Remarks at the Regular Press Conference for the Second Half of FY20242024/11/27
JERA Co., Inc. (“JERA”) held a regular press conference by Hisahide Okuda, President, Director, CEO and COO on Wednesday 27 November. The press conference was held in Japanese and the below is an English translation version.
1.Agenda
• Progress in achieving JERA Zero CO2 Emissions 2050,
• Ensuring stable supply this winter, and
• The importance of thermal power and the business environment
Material :
Document 1 Press Release: Measures to Address the Heavy-Load Winter Season for FY2024
Document 2 Briefing Materials for the Regular Press Conference
2.Summary of Remarks
There are three things I’d like to talk about today:
• our progress in achieving JERA Zero CO2 Emissions 2050,
• ensuring stable supply for this winter, and
• the importance of thermal power generation and its business environment.
P3: Successful Demonstration Testing of 20% Fuel Ammonia Substitution
In terms of our company’s progress in decarbonization this year, let me first touch on our demonstration testing of large-volume ammonia substitution at Hekinan Thermal Power Station Unit 4 this spring. As previously relayed in updates, we were successful in achieving 20% substitution of fuel ammonia. Results were positive, with nitrogen oxides (NOx), sulfur oxide (SOx), and nitrous oxide (N2O)—which has been a concern mainly in Europe—all below the levels we anticipated.
The demonstration testing began on April 1 with a first firing and succeeded in achieving 20% ammonia substitution at 1 GW on April 10. Subsequently, working from the assumption that the transition of thermal power generation to a balancing power source will necessitate adjusting output while operating coal-fired thermal, we checked to see whether there would be any operational issues with reducing coal output while combusting essentially the same amount of ammonia. By conducting demonstration testing of adjusted-output operation at the reduced output of 0.6 GW, on April 17 we confirmed that it was possible, while maximizing ammonia combustion, to operate at a substitution rate of as high as 28% of heating value.
With the results of the demonstration testing having all exceeded expectations, we are now at the stage of accelerating construction and ammonia supply chain development aimed at commercial operation.
P4: Acceleration of Hydrogen and Ammonia Supply Chain Development Aimed at Starting Commercial Operation
In February 2022 we conducted international competitive bidding for fuel ammonia procurement in preparation for commercial operation at Hekinan Thermal Power Station unit 4, which enabled us to somewhat narrow down potential partners. Following continued dialogue, in January 2023 we signed memorandums of understanding with CF Industries and Yara related to the joint development and procurement of blue ammonia in North America. In March 2024 we concluded an agreement with Exxon Mobil to jointly explore participation in a North American blue ammonia project. We are currently making steady progress in examining hydrogen- and ammonia-production projects centered in North America.
With respect to transport, in November 2022 we concluded memorandums of understanding with Nippon Yusen and Mitsui O.S.K. Lines to study cooperation in the large-scale transport of fuel ammonia, and negotiations are proceeding smoothly.
On the power generation side, having finished the demonstration testing at Hekinan Thermal Power Station, we have begun the long-term process of constructing the large-scale fuel ammonia storage tanks needed for commercial operation. Foundation work is nearly complete, and we have begun construction of the above-ground structure. We are also making steady progress in developing supply chains.
P5: Efforts in Pursuit of Zero-Emissions Domestic Coal-Fired Thermal
Given the results of the recent demonstration testing at Hekinan Thermal Power Station Unit 4, we hope to accelerate our efforts to zero out emissions from domestic coal-fired thermal power generation. These efforts fall into three categories. The first is to ensure a stable supply of electricity while reducing CO2 emissions from coal-fired thermal by curbing the operation of coal-fired thermal power plants during the low-demand spring and autumn seasons. The increase in renewable energy going forward will necessitate output fluctuations. In addition, as nuclear power plants are restarted, they will operate stably as a baseload power source, taking over one of the roles previously played by coal-fired thermal. Therefore, we believe it will be possible to constrain coal-fired thermal while still ensuring a stable supply of electricity. The second is to shut down or decommission inefficient coal-fired thermal plants by FY 2030. The third is to move forward, based on the success of the recent demonstration testing, with ammonia substitution at high-efficiency coal-fired power plants and ultimately to ammonia-only combustion. At the same time, we believe carbon capture and storage (CCS) technologies have made considerable progress and, depending on the location, hope to advance the decarbonization of coal-fired thermal by combining CCS with ammonia substitution.
