Yoshikazu Kobayashi has been analysing the international oil and gas markets for the past 11 years at IEEJ. Kobayashi was previously an analyst at Tonen General Sekiyu, an ExxonMobil-affiliated company in Japan, where he covered refinery operation planning and marine transportation optimization for six years.
Kobayashi holds a Master of Arts in International Economics and Relations from Johns Hopkins School of Advanced International Studies (SAIS). He has published numerous publications on energy security and policy in Japan and Northeast Asia, as well as on oil and gas market stabilisation.
1. How will Japan’s electricity market reform impact consumers and its power generation industry?
The impact of the power supply system reform in Japan is limited at this stage. The vast majority of the Japanese households continue to rely on the incsumbent power companies. Currently, the number of households that switched power companies is just above 1 million as of June 3 2016, approximately 1.7% of the total. Even for the area with the highest switching rate, which was traditionally supplied by Tokyo Electric Power Company (TEPCO), the share is only around 3%. These low switching rates suggest that Japanese consumers generally prefer a reliable power supply from incumbent players, even though they might not be the cheapest.
But this does not necessarily mean that the Japanese power industry is insulated. As competition from newcomers is now open, incumbent players will continue to be under pressure to be competitive and reduce cost. Many of the new entrants to the power market will fully take advantage of their cost-competitive coal-fired power generation sources, forcing incumbents to perhaps rely more on coal-fired power generation as well. This may mean a cheaper power supply in the future, but it will threaten the achievement of Japan’s carbon emissions reduction target (26% reduction by 2030). We may need an extra policy framework to obtain sustainability and foster competitiveness of the power supply in the newly liberalised market simultaneously.
2. What plans have been put in place for Japan to reduce greenhouse gas emissions by 26% by 2030?
In order to achieve the 26% reduction target by 2030, a significant amount of energy conservation and use of non-fossil fuel power generation source will be required. The Japanese government announced the country’s energy mix target for 2030 in July 2015. The target includes drastic improvement of energy intensity of GDP (35% decrease by 2030), as well as utilising non-fossil power generation for up to 44% of the total power mix. Needless to say, these are extremely challenging targets under Japan’s current economic and social conditions.
As for energy conservation, all possible means must be taken. These include further improvement of power utilisation efficiency in the industrial sector, deployment of next-generation vehicles like electric vehicles and fuel cell vehicles in the transportation sector, and energy efficiency codes for buildings and electric appliances in the residential and commercial sectors. As for non-fossil fuel power generation, promotion of renewable energy – particularly that of non-solar sources such as wind and geothermal – will be an important agenda. There is also a need to quickly restart the nuclear power plants that are confirmed to be operationally safe.
3. What does the deregulation of Japan’s gas industry in 2017 mean for the regional gas market?
It is expected that the impact of natural gas market liberalisation will be limited like the power market reform. This is because natural gas infrastructure in Japan is fractured and not developed to accommodate a large number of new entrants to the market. Only a small number of power utilities that have their own LNG receiving terminals or oil companies that have their own LNG equity sources will join the market after the reform. Yet even a small number of entrants will force incumbent gas companies to protect their shares in the market. This will create a more competitive environment in the retail city gas markets.
Market reforms of both the power and gas markets increase uncertainties around future LNG requirements for each utility. This makes them more cautious in committing to additional long-term LNG contracts, although the liberalisation process does not necessarily affect Japan’s total demand. The lack of buyers’ commitments to long-term contracts will make investments in new liquefaction capacity more difficult. This may cause the “fallacy of composition”, where partial optimisation fails to achieve overall optimisation.
Buyer caution toward a new long-term contract will delay the investment decision of new LNG supply capacities by sellers, and thus may lead to a supply crunch when demand grows in the future. This issue can be regarded as risk allocation among sellers, buyers, and financers. History shows that volatile prices harm every party in the international LNG markets. The three parties need to continue discussing what will be acceptable risk sharing among them to avoid the worst case market scenario.
4. How can Asia achieve fairer natural gas pricing, while supporting high infrastructure costs?
Two things are important: an open and liquid natural gas market that is based on gas to gas competition, and government support of gas utilisation including infrastructure development. In other words, market mechanisms should be utilised as much as possible to ensure the fairness and transparency of natural gas pricing at the first stage. But when the market mechanism is insufficient to develop the required infrastructure, the government should step in and create incentives for such development. Ensuring the function of the market mechanism should always be prioritised, but we also have to recognise that it is sometimes insufficient to realise required infrastructure investments.
Removal of destination restrictions in the traditional LNG contract will be the most important action for developing an open and liquid natural gas market in Asia. Increased flexibility and liquidity of LNG trade will eventually create a benchmark by which all market stakeholders (including financers to new production capacities) have confidence in the pricing of LNG. The process to create a benchmark may be a decade-long effort, but strong initiatives and commitments by major sellers or buyers can certainly accelerate the creation process.
5. What are your thoughts on the SIEW 2016 theme “New Energy Realities”?
I cannot agree more with this theme for SIEW 2016 based on the current context of international energy and environmental issues. If I am allowed to add another “new reality” – besides the shale revolution, OPEC’s challenges, or the ground-breaking agreement of the Paris Accord – I would like to highlight the potential impact of the global resurgence of populism and nationalism. Populism politics appeals to public discontent against the status quo. Such politics may lead to inward-looking policies in energy and environment spheres, and endanger the existing efforts in global climate change, energy market integration, or free flow of hydrocarbon trade – especially from the United States.
Populism always tends to resonate with nationalism, and such amalgamation could lead to a geopolitical tension that may eventually disturb the international energy market. Danger of populism and nationalism cannot be overemphasized, and we need to share such recognition and take any means to avoid any adverse effects to the international energy markets.