As countries move away from coal, demand for liquified natural gas (LNG) is rising rapidly as a bridge energy between coal and clean energy. In 2021, China’s LNG imports are expected to surpass those of Japan, making it the world’s largest importer. South Korea and Thailand are also increasing their purchase, further pushing up LNG prices. If Japanese corporations decrease their purchase of LNG to avoid the risk of overstocking, Japan might end up facing the same kind of electricity shortage it suffered last winter.
The rise in LNG prices has heightened two risks for Japan. One is inventory risk. While the U.S. and China can store LNG at their empty gas fields, Japan doesn’t have that option nor does it have other options. And because LNG vaporizes inside tanks, it cannot be stored for long periods. If the companies import too much LNG, the potential loss could reach the level of tens of billions of yen.
“The electricity supply and demand balance has been destabilized by the expansion of renewable energy,” explained a senior officer at a major utility. “It’s difficult to estimate how much LNG to import.”
The other risk is having a shortage of electricity during extreme heat or cold spells. This could happen if the companies refrain from procuring LNG to avoid incurring an inventory risk. Such a shortage occurred in January 2021, which pushed up the wholesale price of LNG. The price hike forced many newly established utilities to stop operations, leading to business failures.
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The outlook for 2022 is already harsh. The Ministry of Economy, Trade and Industry expects the electricity reserve capability, which indicates the power supply margin at peak demand, will dip into the negative in regions covered by Tokyo Electric Power Holdings in January and February 2022. The proper reserve capability is around 3%.
LNG is a main energy source for Japan. Despite this, LNG is purchased by individual utilities. In contrast, in China both the government and the private sector are intensifying efforts to import LNG. In South Korea, a public gas corporation is largely in charge of importing LNG. If the Japanese government relies entirely on private corporations for LNG imports, Japan will consistently lose in the fierce competition over this energy resource. (Abridged)