London, 18 March 2011

Gas Strategies Group: China’s decision this week to suspend approvals of new nuclear power plants in the wake of the tragic earthquake and tsunami in Japan illustrates the significant implications a relatively localised event in the Far East can have for global energy security across all advanced and emerging economies.

We have already seen the decision this week by Germany to close seven of its ageing nuclear plants and to put a moratorium on future nuclear build, whilst the nuclear industry in the UK moved quickly to the defence of the technology.

We should be cautious not to exaggerate the problems over nuclear. But there is no doubt that nuclear safety needs to be seriously revisited.

This week, EU energy ministers agreed to introduce – yet to be specified – stress tests. The European Commission will prepare the EU-wide assessment criteria by June, while the tests themselves should be concluded by the end of the year.

James Ball, President Director of Gas Strategies, provider of professional services in global energy, said: “This now represents a formal statement of delay and uncertainty for life extensions and nuclear new build programmes across Europe. The momentum built up over 10 years to nuclear renaissance is also, in reality, lost”.

The UK, a case in point

In the UK, the government has responded to the events at Fukushima Daiichi nuclear power plant by ordering a report on the disaster and the implications for nuclear safety. Interestingly, the UK review will be carried out against the backdrop of the government’s proposed Electricity Market Reforms (EMR), which are set to offer capacity payments to help baseload generators keep capacity available. But the government is yet to ratify the National Policy Statement on nuclear, which will help determine planning decisions for new large-scale plants.

Mitun Patel, Consultant at Gas Strategies said: “New nuclear plants in the UK were originally planned to come online in 2017. But given delays in policy and resulting uncertainty in financing, we had already expected this to be pushed back by up to five years, with ramp up starting around 2022. This already represented a gap that will have to be filled by other forms of new generation capacity.”

However, Patel stressed that following the disaster in Japan, new nuclear plants may not come on line before 2025, or an even later date. This could leave a supply gap that realistically, planned renewable capacity will not be able to fill.

All this makes certain and more urgent the need for the government to think about and act upon contingency plans to avert looming power supply shortages. In particular, there is enhanced urgency for an energy policy that supports more investment in gas plants, and related infrastructure such as gas storage to provide base and peak load supply.

New risks and uncertainties

Following the March 11 earthquake and tsunami, around 25% of Japan’s total nuclear power station capacity of 47.4GW is likely to be out of service for 12-24 months whilst safety checks are carried out to confirm and act upon what nuclear capacity can be brought on stream safely again. Some stations may never come back into service. The plants now out of service amount to some 11.9GW of generating capacity in the Fukushima (TEPCO), Onagawa (Tohoku) & Tokai (JAPC) complexes, according to Pat Roberts, Managing Consultant at Gas Strategies.

This is likely to have massive implications for Asia’s second largest economy as the country now turns to alternative fuels for power generation, mainly oil, gas and coal. And the economic effects are starting to be felt on various sectors and industries in global markets. Countries that export energy and raw materials may see an increase in demand from Japan as it seeks to rebuild. But other countries relying on Japan for manufacturing components will be bracing themselves for shortages in supply.

The immediate impact of the disaster on LNG demand underlines the significant exposure of natural gas to competition on global markets. Analysts from Société Générale estimate that Japan will need to import an additional 5 Bcm of gas in 2011, and 10 Bcm in 2012.

As the tragic events in Japan are still unfolding, any assumptions on longer term LNG demand in Japan may be speculative at this point, but there is no denying that events in the country will have much farther reaching consequences on energy demand. The recent turn of events in the Middle East is also threatening energy supply and driving up energy prices.

The world’s energy choices, up until a week ago, were contentious enough. But participants in the energy industry, whether they operate locally or on a global scale, are now faced with a step change in risks and uncertainties in their commercial planning and decision making.

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