Japan long term power prices and volatility could remain high

Forecasting long-term JEPX prices has become imperative for numerous market players. Renewable asset developers negotiate 20-year corporate PPA agreements, large consumers must adjust their energy procurement strategies, and BESS developers strive to comprehend the revenue aspects of their projects, to name a few.

An increasing number of service providers offer forecasting solutions specifically tailored for the Japanese market, utilizing either PLEXOS or proprietary software. Regardless of the specific solution, they all share a common requirement: well-thought-out long-term scenarios encompassing Japan’s energy mix, power demand, grid evolution, fuel prices, carbon pricing, and renewable generation costs.

The primary drivers of long-term power prices and volatility in Japan are the penetration of solar PV and wind generation assets, their associated generation costs, and fuel prices.

The potential deployment of additional nuclear plants, beyond the restart of existing assets, is expected to be physically constrained due to the availability of qualified human resources and the long lead-time required for the development and commissioning of nuclear power plants. The estimated timeframe for this last parameter is approximately 17 years, as indicated in METI’s 20-year decarbonization auction.

From a macro perspective, it is plausible to argue that long-term power price volatility is likely to increaseThis escalation can be attributed to the growing penetration of solar PV and wind power, as well as the physical limitations on global oil and LNG availability.

According to METI’s 6th energy plan, the solar PV and wind penetration target is set at 20% by FY2030, and around 40% by FY2050, a substantial increase from the current 9.2% in FY2021.

The constraints on procuring oil and LNG globally are anticipated to result in heightened volatility in fuel prices and potentially higher average prices. In 2018, the International Energy Agency reported that conventional oil production peaked in 2008 at 65mb/d and has not recovered since. Furthermore, aggregated data from the 2022 World Energy Outlook suggest that discovered and approved resources are unlikely to increase over the next two decades. Recent insights from CERA have also provided significant data points. The head of Pioneer Natural Resources Co., one of the largest shale oil operators in the Permian Basin, predicts that shale oil production in the region will peak in five to six years as the best drilling and fracking areas are depleted. Cenovus Energy Inc. CEO Alex Pourbaix stated that oil production in the Canadian oil sands will experience slower growth moving forward, indicating that the days of Canadian oil sands production increasing by 300,000 or 400,000 barrels per day are behind us.

The International Energy Agency also projects that global natural gas production will peak in the 2030s in its 2022 World Energy Outlook. Furthermore, a commissioned analysis on Europe’s access to natural gas by the French army highlights potential geological and infrastructure constraints that could affect global supplies during the same period.

Generation cost of solar PV and Wind assets could increase in the long-term

It is commonly assumed that the long-term generation costs of solar PV and wind assets will continue to decrease due to historical reductions in material costs, economies of scale, and efficiency improvements. However, project developers and EPC companies are increasingly aware that current trends have beenrising costs. In the long term, volatile fuel prices, land availability restrictions in Japan, and global constraints on metal availability could all contribute to higher costs for solar PV and wind energy. The IEA’s 2021 report on “The Role of Critical Minerals in Clean Energy Transitions” already highlighted a mismatch between the strengthened climate ambitions worldwide and the availability of critical minerals. Furthermore, there is now an abundance of literature emphasizing the limitations of metal availability on the global deployment of renewable energy and electric vehicles.

Taking a step further 

Global long-term trends may push Japan’s power prices and volatility to exceed the previously considered “normal” JEPX prices before Winter 2021-2022. The market prices witnessed in the last 18 months may become more frequent in the future. Stakeholders should consider running market forecasts that incorporate these factors. Additionally, exploring scenarios where Japan commits to “net-zero” goals using existing technologies, with declining GDP, significant nuclear energy usage, lower electric vehicle adoption, and minimal deployment of Hydrogen and CCUS, can provide valuable insights.


CERA Week 2023 report

CERA Week 2023 report 2

IEA World Energy Outlook 2018

IEA World Energy Outlook 2022

Naturel gas: What supply risk for the EU?

The role of Critical Minerals in Clean Energy Transitions

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