Asia Programme Meeting Summary Governing Complex Energy Systems: Challenges and Strategies for Japan and the UK Alistair Buchanan Partner, KPMG LLP Yoichi Funabashi Chairman, Rebuild Japan Initiative Foundation Barak Kushner Senior lecturer in modern Japanese history, Department of East Asian Studies, University of Cambridge Kazuto Suzuki Professor, Public Policy School, Hokkaido University John Swenson-Wright Head, Asia Programme, Chatham House 6 May 2015 The views expressed in this document are the sole responsibility of the speaker(s) and participants, and do not necessarily reflect the view of Chatham House, its staff, associates or Council. Chatham House is independent and owes no allegiance to any government or to any political body. It does not take institutional positions on policy issues. This document is issued on the understanding that if any extract is used, the author(s)/speaker(s) and Chatham House should be credited, preferably with the date of the publication or details of the event. Where this document refers to or reports statements made by speakers at an event, every effort has been made to provide a fair representation of their views and opinions. The published text of speeches and presentations may differ from delivery. 10 St James’s Square, London SW1Y 4LE T +44 (0)20 7957 5700 F +44 (0)20 7957 5710 www.chathamhouse.org Patron: Her Majesty The Queen Chairman: Stuart Popham QC Director: Dr Robin Niblett Charity Registration Number: 208223 2 Governing Complex Energy Systems: Challenges and Strategies for Japan and the UK Introduction This document is a summary of a panel discussion on the challenges and strategies facing the UK and Japan in governing complex energy systems, which took place on 6 May 2015 at Chatham House. The event was chaired by Barak Kushner, senior lecturer in modern Japanese history at the Department of East Asian Studies, University of Cambridge. Speakers included Alistair Buchanan, Yoichi Funabashi, Kazuto Suzuki and John Swenson-Wright. The event was co-hosted by the Rebuild Japan Initiative Foundation (RJIF) and supported by the Daiwa Anglo-Japanese Foundation. The presentation was held on the record. The views expressed are those of the participants and do not represent the views of Chatham House. John Swenson-Wright: Swenson-Wright opened the session by welcoming the speakers and audience. He emphasized that Japan needs reforms in both foreign and domestic policy. There is a debate within Japan on the government’s ability to cope with crises. This debate reflects both the after-effects of the 2011 Fukushima Daiichi nuclear accident and the broader demographic, educational and foreign policy challenges facing the country. At the same time, Prime Minister Shinzo Abe’s aspirations for Japan to take on a more active role in the region (and beyond) continue to be contentious both in Japan and among its neighbours. Barak Kushner: Kushner highlighted three issues linking Japan’s ‘lost decades’ of economic stagnation. First, Japanese officials are often aware of the problems the country faces – e.g. demography, the rise of China, the changing nature of Japan’s role in the world – but are unable to respond effectively. Second, changes and reforms are often developed and initiated, but the results are far from satisfactory. Third, prior to the triple disaster of 3/11, Japan’s officialdom and society had convinced themselves that Japan was sufficiently different, safe and removed from the world’s problems that it did not require the safety and oversight mechanisms found in other countries. Considering itself apart from the international status quo, Japan felt it did not have to follow the same rules. The causes of Japan’s ‘lost decades’ may have been specific, but the problems arising from them are similar to those facing Europe and other parts of the industrialized world, including the United Kingdom. Therefore, there may be lessons to be learned from Japan’s experience. Yoichi Funabashi: Japan has missed a number of opportunities to establish nuclear energy safety regimes and practices over the past 30 years. For the three decades leading up to 2011, nuclear safety was never seriously confronted. 3 Governing Complex Energy Systems: Challenges and Strategies for Japan and the UK Contrary to claims that 3/11 was beyond human control, the recent RJIF report classifies the Fukushima accident as man-made – caused by poor risk management, governance and leadership.1 In 1991, Japan’s Nuclear Safety Commission – the country’s nuclear watchdog – asserted that power outages did not merit consideration as a nuclear threat. This conclusion was a product of the so-called ‘nuclear village’ consensus as much as of the Japanese ‘safety myth’ – the idea that nuclear energy could be 100 per cent controlled. The second missed opportunity came shortly after 9/11, when the Japanese Nuclear Industry Safety Association (NISA) ignored advice from US authorities to strengthen measures against potential terrorist attacks on nuclear