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Electric Power Business—Characteristics and Strengths Wholesale Electric Power Business Thermal Power

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Electric Power Business—Characteristics and Strengths Wholesale Electric Power Business Thermal Power Electric Power Business—Characteristics and Strengths Wholesale Electric Power Business Thermal Power (Matsushima Thermal Power Plant, Nagasaki Prefecture; Maximum capacity: 500 MW x2). We have also enjoyed substantial economies of scale by pioneering the build- ing of large-scale coal-fired power plants. Coal is a natural resource found in abundance throughout the world and is arguably the most economically stable fossil fuel available. This has become even more noticeable in light of the significant volatility in oil prices in recent times. These strengths contribute to the formation of attractive rates, and our long-term contracts with Tachibanawan Thermal Power Plant (Tokushima Prefecture) EPCOs, generate synergetic effects for forming a stable J-POWER’s key strength in thermal power generation is earnings foundation. our focus on coal-fired power generation, which has As of March 31, 2009, we operate seven coal-fired strong cost competitiveness and fulfills base demand for power plants with a total capacity of 7,812 MW, electricity with a high load factor. We have long main- representing 21% of the coal-fired power generation tained the number one share in coal-fired power facilities in Japan. For fuel, we procure coal from several generation capacity since becoming the first company in countries, mainly from Australia, based on long-term or Japan to use overseas coal in a thermal power plant yearly contracts. SHARE OF COAL-FIRED POWER GENERATION CAPACITY LARGE-SCALE COAL-FIRED UNIT CAPACITY AND FIRST YEAR OF (As of March 31, 2009) OPERATION ● J-POWER Generation capacity (MW) n Others 1,250 TACHIBANAWAN NO. 1 & NO. 2 J-POWER 21% 1,000 MATSUURA NO. 1 ELECTRIC MATSUURA NO. 2 POWER 750 COMPANIES AND OTHERS ISOGO 500 NEW NO. 1 TAKEHARA NO. 3 ISOGO NEW NO. 2* 250 0 Source: Prepared by J-POWER based on reports issued by the Agency for Natural 1981/3 1991/3 2001/3 2009/3 Resources and Energy. “Large-scale” defined as power plants with more than 500 MW output. Chart data up to March 31, 2009 (except for Isogo New No. 2*). Source: Agency for Natural Resources and Energy THERMAL POWER SALES AND LOAD FACTOR CALORIFIC UNIT PRICE BY FOSSIL FUEL (IMPORTS) ● Crude oil ● LNG (Billion kWh) (Billions of yen) (Yen/thousand kcal) ● Fuel coal 60 600 12.0 10.0 45 450 8.0 30 300 6.0 4.0 15 150 2.0 0 0 0 2005/3 2006/3 2007/3 2008/3 2009/3 1990/1 1992/1 1994/1 1996/1 1998/1 2000/1 2002/1 2004/1 2006/1 2008/1 n Power sales 49.3 54.0 48.0 52.4 49.1 Chart data up to March 31, 2009 (Billion kWh) Source: The Energy Data and Modelling Center n Operating revenues 339.2 368.2 326.5 342.7 460.3 (Billions of yen) ● Load factor (%) 77 84 75 81 76 22 ELECTRIC POWER DEVELOPMENT CO., LTD. Wholesale Electric Power Business Hydroelectric Power and Power Transmission/Transforming excel in adjusting output in response to demand peaks. As of March 31, 2009, we operate 59 hydroelectric power plants throughout Japan, with a total capacity of 8,556 MW, comprising 19% of the total hydroelectric power generation facilities in Japan. Considering the limited availability of sites suited to the development of large-scale hydroelectric power plants in Japan, we believe our strong market share and econo- mies of scale in hydroelectric power generation will endure for the foreseeable future. Tagokura Power Plant (Fukushima Prefecture) Our hydroelectric power plants generate a steady Hydroelectric Power stream of earnings based on long-term contracts with Hydroelectric power is an essential power source, EPCOs. Most of the rates for conventional-type facilities particularly in Japan, for three main reasons. First, it is and 100% of the rates for pumped-storage-type facilities currently the only truly domestic energy source on a are fixed rates. meaningful scale. Second, it is a clean energy source with virtually no fuel expenses, namely marginal costs, Transmission and Transforming Facilities and offers many benefits in terms of environmental J-POWER’s transmission and substation facilities not only issues, especially because of no CO2 emissions. Finally, it distribute electricity from our power plants to demand offers outstanding flexibility in terms of the ability to adjust centers, but also play a huge role in the total operation of output to demand levels, which is suitable for intra-day Japan’s power grid. In particular, we operate critical facilities and intra-seasonal demand and supply balancing. that support the wide-area power interchange in Japan, J-POWER has the advantage of high technological such as extra-high-voltage transmission lines connecting expertise in developing hydroelectric power and pos- Honshu with Hokkaido, Shikoku and Kyushu respectively, sesses the most advanced technologies available in as well as the Sakuma Frequency Converter Station, which Japan, particularly for the construction of dams and was the first in Japan large-scale underground structures. We have built and to enable transmission operated hydroelectric power plants for almost half a of electricity between century, starting with the development of large-scale the different frequen- hydroelectric power plants represented by the Sakuma cies of Eastern Japan Power Plant, which started operations in 1956, and the (50 Hz) and Western development of pumped-storage power plants, which Japan (60 Hz). Sakuma Frequency Converter Station (Shizuoka Prefecture) SHARE OF HYDROELECTRIC POWER GENERATION CAPACITY HYDROELECTRIC POWER SALES AND WATER SUPPLY RATE (As of March 31, 2009) (Billion kWh) (Billions of yen) 15 150 12 120 J-POWER % ELECTRIC 19 POWER 9 90 COMPANIES AND OTHERS 6 60 3 30 0 0 Source: Reports issued by Agency for Natural Resources and Energy. 