Kansai Wind Power: A Breath of Fresh Innovation

UNCLAS SECTION 01 OF 04 OSAKA KOBE 000084 SENSITIVE SIPDIS COMMERCE FOR ITA BRICKMAN AND SANTILLO DOE FOR PI BISCONTI AND EE CHALK AND KIMBIS E.O. 12958: N/A TAGS: BEXP EINV ENRG ECON JA SUBJECT: Kansai Wind Power: A Breath of Fresh Innovation REF: Tokyo 596 OSAKA KOBE 00000084 001.2 OF 004 ¶1. (SBU) Summary: Unlike the GOJ's recently announced feed-in-tariff (FIT) policy favoring solar power (reftel) and aggressive goals to raise Japan's solar power production capacity forty-fold by 2030, Japanese officials have established much more modest goals for increasing wind power production. Citing problems with fluctuations in output and frequency, Japan's nine regional electric power companies, which operate essentially independent power grids, have not greatly encouraged the integration of commercial alternative power sources such as wind and solar. Japanese experts differ about wind power's efficacy in Japan, and the Ministry of Economy, Trade and Industry director of electricity infrastructure recently announced that Japan is close to reaching the limit for introducing wind power. Hiroyuki Kamata, President of Clean Energy Factory Co., Ltd., a developer and operator of wind-power generation plants, is unconcerned. Kamata is confident that even without changes to the current power grid or regulatory structure, his company's innovative business model sets it up for success and rapid expansion and the positioning of General Electric wind turbines at sixty sites throughout Japan. End Summary. -------------- Clean Energy Factory -------------- ¶2. (SBU) Established in November 2000, Clean Energy Factory Co., Ltd. (CEF) is a Hokkaido-based developer and operator of wind-power generation plants. Since the company completed its first wind-power project in October 2001, a single windmill powering a GE turbine with electricity generation capacity of 1500 kilowatts per hour (kph), CEF has since expanded to 120 employees and placed more than 80 windmills at wind farms in Hokkaido, Oita, Shizuoka, Yamaguchi, Wakayama and Hyogo Prefectures, with plans to establish operations at a total of sixty sites throughout Japan. ¶3. (SBU) We met with CEF President Hiroyuki Kamata and visited CEF's Minami-Awajijima site in Hyogo Prefecture, the largest wind farm in Kansai with 15 GE turbines. Each windmill stands approximately 100 meters high, has three 37 -meter long blades and generates up to 2.5 megawatts of electricity. The site has a total generating capacity of 37.5 megawatts. Kamata told us it will take 10-12 years for CEF to recover its investment costs and that the average cost of energy production per watt over that period will be 12 yen, about one-third of the current cost for solar energy production. To increase the returns on investment from the facility, the company aims to extend the estimated life span of the windmills to 20-25 years. CEF's onsite maintenance staff carefully monitors the windmills in conjunction with 24/7 remote monitoring from company headquarters in Hokkaido as well as from a GE affiliated company in Germany. The onsite maintenance staff is primarily made up of former self-defense force members, capable of scaling and working within the 100 meter high windmill towers and comfortable living and working in extreme and remote environments. -------------- -- Business Model Exploits RPS Production Benefits -------------- -- ¶4. (SBU) Under Japan's Renewable Portfolio Standard (RPS) that came into effect in April 2003, CEF, as a purveyor OSAKA KOBE 00000084 002.2 OF 004 of renewable energy, receives approximately 1.7 times the standard electricity rate from power companies for its wind generated power, says Kamata. Starting with the fixed cost of 12 yen per watt of energy produced, the RPS and strict regulatory structure of the Japanese power industry make it possible for CEF to calculate and guarantee a relatively certain rate of return on investment. As a consequence, it has been relatively easy for Kamata to convince his investors from GE, AIG, JASCO, and Nomura to support CEF's expansion. Adds Kamata, Kansai Electric Power Company (KEPCO),which buys the electricity generated at CEF's Minami Awajima site, is not currently meeting its minimum alternative energy purchase requirements under the RPS, and therefore CEF wants to add more windmills at the site to benefit from sales to fill the unused amounts. -------------- Plans for Further Expansion -------------- ¶5. (SBU) CEF has secured contract rights from Japan's regional electric power companies to connect to their power grids at sixty sites near areas where CEF has conducted wind surveys and identified viable sites for developing more wind farms. (Note: CEF sold wind farms in Shiratakiyama, near Shimonoseki, Yamaguchi Prefecture and in Shirama, Wakayama Prefecture in late March 2009 to Osaka-based Kinden Corporation. End Note.) ¶6. (SBU) The logistical costs for transporting the enormous GE turbines and blades built in Germany to CEF's wind farms in Japan is incredibly expensive, approximately USD 2 million in transportation and permit fees for delivery of each windmill from port to site, says Kamata. With the goal of reducing its logistical costs, CEF has agreed to purchase a new but unwanted expansion project at the Maizuru, Kyoto commercial port scheduled for completion in March 2010. When asked why Maizuru, Kamata replied, "Because it is inexpensive and happens to be located in the middle of where we plan to expand." -------------- -------------- Tomen, U.S. MBA and Hokkaido Impetus for Innovation -------------- -------------- ¶7. (SBU) Kamata and several other key members of CEF are alumni of Tomen Corporation. In 2006, Tomen became a subsidiary of Toyota's Trading Company, but it was originally incorporated in 1920 as Toyo Menka Kaisha Ltd. (Oriental Cotton Trading). Tomen was once Japan's seventh largest general trading company, 17th largest company overall, and the world's 40th largest firm in terms of sales volume. It was while working in Tomen's machinery and energy power generation area that Kamata first worked with GE, CEF's exclusive source for its wind turbines. ¶8. (SBU) In the late 1990's just prior to Kamata's departure from Tomen to pursue an MBA at New York University's Stern School of Business, Tomen tried, ultimately unsuccessfully he says, to restructure itself into more of an Anglo-American-style company, with the goal of maximizing shareholder value. This