Japan’s utilities and their customers favored by falling LNG prices


Japan’s biggest power utilities, emerging from four years of gloom, have cut electricity rates as cheaper natural gas benefits both the bottom line and customers.

The global collapse in energy prices and abundant supplies of liquefied natural gas are a boon to Japan, the world’s largest LNG importer. The utilities that use the biggest proportion of LNG are benefiting the most, and will lower electricity rates for households and industry in August.

Tokyo Electric Power Co. was one of six utilities to cut rates in the most recent round. Tepco accounted for over a quarter of the nation’s record 89 million tons of LNG purchased in the year that ended March 31. Effectively a ward of the state following the meltdowns at the Fukushima No. 1 nuclear power plant in March 2011, profit expectations for the utility for the business year ending next March have surged threefold in the past 12 months.

For Chubu Electric Power Co., the nation’s third-largest utility, profit forecasts have more than doubled. Chubu accounted for about 15 percent of LNG imports and is the most dependent on the fuel of all utilities in the country.

With electricity sales expected to remain broadly flat, energy costs are the biggest lever on utilities’ profits.

As such, expect more procurement deals along the lines of Tepco and Chubu’s alliance of October last year, said Jane Nakano, a fellow at the Center for Strategic and International Studies in Washington, D.C.

“How they can procure cheap resources will matter,” Nakano said in an interview. “Some of the companies will have a lot more joint ventures like the way we have recently seen with Chubu and Tepco.”

Tepco’s net income for the year ending March 2016 is expected to hit ¥231 billion, from ¥80 billion forecast twelve months ago. For Chubu, the figure is ¥99.5 billion, from ¥44 billion.

Meanwhile, LNG prices here have roughly halved over the period.

That would equate to Chubu’s largest net profit since 2010. For Tepco, whose bottom line is skewed by government funding, 2016 should see the company record its biggest operating income since the Fukushima disaster.

Increases to 2016 forecasts “are reflecting the impact on the power utilities earnings of changes in fuel costs,” said Joseph Jacobelli, an analyst at Bloomberg Intelligence.

In October, Tepco and Chubu partnered to become the world’s biggest single importer of LNG, creating bargaining power to secure cheaper deals for immediate delivery instead of being locked into the industry norm of long-term contracts.

Utilities less exposed to LNG will lag their bigger peers, said Polina Diyachkina, an analyst with Macquarie Group Ltd. in Tokyo. These include smaller companies such as Hokuriku Electric Power Co. and Hokkaido Electric Power Co., which have little or no LNG exposure. Both have been forced to raise their electricity rates due to the government’s pricing mechanism that dictates that prices move in alignment with fuel costs.

While Japan has begun the process of restarting its reactors shuttered after Fukushima, the government anticipates that nuclear will account for less of the nation’s energy mix than it did before the disaster.