As thermal coal is a cheaper fuel than regasified LNG for power generation, Japanese utilities are looking to build new coal power plants and have decided not to renew some LNG import contracts after expiry. Hence, LNG shipments to Japan in 2019 already fell by nearly 12 percent to around 72.8 million tonnes per annum (mmtpa), while cargoes headed for China increased by 37.5 percent to just over 74.1 mmtpa over the same period.
By the end of 2020, Japan is likely to have lost its position as the world’s No.1 LNG importer to China. Analysts noted that Japanese energy companies are currently “well-contracted in LNG” to the early 2020s. However, the average cost of gas for Japanese utilities remains “well above spot price,” Wood Mackenzie finds, stressing “coal is still the cheapest form of electricity generation after nuclear and renewables on a short-run marginal cost basis.”
Public opinion turns against coal
Environmentalist have brand-marked Japan as “an outlier” given that it is one of the very few developed power market that still prioritizes construction of new coal capacity. But the government’s pro-coal policy targets seem to be misaligned with public sentiment and rising concerns about air pollution.
“The tide appears to be turning with increasing restrictions on financing and building coal. As such, we expect this policy target and such a robust share of coal in the generation mix will be increasingly difficult to sustain, which would improve the outlook for LNG,” commented Wood Mackenzie’ senior analyst, Lucy Cullen.
In terms of demand, analysts expect Japan’s LNG imports will remain above 70 mmtpa through much of the 2020s, and may even exceed 60 mmtpa until at least 2040.
So Japan is set to remain the world’s No.2 LNG importer, after China, Ms. Cullen stressed, suggesting: “The Japanese market still provides ample opportunities for LNG sellers, particularly as existing contracts expire.”
Risk of missing renewable targets
Aggressive investments into new wind and solar power capacities is meant to boost Japan’s renewable energy share to 22-24 percent of its 2030, but analyst warned that too little effort is being made to grid-integrate the influx of intermittent green energy supply.
On the nuclear front, Japan restarted five plants last year alone. With next restarts scheduled for the mid-2020 and 2021, this will put downward pressure on LNG import requirements in the early 2020s. “We assume 15 reactors will be back online by 2030, accounting for 12 percent of power generation, much lower than the official target of 20-22 percent,” Cullen said.
“While nuclear restarts generally dampen gas generation, our lower nuclear number implies a more optimistic view of LNG demand compared to the government.”