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

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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.

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Clean Energy Factory
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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.

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Business Model Exploits RPS Production Benefits
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4. (SBU) Under Japan's Renewable Portfolio Standard (RPS)
that came into effect in April 2003, CEF, as a purveyor

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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.

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Plans for Further Expansion
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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."

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Tomen, U.S. MBA and Hokkaido Impetus for Innovation
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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

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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.

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No Need for Energy Regulatory Schemes Reform
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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.

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No FIT, OK, but a Tax Code Change Welcome
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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.

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Noise and Visual Pollution

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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.

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Bird Strikes and Safety Issues
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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