This section discusses the main potential risks related to J-POWER's financial position, business results, current and future business operations, and other matters. From the perspective of actively disclosing information to investors, this section also provides information to help investors understand business and other risks that the Company does not necessarily consider significant.
Climate Change Issues
J-POWER owns many coal-fired thermal power plants, which emit relatively high amounts of CO2 with respect to power output compared with power plants that other fossil fuels such as LNG. We have set the target of zero-emissions of fossil fuel power generations by 2050, and are working to improve the efficiency and decarbonization of coal-fired power generation to achieve this target.
Also, we are also working on the expansion of renewable energy and developing nuclear power plant, which are CO2-free power sources. Furthermore, we are making every effort to achieve the target of the entire electricity power business based on the “Action Plan for the Electricity Industry for Achieving a Low-Carbon Society“ formulated by electric utilities including J-POWER in July 2015.
While Japan’s target energy mix for 2030 assumes that coal-fired thermal power plants will account for part of the country’s power generation, the government declared its target to achieve carbon neutrality by 2050. In the power sector, maximum introduction of renewable energy and use of nuclear power plants are said to be promoted while phasing out of the inefficient coal-fired thermal power plants is being studied.
The government is also studying the frameworks which provide a long-term visibility on capital investments on the power sources which contribute to both carbon neutrality and stable power supply.
J-POWER will pay close attention to the circumstances described here and be engaged in the development of the power sources which contribute to achieving carbon neutrality and business operation which contribute to solving climate change issues.
Still, considering the fact that the government declared its policy to reduce greenhouse gas emissions by 46% from fiscal 2013 by fiscal 2030, if there are material changes or restrictions to J-POWER’s business plans or operations due to new legal regulations introduction, it could have an adverse effect on our financial standing or business results.
Impact of Reforms to the Electric Power Business Regulations on J-POWER’s Electricity Revenue and Business
The Policy on Electricity System Reform was approved by the Cabinet in April 2013, bringing about drastic changes to the business environment surrounding J-POWER. Amendments to the Electricity Business Act fully liberalized market participation in the retail of electric power in April 2016 and eliminated regulations on wholesale electricity utilities (regulations pertaining to business permits and rates). Furthermore, in April 2020, J-POWER and the former EPCOs carried out the legal unbundling of their transmission and distribution divisions. Going forward, there are plans to review the regulations on electricity retail rates (transitional measures) for the former EPCOs.
With the revision of electric power business types in the system reforms, as of April 2016, J-POWER has been reclassified from a wholesale electricity utility as prescribed in the Electricity Business Act prior to amendment to an electricity utility that conducts power generation and transmission businesses. Cost-basis rate regulations have been repealed, and rates related to the power generation business are now determined upon consultation with customers based on market competition. Rates related to the transmission business remain regulated, with a cost-basis rate system, to maintain a healthy transmission and distribution network system.
The majority of J-POWER’s operating revenue comprises rate income from domestic sales to the former EPCOs. Accordingly, as market competition in the power generation business advances, we are taking steps to sustainably maximize the value of our power generation business. Specifically, we are working to stabilize our revenue platform by negotiating appropriate rates with customers, primarily the former EPCOs, and diversifying our electricity sales, as well as enhancing the maintenance of power plants to reinforce competitiveness.
Despite the efforts described here, if there are major changes to business plans or operations due to shifts in long-term electricity demand, increased market competition, consultations with customers, or legal regulations, or if unforeseen problems with facilities cause an inability to secure adequate revenue to cover power generation costs, such a situation may adversely affect our financial position and business results.
Ohma Nuclear Power Plant Construction Project
With regard to the Ohma Nuclear Power Plant Project, the Japan Atomic Energy Commission concluded in August 1995 that the plant has a policy-oriented role in enhancing the flexibility of the plan to use MOX (uranium-plutonium mixed oxide) fuel in light water reactors because the plant adopts an advanced boiling water reactor with a view to using MOX fuel for the entire core (full MOX-ABWR). In addition, the commission expected the implementation of the plan not only by J-POWER, which has primary responsibility, but also under the auspices of the government and EPCOs. Accordingly, under the government’s guidelines, the Company is the recipient of an R&D grant for the use of MOX fuel for the entire reactor core. Also, the Company has already concluded basic agreements with nine former EPCOs, excluding The Okinawa Electric Power Company, Incorporated, that require the nine former EPCOs to purchase the total amount of electricity generated at fair cost. Furthermore, the Company has been confirming the latest status of the project with former nine EPCOs from time to time.
