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Mercuria Energy Group Expands into Japan's Physical Power Market amid Increasing Volatility

Mercuria to enter Japan's volatile power market, highlighting increased foreign interest and market liberalization since 2016.

By Mackenzie Crow

4/4, 09:14 EDT
BP p.l.c.
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Key Takeaway

  • Mercuria Energy Group Ltd. is entering Japan's physical power market, joining other European firms like BP Plc and Engie SA.
  • Japan's spot electricity market saw 60,000 gigawatt-hours traded in Q1 due to policy changes and increased renewable energy integration.
  • The country ensures stable power supply amidst grid challenges, with developments like Jera Co.'s gas-fired unit and nuclear power resurgence.

Mercuria Expands into Japan's Power Market

Mercuria Energy Group Ltd., a global commodities firm, is preparing to enter Japan's physical power market, highlighting the sector's increasing volatility as a lucrative opportunity. The company has recruited Masayuki Kato, a former top electricity trader at Itochu Corp., to spearhead its operations in the country's spot market. This move aligns with the strategies of other European energy giants like BP Plc and Engie SA, which have also ventured into Japan, one of the largest power-consuming nations globally.

The liberalization of Japan's power market in 2016 has attracted foreign firms, initially through derivatives trading, which doesn't require a local presence or specific government license. However, the shift towards physical trading opens up a larger market segment, driven by the volatility in liquefied natural gas prices and the integration of renewable energy sources. According to the Japan Electric Power Exchange, the spot market saw about 60,000 gigawatt-hours of electricity traded in the first quarter, a significant increase from the pre-2016 figures.

Policy Changes and Market Dynamics

Recent policy adjustments in 2022 have introduced potential costs for clean-electricity generators if their production falls short of forecasts, thereby increasing spot market activities. Jesper Johanson, CEO of InCommodities A/S, emphasized the firm's interest in Japan's physical power market due to their expertise in managing risks for renewable asset owners. The derivatives market, though currently smaller compared to spot trades, is expected to grow, mirroring trends in more mature European power sectors.

Japan's Power Supply and Infrastructure Developments

Japan's government has assured a stable power supply for the upcoming summer and winter seasons, with reserve ratios across all regions expected to exceed the minimum requirements. This stability is crucial for a country that has faced grid fragility, especially during peak demand periods. The commencement of Jera Co.'s gas-fired unit at Goi Thermal Power Station and the resurgence of nuclear power are key developments aimed at ensuring electricity stability amidst Japan's grid challenges.

Market Fluctuations and Global Commodity Trends

The electricity market in Japan has shown significant price fluctuations, with a notable drop in the average price for next-day delivery and variations in Tokyo power futures. These changes reflect the dynamic nature of the market and the impact of global commodity trends, including the demand for critical minerals for the energy transition and the resurgence of nuclear power. The interconnectedness of global markets, as evidenced by spot gold prices and challenges in agricultural commodities, underscores the complexity of Japan's energy landscape.

Street Views

  • Roland Rechtsteiner, McKinsey & Co. (Neutral on Japan's power market):

    "Japan being an island makes it a very interesting market, because power is connected to LNG and other imported commodities... You have a lot of requirements to balance within the country."

  • Jesper Johanson, InCommodities A/S (Bullish on Japan's physical power-market space):

    "Our interest in entering Japan’s physical power-market space, rather than solely focusing on derivatives, is directly linked to our expertise in managing risks on behalf of renewables asset owners."

  • Bob Takai, EEX Group (Bullish on futures contracts trading in Japan):

    "We have a lot of potential to grow in the coming months and years."