31 August 2021
In this article, Kanna Mihara, Senior Vice President of Macquarie Capital Japan, looks at the evolving appetite for overseas investment amongst Japanese corporates.
In recent years, Japanese investors in the infrastructure sector have been rapidly becoming more diverse, more active and investing with new intentions.
Until only several years ago, Japanese companies making investments in overseas infrastructure businesses were almost exclusively the well-known trading houses. But these days, the headlines in the “Japan” section of infrastructure industry news publications are occupied by those being made by electricity and gas companies, financial-strategic hybrid investors such as leasing companies and securities groups, and an emerging group of corporates.
In 2019, Kansai Electric, the second largest electricity utility in Japan, took a notable stake in a major overseas power transmission business in UK alongside a major international infrastructure fund, a milestone for Japanese utilities’ overseas investment.
JERA, a joint venture of Tokyo Electricity Power Company and Chubu Electricity Power Company, announced it had acquired stakes in three offshore wind projects in Taiwan with a total 2.5GW capacity.
So, what has changed in the minds of large Japanese businesses traditionally focused on the sizeable domestic market and with little interest in overseas opportunities?
First, the domestic market is shrinking. Japan faces a serious depopulation trend; the national population has been declining for nine years in a row. From over 128 million people in 2010, it is forecast to fall by almost a quarter to 97 million by 20501, with the associated decrease in the active working population being a particular cause for concern. Accordingly, Japanese businesses must look abroad for new sources of revenue. According to the Cabinet Office2, Japanese companies’ foreign direct investment increased 5.6 times between 2000 and 2018, and the prospects for the domestic market are one of the key drivers.
Another change is the emerging need to catch up with new global trends - to learn from and gain experience in offshore markets and apply these learnings to the domestic market.
This is especially prominent in the decarbonisation space where Europe is seen to be about 10 years ahead of Japan. A countless number of Japanese companies have invested in renewable power projects and energy-related technology companies in Europe, and they actively send staff to get involved in management of these businesses.
The key characteristic of the Japanese investors is that they are highly strategic. Hands-on and actively contributing to the development of the projects, they are also – importantly – willing to take risks and learn from their experiences."
Senior Vice President, Macquarie Capital Japan
The need for understanding and experience in this space is becoming only more pressing. In October 2020, the Japanese government announced its target to become carbon neutral by 2050. Since then, a series of new policies have been announced, including generating 30 to 45GW of offshore wind power by 2040. A new $US19 billion Green Innovation Fund was announced to boost Research & Development in key sectors requiring significant investment to decarbonise, and the government is updating Japan’s energy mix for 2050 to include a new renewable target of 36 to 38 per cent.
As of 2018, 85.5 per cent of Japan’s energy is sourced from fossil fuels, while renewables account for just 8.2 per cent, excluding hydrogen.2 Japanese utilities and trading houses are historically heavily reliant on fossil fuel related businesses and have significant exposure to assets such as coal power plants and coal mining projects.
Previously, their shareholders praised the fossil fuel related businesses as a lucrative source of profit, however that position is changing too, reflecting the growing scrutiny of corporate ESG strategies and the investment approaches in carbon-heavy businesses.
In this changing business environment, corporate Japan started thinking about how to utilise the country’s highly efficient and reliable 47GW fleet of coal power plants, and a potentially game-changing idea has emerged out of a 5-year innovation program3. That is to use sustainably produced ammonia as a fuel for the existing coal power plants, essentially converting the most carbon intensive power generation to zero emission.
JERA, one of the biggest utility companies in Japan, has quickly adopted this technology and announced their aim to establish ammonia co-firing technology by co-firing coal and ammonia at a large-scale commercial coal-fired power plant. It has also committed to accelerate hydrogen-based power generation in parallel, and to becoming net zero by 2050.
This invention may have the potential to help the acceleration of decarbonisation globally, especially in Southeast Asia, where the ‘clean up’ of relatively new coal power plants will be needed in the near future.
Both ammonia and hydrogen-based solutions are commonly recognised as having the same direction of evolution, as ammonia can be a carrier of hydrogen and are increasingly recognised as an important part of Japan’s future energy mix. Many Japanese companies have started participating in pilot projects related to hydrogen and ammonia globally and are increasingly seeking sources of overseas supply. This mimics how the LNG supply chain emerged a few decades ago – and could be a start of a whole new global industry and a very significant development in the global energy sector.
The decarbonisation trend is also producing a new class of Japanese infrastructure investors: increasingly environmental-conscious corporates. They have come to realise that the new generation of consumers are looking for sustainably produced products, and the potential introduction of border carbon taxes has made them one of the most powerful advocates of green energy in Japan. Many have pledged to become 100 per cent renewable power operated and they want reasonably priced green energy across their global operations.
One example is NTT Group, which is the largest telecoms company in Japan and consumes 1 per cent of the country's electricity usage. It announced that 30 per cent of its business would be powered by non-fossil fuel power by 2030, and that it aims to acquire 7.5GW of renewable generation capacity.
Another is ENEOS, Japan’s largest oil and gas retailer. it already runs 45 hydrogen stations for vehicles and recently announced a further roll-out to all of its 12,000 gas stations in Japan from 20224. It’s also actively testing renewable hydrogen production with Queensland University of Technology in Australia and started investing in renewable projects itself for future hydrogen production.
These corporate investors are emerging as some of the most competitive in the global market and have the potential to play a key role in global green energy projects.
The key characteristic of the Japanese investors is that they are highly strategic. Hands-on and actively contributing to the development of projects, they are also – importantly – willing to take risks and learn from their experiences. With a long-term view, they focus on the success of projects over an extended period and work strategically towards a future aim.
With such active, ambitious, and increasingly diverse Japanese investors with new intentions, expect to see them take key roles in infrastructure projects all over the world.
Kanna leads Private Capital Markets team in Japan where her primary role is to connect Japanese capital to global infrastructure opportunities. Her most recent experience includes successful co-investment into Onivia, an internet fibre business in Spain with Daiwa Energy & Infrastructure, formation of a partnership with JERA on Formosa offshore wind projects in Taiwan, and acquisition of Electricity North West in UK by a consortium including Kansai Electric.
Since joining Macquarie in 2013, she has worked on two of the first three major infrastructure privatisation projects in Japan - Sendai Airport and Aichi Toll Road - as a financial advisor to the winning consortium of each transaction.
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Macquarie Capital has investments in some of the portfolio companies named in this article.