The need for long-term LNG contracts was triggered by supply instability
Securing long-term LNG contracts is an issue. The trigger was the rise in wholesale prices due to the shortage of LNG from the end of 2020 to the beginning of 2021. In addition to the severe winter, the suspension of other power sources led to a drastic drop in LNG storage volume and wholesale electricity prices soared to 250 yen/kWh. LNG was hastily procured on the spot, but spot prices for Asia also soared in line with Japanese electricity prices. At the time, it was not just a price increase, but there was even a possibility of causing electricity supply instability.
Having experienced this, the Ministry of Economy, Trade and Industry should have come to understand firsthand the importance of securing sufficient amounts of LNG in advance through long-term contracts from gas-producing countries. In the current review of the electricity system reform, measures to secure the LNG necessary for stable supply are also a major theme.
At present, measures are being considered that require retail electricity suppliers to secure a certain percentage of their wholesale electricity through long-term bilateral contracts with power generation companies when procuring it. By entering into long-term bilateral contracts rather than relying solely on the spot market, power generation companies (especially thermal power plants) will also have an incentive to secure LNG through long-term contracts.
Is this feasible?
Unfortunately, this initiative will not work.
In order for retail electricity suppliers to enter into long-term contracts with power generation companies, they must also maintain and continue sales contracts with customers for the long term. However, sales contracts are generally for one year, and the reality is that retail electricity suppliers have no idea how much electricity they will sell in the next few years. Many new power companies renew (acquire) their sales contracts for the following year from the latter half of the fiscal year to the end of the fiscal year. They start procuring electricity slightly in advance, around autumn of the previous year.
For many retail electricity suppliers who sell and procure electricity according to such an annual schedule, prolonging procurement alone is a major risk to their own management. In other words, the idea of lengthening the contract between retailers and power producers in order to enable power producers to enter into long-term contracts for LNG purchases is simply shifting the fuel procurement risk from power producers to retailers.
Long-term LNG contracts go against the liberalization of the power market
Up until now, METI has liberalized the power market, allowing as many as 750 retailers to enter the market, created a wholesale power market (spot market) to promote power procurement by new entrants, and adopted policies to promote the separation of power producers and retailers. These policies had the effect of making transactions at each stage of the power market (between power producers and retailers, and between retailers and customers) shorter-term.
Before liberalization, the old power companies had a monopoly on supply, and it was certain that all future power demand would be the amount of electricity sold by their own companies. At the same time, power producers and retailers were integrated, so it was possible to make future fuel procurement plans based on mid- to long-term forecasts of electricity sales.
At the stage of liberalizing this old system, it can be said that changing policy to promote long-term LNG contracts due to concerns about supply instability reveals their naivety.