plants. Neither did NISA share this warning with the utilities industry. Had NISA seriously heeded it, many more fundamental measures could have been taken to increase Japan’s resilience to potential incidents. Thirdly, both TEPCO and Tohoku Electric Power were warned by their scientists and engineers of the possibility of an earthquake and ensuing tsunami. However, whereas Tohoku Electric Power took ample precautions, TEPCO’s top management’s paid scant attention to the warnings, resorting instead to tactics of delay and deflection. When the tsunami struck, Tohoku Electric Power coped with the floods much better than TEPCO did. The failure of oversight, weak leadership and flawed management in the nuclear energy sector displayed by the above episodes have been substantial elements in Japan’s ‘lost decades’. Kazuto Suzuki: When Japan began to modernize in the late 19th century, many engineers progressed to working in government or the civil service. In the years after the Second World War, engineers became so dominant in shaping Japan’s science and technology policy that Japanese began to speak of the ‘republic of engineers’. In nuclear technology, engineers were equipped with nearly unlimited funding in order to elevate the country’s nuclear sector to international standards. A group of experts from academia, the nuclear industry and local government began to use these funds to promote nuclear energy; this group soon became known as the ‘nuclear village’. In short, there was no adequate system of checks and balances to monitor Japan’s nuclear industry. Following the Second World War, the Japanese government began to promote nuclear energy as Japan’s primary source of energy, despite widespread anti-nuclear sentiment among the country’s population in the aftermath of the atomic bombings of Hiroshima and Nagasaki. Successive Japanese governments focused on stabilizing and supporting the nuclear industry. In this context, the Japanese government, in collaboration with the nuclear industry, propagated the idea that Japan’s nuclear facilities were absolutely safe. The ‘nuclear village’ as the guardian of the ‘safety myth’ successfully convinced the public that Japan’s regulations and oversight mechanisms were sufficient to ensure the country’s safety. Accidents such as Chernobyl were dismissed as resulting from human error, or were deemed irrelevant to Japan on the grounds that the country used different technology. Moreover, Japan’s nuclear industry generously supported communities at the sites of the reactors, providing employment and developing local economies. 1 See Yoichi Funabashi and Barak Kushner (eds), Examining Japan’s Lost Decades (London: Routledge, 2015). 4 Governing Complex Energy Systems: Challenges and Strategies for Japan and the UK Although a great number of committees and agencies are tasked with the oversight of Japan’s nuclear industry, there is a lack of clear chain-of-command responsibility. In the aftermath of the Fukushima disaster, none of these institutions were willing to take responsibility. NISA, technically charged with the first response to nuclear accidents, found it difficult to obtain information, since its local staff had immediately evacuated the Fukushima Daiichi plant following the accident. Prime Minister Naoto Kan’s visit to the Fukushima Daiichi plant on the day after the accident introduced additional confusion into the management of the crisis. To some extent, Fukushima weakened Japan’s ‘safety myth’. However, with Japan’s nuclear plants shut down for the time being, local economies are struggling, exerting pressure on local governments to find solutions. Demands to restart the plants have been accompanied by claims that Japan’s revised nuclear regulations are the most stringent worldwide, and strong enough to prevent another Fukushima-like disaster. Thus, Japan is running the danger of establishing a ‘safety myth 2.0’. In a similar vein, the current focus on regulation is promoting new ties between government and engineers. There are signs that a new ‘republic of engineers’ may be emerging, and with it possibly a new ‘nuclear village’ in which self-reinforcing assumptions and/or captured interests prevent clear analysis. Alistair Buchanan: Japan is on the verge of liberalizing its energy sector, and thus is keen to learn from the UK’s experience of liberalization over the past 25 years. Liberalization of the UK energy market began in 1990. By 2002, its market was fully open to competition for domestic customers. Throughout the period 1990–2002, the UK used its own gas, and had very few electricity connections to mainland Europe. Rather than liberalizing with a big bang, the UK skilfully initiated a process of transition, introducing competition step by step. The first lesson when opening a market is to approach the process of transition as an opportunity to educate stakeholders and to introduce a new way of working. The UK’s energy networks have been very successful. Arguably, the transitions in energy