P6: Adding Steadily Toward the Goal of Developing 20GW Capacity in Renewables
We announced our goal of developing 20GW in capacity in renewables by FY 2035, and today are making steady progress toward that target.
This year we established a structure that places JERA Nex in London as our global command center for renewables with oversight of renewables development in each region. We are putting together a framework for development that integrates the global and the local, broadly applying global knowledge to firmly drive local development suited to regional needs.
Development is moving forward under this framework in various regions, but one example is the development of an offshore wind project now moving forward in Akita Prefecture off the cities of Oga, Katagami, and Akita. As we formulate our development plans, we are leveraging the knowledge of the Belgian offshore wind power developer that we acquired: Parkwind. Specifically, as we prepare for construction, we are utilizing Parkwind’s expertise in how to negotiate with manufacturers, coordinate responsibilities among contractors, and incorporate the latest knowledge in basic design and construction planning.
P7: A Difficult Business Environment for Decarbonization
At the same time, I would like to emphasize that the business environment for decarbonization is a difficult one. The impact of global inflation has been significant, leading to a rapid increase in the cost of developing tools for decarbonization, not only in terms of offshore wind but also for hydrogen and ammonia production.
We understand that global inflation is being driven by a complex of factors. One of these is the strong economy, and with demand for electricity expected to rise considerably due to digital demand, many companies are beginning to develop power sources around the world. At the same time, political reasons are leading to a more fragmented global economy that makes it difficult to develop supply chains.
Page 7 of the briefing materials shows a graph of the price of wind turbines over time. Costs have now risen to 1.5 to 1.8 times what they were four years ago. We believe the situation to be about the same for hydrogen and ammonia production.
Pushing forward with rapid decarbonization in such circumstances runs the risk of inviting, as we see in Europe, a sudden shift of production bases overseas that could lead to a hollowing out of industry. Being in a position of responsibility as an infrastructure operator, however, we feel that the most important thing is to have a diverse array of options that can be combined to draw up a realistic decarbonization scenario, aligning progress in decarbonization with advances in industrial structure.
P8: (Reference) International Comparison of Electricity Rates
As a reference, we have prepared an international comparison of household and industrial electricity rates. Not long ago, Japan had one of the highest electricity rates among the G7 countries, but household electricity rates in the UK, Germany, and Italy are now double those in Japan. Even in France, which relies heavily on nuclear energy, household electricity rates are higher than in Japan. Industrial rates, meanwhile, are higher in the UK, Italy, France, and Germany than they are in Japan.
This situation isn’t due to the pursuit of decarbonization but rather to a combination of overlapping factors such as the interruption of gas supply to Europe caused by Russia’s invasion of Ukraine. With electricity rates so high in Europe, there is a tendency to accept a doubling of offshore wind or ammonia costs overseas because electricity rates have also doubled. In other words, the market-level price has completely changed. At the same time, electricity rates in Japan have not risen. This creates an environment in which each nation is faced with a choice of pushing forward with decarbonization even if it means higher prices or slowing the pace of decarbonization to keep costs in check. I don’t think either is the right answer. I think the most practical approach is to develop a realistic pathway for decarbonization that combines a variety of options while simultaneously furthering advances in industrial structure to gradually cover the cost of decarbonization.
P10: Progress in Replacing Thermal Power Sources Steadily Enhances Supply Capacity
Next, I’d like to talk about supply stability for the winter season. In April 2019 we transferred and consolidated in JERA the domestic thermal power generation businesses of TEPCO Fuel & Power and Chubu Electric Power. Since then, we have planned the replacement of 8.63 GW of thermal power, of which 6.53 GW has already begun operation.
Recently, on August 1 we began commercial operation of Goi Thermal Power Station Unit 1 a month earlier than initially planned so we could meet summer supply-demand needs.
Then, as a measure to address supply-demand needs for the coming winter, we began commercial operations at Goi Thermal Power Station Unit 2 on November 14, also ahead of the original schedule.
Furthermore, Goi Thermal Power Station Unit 3 is in the final stages of construction with 99% of the work complete. If everything proceeds as planned, commercial operations will begin in March 2025, but electricity generated through trial operation before then should be available to contribute to this winter’s supply-demand needs. In addition, to prepare for growing demand in the future, we are moving forward with development and construction planning for Chita Thermal Power Station Units 7 and 8 and intend to make a final investment decision soon.