effort and the eventual collapse of Tomen made a significant impression on Kamata. As a result, CEF's international entrepreneurial spirit is readily apparent in its innovative business model, vision and hiring practices. ¶9. (SBU) While at Stern, Kamata first began to think about introducing wind power to his home area of Hokkaido. Having grown up in an area of Hokkaido with nearly OSAKA KOBE 00000084 003.2 OF 004 constant winds, it made him laugh, Kamata says, when Japanese experts told him that Hokkaido's winds were neither consistent nor strong enough to support wind farms. Convinced that the scientists did not understand the wind requirements needed for the successful operation of modern GE wind-powered turbines, CEF established its own criteria and conducted its own wind surveys and that led to the identification of the sixty sites throughout Japan that CEF has prioritized for development. -------------- No Need for Energy Regulatory Schemes Reform -------------- ¶10. (SBU) Wind power and other alternative energy networks operate independently of, but must feed into the power grids operated by Japan's nine regional electric power companies. Kamata agreed that some aspects of the current regulatory structure make it difficult for CEF and other alternative energy producers to operate at highest efficiency. At the Minami-Awajijima site, for example, CEF sells its power to KEPCO, but must also get approval from Shikoku's power provider. Another regulation, noted Kamata, requires all energy providers to notify power companies of the precise rate of electric current they will supply to the power grid, broken down into 30 minute time blocks, 24 hours in advance of delivery. It is not easy for wind and solar power producers to meet this requirement due to uncontrollable shifts in weather patterns. As a consequence of the requirement, CEF must closely track weather patterns and must underbid its supply commitments by a safe margin. The net result is that CEF usually provides extra electricity at no fee to the power companies. ¶11. (SBU) Kamata told us that the use of batteries to store wind-generated electricity is not yet cost effective. Given the current quality of sodium-sulfide batteries, electricity lost during transfers to and from battery storage is approximately 30-35 percent. With careful monitoring of the weather, CEF can consistently and safely underbid its supply commitment by only 10 percent, thereby beating by 20-25 percent the amounts lost during battery storage and without the additional, substantial costs of the batteries. CEF is considering, however, adapting the use of capacitors to exploit the 20-30 minutes it takes to charge the capacitors as a quasi-storage medium and way to smooth the flow of its wind generated current onto the grid. -------------- No FIT, OK, but a Tax Code Change Welcome -------------- ¶12. (SBU) With regard to the possibility that the recent FIT legislation increasing rates for solar power generation might be expanded and made applicable to wind and other alternative energy sources, Kamata wryly notes that the Ministry of Environment and METI have said they are "considering" it, which means "no" in Japan. More than a change to energy policy or regulations, CEF would like to see the central government modify the tax code with regard to depreciation on fixed assets. CEF has lost money the last three years because of the way taxes on its fixed asset assets are calculated. This is a tough sell though, acknowledges Kamata, because all companies with significant fixed assets want these rules to change and yet, nobody in the central government wants to support the change. -------------- Noise and Visual Pollution OSAKA KOBE 00000084 004.2 OF 004 -------------- ¶13. (SBU) Beyond power company concerns with unstable power flows entering their power grids, opponents of wind power raise noise and visual pollution as downsides of wind farms. Kamata acknowledges that in close proximity, the turbines running at full speed are quite loud. For this reason, CEF has targeted steep, unwanted, lightly inhabited areas as the sites of its wind farms. CEF's Minami-Awajijima site is located, for example, on the hills above the site of bankrupt golf resort. One of CEF's wind farms in Yamaguchi Prefecture is located on the site of a bankrupt pear orchard cooperative. In part to engender goodwill and local acceptance of the wind farm, CEF created a subsidiary, Houhoku Pear Farm Co., Ltd sharing profits with local farmers so that they could continue to earn a living farming pears. Wind turbines, he adds, can be seen as beautiful when viewed within the context of clean energy as a replacement for fossil-fuel based power production. ¶14. (SBU) CEF's need to position its windmills in remote hillside locations created a new business opportunity. Under its subsidiary, CEF Logistics, Co., Ltd., CEF licenses for use in Japan, an unusual crane technology from Germany's Liebherr Company. In comparison to standard construction cranes, the Liebherr crane can operate on narrower, steeper roads thereby reducing the length, width and therefore the cost of building access roads in the remote locations where CEF places windmills. The Governor of Shiga Prefecture, among others, has expressed interest in adapting the CEF crane technology for use in harvesting lumber in rural, mountainous regions of the prefecture. -------------- Bird Strikes and Safety Issues -------------- ¶15. (SBU) In some areas of Japan, the threat of wind farms to local and migratory birds has been raised. While usually fatal to the birds involved, bird strikes are unusual occurrences and structural damage to windmills as a result of bird strikes is rarer still, responds Kamata. There have been only five confirmed bird strikes, he says, among the approximately 2500 wind turbines currently in operation in Japan. CEF has recorded two bird strikes, both at sites in Hokkaido where, Kamata notes, the number of birds is much higher than in the rest of Japan. ¶16. (SBU) Lightning strikes and high winds pose a greater structural risk to the windmills. Although the windmills can withstand gusts of 198 kph (125 mph),CEF stops operations if the wind speed exceeds 90 kph (55 mph) to avoid damage to the blades and turbines. The blades can be remotely stopped and rotated to avoid catching the wind, but in April 2008, two of ten windmills at CEF's wind farm in Shizuoka lost one blade each in winds gusting to nearly 110 mph. DONG