Japanese power companies will this week report for the first time the cost of buying carbon emissions offsets, a sum likely to rise in coming years as a recession does little to help them achieve self-imposed targets.

The new data, which many of the country's utilities will release as part of annual earnings, may help accelerate the efforts of giants like Tokyo Electric Power Co, which are otherwise struggling to sufficiently reduce the amount of carbon required to produce a single unit of electricity.

Any shortfall to the target they voluntarily set to help the government meet its commitments under the Kyoto Protocol would be fulfilled with carbon offsets at home or from abroad, which have been or are to be delivered during Kyoto's 2008-2012 period.

The inclusion of carbon credits in earnings will give investors visibility into previously hidden costs, encouraging companies to work harder to seek a better balance between using cheaper coal and investing in costlier but cleaner alternatives.

The way companies unveil the data may suggest how they will weave it into their business strategy, a step forward from different divisions working on their own previously, said Hiroshi Tomita, head of carbon banking Japan division at Fortis Bank.

Unlike Japan itself, which has a target to cut nationwide greenhouse gas emissions by 6 percent versus 1990, the power sector has pledged to curb its carbon intensity: Each firm is to emit 20 percent less CO2 per kilowatt hour than the 1990 levels, which allows for higher emissions if efficiency improves.

But that plan backfired in the year to March 2009, Japan's first Kyoto year, due mainly to low running rates of carbon-free nuclear power plants, hit by an outage at the country's biggest nuclear plant after a 2007 earthquake.

The sector accounts for about 30 percent of greenhouse gas emissions in Japan.

METRIC NOT IMPROVING

Unlike in Europe, reduction targets set by each industry sector here are not legally binding.

But all power firms have said if their efforts are not sufficient, they would buy carbon offsets from abroad as allowed under the Kyoto pact, such as credits generated from clean energy projects in developing countries and excess emissions rights held by ex-communist governments in eastern Europe.

While power companies will be able to factor a part of the purchase costs into their electricity rates, TEPCO will likely have to pay the most and Hokkaido Electric Power Co or Kansai Electric Power Co the least, analysts said.

When to redeem the costs is up to each company, so some of the firms will refrain from unveiling the bills involved until the last Kyoto year in the business year to March 2013.

The industry emitted an estimated 0.45 kg CO2 per kilowatt hour on average in 2008/2009, little changed from the previous year. In contrast, CO2 generated by power use of some 902 billion kilowatt hours during the same period in Japan fell by an estimated 2.5 percent from a year earlier.

The power sector has a goal to cut that metric to 0.34 kg on average in the five years to March 2013.

Nothing has changed, and they're going to deal with it by spending trillions of yen, said Tetsunari Iida, executive director at the Institute for Sustainable Energy Policies.

Iida, a member of a government panel on environment issues, has estimated the power sector's credit purchases will reach 400 to 500 million metric tons over the five years, given the 0.11 kg shortfall to the target in the first year.

The power industry as a whole has so far procured 190 million metric tons in CO2 equivalent, mainly by early investment in clean energy projects in developing countries. At current prices of 11 euros ($14) a metric ton, that is about $2.7 billion.

NUCLEAR KEY

The key to success lies largely in operations at its fleet of nuclear power plants, which has fallen far short of the expected 80 percent utilization rate. Over the past year, they ran at only 60 percent after an earthquake forced TEPCO to shut the world's biggest plant, forcing thermal plants to run harder.

TEPCO is now ready to restart one of the seven units at the Kashiwazaki-Kariwa plant, awaiting approval by the Niigata prefectural government, the final hurdle.

But it may take years to resume the older reactors, keeping potential CO2 reduction limited to about 10 million metric tons per year, analysts said. The government has also made increasing solar power a key priority in its drive for a lower-carbon future, but any renewable power would be negligible in the near future, analysts said.

To meet their targets, nuclear is a key, said a carbon trading manager at a company in Tokyo, who declined to be named.

There's nothing epoch-making beyond that in terms of technology or systems in the near future.

($1=.7675 Euro)

Energy Japan