Japan can live without nuclear – at a price

Japan can replace lost energy production from a shutdown of its nuclear generating stations with its existing fossil fuel fleet, according to Adam Schatzker and H. Fraser Phillips, analysts at RBC Capital Markets.

While they believe the uranium market would likely be hardest hit given how much it has suffered from the nuclear disaster earlier this year, both thermal coal and liquefied natural gas (LNG) stand to benefit.

Recent media reports suggest local Japanese governments may be against restarting these stations after routine maintenance every 13 months, which could leave the country without any nuclear power by April 2012. However, RBC believes the more than US$30-billion in associated fuel costs and substantial increase in carbon emissions will force the federal government to re-open plants.

Nuclear power and natural gas (through LNG) both contributed 30% to Japan’s electricity production in 2009, while coal comprised 25%. Assuming that coal and LNG plants can be run at 85% of their capacity, RBC thinks Japan has sufficient installed electricity generation to make up for the elimination of nuclear.

The analysts forecast coal-fired generation would climb about 20%, equivalent to roughly 3% of current global supply, while LNG would be key in the transition away from nuclear, driving global demand as much as 12% higher.

However, they warn that the design of Japan’s grid may not be optimized for these changes and it would require a transformation of trade with significant price pressures.