generation, power stations and retail supply went less well. In 2002 the UK had open markets, but since then it has opted for managed markets. In the energy generation market of the early 2000s, the UK effectively held a reserve margin of 15–20 per cent. Today, the margin is approximately 2 per cent, first and foremost due to political interventions motivated by the need to address climate change, social and security issues. The lesson is that under a system of open markets, political interventions can have serious adverse consequences. Consequentially, the UK has opted for a managed market. With regard to the retail sector, in 2002 the markets opened up amid falling prices for coal and gas. However, due to a variety of factors prices subsequently increased, upsetting consumers. Politicians consequently felt compelled to act, and this created a very difficult situation. There are a number of recommendations for Japan: Japan should set aside funds to invest in smart grids, and provide incentives to network companies to do the same. Japan should avoid creating an unrealistic narrative of liberalization equalling ever-lower prices. Japan must ensure that it understands the limitations of competition, in particular with regard to selling a product. 5 Governing Complex Energy Systems: Challenges and Strategies for Japan and the UK Energy is too fundamental a product to separate market developments from political concerns and mechanisms. Japan may wish to break down its ‘republic of engineers’, but it should retain a solid base of engineering graduates. John Swenson-Wright: The 3/11 disaster created a national identity crisis in Japan. Prime Minister Abe’s claim that Japan has become a ‘more normal nation’ may hold true with regard to foreign policy, but not in terms of domestic policy. This ambiguity is reflected in the polarized debate over the Fukushima disaster and Japan’s response to it. This debate, amounting perhaps to a re-engagement of the Japanese public with politics, is one of the positive outcomes of 3/11. It is quite striking in view of the apparent lack of engagement at the national electoral level, in particular during the 2014 parliamentary elections. However, whether or not 3/11 will create a new sense of political participation at the local level will depend not only on public engagement, but on Japan’s ability to renew its institutions of governance to reflect an increasingly complex set of policy choices. Given Japan’s ‘nuclear allergy’ after Hiroshima and Nagasaki, it is surprising how long it took Japan to engage with the issue – successive Japanese administrations have sought to develop nuclear energy since the 1950s. The desire to develop nuclear energy was driven not only by resource scarcity, but also by a sense of vulnerability. The focus on nuclear energy has been costly for Japan, though: in the period 1970– 2007, Japan spent an estimated ¥10 trillion [about US$80 billion at prevailing exchange rates] on developing nuclear energy. Despite popular opposition to nuclear energy and the questionable safety record of Japan’s regulatory bodies, the government decisively pushed for nuclear energy, countering a grassroots anti-nuclear movement through advertising, the creation of the ‘nuclear village’ and massive subsidies to affected communities. In addition, regulators and promoters of nuclear energy were all housed in the Ministry of Economy, Trade and Industry (METI). Only months before 3/11, METI officials were planning to substantially increase the share of nuclear power in Japan’s energy mix. The public reaction was predominantly negative across the political spectrum, blaming the ‘nuclear village’ and vested interests, and criticizing the administration for providing insufficient information on the dangers of a nuclear crisis. Others criticized the country’s academics, who are perceived to have been financially co-opted by the nuclear industry, and the practice of placing bureaucrats in the very industries which they were previously charged with overseeing. Arguments advanced by the nuclear industry to defend itself have been mostly unconvincing. In fact, the most interesting part of the debate goes beyond energy sources, questioning whether the ideal of rapid economic growth is the right paradigm for Japan and suggesting the country turn to a more communitarian form of living. Perhaps the most important development has been the discussion about local governance, and how local governments have responded to the crisis. There is a willingness to create new structures and agreements, which has led to a discussion on the possibility of expanding local government to larger, state-based units, or alternatively to shrinking local government to a smaller level, in order to maximize local expertise. Whether these suggestions are feasible is subject to debate, but they demonstrate an increased willingness 6 Governing Complex Energy Systems: Challenges and Strategies for Japan and the UK to engage with the question of how best to