As LNG prices soar, take steps to avoid electricity shortages in winter

REUTERS/Issei Kato/File Photo/File Photo
A liquefied natural gas (LNG) tanker is tugged towards a thermal power station in Futtsu, east of Tokyo, Japan November 13, 2017.

The prices of liquefied natural gas (LNG) used for thermal power generation are skyrocketing worldwide. It is hoped that the government will take all possible measures to ensure the stable procurement of LNG so that electricity shortages do not occur in winter when demand for heating becomes high.

Reducing dependence on coal-fired thermal power is being promoted to achieve decarbonization. Many countries are trying to expand the use of renewable energy sources, but it is difficult to make up for the absence of coal all at once.

LNG emits far less greenhouse gases than coal and there is now competition for it as a means to cope with the situation in the immediate future.

In mid-September, the spot price of LNG in Asia briefly soared to more than four times the level of last year in a market traded in accordance with supply and demand.

Japan depends on thermal power from LNG for about 40% of its electric power generation. In order to ensure a stable supply of electricity, it is essential to secure a sufficient amount of LNG.

In January when the country was hit by a cold spell, electricity consumption, mainly in western Japan, largely exceeded expectations, leading to a tight situation for supply and demand. This was partly because the operation of LNG carriers was delayed due to the coronavirus pandemic, resulting in a shortage of LNG stocks.

Because LNG vaporizes easily, only about two weeks worth of inventory can be held. A tight electricity market is also expected this winter, and therefore the government and electric power companies should expedite efforts to cope with the situation.

Normally, utility companies sign long-term contracts with LNG suppliers on a 10-year basis, but in recent years the proportion of spot trading has increased.

The deregulation of the electric power industry has made it difficult to predict how much electricity will be sold, and the amount of LNG required changes depending on how much power can be generated from renewable energy sources. Since long-term contracts can result in overstocked inventory, companies tend to rely more on spot trading.

Is it possible to set up a framework for avoiding inventory risks? The government should take the initiative in establishing a system in which it will monitor LNG inventories and allow companies, including gas firms, to provide their stocks to each other.

In China, the government’s policy of curbing coal-fired thermal power has led to a serious power shortage, causing power outage problems. The country has been increasing LNG imports and is expected to overtake Japan this year to become the world’s largest importer of LNG. It is inevitable that competition will intensify.

Currently, nearly 40% of Japan’s LNG is imported from Australia, with supply bases mainly in Asia and Oceania. The United States is increasing its shale gas exports. It is desirable to diversify the procurement network mainly by expanding shale gas imports.

On the other hand, it is effective to use nuclear power, which provides a stable power supply, in order to avoid electricity shortages while aiming to achieve decarbonization. The government must strongly support the restart of suspended nuclear power reactors.

— The original Japanese article appeared in The Yomiuri Shimbun on Oct. 4, 2021.