Japan recently announced a revision to its Strategic Energy Plan. The following paper looks at the main changes regarding power generation by 20301 and how firms can use CME Group Japanese Power futures and Yen-denominated Gas futures contracts for hedging.
According to a draft of its latest energy policy published in July 2021, Japan plans to raise its target for renewable energy in the country's electricity mix for 2030 as part of its commitment to cut emissions.
This new draft comes after Japan nearly doubled its 2030 target for cutting carbon emissions in April 2021, to 46% from 26% based on 2013 levels. Late last year, Prime Minister Suga set a goal for carbon neutrality by 2050.
Among the main policies announced to achieve these objectives, the government is planning to:
Japan plans to reduce the share of LNG from 37% in 2019 to 20% in 2030, while at the same time targeting a reduction of the total power generation to 940 TWh from 1,024 TWh over the same period. This basically means cutting in half the amount of electricity generated from natural gas.
Source: Japan Customs
In 2020, Japan imported 74.4 Million tons of LNG, or 21% of the world LNG volumes.3
If Japan follows the 2030 goal set in the latest version of its Strategic Energy Plan, LNG trading flows in Northeast Asia would be impacted as 14.5 MTPA ‒ representing roughly 4% of the global LNG volume in 2020 and 7% of the LNG delivered last year in the region comprising of China, South Korea, Japan, and Taiwan.
Japan plans to also increase the share of power generated by nuclear plants from 6% in 2019 to 20-22% in 2030.
In order to produce 205 TWh from nuclear plants in 2030 and assuming a 90% utilization rate, Japan would need 26 GW of nuclear capacity to be operating by that time, up from the current 8-10 GW.
Before the Fukushima incident, 54 nuclear reactors were in operation with a total generation capacity of 48.8 GW and up to 25-30% of electricity production was coming from nuclear power.4
Of the remaining 34 reactors, totaling 34 GW of installed capacity, only 16 have obtained all the authorizations to resume operations as of July 2021.5
Out of them, 10 reactors are operating. They are situated in the Kansai and Hokuriku regions of Japan’s main island Honshu as well as on the Island of Kyushu and Shikoku. None of the reactors facing the Pacific Ocean ‒ where the risk of tsunami is higher ‒ have currently been brought back online.
To reach the 26 GW of operating capacity implied by the Strategic Energy Plan, most of the remaining reactors would need to be back online by 2030.
As for the decrease of the LNG’s share, the increase of power generated by nuclear plants and renewables will have an impact on the power markets of the Kansai and Tokyo regions.
In parallel, electricity prices on the Japanese Electricity Power Exchange (JEPX) have experienced a decorrelation with oil-linked LNG prices represented by the JCC index since the deregulation of the market.
This creates additional risks for retailers as electricity bills remain partly indexed on a fuel cost adjustment mechanism that is based on trade statistics prices of crude oil, LNG, and coal.6
Source: CME Group
But firms have now the possibility to manage the risk related to the differential between gas prices and power prices with the emergence of listed futures.
Earlier this year CME Group listed a set of Japanese Power futures for Tokyo and Kansai, based on JEPX day-ahead prices as well as LNG-related instruments: JCC (Detailed) futures contracts and Yen-denominated Platts JKM futures contracts.7
These cash-settled contracts denominated in yen can be a useful instrument for power generators to lock this differential – also called “spark spread” – for both the gas imported under term contracts linked to oil (JCC) or sourced from the spot market (JKM).
Source: CME Group
Japan’s road to lower carbon emissions requires significant changes in the power generation sector. The country has drawn an extensive plan to reach its ambitious 2030 goal and set clear objectives for each power source.
The energy transition set to take place over the next few years will have drastic impacts on the Japanese power market, which is already going through a transformational phase with a full deregulation and the emergence of a derivatives market.
In this new and moving environment, Japanese power generators might have to follow their US and European peers who have been actively hedging spark-spreads for years.
Such hedging strategy can now be facilitated with existing futures contracts for each leg of this spread.
|Code||Japanese Power – monthly contracts|
|East Japan||JBT||Japanese Power (Day-Ahead) Tokyo base-load futures|
|JPT||Japanese Power (Day-Ahead) Tokyo peak-load futures|
|West Japan||JBK||Japanese Power (Day-Ahead) Kansai base-load futures|
|JPK||Japanese Power (Day-Ahead) Kansai peak-load futures|
|Code||Yen-denominated Natural Gas/LNG contracts|
|Platts JKM||JKY||JKM (Platts) Yen-denominated futures|
|JCC (Detailed)||JCY||JCC (Detailed) Yen-denominated futures|
Click here to learn more about CME Group’s Japanese Power contracts.