Remarks at First Half of FY2024 Regular Press Conference2024/05/17
JERA Co., Inc. (“JERA”) held a regular press conference with Global CEO and Chair Yukio Kani and President, Director, CEO and COO Hisahide Okuda on 16 May.
*This Press Conference was held in Japanese. This is a translation version and Japanese version overrides in case of any discrepancy.
1. Press Conference Overview
Themes: • JERA growth strategy to realize the 2035 vision
• Financial strategy and financial targets for 2035
• Achieving JERA Zero CO2 Emissions 2050
Briefing Materials: JERA Growth Strategy to Realize the 2035 Vision
2. Summary of Remarks
■ Yukio Kani, Global CEO and Chair
I’ll explain the following concerning JERA’s growth strategy for realizing its 2035 vision:
• our progress over the last decade and goals for the next,
• our strategy for achieving those goals,
• our initiatives in three specific areas of investment, and
• what holds the keys to success.
P6: Clear achievements during 10 years since start pave the way to becoming a global energy leader
In 2014, Tokyo Electric Power Company and Chubu Electric Power Company committed themselves to creating a global energy company.
Five years later in 2019, JERA had completed the integration of their domestic and overseas fuel and thermal power businesses and, as one of the world’s largest buyers of LNG, we both supplied a third of Japan’s electricity and were accelerating our decarbonization initiatives.
Profits to date have exceeded our targets, but now, a decade since we were first conceived, we have stopped to take stock of our course for the next ten years.
P7: The world is facing growing challenges and uncertainties strongly related to energy
When we survey the domestic and international business environments, we can see that many of the issues causing increasing uncertainty are closely related to energy. Indeed, climate change, poverty, and geopolitical risk are all directly linked to energy issues.
These issues need to be solved, particularly is Asia, which will remain a hub for growth going forward. At the same time, because the relative size of Japan’s economy is expected to decline, this may be our last chance to consider how Japan can contribute to the world. AI is another leading factor driving social change, and here, too, energy holds the key.
P8: Mission/Vision - Leading the energy transition with a unique business model
Taking these issues into account, I’d like to talk now about where JERA is headed.
What we value most is our mission. JERA’s mission is providing “solutions to the world’s energy issues,” and this means solving the energy trilemma by simultaneously achieving sustainability (reducing CO2), affordability (offering energy at a reasonable price that mitigates poverty), and stability (providing a stable supply of energy even when geopolitical risks occur).
Our vision for 2035 is one of being mindful of our mission every day as we take action to provide cutting-edge solutions.
It is a vision of commercializing a new business model in Japan—one that combines renewable energy with low-carbon thermal power that compensates for the intermittency of renewables—and then expanding this to Asia and the world.
If this business model is on track in 2035, then I think achieving zero emissions by 2050 will come into sight.
P9: Providing optimal solutions through JERA’s unique combination of its Strategic Positioning (SP) and Operational Capabilities (OC)
How, then, will we arrive at this vision for 2035? Let me show you the strategic framework.
JERA must first clarify where to invest and where not to; we will be focusing our investments on three strategic positions: LNG, renewables, and hydrogen & ammonia. Then, we will refine each investment by elevating our everyday work practices.
Specifically, we will strengthen three operational capabilities: investing smarter, optimizing the flow of energy, and both safely and flexibly operating the assets we own.
From these three strategic positions and three operational capabilities, JERA will increase the range of solutions it can offer, enabling us to provide multiple solutions in combination to meet the needs of each client, region, or country.
P10: Key targets for 2035: investment of 5 trillion yen in 3 strategic business areas and achieving a profit of 350 billion yen
Looking at the numbers for this effort, we aim to invest 5 trillion yen in the three strategic positions over the next ten years and, by preparing a structure for combining renewables and low-carbon thermal power, to generate 350 billion yen in annual profit.
Amid rising interest rates and rising construction costs, in addition to being more disciplined investors, we also aim to generate higher-than-usual profit from investments by strengthening optimization and O&M capabilities. In addition, we will be agile in adjusting the allocation to the three strategic positions according to changing conditions.
