Blockchain, Drones Are Strategies for Survival at Japan's Tepco

(Bloomberg) -- Shattered by the enormity of the Fukushima nuclear disaster and bleeding customers to nimbler rivals, Tokyo’s lumbering, 66-year-old electric-power behemoth has a new strategy for long-term survival: reinventing itself as a cutting-edge innovator.

Tepco, known formally as Tokyo Electric Power Co. Holdings Inc., is scouring the periphery of the industry for the latest ideas and technologies -- using blockchain to manage power flows is one possibility. The company is hunting both overseas and around Japan for startups and other investments with the potential to revolutionize the power sector.

“We must ensure our survival because we’re responsible for the Fukushima cleanup and revitalization,” Shinichiro Kengaku, who leads a Tepco task force that invests in foreign companies, said in an interview. “We realized we had to be more proactive in pushing innovation. We want to be the ones disrupting the industry, not the ones being disrupted.”

The long-term viability of Japan’s biggest utility has been in doubt as reforms and rapid technological advancements sparked by the worst nuclear disaster since Chernobyl upset the traditional order. After operating with almost no competition since the end of World War II, Tepco has lost nearly 3 million households and small-businesses since deregulation in April 2016 let customers switch power providers.

Compared with its rivals, Tepco’s situation is particularly dire. Its stock price is down 78 percent since the Fukushima meltdown left it on the hook for 16 trillion yen ($142 billion) in cleanup costs. Other utilities and regional power companies, which share 4 trillion yen in costs related to Fukushima, are down about 30 percent since the disaster. Tepco also lags behind utilities in other nations in weaving renewable energy into its supply chain, according an October report from the Institute for Energy Economics and Financial Analysis.

Besides searching for innovative technology to help shore up long-term prospects, Tepco hopes to boost its profit in the short-term by selling natural gas to households, restarting its remaining atomic facility in Niigata prefecture, investing in overseas power projects and partnering with rivals to reduce fuel-import costs.

“In the new electricity market that’s emerging in Japan, old utilities face being outmaneuvered by nimbler, more innovative companies using new technology,” said Simon Nicholas, an analyst at the Institute for Energy Economics and Financial Analysis. “For a company like Tepco, it would be hard to see how it could pay off its Fukushima costs if it remained wedded to the old model. Tepco and the others will have to innovate in order to thrive going forward.”

One such innovation might be virtual power plants, which aggregate small bits of electricity to send back into the grid or on to consumers. Tepco announced a partnership with Nissan Motor Co. last year to test a system that uses batteries in electric vehicles to create such a network.

Five ‘D’s

But Tepco won’t have the field to itself. Japanese companies from trading houses to mobile-phone carriers are testing VPP systems, showing how quickly utilities could lose their grip on the market to new competition.

Tepco’s Kengaku distilled the challenge down to what he called the five D’s -- de-centralization, deregulation, digitalization, de-carbonization and democratization, forces that he said will eventually disrupt the industry’s current structure. One result will be the emergence of “prosumers” who produce and consume their own electricity through distributed generation systems, increasing the number of ways customers can receive their power and disrupting the monopoly held by utilities, he said.

The path is similar to what happened in developed nations around the world, including the U.K. and Germany, where companies use distributed generation systems and employ energy-efficiency measures, reducing the need to buy electricity from traditional utilities.

Tepco’s task force, which started in April 2016, has invested in four overseas ventures, including a German company that uses blockchain technology to manage power flows and a U.K. venture that uses “smart home batteries” to create virtual power plants. The Tokyo-based company also co-created Free Electrons, an alliance of utilities around the world committed to supporting energy startups. And it’s the only Japanese utility in the Energy Impact Partners coalition, a private equity firm that invests in technology throughout the power supply chain.

Drone Highways

Tepco said in March that it partnered with mapping company Zenrin to offer services that could lead to the creation of “drone highways” that ensure safe flights for small-scale autonomous aircraft, compiling a 3D database of potential obstructions such as transmission lines and poles.

The utility’s strategy mirrors attempts by rivals to adjust to deregulation. Tokyo Gas Co., which has taken more of Tepco’s lost customers than any other competitor, announced in December that it set up a fund based in California to invest in next-generation energy technology.

Chubu Electric began a program for startups to submit innovative energy ideas, and the winners will get funding or even be folded into Chubu Electric’s business operations. Kansai Electric Power Co. is sending some of its employees to startups to work for a short time, learn about the company and come back with new ideas.

“The utility business model used to be about getting infrastructure built at the lowest cost and taking advantage of economies of scale,” Sonia Aggarwal, vice president of Energy Innovation Policy & Technology LLC, said in a phone interview. Now “it’s more about taking the best advantage of the infrastructure that we’ve already built and trying to incorporate new technology.”

--With assistance from Chisaki Watanabe and Isabel Reynolds

To contact the reporter on this story: Stephen Stapczynski in Tokyo at sstapczynsk1@bloomberg.net.

To contact the editors responsible for this story: Ramsey Al-Rikabi at ralrikabi@bloomberg.net, Steve Dickson, Abhay Singh

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