2005/3 2006/3 2007/3 2008/3 2009/3 n Hydroelectric power 11.1 8.5 10.6 8.2 8.3 sales (Billions kWh) n Hydroelectric 137.1 126.8 123.4 114.5 110.9 operating revenues (Billions of yen) ● Water supply rate (%) 118 90 112 85 88 ANNUAL REPORT 2009 23 Wholesale Electric Power Business J-POWER’s Rate Structure THERMAL POWER HYDROELECTRIC POWER AND TRANSMISSION n Hydroelectric Variable portion of rate Variable costs (excl. pumped-storage) Fuel, chemicals and other costs Variable portion of rate Fixed costs Depreciation Maintenance costs Fixed costs Headquarters costs Fixed portion of rate Depreciation Taxes Maintenance costs Return on capital Headquarters costs Fixed portion of rate Taxes n Pumped-storage hydroelectric Fixed rate Return on capital n Transmission Fuel, maintenance and other costs comprise a high proportion of the total With regard to hydroelectric power, transmission and substation facilities, costs and fluctuate greatly from year to year. Therefore we revise thermal capital costs, fixed-asset taxes, etc. comprise a high proportion of the power contract rates every two years to reflect these changes. Variable total cost, and annual cost fluctuations are small. Therefore their contract costs such as fuel costs, which fluctuate in accordance with power output, rates are set at a lower level from the start of operations and are not are covered by the variable portion of the rates. We also maintain a fuel cost subject to regular revision to ensure long-term rate stability. In the case of adjustment system that covers fluctuations in foreign exchange rates and conventional hydroelectric power, the fixed portion of the rate accounts for the prices of heavy oil used as a supplementary fuel. Fixed costs, including a higher proportion, minimizing the impact on sales caused by power depreciation, maintenance and return on capital, which are incurred equally output fluctuations. The contract rates of both pumped storage hydroelec- regardless of output level, are covered by the fixed portion of the rate. This tric power and transmission are based entirely on the fixed rate. These framework allows J-POWER to secure stable cash flows. rate structures enable J-POWER to generate stable cash flows. Deregulation of the Electric Power Industry and J-POWER’s Response The deregulation of the electric power industry in Japan has cre- • We are developing new types of wholesale electricity businesses such ated a new environment in which business enterprises other than as the IPP business and the electricity supply business for PPSs (See page 25, Other Electric Power Businesses). electric power companies (EPCOs) can participate in electricity • We have commenced sales of electricity to the wholesale markets such wholesaling and retailing businesses. Since April 2005, the deregu- as JEPX by utilizing a part of existing generation capacity. lation of the retail electricity sector was expanded to approximately Further reforms of the electric power industry have been under 60% of the market, and wholesale electricity transactions were discussion since April 2007 in the Power Business Subcommittee commenced in the Japan Electric Power Exchange (JEPX). of the Advisory Committee for Natural Resources and Energy. The Though the deregulation has had the effect of increasing com- subcommittee has decided to first implement industry reforms petition and applying downward pressure on prices, J-POWER designed to establish a competitive environment within the existing considers the deregulation to be a positive change toward expand- scope of retail deregulation. Further expansion of retail deregulation ing its business opportunities from a long-term perspective. We is planned for review in 2013. While monitoring carefully the trends also recognize that it is essential for us to vigorously respond to toward deregulation and responding flexibly to changes in the busi- these changes, and we are promoting the following sorts of initia- ness environment, we aim to expand business opportunities by tives to achieve stable growth. making use of new options created by the deregulation. DEREGULATION OF JAPAn’s ElEcTRIc POWER InDusTRY Phase 1 Phase 2 Phase 3 Phase 4 Phase 5 Phase 6 1995 2000 2004 2005 2008 2013 Introduction of com- Partial deregulation of Expansion of retail Expansion of retail Prioritize establishment Review full retail petitive bidding for electric power retailing deregulation deregulation (approx.
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