The Lessons of the Great Tohoku Earthquake and Its Effects on Japan’s Economy (Part 4)

The Effects of Power Shortages on Japan’s Economy

Analysis based on inter-industry table: effects of blackouts alone could surpass ¥1 trillion

Toshiaki Kouno
Senior Associate

April 14, 2011 (Thursday)

Much social infrastructure, including a nuclear power plant, was destroyed by the recent Great Tohoku Earthquake. The real economy has also been greatly affected by logistic difficulties and the need to screen agricultural produce affected by radiation. While these problems with logistics and agriculture are also important, here I would like to look at the effects of power shortages on Japan’s economy and industries.

Severe Power Shortages in the Summer Months

According to the Electric Power Industry Handbook, the maximum power output of TEPCO’s power plants as of March 2011 is 64.48 GigaWatts. Those power plants which have stopped power production due to the earthquake and are unlikely to recover quickly are: Fukushima Reactor 1 (nuclear; output = 4.696 GW), Fukushima Reactor 2 (nuclear; output = 4.40 GW), Hirono Reactor (thermal; output = 3.80 GW), and Hitachinaka Reactor (thermal; output = 1.00 GW). Together, these power plants make up more than 20% of TEPCO’s maximum output.

Due to the stoppage of these power plants, there will be unavoidable planned power outages within TEPCO’s jurisdiction until April. However, as a result of the following points, power shortages will once again become a serious problem in Eastern Japan, which normally sees a demand spike in the summer due to air conditioner usage.

There are safety-related problems which make restoring the nuclear power plants extremely difficult
Even if we were to try to adapt power from other power companies, the frequencies of Eastern and Western Japan are different, and there are only 3 transformer substations in Japan that could transform Western Japan’s 60 Hz power to Eastern Japan’s 50 Hz, and those can only handle 1 GW of power.
The only power plants in Eastern Japan (with more than 10 MegaWatts output) which plan to begin operation this year are Sendai Reactor 4 (Tohoku Electric Power Company; liquefied natural gas (LNG); 446 MegaWatts; planned start of operations – July) and Futtsu Reactor 4 (TEPCO; LNG; 1.52 GW; planned start of operations – October). Furthermore, building new power plants will take a very long time.

Preliminary Calculation of Effects Using Inter-industry Table

Let us now look at how power shortages will affect Japan’s industry based on the most recent Inter-industry Table (2005).

In order to calculate the specific effects on the economy, I hypothesize the following. First, while TEPCO’s power supply is reported as topping out at 50 GW, I assume that the power demand through the summer months will be equal to the greatest power demand TEPCO ever recorded, i.e. 64.30 GW on July 24, 2001. At that time, between 8 AM and 8 PM, power demand exceeded power supply by an estimated total of 125 GWh in one day. If we assumed that this were to continue for 60 days straight, then the summertime power supply shortage would total 7.5 TeraWatt-hours (= 7.5 billion kWh).

Furthermore, according to TEPCO’s 2010 numerical tables, the price of electricity was ¥21.18/kWh in 2009, and therefore the estimated loss due to lack of power due to supply shortage is approximately ¥166.3 billion. While it is unclear whether the power shortage will suppress household power consumption (end consumer decrease) or business power consumption (supplier-side decrease), I assume here that household power consumption will not decrease at all and that businesses will take the full brunt of the shortage. Consequently, if we estimate the effects on Japan’s economy of a power shortage equal to ¥166.3 billion, the total ripple effect on all sections of the inter-industry table is estimated to increase to ¥1.5 trillion.

Table 1: Effect on Industry Output If Power Supply Were Reduced by ¥166.3 trillion

(Created from 2005 Inter-industry Table. Unit: billion yen)

Industrial Soda Chemicals	46.6
Cement	26.8
Steam & Hot Water Supply	21.9
Metallic Ores	20.9
Paper, Paperboard	19.3
Other Industrial Inorganic Chemicals	18.8
Pulp	17.3
Glass Fiber and Glass Fiber Products	16.3
Cast and Forged Steel Products	15.7
Rail Transport (Freight)	15.1
Synthetic Rubber	13.5
Coal Mining, Crude Petroleum and Natural Gas	12.6
Chemical Fibers	12.4
Other Non-Metallic Ores	12.4
Cold-finished Steel, Coated Steel	11.1
Pig Iron and Crude Steel	10.6
Water Supply	10.5
...	...

Table 1 shows the industries whose outputs will be particularly affected by reduced power supply, in descending order. The industries that will be hardest hit are mainly manufacturing industries, such as industrial soda chemicals, cement, steam and hot water supply, metallic ores, paper/paperboard, other industrial inorganic chemicals, pulp, glass fiber/glass fiber products, and cast and forged steel products. Moreover, while areas such as rail transport (freight) and water supply are located fairly high up in the table, their operations cannot be suspended so easily (e.g. outright stoppage of transportation or water supply), and so, in reality, the burden will most likely be shifted to other areas.

Measures Preventing Economic Loss

What sorts of countermeasure might prevent the economic loss mentioned above? Given that there is not enough time for capital spending, the most realistic method that comes to mind is energy saving. However, saving energy during the summer is far from easy; air conditioning demand is estimated to comprise 1/3 of power consumption in the summer months. When TEPCO recorded its highest power usage ever on July 24, 2001, the day’s high and low temperatures were 38℃ and 28℃, both of which were record highs for that year. I pray that this year’s summer will not be severely hot, but if our aim is to suppress air conditioning demand, simply practicing “Cool Biz” will not be enough. We must consider taking measures such as having alternating summer vacations at the company level, not making employees come to the office, or running operations during the night instead of during the day.

Another possibility is moving production bases temporarily from Eastern and Northeastern Japan to Western Japan or Hokkaido, which are unlikely to be affected by power shortages. However, if this method were used for the long term, it would lower employment rates and income in the Eastern and Northeastern areas and hinder the reconstruction of damaged regions especially. It may be unavoidable for individual companies to take such measures, but we must also consider carefully the effects on regional economies.

Looking forward to next year and beyond, there is also a need to discuss how to proceed with capital spending as a mid-term measure. Building more transforming substations to convert frequency so that power can be sent from Western Japan, which suffers no shortages, to Eastern Japan; introducing new energies such as solar and wind to a greater extent; and highly insulated houses must all be considered immediately as possible objects of capital spending.