2011-07-07   Source: www.economist.com

When managers from Tokyo arrived at the Nippon Paper factory in Ishinomaki, north-eastern Japan, after the March 11 tsunami, they had to clear a narrow path through debris to reach a door. Overturned cars were piled in the parking lot, and giant rolls of uncut paper littered the grounds.

Happily for the company and the factory’s 600 full-time workers, much of the Ishinomaki plant turned out to be salvageable, and some production is expected to resume in September. But there will be big changes. Capacity will be lower, so exports, which accounted for about a quarter of output, will be scrapped.

And – in a shift that reflects broader developments across Japan – the plant will change the way it gets its power. Oil furnaces that provided much of its electricity before the tsunami will be mothballed in favour of cleaner-burning biomass generators, which can turn things such as waste pulp and paper – as well as wood from tsunami-wrecked buildings – into fuel.

Nippon Paper’s choice highlights a renewed focus on green energy since the tsunami and subsequent nuclear crisis, with the waves that destroyed the Fukushima Daiichi atomic station raising questions about the future of nuclear power.

The potential for a green shift is large. Japanese manufacturers such as Toshiba, Panasonic and Sharp are important producers of clean-energy hardware. Japan is the second-largest maker of solar panels, behind only China.

But much of their output is exported, and domestic adoption of renewable energy has been slower than in comparable countries such as Germany or – in the case of wind power – the US.

Naoto Kan, prime minister, has admitted that plans to boost nuclear power’s share of electricity generation to 50 per cent over the next two decades, from about 30 per cent now, will have to be set aside. In an interview with the Financial Times last month, he said he hoped to turn the disaster-hit north-east into a “major production centre for natural energy” that would serve as a model for the rest of the country.

According to government data, in 2007 Japan generated just 6 per cent of its primary energy from renewable sources, including hydropower – a level virtually unchanged since 1973. In the electricity sector, the proportion actually fell by half in the same period, to 8 per cent, as the role of nuclear power and natural gas expanded rapidly.

“Japan could be a world leader if it wanted to be,” says Mike Hugh, chief executive of Asia Cleantech Gateway, a consultancy.

Germany, a country with similar technological strengths, has raised its share of renewable energy in recent years. Last month, Berlin announced it would abandon nuclear power altogether, necessitating even more ambitious increases.

Japan’s plans are less clear cut than Germany’s, and any serious transformation will take years and require leadership and money from the government, experts say.

In the short term, at least, much of its lost nuclear capacity will be replaced by natural gas rather than solar or wind power. But concerns about energy security – Japan needs to import virtually all its fossil fuels – make the buying of more gas an unpalatable long-term solution, and of course there are worries about global warming.

Some companies are already responding. Last month, Toshiba – a major producer of nuclear reactors as well as other forms of power generation – announced it would invest Y700bn ($8.7bn) in the environmental and energy sectors over the next three years. It also secured the $2.3bn acquisition of Landis+Gyr, a Swiss maker of high-tech electricity meters used in energy-efficient “smart grids”.

“We do think the disaster will create new opportunities,” says Fumio Ohtsubo, president of Panasonic, another company that is pushing into green technology.

He predicts an increase in demand in solar panels, hydrogen fuel cells, lithium-ion batteries and low- energy LED lighting.

Another company that could benefit is the electronic equipment maker Kyocera, one of Japan’s biggest manufacturers of solar panels. Its share price has rebounded to pre-tsunami levels, beating a broader market that remains about 7 per cent down.

New entrants are also eyeing green energy. Masayoshi Son, founder of Softbank, Japan’s third-biggest mobile phone operator, has pledged to invest “several per cent” of the company’s Y3,000bn in revenues in a scheme to build solar plants with local governments.

Cost will be one obstacle to a general shift to renewables.

Japan introduced a feed-in tariff for solar power in 2009, but to get 10m households to install panels on their roofs – a goal stated by Mr Kan at last month’s G8 meeting – experts say they would need to be more generous, at least at first, a problem for a cash-strapped government.

The spoils may also flow to foreign companies rather than local ones. Since the disaster, electronics shops have stepped up marketing of low-cost Chinese solar modules.

Japan’s electricity market also needs reform.

At present, regional monopolies control both generation and distribution, and physical and regulatory barriers limit transmission between regions.

This discourages the sort of small-scale, independent projects often associated with green energy, says Mr Hugh of Asia Cleantech Gateway.

“To attract more producers, you need a more liberal market,” he says.