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Analysis: Japan's post-crisis response to reduce energy market volatility

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Analysis: Japan's post-crisis response to reduce energy market volatility

Highlights

Measures include LNG inventory controls, procurement guidelines

Rekindles debate on role of nuclear in energy security

Energy systems need to be insulated against disruptive weather patterns

Singapore — Japan's post-crisis response to January's energy shortages is expected to help reduce volatility in electricity and natural gas markets in Asia, not just next winter but also over the longer term, as governments around the world seek to insulate energy systems from increasingly disruptive weather patterns.

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While weather phenomena, ranging from Australian wildfires to Taiwan's drought, that impact energy systems are not unusual, their frequency and magnitude is expected to intensify as climate change accelerates, pushing market participants to brace for more volatility in fuel demand and supply.

Policymakers and energy companies are having to take these disruptive forces into consideration at a time when the energy mix itself is shifting towards cleaner fuels. Managing the energy transition and redirecting investments where needed, while ensuring stable energy supply, has become a precarious balancing act.

At the peak of winter in January, supply chain disruptions and a sudden drop in temperatures sent gas inventories at western Japan's power utilities to dangerously low levels, causing a record spike in electricity prices and threatening power outages.

Japan's Ministry of Economy, Trade and Industry, having braved the post-Fukushima energy landscape, intervened to shore up supplies in January. Later, it followed up with detailed investigations into the causes, and issued measures to insulate the system from future incidents.

After a two-month probe METI came up with a set of short-term and long-term policy actions to plug loopholes in the emergency response mechanism, choosing to shore up the system rather than blame the individual failings of utilities.

It is proposing a more robust real-time system of monitoring gas and LNG stocks that will provide an early warning of shortages and allow utilities to move feedstock, a revamp of procurement guidelines for coal, oil and LNG by next winter that allows for emergency purchases, and options to backstop sudden shortages with storage solutions.

State power coordinator the Organization for the Cross-regional Coordination of Transmission Operators, or OCCTO, said power utilities should assess their power supply-demand balance more cautiously, such as considering scheduled maintenance and electricity supply contracts that can respond to high demand.

Lessons for the energy mix

Disruptive events also feed into long-term energy policymaking – such as the reassessment of nuclear power's role in energy security.

"The main lesson is that we should not rely on one or two energy sources to have a resilient energy system. No energy [source] is perfect," said Masakazu Toyoda, Chairman of the Institute of Energy Economics, Japan, adding that renewable energy is zero-carbon but fragile in severe winter conditions.

"In addition, natural gas, which is the cleanest among fossil fuels, is also fragile to respond to a rapid increase in demand which was caused by severe winter, because it is difficult to stockpile," he said, noting that nuclear plants on the other hand remained stable in Japan and in Texas with the smallest failure rates among various energy sources -- wind power, gas and coal.

"So I would not say that the main lesson from the power crisis is the value of nuclear energy, but say that we should pay more attention to the resilient nature of nuclear energy as one of the zero-carbon energies," Toyoda said.

He said a balanced energy mix does not rely on just one or two energy sources. "Therefore, I believe that nuclear energy is [an] important part of the energy mix as one of the zero-carbon energies," he added.

Across the Pacific

Japan's post-crisis response mirrors soul searching in Texas' energy sector, although the scale of the impact was vastly different, with Japan largely managing to keep the lights on.

In Texas, bankruptcies have swept through energy companies, there is little consensus on how to make companies accountable for the winterization of equipment in a market-driven system, and there is rampant politicization of the energy transition.

"The important lesson for Japan is how to properly organize an imbalanced market from one region of Japan to others and whether they need regulations that promote the installation of storage to qualify for capacity market payments," said Amy Myers Jaffe, energy consultant and Managing Director of the Climate Policy Lab.

"Does Japan have trading between their regions now? Do they have conversion between DC and AC networks?" she said were the questions it needs to ask.

"Texas is only requiring backup capacity plans for renewables but what is needed is a more comprehensive capacity market across the entire generation system, including payments and standards that go beyond short-range solutions, for example multiple hours/days not minutes," Jaffe said.

Clearly, a lot more needs to be done to fix energy systems that have not changed in decades.

So far, with the measures by Asia's largest LNG importer, market participants expect some volatility drivers to be addressed, which in turn affects hedging activity for next winter by traders, even though a wider coordinated regional approach remains absent.

It is unclear whether regulators from top importers South Korea, Japan and China will cooperate to further insulate their systems. Preventive steps to date have been limited to storage investments and expansion.