P11: LNG – As integrated value chain player, we continue to provide solutions to our customers in Japan and Asia through stable and flexible LNG supply
Now I’d like to introduce our strategy and efforts in each of our strategic positions.
Starting with LNG, leveraging one of the world’s largest off-take capabilities, we are focused on three approaches: strengthening the LNG value chain, diversifying procurement and sales flows, and optimizing the flow of LNG at the global level. This enables us to provide energy security solutions for resource-poor Japan that have been functioning effectively since the crisis in Ukraine. In addition, for regions that use a great deal of coal- or oil-fired thermal power, particularly in Asia, we will promote decarbonization through the adoption of LNG in combination with renewables.
P12: Renewables – Center of Excellence in UK with Glocal system for scaling up wind and solar
Up next is renewable energy. Starting from scratch, in the last five years we have grown to become one of Asia’s top players, with capacity of 5GW and a headcount of 300. The fact that large-scale renewable energy projects can also be used to produce green hydrogen and ammonia gives JERA a unique growth opportunity.
There are three steps we will take to scale up.
We are already working on Step 1—building a center of excellence with a team of experts in Europe —by establishing JERA Nex (UK) headquartered in London and, last year, acquiring Belgium’s largest wind power company, Parkwind.
Step 2 will be to integrate the local teams already active in Japan and overseas with the European team from Step 1, creating a glocal system that fuses both the global and the local. Then, by forming attractive business entities that have a certain scale and diversity of business areas, in the final step we will explore partnerships and integration with global players.
P13: Hydrogen & Ammonia – First mover in creating low carbon value chain with multi-purpose decarbonization initiatives
The third strategic position is hydrogen & ammonia.
First, the term “hydrogen & ammonia” is somewhat symbolic. To be more precise, we understand the challenge we face to be finding solutions for decarbonizing thermal power generally.
Leading the way is our effort to substitute fuel ammonia for coal at Hekinan Thermal Power Station. As with the LNG value chain, we aim to leverage the large-scale off-take of thermal power to build the ammonia value chain. Also unique is our aim to promote the decarbonization of society overall by opening the hydrogen and ammonia infrastructure we develop to multi-purpose use, such as for marine fuel or in small- and medium-sized factories.
With respect to hydrogen, last year we began introducing 40% hydrogen at a gas-fired thermal power station in the United States, launching efforts to build the hydrogen value chain. In addition, we are also taking on the challenge of finding new solutions such as collecting CO2 on the power-generating side and combining it with CCS (carbon, capture, and storage) while utilizing the existing LNG value chain.
P14: The journey of energy transition: Aiming for the 2035 Vision through long-term perspective and agile portfolio adaptation
Finally, I’d like to talk about what holds the key to success.
Because the energy transition will be a long, long journey, it is essential to take a long-term perspective. At the same time, whether we can quickly change the way resources are allocated among our three areas of investment to adapt to changes in the business environment or new advances in technology will be critical. In addition to flexible decision-making mechanisms, what makes agile adaptation possible is the common business operational platform shared by our three operational capabilities: business development, optimization, and O&M. For a more comprehensive view, we can look at the three strategic positions in terms of, say, hydrogen and ammonia and see that blue hydrogen and ammonia enables us to fully utilize our expertise and human networks in the LNG value chain while green hydrogen and ammonia enables us to fully utilize our expertise and human networks not only in the LNG value chain but also in large-scale renewable energy projects.
P15: Collaboration is key to achieving Mission & 2035 Vision
Building such agile systems is critical, but the key to achieving our mission and vision will be our collaborations with other partners.
Our three strategic positions all involve many large-scale projects with long life cycles that require teaming up with reliable partners, not least to diversify risk. Because partnering with someone means working side-by-side for more than 40 years, every company chooses its partners carefully. Whether we come to be chosen as a business partner by top global players, whether from Japan or overseas, will be extremely important.
