Turning Japanese: Typical power price spreads in Japan

Cornwall Insight has been supporting customers in the Japanese market for some time now. This Chart of the week explores the daily spreads seen in recent quarters and why a number of international players are turning to Japan.

The Japanese market has experienced substantial volatility in recent quarters. The island is an important energy importer without significant indigenous coal or gas reserves. While long-term contracts have helped to shield the market from the worst of commodity price movements in the last year, the impacts have still been felt in the market, translating into higher average electricity prices and broader intraday spreads.

The average quarterly price and daily spread between the P10 and P90 price can be seen in this Chart of the week.

A number of trends are evident. Spreads and average prices vary substantially over time, with the global increase in commodity prices from Q321 and then the Russian invasion of Ukraine in Q122 increasing average prices and widening spreads. If we take Chubu as a “typical” region, average daily prices increased by ¥19.8k/MWh (322%), and typical daily P10-P90 spreads widened by ¥16.8k/MWh (189%) over the time series relative to the starting quarter.

There is variation by region. The Japanese interconnected market is split into nine regions across two different frequencies. The eastern side of the market (Hokkaido, Tohoku, and Tokyo) operate at 50Hz, while the remainder operates at 60Hz. Limited interconnection exists between the different frequencies and regions, separating prices. Hokkaido, Shikoku, and Kyushu are all separated from Honshu by bodies of water.

While the lowest typical spreads for much of the analysis period were seen in Tokyo (as low as ¥3.8k/MWh in Q221), in the last two quarters, these were seen in Kansai (¥20.8k/MWh in Q322). In comparison, Tohoku had the greatest daily average spreads in Q3 2022 at ¥32.7k/MWh, almost double those of Kansai. Despite receiving the lowest average price of all regions in Q322 (¥12.8k/MWh), the P10-P90 spreads in Kyushu averaged ¥23.6k/MWh due to a number of very low-priced periods.

Figure 2 compares Tohoku and Queensland as the two regions with the highest average daily spreads in Q3 2022 between the Japanese and Australian markets and converts for currency differences. In Q3 2022, typical daily spreads were $63/MWh (18%) higher in Tohoku than in Queensland, although this difference clearly varies over time. In some quarters, particularly in mid-2021, typical spreads were much lower in Tohoku than in Queensland, averaging only 20% and 40% of the Queensland equivalent in Q2 2021 and Q3 2021, respectively. The difference in Q1 2021 prices and spreads is due to a cold snap event in Japan, leading to a pronounced price spike.

If you’re interested in the Japanese market and would like more information on how Cornwall Insight can help, please contact Dan Starman or Ben Cerini.

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