What do Japan’s soaring spot power prices mean for the energy transition?

Japan’s power prices were on an unprecedented rally in the first two weeks of 2021. Spot prices kept hitting record highs and peaked at over US$ 1400/MWh on 13 January, 20 times higher than the same period last year.

So, what’s behind these historical highs, and what does it mean for the energy transition? We explored this in detail in a recent insight. Fill in the form for a complimentary extract or read on for an introduction.

A cold winter brought a supply crunch

Unsurprisingly, a colder-than-expected winter is one of the culprits. Compared with last year, daily temperature in Tokyo was around 2.5 °C and 5.5 °C lower in the first two weeks. As a result, widespread and sustained needs for space heating pushed electricity demand up by 10% to 30%.

However, power supply failed to keep up with the staggering demand growth. In fact, there was a significant supply crunch. Dispatchable generation capacity, including coal, gas, nuclear and fuel oil, was 23 GW lower than last year at the start of 2021. It was still 5% lower when the price spike peaked on 13 January, even though more coal-fired power had been put into operation.

The close coupling of the power and LNG markets has caused a vicious cycle

Why is gas not playing a bigger role to end this supply crisis? Generation companies had to constrain the output of their gas-fired power fleet to save fuels so that they can delay depletion of LNG inventories. On the other hand, the production issues, shipping bottleneck and liquidity crunch have jointly pushed spot LNG prices to new record highs. The close coupling between the power and LNG market has caused a vicious cycle that leads to ever higher gas and power prices.

Renewable power was also hit by the bad weather. Japan’s solar-centric renewable power landscape means renewable supply is highly vulnerable to snowy weather. Data suggests that the output of solar power stations in the first two weeks of 2021 was down by 50% or more in days with heavy snowfalls. This implies around 25 GW of solar generation capacity could have become unavailable, worsening the supply bottleneck.

What does this mean for the energy transition in Japan?

The spot power price spike brings Japan’s energy transition pathways into focus. In the full insight, we highlight the key challenges to reaching the 2050 carbon neutral goal Japan announced last year

1. Hourly and daily power demand peaks will fluctuate significantly paced by temperature changes, piling more pressure on grid dispatch.
2. We expect solar share of peak load will grow from 30% today to over 100% in the next 20 years, amplifying the impact of loss of load during heavy snowfalls in winter.
3. The budding merchant renewable market will get more attention if price spikes become a more common feature.
4. Power system planners need to overcome multiple challenges to ensure energy security and support the energy transition. Options include rethinking coal and nuclear retirement, promoting grid and storage investments, perfecting market designs and introducing the capacity market, and ensuring fuel adequacy to address seasonal shortages.

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