In addition, whether we can share, through open discussion not only with the private sector but also with governments, a common understanding about the path to decarbonization will also be important. The reason is that when adopting LNG for the first time or taking on new solutions, having a shared understanding with government can reduce uncertainties in the long-term business environment.
In our experience, there are two things that are important to making such collaborations successful. The first is whether you can share a common destination—the mission or vision—and the second, even more important, is whether you can share a common culture. At JERA, we value a flat culture where diverse talents come together and exchange their views openly. Together with our many partners and stakeholders, we will continue striving to reach our destination.
Thank you.
■ Hisahide Okuda, President, Director, CEO and COO
I’ll talk primarily about the financial targets we hope to reach through our growth strategy, and about our efforts at decarbonization.
P17: Achieve a financial structure valued by capital markets
This is a list of the financial targets we have established as a package with our growth strategy. The key point is that we have established these financial targets to focus on achieving financials that will be more highly valued by capital markets than before. Some good examples are targeting an ROIC-WACC spread of at least 150bps for capital efficiency, and a Net DER of no more than 0.5 and a Net Debt/EBITA of no more than 2 years for financial soundness.
P18: Establish financial KPIs that deliver capital efficiency and financial soundness to maintain a strong credit rating
In establishing these financial targets, we were mindful of earning evaluations from capital markets and rating agencies that are in line with those of our competitors and rivals in global markets.
The graph on the left indicates capital efficiency. Among the European utilities and international oil companies that are our rivals, companies earning a PBR of 1 or more from capital markets have ROIC–WACC spreads of at least 150bps, so this is our target.
The graph on the right indicates financial soundness and the evaluation of rating agencies. Our competitors currently achieve a Net DER of no more than 0.5 and a Net Dept/EBITA of no more than 2 years and earn a high credit rating as a result. Because it will be important for us to follow their lead, to achieve ratings that are in line with theirs, we have established the targets I described.
P22: JERA is one of the first domestic operators to announce its commitment to the environment
In October 2020, we announced JERA Zero CO2 Emissions 2050, one of the earliest environmental commitments made by a domestic energy operator. The numerical targets shown here have already been made public, and we are currently advancing various initiatives to achieve them.
P23: Leading the decarbonization of Japan's power sector with renewables and zero-emission thermal power
Domestically, by moving forward with the mutually complementary development of renewables and zero-emissions thermal power, we are advancing initiatives that lead the decarbonization of Japan’s electricity sector.
First, for renewables, our development efforts are primarily focused on offshore wind. With respect to advancing zero-emissions thermal power, our policy is to do so by substituting fuel ammonia for coal, substituting fuel hydrogen for LNG, and, going forward, to also consider technological trends and the utilization of CCS/CCUS.
P24: Steady progress towards zero-emissions thermal power using ammonia of the Hekinan Thermal Power Plant
We are moving forward with a project to switch to the use of ammonia as fuel at Hekinan Thermal Power Station in Aichi Prefecture, with large-scale demonstration testing of 20% fuel substitution currently underway. On 10 April we successfully achieved 20% ammonia substitution at the full output of 1GW.
The results were extremely favorable, not only demonstrating successful combustion but also confirming that emissions of nitrogen oxides (NOx) were no greater than before substitution while those of sulfur oxides (SOx) declined by about 20%. In addition, I can report that the demonstration testing is proceeding extremely smoothly and that we have detected no emissions of N2O, a potent greenhouse gas about which concern had been expressed by some in Europe and elsewhere.
Another result of the demonstration testing is that we were able to perform the construction necessary for ammonia substitution without stopping normal operations of the Hekinan Thermal Power Station and to replace the burners during a regular inspection. I think it is a really important point that we have been able to achieve demonstration testing of 20% fuel ammonia substitution while continuing to operate the power station with no disruption to the stable supply of electricity.