structure national government. This may be a positive externality of 3/11 and the ensuing crisis. Looking forward, a number of questions need to be addressed: Can technological changes in the new regulatory framework guarantee that there will not be another 3/11? How have changes in public attitudes affected the discourse on representative government? How much trust is there in national government, both with regard to energy governance and more broadly? How legitimate are Japan’s representatives, and are they willing to create a genuinely transparent regulatory framework? Barak Kushner: Though Japan on the surface appears to be functioning well, Fukushima is an ongoing problem. Moreover, many of the country’s problems have a substantial impact on its citizens. The prevailing sentiment in northeastern Japan is pessimism, and many believe that nothing has changed. Question 1: Does the positive example of the Tohoku Onagawa nuclear plant not suggest that the ‘nuclear village’ is not the unitary actor that critics claim it to be? Yoichi Funabashi: The term ‘nuclear village’ does not necessarily imply a monolithic entity. However, regulatory agencies do not have sufficient status to dictate their terms. Although they offer recommendations and advice, they have never been able to ensure that safety regulations are seriously enforced. The ‘nuclear village’ atmosphere remains. This is a cultural problem. Question 2: Are hopes that liberalization – through the ‘unbundling’ of energy companies – will increase transparency and accountability justified? Alistair Buchanan: Liberalization in Japan is indeed likely to lead to energy companies ‘unbundling’, and thus to greater transparency and accountability towards customers. However, this process will require a change of culture, which will pose a challenge to energy companies. It is very important that liberalization is approached as a process, and conducted as a transition rather than in a single sweep. Yoichi Funabashi: One of the lessons of Fukushima was the crucial importance of guarding the independence of regulatory and oversight institutions. The Nuclear Regulation Authority (NRA) was established in 2012, and has been much more independent than its predecessor. It has also made clear its policy of introducing a constant feedback loop to monitor and improve safety practices, including through new technology. The ‘nuclear village’ used to be suspicious of new safety technology, because this contradicted the myth of perfect safety. 7 Governing Complex Energy Systems: Challenges and Strategies for Japan and the UK Question 5: It could be argued that TEPCO’s poor risk management resulted from the company’s position within Japan’s oligopolistic energy market. Is this structure still appropriate, or should the country engage in liberalization? Kazuto Suzuki: Liberalization by definition means less regulation, and less control over operators. From this point of view, a regional monopoly is preferable, since it facilitates regulation. However, many people believe that the electricity companies’ monopoly underpins the ‘nuclear village’ model, and that this is why the monopoly has come under scrutiny. A more competitive and diverse market may encourage a more effective regulatory framework. Question 6: To what extent was the miscommunication that occurred between governmental institutions and the bureaucracy a result of the latter having to adjust to the Democratic Party of Japan (DPJ) being in office, as well as to the DPJ’s inexperience? Kazuto Suzuki: Tensions between the DPJ government and the bureaucracy may have been a negative factor. However, the government fared relatively well in its response to the tsunami, and very well in coordinating the immediate reconstruction and rescue planning. This suggests that despite potential tensions, problems in Japan’s response to the nuclear disaster cannot be blamed solely on the DPJ. Yoichi Funabashi: The Liberal Democratic Party (LDP) government’s response to the 1995 Kobe earthquake was very poor. The DPJ, in contrast, immediately mobilized the Japanese Self-Defence Forces, which were of enormous help despite the challenges they faced. Perhaps there were tensions between the DPJ leadership and TEPCO’s top management. However, had the LDP been in power, the population almost certainly would have perceived collusion between the government and TEPCO as having exacerbated the crisis. Instead, 3/11 revealed Japan’s profound issues with regard to governance, leadership and crisis management. There are Japanese intellectuals who have compared the breakdown of leadership in the wake of Fukushima to the days preceding the Pacific War. John Swenson-Wright: Japan’s crisis of governance is partially due to excessive centralization of political power. To improve its crisis management at both the local and national level, Japan must move away from its hierarchy of power, which privileges the centre, and must recognize the need for a much more diverse range of representatives.