Japan's wholesale electricity prices are poised to more closely reflect spot fuel prices, as part of major reforms to the Japan Electric Power Exchange (Jepx). This may cause large fluctuations in physical power prices and further drive demand for futures contracts.
The recent discussion by Japan's trade and industry ministry (Meti) to review Jepx's pricing system in response to high price volatility earlier this year was concluded to allow sellers on the exchange to rationally incorporate costs for additional spot fuel purchases in their marginal cost measures. This is aimed at sending appropriate price signals to the market by reflecting the fundamentals of thermal fuels, thereafter avoiding a severe shortage of electricity and fuels.
Utilities Tohoku Electric Power, Kansai Electric Power, and Tokyo Electric Power and Chugoku Electric Power's 50:50 thermal power joint venture Jera have already come forward to start using the new price mechanism. This would allow sellers to lift offer prices on Jepx when spot fuel prices, especially LNG to be used for additional power generation, extend gains, and vice versa when fuel prices fall.
The pricing reform has also come out in favor of utilities on Jepx to apply opportunity costs to their marginal costs, only when implementing fuel conservation, from 1 December. This would encourage sellers to increase supplies on the exchange to grab the forgone benefit that would have been derived from an option not chosen, such as when forward prices traded higher than at present. Sellers are required to submit their evaluation formula to the authority at least two weeks before adopting the new price practice.
These reforms would expose the wholesale power market to potential risks of greater volatility, especially given the recent spike in spot LNG prices. This would spur liquidity in power futures markets, with hedging and speculative trading expected to increase further, Bob Takai, an executive advisor of the German-based European Energy Exchange (EEX) group told Argus.
Japan's power sector would get more basic visibility on spot fuel-linked wholesale prices by monitoring spot LNG prices, which have recently tracked European gas hub prices. Better visibility on power prices, through learning movements of relevant natural gas and LNG markets, would make it easier to take risks, which would attract more futures trading activities and increase opportunities to trade the spread between LNG and electricity futures, Takai said.
The ANEA price, the Argus assessment for spot LNG deliveries to northeast Asia, has in recent months reacted strongly to movements in the Dutch TTF gas price, reflecting the influence of supply-demand factors in Europe on the Asian market. Competition for LNG supplies from both regions ahead of the peak winter demand season means that sellers have taken the opportunity to raise their offers to Asia, and Asian buyers have had to bid upwards in order to keep the arbitrage open and secure cargoes from the Atlantic basin.
Japan's power futures markets have been enhancing liquidity, especially after the spike in wholesale power prices in January, mainly because of an LNG shortage during a cold snap that boosted heating demand. Jepx system prices for day-ahead contracts rose above ¥200/kWh ($1.76/kWh) for four consecutive days during 12-15 January. This resulted in the highest ever monthly average of ¥63.07/kWh in January, compared with ¥18.48/kWh for last month's average.
The hike in Jepx prices affected small-scale power retailers, especially those without their own power plants. This has urged the government to call for effective use of futures contracts, as well as to reform the pricing system and disclosure range of fuel-related information in the wholesale market.
EEX cleared 6.2TWh of Japanese power derivative products over January-November this year, which was more than 10 times the volume traded last year since its launch in May 2020. Transacted volumes at the Tokyo Commodity Exchange also increased to 876GWh on January-November, up by 83pc compared with the same period of 2020.