P11: Reviewing Summer Supply and Demand
We are doing everything possible to secure sufficient power generation capacity. Looking back on this past summer, however, the supply-demand situation was disruptive. The reserve margin frequently dropped sharply just a day or two in advance, something that was a challenge to address.
One example can be seen in the data for July 8 in the graph on page 11 of the briefing materials. A week in advance, the projected reserve margin was a comfortable 8% but dropped sharply two days out to nearly 0%. From that point, we quickly implemented measures such as increased-output operations that brought the reserve margin to about 4% for the previous day and current day.
Such sudden drops in the reserve margin occurred frequently this summer. In response, we took measures such as increasing the output of existing power sources and cancelling work on power sources that had been scheduled to go offline, thereby helping to increase the reserve margin in a short time. One of the reasons for such sharp fluctuations in reserve margins is that the mechanism for securing balancing power changed this April, and I think the resulting confusion had a significant impact. The national government is already aware of the issue and improvements have been made to the system so I expect we will see more stable supply-demand management this winter.
Judging by the reserve margins announced by the government, there should be sufficient leeway even if this winter turns out to be relatively harsh. Looking at the current global situation, however, we believe there is some likelihood of the emergence of various market fragmentation risks. Because there is potential for unplanned shutdowns or issues with fuel supply, we will remain vigilant and do everything we can to prepare.
P12: Restarting Taketoyo Thermal Power Station to Contribute to a Stable Supply this Winter
As part of our efforts to address supply-demand balance this winter, in addition to moving forward the start of operations at Goi Thermal Power Station, we have also announced our intention to restart Taketoyo Thermal Power Station. I would like to apologize again for the great concern and inconvenience caused by the fire incident at Taketoyo Thermal Power Station on January 31. Since then, we have investigated, identified the causes, and put together plans to restart.
As described in the table on page 12 of the briefing materials, a full restart is planned for the end of FY 2026. As previously announced, placing safety first we intend to lower the biomass co-firing rate from 17% to 8%.
Two years, however, remain until the end of FY 2026, so we are expediting a provisional restart to help ensure there is a sufficient supply of electricity during the heavy-load summer and winter seasons in the interim. Preparations are underway to begin coal-only provisional operations by around January, and we believe it will be ready in time for the harsh winter period.
Operations will be coal-only for a period, and even after full restart the biomass co-firing rate will be lower than before, which means increased CO2 emissions. To address this, as I mentioned earlier, we plan to limit the use of coal-fired thermal during non-peak load periods and take other measures to ensure that total CO2 emissions are comparable to when using a biomass co-firing rate of 17%.
P14: The Roles Thermal Power Generation is Expected to Play
Finally, with discussions of the Basic Energy Plan now underway, we’ve prepared a slide to reiterate the importance of thermal power generation. I believe there are two roles that thermal power generation is expected to play.
One is to develop infrastructure to meet the growing demand for electricity. Renewables will become the primary sources of power going forward but have a low energy density Offshore wind power, in particular, has a long development lead time. Such factors make it difficult to ramp up supply quickly. We believe, therefore, that it will be necessary to continue enhancing supply capacity, including from thermal power sources.
The other is to respond to increasing fluctuations in the electricity supply-demand balance. As more renewables enter the mix, we are certain to see greater supply-demand fluctuations, both short-term and long-term. As nuclear energy is integrated it will function as a base load power source, creating an environment in which the role of smoothing out supply-demand fluctuations must be shouldered almost entirely by thermal power.
As a result, we believe thermal power will become even more essential for addressing supply-demand fluctuations, and that it may be time to reassess its importance.
P15: Consider Power Source Development in Anticipation of Increased Demand for Electricity
Electricity demand driven by data centers is expected to increase rapidly in Japan as in other parts of the world. In addition, economic security concerns are already causing the return to Japan of many factory operations that had been located overseas, a trend we expect to continue. In this context, we believe it is a near certainty that electricity demand will turn positive.
To address this, we are in the last phase of making a final investment decision about Chita Thermal Power Station Units 7 and 8 and expect to have something to announce soon.
