed at last year's UN climate conference to cut carbon emissions by 26 per cent by 2030 from 2013 levels.

By contrast, the United Kingdom's power grid went coal free on several occasions in May for the first time in over a century. Japan says it has to rely more on the fuel after shutting down most nuclear reactors that used to supply a third of its electricity before the Fukushima disaster.

Japan has pledged to make thermal power stations more efficient to meet its global emissions commitments, though experts question how quickly and cost effectively this can be done.

The Oxford University study criticises Japan's pro-coal policies and says much of the industry could end up becoming uneconomic due to likely measures to cut coal use, the prospect of nuclear restarts and rising use of renewables.

Coal-fired power stations valued at as much as 8.9 trillion yen (S$115 billion) are at risk of becoming stranded, a situation where assets suffer unanticipated writedowns, the study said.

Other trading houses such as Mitsubishi and Itochu did not respond to queries on the issue of stranded assets. Marubeni declined to comment and Sumitomo did not comment on the risk of stranded assets.

Japan's increased burning of coal also comes just as global use of renewable energy jumps. Japan is now the third-biggest solar power user, according to the renewable energy policy network Ren21.

Tom O'Sullivan, founder of energy consultancy Mathyos Japan, said that building new coal power stations, even with better technology, seemed to run counter to the Paris climate agreement.

"Going down this path may create stranded asset risk for Japanese investors and Japanese banks over the next 15 years,"said Mr O'Sullivan.

Big parts of corporate Japan remain committed to coal, with the country's largest project financing recently launched by the Mitsubishi group for two coal plants.

"As the government's basic energy plan stipulates, coal is an important base-load electricity supply that is excellent as a stable and economical power source ... and for fuel procurement stability," Chubu Electric Power, Japan's third-biggest electric utility, told Reuters.

Tokyo Electric Power, the utility with the most assets at risk of being stranded, according to the Oxford University study, declined to comment on the report, saying it did not know what assumptions were used.

A spokesman at Electric Power Development, another big coal user, said it contained factual errors.

The issue of stranded assets was, however, raised at a meeting of a panel of government-appointed experts to look into boosting the efficiency of fossil fuel plants.

Hiroshi Sasatsu, director of the research & development department at Electric Power Development, told the panel that coal assets would not suddenly become stranded and urged the government to help develop technologies to use fossil fuels more efficiently.

The panel is set to recommend technological measures aimed at improving efficiency of thermal power stations, even as doubts exist over the commercial use of carbon capture and storage (CCS).

REUTERS