Japanese utilities/Tepco: nuclear clean-up has no end in sight

Making a return on Japanese stocks has rarely been this easy. Overflowing liquidity has pushed the benchmark Nikkei 225 index up nearly 50 per cent in the past year, outperforming global peers. Investors are growing a little less discerning.

Stocks once considered off-limits have become fair game. Tepco, the electric utility and operator of the devastated Fukushima Daiichi nuclear power plant is one of them. Shares are up a fifth from the December low.

The meltdown at the Fukushima nuclear plant was a decade ago. The effects on the environment — and the cash outflows — are ongoing. The original plan was to have the decommissioning process done by 2051 at the very latest. Yet now that looks far too optimistic. The most important part, getting the melted fuel from inside the reactors, has not even begun. Experts expect the clean-up to take as long as 100 years.

A much closer deadline looms. Tanks that hold treated radioactive water will reach maximum capacity of 1.4m tonnes in two years. The Japanese government has decided to start releasing contaminated water into the Pacific Ocean when it reaches that level.

That means higher potential cash outflows for compensation to the likes of local business and fisheries by Tepco, which has already been footing most of the total ¥22tn ($200bn) bill for clean-up and damages.

Meanwhile, its chances of improving profits to offset the costs are limited, as all seven reactors of its main plant remain idle amid earthquake risks and ongoing safety concerns. Pricier fossil fuels are substituting for lost output from idle reactors. Gross margins have more than halved to 2.1 per cent in the past two years.

In April, the last hope of a turnround — restarting some of its nuclear reactors — was lost. Japan’s nuclear regulator banned a restart of its largest nuclear plant due to serious safety flaws.

For now, the situation shows little hope of improvement. Costs may end up being covered through higher taxes and utilities bills. Investors, if not careful, will be caught footing the bill too.

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