Business / Corporate

First Energy taps biomass in Japan for market-leading gains

by Chisaki Watanabe and Stephen Stapczynski

Bloomberg

A little-known Tokyo-based company’s commitment to biomass has made it a darling among investors.

As of the end of trade Wednesday, First Energy Service Co. had jumped 42 percent in the past month, making it the top performer on the Topix index, which lost 4.4 percent in the same period. First Energy jumped 8.8 percent on Thursday after the company’s chief executive officer said he’s eying more investment in power plants fueled by organic material.

Investors have flocked to First Energy as the company reiterated its commitment to woody biomass, increased its dividends and as an equity analyst highlighted the company’s strong growth potential.

“Our profitability is extremely high under the feed-in tariff scheme,” CEO Tomotada Shimazaki said in an interview in Tokyo on Thursday, referring to Japan’s clean-energy incentives. “That’s because we’ve been in the biomass power generation business for 10 years and our generation cost is lower than competitors as we internalize our businesses to avoid paying extra expenses.”

After a global deal reached in December to tackle climate change, the company expects an increase in demand for low-emission, base-load power facilities, such as biomass. First Energy has restructured its business units to focus on woody biomass facilities, operation and fuel, expecting strong government subsidies to continue backing its vision, it said in a mid-term plan released this month. As part of its reorganization, the company said on Monday that it would shed its sole solar power project.

“Solar isn’t as exciting a business as biomass,” said Shimazaki, who was a derivatives trader before joining First Energy in 2005. According to Shimazaki, First Energy is stronger than its competitors because it has its hands in the entire biomass supply chain — from construction and operation to fuel procurement and resource development.

Woody biomass refers to several kinds of wood material ranging from branches and leaves to recycled building material that can be used as a source of fuel. Biomass has spurred the interest of clean-energy producers in Japan since the start of the Fukushima disaster in 2011 ushered in a program of government incentives to encourage renewables.

Depending on the type of wood product burned, woody biomass tariffs can be as high as ¥40 per kilowatt-hour — making it one of the most cost-competitive renewable energy sources.

First Energy currently operates two woody biomass facilities, with plans to start a third unit in September and begin construction of a fourth unit by 2019, it said in its mid-term plan. The company will invest in additional facilities as long as the government’s incentive program for clean energy continues to provide support, Shimazaki said.

“Solar does not create jobs or business opportunities in local communities, while biomass creates businesses and has a potential for job creation,” Shimazaki said.

The new facility in Oita Prefecture that’s set to start this year is 18 megawatts in capacity and will boost the company’s profit by ¥1.2 billion ($11 million) per year when fully operational in two years, Koichi Hariya, an analyst at Ichiyoshi Research Institute Inc., said in a note dated May 23.

The company, founded in 1997, plans to continue developing wood fuel and resources, as well as offering its expertise to companies planning to or currently operating biomass facilities.

The company’s strength is the operation of biomass facilities and fuel procurement, according to Hariya. Citing First Energy’s strong profit growth potential, Hariya expects the stock to reach ¥1,000, more than double the price when he made his estimate in his May 23 report.

First Energy uses advanced technology to survey and locate wood resources, lowering cost and improving the quality of fuel for biomass facilities. Fuel makes up about 70 percent of biomass’ total operating costs, according to figures from the government. The company’s facilities operate at capacity above 90 percent, compared with around 85 percent for the average biomass plant, according to Shimazaki.

First Energy expects to make an operating profit of ¥2.7 billion in the fiscal year ending June 2019, according to a mid-term presentation released last week. That compares with the company’s ¥1.6 billion operating profit in the fiscal year ended June 2015.

The company increased its dividend forecast last week to ¥5 for the current fiscal year ending June 30 from ¥3, and expects to raise it again next year, according to Shimazaki.

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