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Power prices surge in Japan

What has caused the recent record highs in power prices in Japan, and what has been the broader impact in the global energy markets?


  1. In recent months, power prices in Japan have been volatile as the country uses more renewable energy in the wake of the Fukushima disaster in 2011 and the move towards carbon neutral economy in 2050.
  2. During the winter months, very cold weather in Japan led to high demand for heating. This subsequently caused a power price spike on the Japan Electric Power Exchange (JEPX).
  3. The increased demand for heating in Japan had a impact on the LNG market, sending it to record highs in Asia and also affected pricing in the European gas market.

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During recent months, the Japan power market has experienced price volatility and witnessed power price levels not seen since the market was deregulated in 2016. And accordingly, fundamental supply and demand information and forecasts to understand and anticipate the power price development have never been more important.

JEPX Price (baseload) in Japan 2016 – to date;

JEPX Price (baseload) in Japan 2016 – to date. Power prices surge in Japan
Source: Refinitiv Workspace/JEPX. Click the chart to request a free trial.

Although the Japan power system has a diverse power generation mix, the Fukushima nuclear incident in 2011, and collapse of nuclear power generation that followed, tightened the supply and demand balance and increased Japan’s reliance on imported fossil fuels. For example, Japan has for some time been the world largest importer of LNG.

An extensive build-up and use of renewables production sources as wind and solar to close the supply gap and ease the dependency on fossil fuel imports has materialised only slowly since the Fukushima incident. That said, solar power now constitutes a relevant part of the electricity production mix, and this influences short-term power prices and how the power demand is met.

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The Japanese government recently announced a target of 2050 for for carbon neutrality, and has ambitions for electrification, as well as offshore wind and solar production capacity.

The increased penetration of intermittent generation in the power generation mix in Japan is likely to increase the price volatility further and accordingly the access to a reliable and accurate supply and demand forecast. In addition, hedging needs will increase.

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What has happened to power prices in Japan?

During the last couple of months, Japan experienced a hike in heating needs due to unseasonably cold temperatures across the country and in the high demand areas.

The low temperatures caused a sharp increase in heating demand. This increase more than outweighed any demand destruction stemming from heightened COVID-19 containment measures after rising cases in Japan.

The utilities held back power generation to avoid depleting inventories on the thermal power plants.

In December and January, the Organization for Cross-regional Coordination of Transmission Operators (OCCTO) instructed general power transmission and distribution business operators a total of 218 times to supply the necessary electricity in the areas where the power supply and demand situation was deteriorating. Almost all gas capacity came back online during that period to cover the high load.

Gas power plant outages in Japan, August 2020 – January 2021

Gas power plant outages in Japan, August 2020 - January 2021
Source: Refinitiv Workspace/IIR. Click the chart to request a free trial.

During the periods with the highest load, we also observed a significant dip in the solar power production contributing to a bullish impetus on the power prices. Overall, this resulted in a tight supply and demand balance and unprecedented price spikes seen on the Japan Electric Power Exchange (JEPX).

Trade volumes in the nascent derivates marked in Japan for power futures contract increased as well, signalling the need for hedging against the increased price volatility.

Actual/normal demand, actual solar generation, JEPX Price, December 2020 – January 2021

Actual/Normal Demand, Actual Solar Generation, JEPX Price, December 2020 - January 2021
Source: Refinitiv Workspace/TSOs/JEPX. Click the chart to request a free trial.

The impact on the wider energy complex

The abrupt increase in heating needs also had an impact on the wider energy complex due to Japan’s reliance on imported fossil fuels and LNG.

Although Japan has secured LNG supply over long-term contracts, the supply squeeze also triggered additional demand for spot LNG. This extra demand from Japan, along with other Asian countries, pushed up the JKM NE LNG spot reference price to record levels, reflecting Japanese LNG shortage.

The tight situation in the Japanese power market contributed to the record high LNG prices in Asia and was also felt elsewhere as it disincentivised sending cargoes to the UK or CWE, and consequently also had a bullish effect in the European gas market.

LNG and European gas prices, front month contracts

LNG and European Gas Prices, front month contracts.
Source: Refinitiv Workspace. Click the chart to request a free trial.

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