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Japan's energy sector needs to adapt to be fit for the future

My company changed to respond to environmental and technological upheaval

| Japan
LNG storage tanks at Jera's Futtsu Thermal Power Station: natural gas is an important tool in quickly reducing carbon dioxide emissions.   © Reuters

Japanese companies have a reputation for resisting change. Utilities, in Japan and other countries, are often seen as especially conservative and uninventive.

But Japan's energy companies are now breaking away from this stereotype, as deregulation reorders the energy sector; advances in energy technology and climate concerns disrupt business as usual; and the aftereffects of the 2011 Fukushima nuclear disaster continue to reverberate.

My company, Jera, seeks to be in the forefront of transforming the industry. It was founded in 2015 by the electric utilities Chubu Electric Power and Tokyo Electric Power Co. Holdings as a joint venture, aimed at combining the strengths of the fossil fuel, biofuel and power generation operations of the shareholders, and creating a leading global energy company.

The venture excluded the shareholders' nuclear operations, and the transmission, distribution and retail businesses.

I was in the group that developed the Jera concept and served as Jera's chairman for three years before assuming my current post as chief global strategist. While much remains to be done, we have embedded irreversible change.

First, the original focus of Jera, the world's largest liquefied natural gas buyer, was on fossil fuels. We now see our global strength in LNG as one pillar to growth alongside renewable power and new technology.

Natural gas is an important tool in quickly reducing carbon dioxide emissions by replacing higher emission technology. With its capability to provide power flexibly on demand, it enables the development of renewable energy, which depends on the elements and is variably reliable.

By combining our LNG capabilities with renewable power and digital technology, we will have a sustainable core business and we can facilitate the transition to a clean-energy economy.

Developing what we call the "Jera Way" has been key for us. While we started with the combined know-how of our two shareholders, we are creating our own ways of operation, which we benchmark against global peers.

But we face structural challenges in implementing change. Japanese business customs can hold back change. For example, despite long experience in Japan, I was surprised at the deference given to senior executives and their distance from workers.

Some people in the company whom I have known for years suddenly stopped coming to talk to me when I became chairman -- I was too senior. This deference can stifle discussion and change, out of concern that an unapproachable senior person might not agree.

The 2011 earthquake and tsunami, and the shutdown of all nuclear power generation in Japan that followed, created a sense of urgency, along with the price spike in global energy markets that came soon after.

We knew that if business as usual were to continue, Japan's energy sector would languish and impair the country. Our shareholders as well as Jera employees had the courage to challenge the status quo and implement the Jera plan.

Within Jera, we pursue more open communication. I and other senior executives maximize accessibility by spending time in our open-plan main work space, and we emphasize getting information out of silos.

Jera welcomes diverse points of view. It takes seriously the voices of outsiders brought to serve on the board, in management and as expert advisers, as well as differing opinions from within. This diversity drives change.

Japan's energy policies are evolving, with the aim of making the power and gas sectors market-oriented and open to competition, while meeting Japan's Paris climate accord undertakings.

All this is very welcome. However, the process of energy sector reform is drawn out and presents challenges.

Regarding market structure, one concern is the design of so-called capacity markets, in which the power system operator runs an auction to obtain offers from generators for providing generating capacity to meet reserve capacity needs.

Experience from other parts of the world indicates that the capacity market design being considered in Japan -- which will involve an annual auction of power generating capacity -- will create volatile prices. The resulting revenue streams may be too uncertain to underpin the long-term capital commitments needed to keep capacity in service and replace aging facilities.

More broadly, Japan has a Strategic Energy Plan, which includes a targeted energy mix, designed to achieve a stable energy supply and meet environmental targets. The plan, which was updated in 2018, targets that 20-22% of Japan's power will come from nuclear generation in 2030, 22-24% from renewables, 27% from natural gas and 26% from coal.

Many colleagues in the global energy industry, particularly those from Europe, recognize that Japan is a resource-poor nation where coal adds diversity to energy supplies.

However, many express surprise at the size of coal's share. Some note that the Strategic Energy Plan implies that, between now and 2030, the share of natural gas in power generation will drop by more than 10%, while the share of coal would see only a single-digit dip.

In addition, many industry colleagues think that it will be challenging for Japan to achieve the nuclear power generation target, given the difficulty of obtaining clearances at the national and local level. To the extent that those clearances don't come through, Jera and other thermal and renewable power providers will be expected to step in to fill the gap.

Jera meets the Japanese government's policy guidelines for the power sector, including those on the environment. However, our aim is to achieve substantially better environmental performance than the guidelines, using the best available technology and through our focus on combining LNG strength with renewables and new technology.

This is not only environmentally responsible, but is prudent business, taking into account climate change, evolving popular opinion, investor attitudes, the global shift away from coal and the possibility that Japan's energy policies may evolve in a similar direction.

Hendrik Gordenker is senior corporate vice president and director of Jera. He previously served as Jera's chairman for three years and before that as senior advisor from the company's founding in April 2015.

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