P25: In Asia, expanding the use of LNG is key to promoting a low-carbon society
In this way, we hope to develop a platform for supplying clean energy that combines zero-emissions thermal power and renewable energy, and to expand this to Asia.
There is, however, an order to things, and we believe it is important first to provide firm support for expanding the adoption of LNG in Asia. Many countries in Asia have not yet even achieved a stable supply of electricity. For such countries, supporting the development of LNG-fired thermal rather than new coal-fired thermal and then, in parallel, also supporting the adoption of distributed renewable energy—and, looking to the future, the substitution of ammonia for coal—is, we believe, the kind of practical approach capable of contributing quickly and effectively to decarbonization in Asia.
P26: JERA optimally combines a variety of options to achieve decarbonization based on country and region-specific circumstances
Yesterday, the national government began discussing its Basic Energy Plan, so I’d like to share with you JERA’s thoughts.
First, our basic policy is to simultaneously pursue decarbonization, supply stability, and economic efficiency by preparing a variety of options and then combining them optimally to meet national or regional conditions. I’ve discussed the use of hydrogen and ammonia as zero-emissions thermal, but this is positioned as just one option.
For reference, we have illustrated how much land area is required for power generation facilities with an output of 1GW, and you can see that the energy density varies widely by power source. As a result, it is only natural that the combination of options will differ between countries with vast land areas and those with smaller territories. We hope to take such conditions into account as we provide each country with solutions that fit.
P27: Need a combination of power sources and storage batteries that can respond to short- and long-term fluctuations in supply and demand
Another important point when combining power sources is that it is necessary to combine power sources and storage batteries realistically in a way that is responsive to short- and long-term fluctuations in supply and demand.
Of the two graphs at the bottom of the page, the one on the left illustrates fluctuations in electricity supply and demand over the course of a day. There is a huge difference in demand for electricity between afternoon and night, and demand can also fluctuate widely due to weather changes over the course of a day. Because such short-term fluctuations in supply and demand are regulated using thermal power, the burden on thermal power facilities becomes significant as the number of startups, shutdowns, and output fluctuations increases. Therefore, we believe it is necessary to innovate when configuring the power supply by, say, introducing storage batteries as much as possible to iron out the wrinkles.
At the same time, the graph of annual power supply and demand fluctuations on the right shows large seasonal fluctuation, too. In Japan, with its four seasons, electricity is used for heating and air conditioning, and demand fluctuates greatly by more than 30GW between spring/autumn and summer/winter. It would require a huge number of storage batteries to cover all this fluctuating demand, making this extremely difficult in practice. Such large fluctuations in supply and demand must be covered by starting and stopping thermal power generation facilities. This is why we believe zero-emissions thermal power is necessary to achieve both stable supply and decarbonization.
P29: NOx/SOx reduction is important not only for CO2 emissions but also for ecosystem conservation
We are advancing decarbonization with zero-emissions thermal as one option, but the important thing here is to the need to thoroughly constrain not only CO2 but also NOx and SOx.
CO2 effects ecosystems through climate change, but the impact of NOx and SOx is greater because they influence ecosystems directly. As shown in the graph, Japan is a leader in this field, and within Japan JERA has been able to limit NOx and SOx to levels much lower than average. Maintaining this state, we will move forward to steadily introduce hydrogen and ammonia as part of achieving zero-emissions thermal power.
P30: Consider revising power sources development plans to prepare for potential increases in electricity demand
In revising the Basic Energy Plan, together with decarbonization it will be extremely important to prepare for potential future increases in electricity demand. To date, we have invested in replacing aging thermal power stations and the decarbonization of electricity.
Today, however, increased electricity demand from data centers, AI, and other aspects of the digital transformation (DX), and from the return of certain factories, such as those for semiconductors, to the domestic market, make it possible to foresee a return to rising electricity demand in the near future. In that case, it will be necessary to create new power sources, but this will be difficult without a policy environment offering greater business predictability than today.
Discussing such points firmly with the national government, we hope to revise our power source development plans to cope with an increased demand for electricity.
Thank you.