Can Japan keep the lights on? The Ukraine war upends a big energy bet

In 2018, when the power company Hope Energy entered Japan’s new retail electricity market, it thought it had a surefire strategy. Wholesale energy was becoming ever cheaper as liquefied natural gas flooded global markets. Hope Energy would sell competitively priced electricity contracts to local governments and public facilities, undercutting Japan’s old-line power companies, which had long prioritized stable supplies over cost.

But then came the pandemic and the Ukraine war, which caused LNG prices to soar. Hope Energy could not honor its price pledges, and it, along with more than 30 other electricity retailers in Japan, went out of business. Customers scrambled for new providers.

Now, the world’s third-largest economy is again confronting the fragility of its energy system. That has forced a reconsideration of how the resource-poor country can maintain a reliable and affordable power supply in an era of growing geopolitical uncertainty, reflected most immediately in rising calls for a boycott on Russian energy.

The reassessment, analysts agree, is likely to set back Japan’s efforts to more fully deregulate its electricity industry and reach its goal of carbon neutrality by 2050. It is also putting new pressure on the country’s economy and politics, as anxieties about Japan’s ability to supply itself with power rise to their highest levels in over a decade.

While many nations have been buffeted by the energy-market chaos set off by Russia’s invasion of Ukraine, prompting a rush for new sources of energy and causing pain for consumers, the spike in LNG prices has become a particular source of concern for Japan.

Energy security has been a long-standing preoccupation in Japan, where electricity generation is overwhelmingly dependent on imported fossil fuels. Natural gas has become an important part of the mix, as the country sought to shut down polluting coal-fired plants and mothballed much of its nuclear power industry after the 2011 meltdown at the Fukushima Daiichi station.

Cheap and plentiful, cleaner than coal and safer than nuclear, LNG was seen in Japan as a crucial transitional fuel as it gradually shifted to renewable energy. But it is no longer cheap or plentiful, with supplies diminished by logistics issues related to the pandemic and increased demand from China as it moves away from coal. Sanctions on Russia, one of the world’s biggest suppliers of LNG, have further cramped supplies, sending prices soaring.

In March, LNG sold in Japan for nearly 23% more than it did the previous month, a problem made worse as the yen has sunk to 20-year lows against the dollar.

“The war, the sanctions, are a very real stress test” to Japan’s energy system, said Yuriy Humber, founder of Japan NRG, a consulting group. So far, he said, the results are “not looking good.”

Japan is the world’s second-largest importer of liquefied natural gas after China, which took the lead last year. Even before the Fukushima disaster, LNG generated around 24% of the country’s electricity, a share that had grown as the country took coal power offline.

After the meltdown, usage skyrocketed, and today over one-third of Japan’s power comes from the fuel. In 2020, Japan purchased more than 74 million tons of LNG, over one-fifth of the global supply. (In the United States, 38% of electricity comes from natural gas, but the country produces most of what it consumes.)

Around 8% of Japan’s supply comes from a project, Sakhalin-2, that was established as a joint venture among the Russian firm Gazprom, the British company Shell and two Japanese companies, Mitsui and Mitsubishi. That has put Japan in a difficult position as the United States and others have called for a boycott on energy exports from Russia, a critical source of Japanese LNG.

In early April, Japan announced that it would eventually phase out purchases of Russian coal. But Prime Minister Fumio Kishida has insisted that his country cannot afford to cut off its support to Sakhalin-2, which he has described as “extremely important to Japan’s energy security.”

Even without the war and the pandemic, an energy crisis seemed bound to happen in Japan.

Some regions have run their electrical grids near capacity since the Fukushima disaster. In the warmest and coldest months, regional providers’ surplus power generation often dips below 3%, the minimum level considered necessary for guaranteeing a steady supply. And LNG, other energy sources, is not amenable to stockpiling. Japan maintains only two to three weeks’ supply at a time, and that has left the country vulnerable to blackouts in periods of unexpectedly high power demand.

But the collapse of Hope Energy and other electricity retailers is symbolic of how much the two calamities have shifted the once optimism calculations around Japan’s energy future.

In 2016, Japan began to deregulate the electric power market, allowing retailers to compete with monopolistic firms like the Tokyo Electric Power Co., the operator of the Fukushima nuclear power plant.

There seemed to be plenty of room for cost savings: Producers in the United States were making so much natural gas that, in some cases, it was cheaper for them to burn it at the well than pay for it to be transported.

In Japan, hundreds of companies rushed into the newly deregulated power market. Some, like Japanese internet giant Rakuten, had no industry experience. Many did not hedge against the possibility of rising energy costs. Few invested in their own generation capacity, eschewing fixed costs. And rather than signing long-term energy contracts or low prices through the use of futures, many tried to keep overhead low by making purchases in line with daily power demand, buying at wholesale rates with the shortest possible lead time.

Convinced that rates would continue dropping, companies “mistakenly thought that they could do business that depended on” Japan’s wholesale energy market, said Syusaku Nishikawa, an energy analyst at Daiwa Securities.

Hope Energy, which started life providing tech and human resources expertise to local governments, founded an energy division in 2018, hoping to use its existing business networks to cash in.

The business started well: By June 2020, the company said it had $95 million in sales, a more than 760% increase over the same period the previous year. In light of its success, it separated from its parent company and announced that it was moving into renewable energy.

However, the sudden surge in prices in early 2021 blindsided the company, which had not prepared for the possibility of a major jump in costs, according to a statement it released when it declared bankruptcy.

Masaru Tagami, who is in charge of facilities procurement for the central Japanese city Hida, one of Hope Energy’s former clients, said it had been caught off guard by the company’s “sudden” collapse and the rise in costs as its business was handed to another firm.

The city’s annual electric bill is expected to rise 40%, he said, adding that the situation had played havoc with its budget.

“I am seriously worried about how long these circumstances will continue,” he said.

Power companies hit hard by the pandemic-related spike expected that prices would abate by this March as the effects on supply chains wore off, said Junichi Ogasawara, a senior research fellow at the Institute of Energy Economics Japan.

“But with Russia’s invasion of Ukraine, the situation has changed to one where the current conditions will drag on,” he said.

Since then, the precariousness of Japan’s energy situation has only become clearer. In March, after an earthquake near Fukushima knocked out part of the electrical grid, a cold snap pushed Tokyo to the brink of rolling power outages. In the past, coal-fired power stations could have been called upon for cheap backup energy, but inefficient old plants have been taken offline.

In a disaster-prone country like Japan, “we’re still in a position where these kinds of things can happen again” unless the government fixes the issues introduced by deregulation and the patchwork shift to renewables, said Dan Shulman, CEO of Shulman Advisory , a firm analyzing Japan’s power industry.

In Europe, the chaos in energy markets has led to greater calls for the development of renewable energy sources. But in Japan, resistance by the largest power firms has kept solar and wind power — which are less dependable and hard to store — from being well integrated into the electrical grid.

Politicians and businesses in Japan, seeking a quick fix, are arguing for investment in more supplies of LNG and a return, at least in the short term, to coal and nuclear, said Gregory Trencher, an associate professor at Kyoto University who studies energy policy .

“This has just reinforced the mentality that we need a balanced mix of energy sources,” he said, adding that “for people that would like to wake up in the morning and see nuclear and coal disappear from Japan’s power mix, I think that’s become even more difficult.”


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