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Analysis of and Countermeasures Against the Impact of Electricity Price Rises

August 7, 2012

Overview

 Following the shutdown of nuclear power plants, spending on fossil fuels by general electric utilities around Japan has soared during fiscal 2012 and is expected to rise by ¥3.7-4.3 trillion on fiscal 2010. If the utilities were to attempt to put their businesses back into the black solely by raising electricity prices, prices would have to rise by 26.9-31.3% on fiscal 2010 levels, on average across Japan. Although it is essential that utilities strive to cut costs, the impact of rising fuel costs has been considerable, and other utilities besides Tokyo Electric Power Company will have to raise their prices sooner or later.

 Steadily rising fossil fuel prices will contribute to a rise in electricity prices in the medium-to-long term too. Since the cost of the feed-in tariffs (FIT) for Japan’s renewable energy full amount buyback scheme, which came into effect on July 1, 2012, are recovered by adding a surcharge onto electricity prices, it too will exert upward pressure on prices. Estimates of the scale of electricity price rises up to fiscal 2030 suggest that Option 2 of the ratios of electricity sources proposed in the Basic Energy Plan (nuclear power 15%, renewable energy 30%) would result in a rise of ¥2.4-3.1/kWh (up by 15.0-19.6% on fiscal 2010 prices). Of this, the surcharge would account for ¥1.4-2.1/kWh (8.8-13.2%). This would represent an increased burden on ordinary households of ¥1,000 per month.

 The rise in electricity prices will have a major impact on both households and industry.

 Assuming that the increase in fuel costs during fiscal 2012 is recovered solely by increasing electricity prices, the maximum rise in electricity prices on fiscal 2010 would be 31.3%, which would represent an increase in annual consumption expenditure on electricity of ¥37,000 per household (of 2 persons or more). Assuming that the medium-to-long term rise in fossil fuel prices and the impact of the FIT would push electricity prices up 19.6% by fiscal 2030 (Option 2, upper limit scenario), the burden on households would increase by ¥23,000. Since household incomes have tended to decline in recent years, an increase of ¥20,000-40,000 in expenditure would lead to cutbacks on other consumption expenditure and could have a negative impact on the national economy.

 (ii) An analysis of the impact of a 31.3% rise in electricity prices on industry suggests that the industries whose profits are most likely to decline are material industries, such as chemicals and iron and steel, and the automotive industry, including parts manufacturers. These are key industries in Japan, with high employee wages. If a rise in electricity prices were to exert downward pressure on manufacturing profits for a prolonged period, the decline of key industries and the transfer of production bases overseas would result in a loss of employment within Japan, and, in conjunction with the direct increase in the burden on households due to the rise in electricity prices, could lead to a decline in the national standard of living.

 To minimize the impact on households and industry, it will be necessary both to curb the rise in electricity prices (cost price) and to soften the negative impact of the price rise.

 Possible ways to curb the rise in the price of electricity include controlling the import prices of fossil fuels, especially LNG, reviewing electricity business regulation, (including market liberalization) and keeping FIT to an appropriate level. In particular, measures are required to keep down fuel procurement costs for LNG-fired power stations, which can easily affect the cost of power generation, such as (i) revising the method by which import prices are decided, (ii) acquiring upstream interests, (iii) diversifying supply sources and (iv) promoting joint procurement.

 One way to soften the impact of electricity price rises is to adopt measures that reduce the burden on industries exposed to international competition. However, burden reduction measures that exempt industries from electricity charges and surcharges will effectively support industries that use large amounts of energy and are highly dependent on electricity. It will therefore be important to encourage the introduction of energy-saving technologies and the review of manufacturing processes, energy portfolios and product lineups by limiting the scope and duration of these measures and, taking a medium-to-long term view, through support for energy-saving measures combined with preferential tax treatments, subsidies, etc. Moreover, if these subsidies and preferential tax treatments are financed by taxing other forms of energy, it will be worth considering the introduction of tax systems on the European model – centering on environmental taxes and carbon taxes – which are mainly borne by the household sector. Japan, too, will need to discuss in depth how the burden should be shared.

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