As a nuclear power plant using MOX fuel for the entire core, the Ohma Nuclear Power Plant Project received consent from the municipality of Ohma as well as Aomori Prefecture and was included by the Electric Power Development Coordination Council in the national Electric Power Development Master Plan as laid out by the Electric Power Development Promotion Act in August 1999. In April 2008, the nuclear reactor installation permit was granted based on the Act on Control of Nuclear Raw Material, Nuclear Fuel and Nuclear Reactors, and, in May of the same year, upon the initial approval of the construction work plan by the Minister of Economy, Trade and Industry, based on the Electricity Business Act, construction began. At that time, planned construction costs were ¥469.0 billion. Construction was suspended immediately after the Great East Japan Earthquake struck in March 2011 but was resumed in October 2012.
On December 16, 2014, we submitted an application for permission for alteration of a reactor installment license and an application for construction plan approval to the Nuclear Regulation Authority (NRA) in order to undergo a review of compliance with the New Safety Standards concerning nuclear power plants promulgated by the NRA in July 2013. Specific examples of the wide-ranging measures include the reinforcement of design-basis accident prevention measures and the raising of assumptions and enhancement of countermeasures with regard to earthquakes, tsunamis, and other such events to prevent severe accidents, as well as measures to prevent damage to the core and the containment vessel that were newly drawn up under the Safety Standards as severe accident countermeasures. Furthermore, we have decided to install a specified severe accident response facility that will enable reactor decompression and other functions to be controlled remotely to inhibit the abnormal release of radioactive material due to damage sustained by the reactor containment vessel. The construction work for the additional safety enhancement measures compiled in the above-mentioned application will commence following confirmation that the content of the Company’s application conforms to the New Safety Standards when reviewed by the NRA. The Company forecasts that the additional construction work will cost approximately ¥130.0 billion. Moving forward, J-POWER will seriously and appropriately respond to the NRA’s conformity reviews and steadily implement necessary safety measures or other measures required in a company-wide effort to build a safe power plant.
While it is impossible to predict the progress of the compliance review as an examinee, we aim to start construction on additional safety enhancement measures in the latter half of 2022 and to complete them in the latter half of 2027. However, the construction work schedule for the additional safety measures may be extended depending on changes in the environment surrounding the nuclear power business, the status of reviews by the NRA, or the emergence of a need for additional response to the New Safety Standards. In such events, construction expenses may increase further, and other related costs may arise. In addition, nuclear power generation entails various risks, such as revisions to plans due to significant changes in conditions around the nuclear power business caused by the review of Japan’s nuclear policy, the advance of market competition, or other unexpected circumstances as well as risks associated with the storage and handling of radioactive materials and risks all electric power plants are exposed to, such as natural disasters and unforeseen accidents after operations have commenced.
On the other hand, the Ohma Nuclear Power Plant, which will be able to use MOX fuel for the entire core, can contribute greatly to the nuclear fuel cycle; the government basic policy in the strategic energy plan. The Federation of Electric Power Companies published the New Pluthermal Program in December 2020, and the Plutonium Utilization Plan in Feburuary 2020, respectively. Considering the status of pluthermal at the end of fiscal 2020, we consider that the Ohma Nuclear Power Plant is essential for the stable operation of Rokkasho Reprocessing Plant because the Ohma Nuclear Power Plant can consume plutonium of 1.7t Put per year with the full MOX operation while the Rokkasho Reprocessing Plant can collect plutonium of 6.6t Put per year at maximum. In light of the importance of the Ohma Nuclear Power Plant as described here, J-POWER will address the various risks associated with nuclear power business and promote this business while cooperating with the concerned parties and verifying the economics of the project. However, if any of these risks should eventuate, it could adversely affect the financial position and business results of the Company.
New Businesses in and outside Japan, Including Overseas Power Generation Business
J-POWER aims to reinforce its revenue platform by advancing new initiatives domestically and overseas, including in the overseas power generation business.
Specifically, in the overseas power generation business, we are applying the experience gleaned through our consulting services businesses in various countries in the pursuit of independent power producer (IPP) projects and other initiatives.
In the domestic electric power business, we are proceeding with new development, including that of high-efficiency coal-fired thermal power plants; power generation businesses utilizing wind, geothermal, waste-fueled thermal, and other renewable energies; electric power retailing; and other new initiatives.
However, these businesses may not generate the level of profits that we anticipate, due to unforeseeable circumstances, including major changes in operating conditions; changes in demand or the market environment; and changes in regulations. Changes in our business plans or the suspension of operations or construction prompted by such circumstances could result in related expenses or a need for additional funding that could potentially have an adverse effect on our financial position and business results. Furthermore, some of these businesses are operated as joint ventures with third parties. In cases where the joint venture format is revised due to changes in the business environment or J-POWER is a minority equity owner and thus unable to engage in management and administration, the results of the joint venture may not beneficially impact our business performance. In addition, overseas businesses entail foreign exchange risk as well as country risk due to political instability and other factors.
