Japanese Government: $26 billion bailout of TEPCO is a "major step forward"

Written by dkoplow Posted: 08/3/2011 3:3 PM EDT

The Japanese Parliament has just passed a new law that pumps the equivalent of $26 billion into a fund to pay for damages caused by TEPCO's Fukushima disaster.  This is an "initial" contribution, so more could be on the way.  Rather than viewing this massive bailout to nuclear power as a failure in all dimensions of the regulatory oversight and financial assurance system of Japan, the payment is characterized as a "major step forward" by Yukio Edano, the chief cabinet secretary.

From the perspective of victims of the accident, it is a step forward -- since otherwise they would have received virtually no compensation for the damages the accident has caused to their health, their jobs, and their lives.  But this should not by any means obscure the fact that clearly nuclear power has been wildly mispriced in Japan; and that had it been properly priced their energy system could well have evolved in very different ways.  Further, other countries ought to look to this example as Exhibit A on why they need to fix their own nuclear liability regimes.

This type of bailout certaintly won't change the minds of "see-no subsidy" groups who can rationalize any level of pork as somehow not really a subsidy-- here's the World Nuclear Association ("Nowhere in the world is nuclear power subsidised per unit of production.  In some countries however it is taxed because production costs are so low.")  But the hope is that more open-minded folk will look a bit more realistically at the economics of various energy options inclusive of subsidies, and adjust policy and investment decisions accordingly.  

According to the US Energy Information Administration, Japan generated roughly 6,650 billion net kWh of nuclear power for the time period covered by EIA's data (1980 through 2009).  This single bailout contribution is equivalent to a subsidy of 0.39 cents/kWh for the entire period, a value that provides a rough proxy for what an actuarily-fair insurance premium should have been.  While there was some generation outside the range captured in the EIA time series (which would reduce the subsidy/kWh), the errors are more likely to understate the subsidy than to overstate it.  First, this calculation assumes break-even; real insurance operates to earn a return and would have set premiums higher in line with that objective.  Further, this "initial" contribution is well below the cost estimates of the accident. 

To provide a more robust range for the liability subsidy, we can use as a ballpark figure for the liability subsidy the $246 billion estimate put forth by the Japan Center for Economic Research (JCER) for the cost of the Fukushima accident.  The Center is an institution that, according to the Economist magazine, "is heavily financed by a federation of electricity utilities, all but one of which use nuclear power," so would not seem likely to unnecessarily inflate the cost of the accident.  This massive cost will not be financed by TEPCO, which is struggling to survive.  Instead, it is quite likely to be paid by taxpayers.  The full bailout would translate to a subsidy of roughly 3.7 US cents for every kWh generated in Japan between 1980 and 2009.  Clearly, proper pricing of liability alone would have greatly altered the energy landscape of Japan.

(Thanks to Ron Steenblik for the original article link)