Analysis: Out in the cold: how Japan's electricity grid came close to blackouts

European Energy Exchange AG

05/02/2021 08:21

By Aaron Sheldrick and Yuka Obayashi
    TOKYO, Feb 5 (Reuters) - Japan's worst electricity crunch
since the aftermath of the Fukushima crisis has exposed
vulnerabilities in the country's recently liberalised power
market, although some of the problems appear self-inflicted.
    Power prices in Japan hit record highs last month as a cold
snap across northeast Asia prompted a scramble for supplies of
liquefied natural gas (LNG), a major fuel for the country's
power plants. Power companies urged customers to ration
electricity to prevent blackouts, although no outages occurred.
    The crisis highlighted how many providers were unprepared
for such high demand. Experts say LNG stocks were not topped up
ahead of winter and snow disabled solar power farms. 
    The hundreds of small power companies that sprang up after
the market was opened in 2016 have struggled the most, saying
the government does not disclose the market data they need to
operate. The companies do not have their own generators, instead
buying electricity on the wholesale market.
    Prices on the Japan Electric Power Exchange (JEPX) hit a
record high of 251 yen ($2.39) per kilowatt hour in January,
equating to $2,390 per megawatt hour of electricity, the highest
on record anywhere in the world. One megawatt hour is roughly
what an average home in the U.S. would consume over 35 days.
    But the vast majority of the new, smaller companies are
locked into low, fixed rates they set to lure customers from
bigger players, crushing them financially during a price spike
like the one in January.
    More than 50 small power providers wrote on Jan. 18 to
Japan's industry minister, Hiroshi Kajiyama, who oversees the
power sector, asking for more accessible data on supply and
demand, reserve capacity and fuel inventories.
    "By organising and disclosing this information, retail
electricity providers will be able to bid at more appropriate
prices," said the companies, led by Looop Co.
    They also called on Kajiyama to require transmission and
distribution companies to pass on some of the unexpected profits
from price spikes to smaller operators.
    The industry ministry said it had started releasing more
timely market data, and is reviewing the cause of the crunch and
considering changes. 
    
    RETHINK
    Japan reworked its power markets after the Fukushima nuclear
disaster in 2011, liberalizing the sector in 2016 while pushing
for more renewables. 
    But Japan is still heavily reliant on LNG and coal, and only
four of 33 nuclear reactors are operating.  urn:newsml:reuters.com:*:nL1N2JU0AB
 urn:newsml:reuters.com:*:nL1N2JX08C The power crisis has led to growing calls to
restart more reactors.  urn:newsml:reuters.com:*:nL4N2K80LC
    Kazuno Power, a small retail provider controlled by a
municipality of the same name in northern Japan, where abundant
renewable energy is locally produced, buys electricity from
hydropower stations and JEPX.
    During the crunch, the company had to pay nearly 10 times
the usual price, Kazuno Power president Takao Takeda said in an
interview. Like most other new providers, it could not pass on
the costs, lost money, and folded. The local utility has taken
over its customers.
    "There is a contradiction in the current system," Takeda
said. "We are encouraged to locally produce power for local
consumption as well as use more renewable energy, but prices for
these power supplies are linked to wholesale prices, which
depend on the overall power supply." 
    The big utilities, which receive most of their LNG on
long-term contracts, blamed the power shortfall on a tight spot
market and glitches at generation units.
    "We were not able to buy as much supply as we wanted from
the spot market because of higher demand from South Korea and
China," Kazuhiro Ikebe, the head of the country's electricity
federation, said recently. 
    Ikebe is also president of Kyushu Electric Power,  9508.T 
which supplies the southern island of Kyushu.
    Utilities took extreme measures - from burning polluting
fuel oil in coal plants to scavenging the dregs from empty LNG
tankers  - to keep the grid from breaking down.  urn:newsml:reuters.com:*:nL1N2JO0LX
 urn:newsml:reuters.com:*:nL1N2JN0KN
    "There is too much dependence on JEPX for procurement," said
Bob Takai, the local head of European Energy Exchange, which
started offering Japan power futures last year. He added that
new entrants were not hedging against sharp price moves.  
    Three people, who requested anonymity because of the
sensitivity of the matter, were more blunt. One called the
utilities arrogant in assuming they could find LNG cargoes in a
pinch. Prices were already rising as China snapped up supplies,
the sources noted.    
    FALLOUT
    "You had volatility caused by people saying 'Oh, well,
demand is going to be weak because of COVID' and then saying 'we
can rely more on solar than in the past,' but solar got snowed
out," said a senior executive from one generator. "We have a
problem of who is charge of energy security in Japan." 
    Inventories of LNG, generally about two weeks worth of
supplies, were also not topped up enough to prepare for winter,
a market analyst said. 
    The fallout from the crunch has become more apparent in
recent days, with new power companies like Rakuten Inc  4755.T 
suspending new sales and Tokyo Gas  9531.T , along with
traditional electricity utilities, issuing profit downgrades or
withdrawing their forecasts.
    Although prices have fallen sharply as temperatures warmed
up slightly and more generation units have come back online, the
power generator executive said, "we are not out of the woods
yet."  

($1 = 105.1700 yen)

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GRAPHIC: Japan power companies shares    https://tmsnrt.rs/3cC35TR
GRAPHIC: Japan daily spot power price highs     https://tmsnrt.rs/37nAw9H
GRAPHIC: Prices for spot cargos of LNG in Asia    https://tmsnrt.rs/36yAbjR
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 (Reporting by Aaron Sheldrick and Yuka Obayashi. Editing by
Gerry Doyle)
 ((aaron.sheldrick@thomsonreuters.com; 81-80-2677-4134;))