The Company has invested a very large amount in power plants and other facilities. The funds for these investments have been procured mainly through borrowings and the issuance of bonds payable. We anticipate the need to raise funds in the future to invest in new domestic and overseas projects, such as renewable energy and Ohma Nuclear Power Plant, and to repay existing obligations. If we are unable to raise the required funds on acceptable terms and in a timely manner due to the prevailing conditions in the financial markets, the Company’s credit situation, or other factors at that time, it could have an adverse effect on our business development, financial position, and business results.
Fuel for Coal-Fired Thermal Power
J-POWER’s coal-fired thermal power plants use imported coal as their main source of fuel. In procuring imported coal, the Company purchases coal from diverse sources in Australia, Indonesia, Russia, and elsewhere to seek both stable and economical supply. In addition, the Company holds interests in certain coal mines, aiming for stable coal supply. The Company’s imported coal procurement is handled mainly under long-term or approximately one-year contracts, with spot purchasing to fill gaps as necessary. Coal purchase prices under long-term contracts are normally adjusted once per year in light of market prices.
The Company’s fuel cost is impacted by factors such as changes in imported coal prices, supply and demand in the transport vessel market, and problems with the facilities or operations of suppliers. According to the power purchase agreements with customers for our major coal-fired thermal power plants, the electricity rates corresponding to fuel price properly reflect market conditions relating to fuel procurement. As a result, fluctuations in fuel cost have a limited impact on the business performance of J-POWER. However, if coal prices rise sharply, there will be a delay before the rise in fuel prices is reflected in electricity rates. This could have a temporary adverse effect on the results of our performance. Furthermore, if coal prices drop sharply, negatively affecting the performance of the coal mines in which J-POWER holds interests, the Company’s financial position and business results could be adversely affected.
Natural Disasters, Infectious Disease Outbreaks, and Other Unforeseen Events
Should a natural disaster, human error, terrorist activity, fuel supply stoppage, or other unforeseen circumstance result in a major disruption of J-POWER’s power plants or transmission or transformation facilities, or should such an event disrupt the information systems that control operations at these facilities, this could potentially hamper our business operations and consequently have an adverse effect on the surrounding environment. To prevent accidents at power plants as well as transmission and transformation facilities, which are important infrastructure for the countries and regions where J-POWER operates, to ensure the safety of the concerned parties and to protect the surrounding environment, J-POWER works to establish security and disaster prevention systems, takes accident and disaster prevention measures and emergency response and recovery countermeasures, and implements environmental monitoring.
Nevertheless, if an accident or other events were to halt operations of J-POWER’s power plant, transmission, or transformation facilities, or if an accident or other events were to negatively impact the surrounding environment, the Company’s financial position and business results could be adversely affected.
Furthermore, J-POWER implements measures related to the maintenance and operation of its power plants, transmission, and transformation facilities to ensure stable power supply. Nevertheless, if an outbreak of an infectious disease or other unforeseen events were to result in difficulties in securing the personnel, materials or equipment necessary to carry out facility operations, construction, repairs, large-scale inspections or other operations, the Company’s financial position and business results could be adversely affected.
The electric power business, which comprises the majority of J-POWER’s business, is regulated by the Electricity Business Act.
In line with the Amended Electricity Business Act of June 2014, regulations related to wholesale electricity utilities (regulations on business permits and rates) stipulated in the previous act were repealed in April 2016. However, J-POWER will continue to be regulated under the act as an electricity utility that operates power generation and transmission businesses. Thus, J-POWER is subject to business and safety regulations, change and suspension orders derived from such regulations, and provisions regarding the cancellation of licenses to operate transmission businesses. The Company’s business operations are also subject to various other laws and regulations. If the Company is unable to comply with these laws and regulations, or if these laws and regulations are revised, this could potentially have an adverse effect on its business operations, financial position, and business results.
Also, based on the concept of mutual aid for nuclear power operators, nuclear power business operators are obligated to contribute to expenses required for the Nuclear Damage Compensation and Decommissioning Facilitation Corporation, based on the Nuclear Damage Compensation and Decommissioning Facilitation Corporation Act, which aims to build a system that centers on a facilitation organization that can respond to nuclear damage compensation into the future. In relation to the Ohma Nuclear Power Plant Project, which is currently under way, J-POWER will pay contributions once the Ohma Nuclear Power Plant commences operation of the nuclear reactor, as stipulated in the Act on Compensation for Nuclear Damage. Depending on the amount of such contributions, this may adversely affect the financial position and business results of the Company.
Management of Business Information
The Company holds a large amount of important information that must be kept confidential, including personal information. The Company controls this information carefully by implementing information security measures, employee training programs, and through other means. However, a leak of sensitive information outside the Company could adversely affect the Company’s reputation and business performance.