Japan's power firms paid a combined 100.1 billion yen, or $1 billion, for carbon credits in the year that ended on March 31, their annual earnings reports showed, giving investors a rare glimpse into how much utilities are spending to offset their own carbon emissions.

The sector is one of the biggest buyers of carbon credits from abroad and is expected to buy more as it struggles to meet its voluntarily set targets, which were based on a model in which its carbon-free nuclear plants run at 80 percent or more of their capacity -- well up from 60 percent now.

The inclusion of carbon credit figures in earnings statements, effective from 2008/2009, gives investors information that is otherwise largely hidden, on how each firm strikes a balance among burning relatively cheap coal, funneling money abroad through carbon credits and investing in costlier but cleaner alternatives at home.

Japan's No.1 utility, Tokyo Electric Power Co, and five others, spent a combined 75.6 billion yen on credits for redemptions in the past year as part of efforts to help Tokyo to meet its goals for cuts in greenhouse gas emissions under the Kyoto Protocol.

Hokkaido Electric Power Co, Japan's No. 7 power firm, said it would report its total carbon credit costs in the final year of the five-year Kyoto pact to March 2013. The three others said they had reported in their latest earnings the cost of carbon credits to be redeemed later.

All 10 companies declined to say how much volume in CO2 equivalent they had received for their money, key information for assessing carbon credit deals.

The Federation of Electric Power Companies of Japan has said the 10 utility companies as a whole bought some 190 million metric tons in CO2 equivalent for delivery over the 2008-2012 Kyoto period. It will update that figure in September.

A majority of the credits has been or is to be derived from early investment in clean energy projects in developing countries such as China.

But some firms appeared to be ready to tap another type of carbon offset now that Tokyo has sealed government-to-government deals to buy offsets from Ukraine and the Czech Republic, making it easier for Japanese companies to follow suit.

AAU A CHOICE

A majority of the 10 firms declined to comment on their future buying plans. But three said buying carbon credits from these two countries was one option if they failed to reduce the amount of carbon they emit in producing a single unit of electricity as much as planned.

The reduction targets are not legally binding. But all the power firms have said that if their efforts were not sufficient they would buy carbon credits at home or from abroad.

In Japan's first Kyoto year, which ended in March, the 10 firms emitted 9.5 percent to 72 percent more CO2 per kilowatt hour than their target over the five-year period.

Their spending on carbon offsets so far has been focused on those generated from clean energy projects in developing countries, called Certified Emission Reductions (CERs).

Some of the firms are now considering buying another type of offset called Assigned Amount Units (AAUs), bought from developed nations that are comfortably below their emission cut targets. AAUs are often referred to as hot air units.

Critics argue that most of these credits were generated through economic restructuring in eastern Europe in the 1990s when polluting industries in former communist nations were shutting down, rather than by fresh investment in clean energy.

Carbon offsets from projects at small domestic businesses are a growing area for the power sector to invest in, but the amount viable for CO2 cut from a total 10 projects approved by the government so far is only 5,700 metric tons per year.

($1=95.31 Yen)

(Editing by Clarence Fernandez)

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