Moreover, we also believe we must consider additional replacements. Such replacements, though, can take four or five years. In the case of Chita Thermal Power Station, for example, even if we make the decision now, the earliest we could begin operations is FY 2029. Data center-driven demand is going to appear before then, so to address this we are beginning to explore ways to reliably handle an increasing demand for electricity in a short timeframe, not only through replacements but also through repowering or refreshes that involve partial updates of existing power plants with new equipment. We are urgently examining what options we have, including adopting higher-output systems when refreshing facilities, and hope to respond to the rising demand for electricity with a combination of such measures.
P16: The Large-Scale Introduction of Renewables Increases the Need for Balancing Power Sources
What should we think about the need for balancing power sources? As I mentioned earlier, we anticipate both the large-scale introduction of renewables and the restart of nuclear power plants. There will be a growing need to use thermal power to cope with both short- and long-term supply-demand fluctuations.
Until now, the role of smoothing out such fluctuations, whether short or long term, has been played by LNG-fired thermal. We believe this has its limits, however, and believe that in addition to LNG-fired thermal we can also use coal-fired thermal output to balance longer-term seasonal fluctuations.
The illustration on page 16 of the briefing materials describes supply-demand fluctuations including shorter-term hourly or daily fluctuations, medium-term monthly fluctuations, and longer-term yearly fluctuations. Currently, nearly all of these are addressed using LNG-fired thermal, an approach we think is unsustainable. We believe it will be necessary to shift to a structure in which hourly fluctuations are addressed primarily using storage batteries and pumped-storage hydroelectric power while daily to monthly fluctuations are handled with LNG-fired thermal and seasonal fluctuations with coal-fired thermal. What we need most of all as we promote the adoption of renewables is to establish a system that reliably addresses supply-demand fluctuations by effectively combining such a division of labor. There is, however, one major problem.
P17: An Increasingly Challenging Environment for Procuring Materials and Equipment for Thermal Projects
Thermal power, particularly gas-fired thermal, faces a very difficult environment. Construction of gas-fired thermal is booming in global markets including North America, Europe, and the Middle East. As noted in the chart on the lower left of page 17, “Demand for Additional Gas-Fired Thermal Capacity in Europe Over Time,” large-scale gas-fired thermal projects are expected to be introduced in the European market beginning around 2025, and thermal power equipment has already been ordered. As shown in the graph on the lower right of the page, “Gas Turbine Share by Maker,” the consolidation underway among gas turbine manufacturers has resulted in an oligopoly dominated by three firms. As this consolidation continues and every country is trying to construct gas-fired thermal power plants, these firms are flooded with orders for gas turbines. This naturally leads not only to longer delivery times but also to soaring prices. The same situation is occurring with gas turbines as the one explained on page 7 concerning wind turbines and ammonia and hydrogen.
P18: (Repeat) International Comparison of Electricity Rates
The situation with gas turbine prices is driven in part by the high electricity rates in Europe, where the market can absorb the higher cost of gas turbines. Some countries and regions have struggled to keep up, and Japan finds itself becoming one of them. In the US, electricity rates themselves are low but the market rate for marginal power generation is extremely high. Since the market rate for the gas-fired thermal that serves as marginal power is high, orders for gas turbines still get placed even at higher prices. The fact that we need to move forward in such an environment to develop thermal power sources to meet increased demand is a huge challenge.
P19: Maintaining the Functionality and Continued Business Viability of Thermal Power Generation
One of the biggest management challenges we face is how to maintain the functionality of thermal power generation and ensure its continued business viability. The changing environment for thermal power generation creates challenges, but it is also becoming considerably more difficult to secure personnel.
To address this difficulty, we are making changes in the way we approach personnel acquisition and working to automate processes through the adoption of Digital Power Plants. The ability to respond to contingencies cannot be automated, however, so we are also developing training programs to strengthen such skills and working to maintain technical proficiency. Still, we believe it will be crucial to develop mechanisms to ensure that the value generated by thermal power is properly evaluated and traded in the market. Thermal power generation emits CO2, and the need to work progressively toward zeroing out emissions is clear, but we look forward to working with the national government and others to devise mechanisms and pricing that properly values the unique flexibility of thermal power. We also hope to build a platform for evaluating and trading electricity based on its value, thereby laying a foundation that ensures the sustainability of the thermal power business.
Thank you.