Japan's Power Prices Soar Amid Heat Wave and LNG Supply Chain Shocks
A severe heat wave has sent electricity demand soaring in Japan, pushing power prices to their highest level since January 2023. The nationwide next-day power price climbed to $0.16 per kilowatt-hour (kWh) on August 24, a 20% increase from the previous week.
The intense heat wave, which saw temperatures reach at least 40 degrees Celsius for five consecutive days in July, has been accompanied by rising global spot prices and disruptions to Middle Eastern LNG supplies. Japan's high dependence on foreign energy supplies, particularly imported LNG, leaves it acutely exposed to supply chain risks emanating from the region.
According to the International Energy Agency (IEA), approximately 93% of Qatar's LNG exports and 96% of those from the UAE passed through the Strait of Hormuz last year. The paralysis of shipping through this key waterway due to the Iran war has removed nearly 20% of global LNG supply from the market.
Japan's power producers have begun increasing coal-fired generation in response to rising LNG costs, but this strategy has failed to deliver unqualified cost savings as thermal coal prices also rise. The uncertainty in the LNG market is now affecting not only Japan's power sector but also its shipbuilding industry, with plans to rebuild the country's domestic LNG carrier construction system and designate it as an economic security priority.